Initial Public Offering (IPO): Pre-Effective Amendment to Registration Statement (General Form) — Form S-1 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: S-1/A Amendment No. 4 to Form S-1 HTML 2.04M
2: EX-3.1 Ex-3.1: Form of Fourth Amended and Restated HTML 68K
Certificate of Incorporation
3: EX-3.2 Ex-3.2: Form of Amended and Restated Bylaws HTML 66K
4: EX-5.1 Ex-5.1: Opinion of Sullivan & Cromwell LLP HTML 10K
5: EX-10.12 Ex-10.12: Amendment and Restatement Agreement HTML 223K
6: EX-10.13 Ex-10.13: Clearing Services Agreement HTML 254K
7: EX-10.14 Ex-10.14: Trs - Application Services Agreement HTML 957K
8: EX-10.24 Ex-10.24: First Amendment to Credit Agreement HTML 48K
9: EX-10.25 Ex-10.25: Deed of Novation 6 13K
10: EX-10.26 Ex-10.26.: Settlement Agreement HTML 45K
11: EX-10.27 Ex-10.27: Lease Amendment Six HTML 21K
12: EX-23.1 Ex-23.1: Consent of Ernst & Young LLP HTML 9K
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
David B. Harms, Esq.
David J. Gilberg, Esq.
Catherine M. Clarkin, Esq.
Sullivan & Cromwell LLP
125 Broad Street New York, NY10004
(212) 558-4000
William F. Gorin, Esq.
Cleary Gottlieb Steen & Hamilton LLP
One Liberty Plaza New York, NY10006
(212) 225-2000
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
Proposed Maximum
Amount of
Title of Each Class of
Aggregate
Registration
Securities to be Registered
Offering Price
Fee
Common Stock, par value $0.01 per share(1)
$230,000,000(2)
$27,071(3)
(1)
Includes shares which the underwriters have the option to
purchase to cover over-allotments, if any.
(2)
Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(o) under the Securities Act of
1933.
(3)
$13,536 of which was previously paid.
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.
This
is an initial public offering of common stock of
IntercontinentalExchange, Inc.
We
are offering 2,500,000 of the shares to be sold in the offering.
The selling shareholders are offering an additional
7,500,000 shares. We will not receive any proceeds from the
sale of the shares being sold by the selling shareholders.
Prior
to this offering, there has been no public market for our common
stock. We estimate that the initial public offering price per
share will be between $18.00 and $20.00. We have applied to list
our common stock on the New York Stock Exchange under the symbol
“ICE”. See “Underwriting” for a
discussion of the factors to be considered in determining the
initial offering price.
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.
Per Share
Total
Initial public offering price
$
$
Underwriting discount
$
$
Proceeds, before expenses, to IntercontinentalExchange,
Inc.
$
$
Proceeds, before expenses, to the selling shareholders
$
$
To
the extent that the underwriters sell more than
10,000,000 shares of our common stock, the underwriters
have the option to purchase up to an additional
1,500,000 shares from some of the selling shareholders at
the initial public offering price less the underwriting discount.
The underwriters expect to deliver the shares of common stock in
New York, New York
on ,
2005.
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. 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 futures and 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, the International Petroleum Exchange, or the IPE.
The IPE is the largest energy futures exchange in Europe, as
measured by 2004 traded contract volumes.
During the six months ended June 30, 2005,
43.4 million contracts were traded in our combined futures
and OTC markets, up 43.8% from 30.2 million contracts
traded during the six months ended June 30, 2004. During
2004, 35.5 million contracts were traded in our futures
markets and 31.0 million contracts were traded in our OTC
markets, up 6.6% from 33.3 million futures contracts traded
during 2003 and up 27.6% from 24.3 million OTC contracts
traded during 2003. Our revenues consist primarily of
transaction fees, market data fees and trading access fees. On a
consolidated basis, we generated $69.4 million in revenues
for the six months ended June 30, 2005, a
37.4% increase compared to $50.5 million for the
six months ended June 30, 2004, and $8.7 million
in net income for the six months ended June 30, 2005, a
13.2% decrease compared to $10.1 million for the six months
ended June 30, 2004. The financial results for the six
months ended June 30, 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 ongoing litigation. On a consolidated
basis, we generated $108.4 million in revenues for 2004, a
15.6% increase compared to $93.7 million for 2003, and
$21.9 million in net income for 2004, a 64.1% increase
compared to $13.4 million for 2003. We recorded
consolidated net cash provided from operations of
$40.2 million in 2004, a 48.2% increase compared to
$27.1 million in 2003.
Our History
In 1997, Jeffrey C. Sprecher, our founder, chairman and chief
executive officer, acquired Continental Power Exchange, Inc.,
our predecessor company, to develop a platform to provide a more
transparent and efficient market structure for OTC energy
commodities trading. In May 2000, our company was formed, and
Continental Power Exchange, Inc. contributed to us all of its
assets, which consisted principally of electronic trading
technology, and its liabilities, in return for a minority equity
interest in our company. In connection with our formation, seven
leading wholesale commodities market participants acquired
equity interests in our company, either directly or through
affiliated entities. We refer to these leading commodities
market participants, or their affiliates, as the case may be, as
our Initial Shareholders. Our Initial Shareholders are
BP Products North America Inc. (formerly known as
BP Exploration and Oil, Inc.), DB Structured Products,
Inc. (formerly known as Deutsche Bank Sharps Pixley Inc.), The
Goldman Sachs Group, Inc., Morgan Stanley Capital Group
Inc., S T Exchange Inc. (an affiliate of Royal Dutch
Shell), Société Générale
Financial Corporation and Total Investments USA Inc. (an
affiliate of Total S.A.). In November 2000, six leading natural
gas and power companies, which we refer to as the Gas and Power
Firms, acquired equity interests in our company. The Gas and
Power Firms are AEP Investments, Inc. (formerly known as
AEP Energy Services, Inc.), Aquila Southwest Processing, L.P.,
Duke Energy Trading Exchange, LLC, El Paso Merchant Energy North
America Company, Reliant Energy Trading Exchange, Inc. and
Mirant Americas Energy Marketing, L.P. In June 2001, we expanded
our business into futures trading by acquiring the IPE, which,
at the time, was operated predominantly as a floor-based,
open-outcry exchange. We closed our open-outcry trading floor in
London on April 7, 2005, and since that date, all of our
futures trading has been conducted exclusively in our electronic
markets.
Our Business
Our marketplace is globally accessible, promotes price discovery
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 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 two distinct markets: futures markets
and OTC markets. Futures markets offer trading in standardized
derivative contracts on a regulated exchange and OTC markets
offer trading in over-the-counter 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 third
party clearinghouse where they are marked to market and margined
daily before final settlement at expiration.
We operate our futures markets through our subsidiary, the IPE,
a Recognized Investment Exchange based in London. As a
Recognized Investment Exchange, the IPE is recognized, in
accordance with the terms of the Financial Services and Markets
Act 2000, as an investment exchange by the Financial Services
Authority, the regulatory authority that governs, among other
things, commodities futures exchanges in the United Kingdom. To
take advantage of the increasing acceptance and adoption of
electronic trading, and to maintain and enhance our competitive
position, we closed our open-outcry trading floor in London on
April 7, 2005. All of our futures trading is now conducted
exclusively in our electronic markets. We expect to achieve cost
savings of approximately $1.4 million in 2005 and between
approximately $4.0 million and $5.0 million annually
in 2006 and 2007 in connection with the closure, which will be
offset in the near term by a charge of $4.8 million that we
recorded in the second quarter of 2005. During the period
following the closure of our open-outcry trading floor, average
daily trading volumes initially decreased to 137,000 contracts
traded in April 2005 from 151,000 contracts traded in
March 2005. Beginning in May 2005, trading volumes
increased and, in certain cases, reached record levels. The
initial decline in April was 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
and new participants began trading on our platform. We achieved
a record monthly volume in our futures business in May 2005
with average daily trading volumes of 159,000 contracts. We
subsequently achieved a record monthly average daily trading
volume of 173,000 contracts in June 2005, 189,000 contracts in
August 2005 and 190,000 contracts in September 2005. We also
achieved daily volume records for Brent Crude futures and total
futures of 231,000 and 296,000 contracts traded, respectively,
on August 10, 2005. For a more detailed discussion of our
floor closure, see “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Segment Reporting — Futures
Business Segment.”
We operate our OTC markets exclusively on our electronic
platform. In addition to trade execution, our electronic
platform offers a comprehensive suite of trading-related
services, including electronic trade
confirmation, integrated access to clearing services and risk
management functionality. We also offer a variety of market data
services for both the futures and OTC markets.
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:
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 2004. The IPE Brent Crude futures
contract is a leading benchmark for pricing crude oil produced
and consumed outside of the United States, as well as a range of
refined oil products. We also operate the leading market for
trading in cleared OTC Henry Hub natural gas contracts, with
16.4 million contracts traded during the six months ended
June 30, 2005 and 15.9 million contracts traded during
the year ended December 31, 2004, compared to
4.6 million and 5.3 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.
Leading Electronic Energy Trading Platform
Our electronic trading platform provides centralized and direct
access to trade execution and real-time price discovery. 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
over 7,100 active screens at over 940 OTC participant
firms and over 300 futures participant firms as of
June 30, 2005.
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. We believe that our
demonstrated ability to develop and launch new products for both
the futures and OTC markets provides us with several competitive
advantages, including:
•
Multi-Product Trading: We operate a globally accessible
platform that offers qualified market participants a seamless
interface between trading in futures products, options on those
futures, and a broad range of OTC products.
•
Multiple Access Options: Our participants access our
marketplace through a variety of means, including through our
Internet-based electronic trading platform, proprietary
front-end systems, independent software vendors and brokerage
firms. Independent software vendors allow market participants to
access multiple exchanges through a single interface, which is
integrated with the participants’ risk management systems.
•
Cleared OTC Contracts: We were the first marketplace in
North America to introduce cleared OTC energy contracts, which
we believe have attracted new participants to our OTC markets by
reducing bilateral credit risk and by improving capital
efficiency.
Highly Scalable, Proven Technology Infrastructure
Our Internet-based electronic trading platform provides rapid
trade execution and is, we believe, one of the world’s 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, through
our electronic platform. This is in contrast to the lack of
transparency of traditional open-outcry exchanges and
voice-brokered markets. All participant orders placed on our
platform are executed in the order in which they are received,
ensuring that all orders receive equal execution priority. In
addition, the transparency of our platform facilitates market
regulation through increased market visibility and the
generation of complete records of all transactions executed in
our markets.
Our company has established a board of directors that is
independent from our participants and trading activity on our
electronic platform, which allows the board to act impartially
in making decisions affecting trading activity. In contrast,
many of our competitors are governed by floor traders 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 launch 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 can achieve price improvement over alternate means
of trading. Electronic trade execution offers cost efficiencies
by providing firm posted prices and reducing trade-processing
errors and back office overhead, and 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
settlement. In addition, in our futures business, eligible
participants 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,
and the Chicago Board of Trade, 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
$2.9 million based on September 2005 NYMEX seat sale
prices). While a “seat” conveys a right of ownership
and other benefits to its member, it poses a significant barrier
to gaining direct access to futures exchange markets, unlike our
futures markets.
Strong Management Team
Our senior management team has on average over 19 years of
experience in the energy and financial services sectors. Our
founding management team includes Jeffrey C. Sprecher, our
chairman and chief executive officer, Charles A. Vice, our chief
operating officer, and Edwin D. Marcial, our chief technology
officer. We enhanced our management team with additional
noteworthy professionals, including Richard V. Spencer, our
chief financial officer, and David S. Goone, our head of
business development and sales. Our management team has
successfully developed and deployed our electronic platform,
integrated the IPE into our business, developed and launched our
electronic trade confirmation system and introduced the
industry’s first cleared OTC energy contracts in North
America. We believe that the proven strength and experience of
our management team will continue to provide us with a
competitive advantage in executing our business strategy.
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:
•
Competition. We face intense competition from
regulated 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 and longer operating histories. We also face
competition from new entrants to our markets. Our business
depends on our ability to compete successfully.
•
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 IPE Brent Crude and Gas
Oil futures contracts and our OTC North American natural gas and
power contracts, which represent a significant percentage of our
revenues.
•
Retention of Market Participants. As a result of
the closure of our open-outcry trading floor on April 7,2005, floor members who had previously traded on our trading
floor may not continue to trade in our markets and may seek an
alternate trading venue, including NYMEX. Our other
participants, including participants that have begun trading
electronically, may also seek an alternative trading venue. If
participants trading in our markets move to an alternative
trading venue, we would lose trading volume, which could
negatively impact our results of operations and profitability.
•
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.
•
Regulation and Litigation. We are currently
subject to oversight in the United States and regulation in
the United Kingdom. We are also subject, from time to time,
to claims that we are infringing on the intellectual property
rights of others, which can result in litigation. In September
2005, our motion for summary judgment was granted by the federal
district court in our litigation with our principal competitor,
NYMEX, which NYMEX has announced it expects to appeal. If NYMEX
is successful in its appeal, and the matter is determined
adversely to us, our business would be materially and adversely
affected. Failure to comply with existing regulatory
requirements, and possible future changes in these requirements,
or unfavorable outcomes of litigation regarding intellectual
property rights of others, could adversely affect our business.
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 include
financial services companies, such as investment banks, hedge
funds, proprietary trading firms and asset managers, as well as
industrial businesses that are increasingly engaging in hedging,
trading and risk management strategies. 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
appeal to 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 nine
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 brokerage
firms. 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. For example, in
2004, we introduced our Market Price Validation service, an
information service that provides a means for subscribers to
mark to market their month-end portfolios. 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
44 data vendors that distribute this information, directly
and through various sub-vendors, to approximately
19,200 subscribers. We believe that the database of
information generated by our platform serves as the single
largest repository of energy market data in North America. 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 2004, we
launched two new electronically traded futures contracts for
U.K. power, and we, together with the European Climate Exchange,
launched a futures contract on our platform in April 2005 based
on carbon emission allowances issued under a European Union
sponsored program designed to control and reduce greenhouse gas
emissions. During the past three years, we successfully launched
over 30 new cleared OTC contracts, and we currently plan to
introduce new products at a similar rate going forward. In
particular, we believe there is an opportunity to increase
electronic trading in oil contracts, since historically only a
small percentage of all oil trades have been executed
electronically. We also intend to continue to introduce
bilateral OTC contracts in less liquid, or niche, markets to
satisfy the specific needs of our participants as they arise. We
may also seek to license our platform to other exchanges for the
operation of their markets on our platform, as we have with the
Chicago Climate Exchange.
Pursue Select Strategic Opportunities
We intend to pursue strategic acquisitions and alliances that
will enable us to supplement our internal growth, expand our
trading products and related services, advance our technology
and take advantage of new developments in the markets for energy
commodities trading. For example, we have considered, and may
consider in the future, acquiring or entering into a joint
venture agreement with businesses complementary to our market
data business or businesses that offer risk management or other
complementary services. We may also consider establishing our
own clearinghouse, or acquiring or making a strategic investment
in an existing clearinghouse, to provide clearing services
directly to participants in our futures and OTC markets. We
focus on key evaluation criteria when identifying and assessing
potential strategic transactions.
In this prospectus, we refer to the changes described below as
our recapitalization. Effective immediately prior to the closing
of this offering, we will amend our charter and bylaws to, among
other things:
•
create a new class of common stock, which we refer to as new
common stock, to be issued to investors who purchase shares in
this offering;
•
create a new class of preferred stock;
•
authorize our board of directors to grant holders of our
outstanding shares of Class A common stock, Series 1,
which we refer to as our Class A1 shares, and holders
of our outstanding shares of Class A common stock,
Series 2, which we refer to as our
Class A2 shares, a right to convert these shares into
shares of new common stock at the holder’s option, subject
to such conditions as our board of directors may deem
appropriate;
•
adopt customary anti-takeover provisions in our charter; and
•
reduce the number of authorized and outstanding Class A1
and Class A2 shares by way of a 1 for 4 reverse stock
split.
Unless the context otherwise requires, we refer to our
Class A1 shares and our Class A2 shares,
collectively, as our Class A common stock, and we refer to
our Class A common stock and shares of our new common stock
that will be sold in this offering, collectively, as our common
stock. Any shares to be sold by the selling shareholders in this
offering will be converted from the Class A2 shares
held by such holder into shares of new common stock immediately
prior to the closing of this offering.
Unless otherwise specified, all information in this prospectus
assumes that the recapitalization has been completed, including
the 1 for 4 reverse stock split of the Class A common
stock, and all share and per share data in this prospectus
relating to our capital stock, stock options and restricted
stock grants have been adjusted retroactively to give effect to
the reverse stock split. Unless otherwise specified, all
references to our common stock and our charter and bylaws refer
to those items as they will be in effect at the closing of this
offering.
You may contact us at our principal executive offices, located
at 2100 RiverEdge Parkway, Suite 500, Atlanta, Georgia30328, 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.
We will receive net proceeds from our sale of common stock in
the offering of approximately $39.3 million (assuming a per
share price equal to the midpoint of the estimated price range
set forth on the cover of this prospectus). We intend to use the
net proceeds for general corporate purposes, including expanding
and diversifying our products and services, and for repayment in
full of outstanding long-term debt, which as of June 30,2005, amounted to $13.0 million. We will not receive any
proceeds from the sale of common stock by the selling
shareholders.
Voting rights
The holders of our common stock will be 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.
Proposed 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
52,885,868 shares of our common stock outstanding as of
June 30, 2005, after giving effect to the recapitalization.
This number of shares of common stock to be outstanding excludes:
•
5,250,000 shares of our common stock reserved for issuance
upon the exercise of options under our 2000 Stock Option Plan,
of which 5,052,260 shares were subject to outstanding
options as of June 30, 2005, at a weighted average exercise
price of $8.44 per share;
•
1,425,424 shares of our common stock under our 2004
Restricted Stock Plan subject to outstanding grants as of
June 30, 2005; and
•
18,984 shares of our common stock under our 2003 Restricted
Stock Deferral Plan for Outside Directors subject to outstanding
grants as of June 30, 2005.
(1)
Does not include 1,500,000 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. All shares to be sold by the selling shareholders
will be converted from the Class A2 shares held by such
holders into shares of new common stock immediately prior to the
closing of this offering. All references to common stock to be
outstanding after the offering include these Class A2
shares as new common stock.
(2)
Includes 10,000,000 shares of new common stock,
2,862,579 Class A1 shares and 42,523,289
Class A2 shares.
The following tables summarize the consolidated financial data
for our business. The following summary consolidated financial
data set forth below should be read in conjunction with our
consolidated financial statements and related notes and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included elsewhere in
this prospectus.
We derived the summary consolidated statement of income data and
the consolidated balance sheet data set forth below for the six
months ended June 30, 2005 and 2004 and as of June 30,2005 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, 2004, 2003 and 2002 and as of
December 31, 2004 and 2003 from our audited consolidated
financial statements that are included elsewhere in this
prospectus in reliance upon the report of Ernst & Young
LLP, independent registered public accounting firm. Our
historical results do not necessarily indicate results expected
for any future period. In management’s 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.
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 six months
ended June 30, 2005 and 2004 and the years ended
December 31, 2004, 2003 and 2002, see our consolidated
statements of income and note 12 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 “Management’s
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 six months ended June 30, 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, and other
associated costs, including legal costs and asset impairment
charges. No floor closure costs were incurred in prior periods
and no additional closure costs are expected to be incurred. See
note 19 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 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 six months ended June 30, 2005.
See note 14 to our consolidated financial statements that
are included elsewhere in this prospectus.
(5)
The financial results for the six months ended June 30,2005 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 ongoing litigation.
(6)
We granted a put option to Continental Power Exchange, Inc. in
connection with our formation that could require us under
certain circumstances to purchase its 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. See
“Certain Relationships and Related Transactions —
Continental Power Exchange, Inc. Put Agreement”. We
initially recorded the redeemable stock put at the minimum
$5 million redemption threshold. We have adjusted the
redeemable stock put to its redemption amount at each subsequent
balance sheet date. The adjustment to the redemption amount has
been recorded to retained earnings or, in the absence of
positive retained earnings, additional paid-in capital. See
note 9 to our consolidated financial statements that are
included elsewhere in this prospectus.
(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)
In connection with our recapitalization, immediately prior to
the completion of this offering we will amend our charter to
effect a 1 for 4 reverse stock split of our common stock.
All share data and per share data have been adjusted
retroactively for all periods presented to give effect to the
reverse stock split. For a description of our recapitalization,
see “Organization and Recapitalization.” The
recapitalization will have no financial impact on our
consolidated statements of income or financial statement
balances.
Restricted cash and restricted short-term investments
12,476
12,476
18,421
36,797
Total current assets
130,962
104,662
100,042
105,893
Total assets
228,840
202,540
207,518
214,879
Total current liabilities
32,242
32,242
34,440
17,917
Long-term portion of revolving credit facility
—
13,000
13,000
—
Redeemable stock put
24,176
24,176
17,582
17,582
Shareholders’ equity
163,894
124,594
132,149
101,194
(1)
As adjusted to reflect the sale of shares of our common stock in
this offering at an assumed initial public offering price of
$19.00 per share (the midpoint of the estimated price range set
forth on the cover of this prospectus), after deducting the
underwriting discount and our estimated expenses in this
offering, and our repayment, out of the net proceeds of this
offering, of long-term debt which, as of June 30, 2005,
amounted to $13.0 million.
Our total average daily exchange fee and commission fee revenues
$
477
$
336
$
353
$
294
$
460
Our Trading Volume:
Futures volume(1)
18,598
17,758
35,541
33,341
30,441
Futures average daily volume(2)
150
142
140
132
121
OTC volume(1)
24,847
12,447
30,961
24,260
43,982
OTC average daily volume(2)
199
100
123
97
175
(1)
Volume is calculated based on the number of contracts traded in
our markets, or the number of round turn trades. Each
“round turn” represents a matched buy and sell order
of one contract.
(2)
Represents the total volume, in contracts, for the period
divided by the number of trading days during that period.
The purchase of our common stock involves significant
investment risks. The risks described below comprise all
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, 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. 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 year’s 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.”
In November 2004, NYMEX opened an open-outcry trading floor in
Dublin for trading in a contract that directly competes with our
most important futures contract, the IPE Brent Crude futures
contract. Similarly, on April 8, 2005, NYMEX began offering
trading in a Northwest European gas oil futures contract that
directly competes with the IPE Gas Oil futures contract. On
September 12, 2005, NYMEX opened a new open-outcry trading
floor in London, simultaneously closing its Dublin trading floor
and shifting trading in Brent crude futures contracts and
Northwest European gas oil futures contracts to London. Given
the recent closure of our open-outcry trading floor on
April 7, 2005 and the fact that we now conduct all futures
trading exclusively in our electronic markets, a NYMEX trading
floor may appeal to traders who prefer the open-outcry method of
trading. If we lose participants to NYMEX, we would lose trading
volume, which could negatively impact our results of operations
and profitability. See also “— We may lose
trading volume in our futures business following the closure of
our open-outcry trading floor”. 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. NYMEX has announced that it
expects to appeal that decision. If NYMEX is successful in its
appeal, and the matter is determined adversely to us, 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 HoustonStreet;
•
energy futures exchanges, such as European Energy Derivatives
Exchange, or Endex (formerly known as Amsterdam Power Exchange),
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. 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 substantially larger than we are and 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 than we do. In addition, our competitors may:
•
respond more quickly to new or evolving opportunities,
technologies and participant requirements than we can;
•
develop services and products similar to or that compete with
ours;
•
develop services and products that are preferred by our
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;
•
utilize better, more user-friendly and more reliable technology;
•
consolidate and form alliances, which may create higher trading
volumes, cost reductions and better pricing than we offer;
•
more effectively market, promote and sell their products and
services; and
•
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 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 86.7%, 83.9%,
86.9% and 94.7% of our consolidated revenues for the six months
ended June 30, 2005, and for the years ended
December 31, 2004, 2003 and 2002, respectively, from our
transaction-based business. Of our consolidated revenues, 1.0%,
7.6% and 2.6% for the years ended December 31, 2004, 2003
and 2002, respectively, represented shortfall payments made
under order flow agreements with our Initial Shareholders, the
Gas and Power Firms and order flow agreements in the OTC
European gas markets, all of which are no longer in effect. 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. 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, reductions in commission
rates or regulatory changes, 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. 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.
This is particularly true in the case of increased trading due
to the effects of Hurricanes Katrina and Rita, which may be
temporary and unlikely to continue. 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.
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;
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, many 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 IPE Brent Crude and IPE 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 the markets
for IPE Brent Crude futures contracts, IPE Gas Oil futures
contracts and OTC North American natural gas and power
contracts. Trading in IPE Brent Crude futures contracts
accounted for 27.2%, 29.7%, 30.4% and 17.6% of our consolidated
revenues for the six months ended June 30, 2005, and for
the years ended December 31, 2004, 2003 and 2002,
respectively. Trading in IPE Gas Oil futures contracts accounted
for 9.5%, 11.3%, 10.6% and 6.8% of our consolidated revenues for
the six months ended June 30, 2005, and for the years ended
December 31, 2004, 2003 and 2002, respectively. Trading in
OTC North American natural gas contracts accounted for 35.9%,
26.8%, 17.9% and 33.3% of our consolidated revenues for the six
months ended June 30, 2005, and for the years ended
December 31, 2004, 2003 and 2002, respectively. Trading in
OTC North American power contracts accounted for 10.9%, 8.7%,
6.1% and 17.7% of our consolidated revenues for the six months
ended June 30, 2005, and for the years ended
December 31, 2004, 2003 and 2002, respectively. Our trading
volume or market share in these markets may decline due to a
number of factors, including:
If our trading volume or market share in these markets declines,
our revenues would likely decline, which would negatively impact
our ability to remain profitable and to grow our business.
Several of the largest and most active commercial participants
in our North American natural gas and power markets terminated
or substantially reduced their energy commodities trading
activities beginning in mid-2002. This was due, in part, to
highly publicized problems involving energy companies and
significant declines in liquidity and trading volumes, increased
regulatory scrutiny and enforcement actions brought against
certain market participants. While some of these participants
later resumed their trading activities, several new participants
began trading in our markets — most notably financial
institutions, hedge funds and proprietary trading firms.
Competition for these new market entrants among exchanges and
trading operations across a variety of markets is intense.
A decline in the production of commodities traded in our
markets could reduce our liquidity and adversely affect our
revenues and profitability.
We derived 85.6%, 82.1%, 79.1% and 92.0% of our consolidated
revenues for the six months ended June 30, 2005, and for
the years ended December 31, 2004, 2003 and 2002,
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, our participants could
become less willing to trade in contracts based on that
commodity. For example, the IPE 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 IPE 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 IPE 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 IPE Brent Crude futures contract accounted
for 60.7%, 58.0%, 58.0% and 57.9% of our total revenues from our
futures business, net of intersegment fees, for the six months
ended June 30, 2005, and for the years ended
December 31, 2004, 2003 and 2002, respectively, or 27.2%,
29.7%, 30.4% and 17.6% of our consolidated revenues for the six
months ended June 30, 2005, and for the years ended
December 31, 2004, 2003 and 2002, respectively. Any
uncertainty surrounding the settlement of the IPE Brent Crude
futures contract, or a decline in the physical supply or
production of any other commodity, could result in a decline in
trading volumes in our markets, adversely affecting our revenues
and profitability.
We may lose trading volume in our futures business
following the closure of our open-outcry trading floor.
In response to the increasing acceptance and adoption of
electronic trading, and to maintain and enhance our competitive
position in our futures business, we closed our open-outcry
trading floor and fully transferred all trading in futures
contracts to our electronic platform on April 7, 2005. We
cannot assure you that the market will accept our decision to
offer our electronic platform as the sole forum for trading the
contracts that previously were traded both electronically and
through our open-outcry trading floor, or that we will be able
to maintain our market share and liquidity in our products.
During the period following the closure of our open-outcry
trading floor, average daily futures trading volumes initially
decreased to 137,000 contracts traded in April 2005 from 151,000
contracts traded in March 2005, but have since increased to a
daily average of 183,000 contracts traded during the three
months ended September 30, 2005. The initial decline in
April was due in part to the displacement of floor-based traders
following the floor closure on April 7, many of whom later
began trading electronically along with new participants.
However, some of these traders may have temporarily transferred
their trading activity to our electronic platform, but may
subsequently seek an alternate trading venue. On
September 12, 2005, NYMEX established an open-outcry
trading floor in London for trading in Brent crude futures
contracts and Northwest European gas oil futures contracts.
NYMEX’s London trading floor may attract certain traders,
who may migrate their trading to NYMEX from our
electronic platform. NYMEX may also offer financial incentives
that we are unable to match to traders to trade on their
open-outcry trading floors, as it has done in the past. Any
decline in our trading volumes as a result of the floor closure
in the short-term or long-term will negatively impact our
transaction fees and, therefore, our revenues. Historically, we
have derived a substantial portion of our futures business
revenues from transaction fees generated from trades executed on
our open-outcry trading floor. During the year ended
December 31, 2004, only 6.9% of our gross transaction fees
and only 4.3% of our net transaction fees in our futures
business segment were derived from exchange fees generated by
trades executed on our electronic platform. Declining trading
volumes may also make our futures markets less liquid than those
of competing markets that trade exclusively on an open-outcry
trading floor or on both an open-outcry trading floor and an
electronic platform. Over time, this decision may prove to be
ineffective and could ultimately adversely affect our
profitability and competitive position. We also incurred charges
in the second quarter of 2005 of $4.8 million in connection
with the closure of the open-outcry trading floor. See also
“— 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”.
Furthermore, our ability to retain existing participants and
attract new participants to our futures markets, and to maintain
market share and liquidity in our products, may be impaired as a
result of any technical problems or failures associated with our
platform. See “— Our business may be harmed by
computer and communications systems failures and delays”
for a more detailed discussion of risks related to the operation
of our electronic platform.
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 year’s 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 year’s prior written
notice. Our cleared OTC contracts have become a significant
component of our business, and accounted for 62.2%, 44.5%, 13.4%
and 1.4% of the revenues, net of the intersegment fees,
generated by our OTC business for the six months ended
June 30, 2005, and for the years ended December 31,2004, 2003 and 2002, respectively.
The interruption or cessation of these clearing services and our
inability to make alternate arrangements in a timely manner
could 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 six months ended June 30, 2005,
and for the years ended December 31, 2004, 2003 and 2002,
transaction fees generated by our futures business, which are
also referred to as exchange fees, accounted for 37.4%, 42.0%,
42.6% and 25.1%, 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, could 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 six
months ended June 30, 2005, and for the years ended
December 31, 2004, 2003 and 2002, transaction fees derived
from trading in cleared OTC contracts accounted for 34.3%,
21.7%, 6.4% and 0.9%, respectively, of our consolidated
revenues. 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. As discussed below, as an
alternative approach, we may establish or acquire our own
clearinghouse. However, the number of clearing facilities that
are not owned by our competitors is limited, and developing our
own clearing facility would be costly and time consuming.
Requiring our participants to change clearing facilities may
also be disruptive and costly.
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 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 in the future decide to establish
a clearinghouse that would clear transactions executed in our
markets. Alternatively, we might decide to purchase or acquire
an interest in an existing clearinghouse for that purpose.
Establishing or acquiring a clearinghouse, and subsequently
operating the clearinghouse, would require substantial ongoing
expenditures and would consume a significant portion of our
management’s 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
might 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 in any event
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.
Many of our current shareholders are also our participants
and their interests may differ from those of other
shareholders.
Many of our Initial Shareholders and the Gas and Power Firms are
both our principal shareholders and participants in our markets.
Revenues from these investors accounted for 15.8%, 23.3%, 45.8%
and 60.8% of our revenues generated by our OTC business, net of
intersegment fees, for the six months ended June 30, 2005,
and for the years ended December 31, 2004, 2003 and 2002,
respectively. Revenues from all our shareholders that own in
excess of 1% of our outstanding common stock accounted for
22.5%, 27.1%, 36.3% and 50.6% of our consolidated revenues for
the six months ended June 30, 2005, and for the years ended
December 31, 2004, 2003 and 2002, respectively. 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. They, collectively, will own
approximately %
of our outstanding common stock upon the closing of this
offering.
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, three of our Initial
Shareholders are affiliated with Morgan Stanley & Co.
Incorporated, Goldman, Sachs & Co. and SG Americas
Securities, LLC, each an underwriter for this offering.
We are currently subject to oversight in the United States
and regulation in the United Kingdom. Failure to comply with
existing regulatory requirements, and possible future changes in
these requirements, could adversely affect our business.
We operate our electronic platform 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. In contrast, the IPE, through which we
conduct our futures business, operates as a Recognized
Investment Exchange in the United Kingdom. As a Recognized
Investment Exchange, the IPE 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. The IPE is required under the Financial
Services and Markets Act 2000 to maintain sufficient financial
resources, adequate systems and controls and effective
arrangements for monitoring and disciplining its members. The
IPE’s 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. Failure to comply with our
regulatory requirements could subject us to significant
penalties, including termination of our ability to conduct our
regulated businesses.
Future 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:
•
the manner in which we communicate and contract with our
participants;
•
the demand for and pricing of our products and services;
•
a requirement that we maintain minimum regulatory capital on
hand;
•
a requirement that we exercise regulatory oversight with respect
to our OTC participants, and assume responsibility for their
conduct;
•
a requirement that we implement systems and procedures to
maintain and enforce compliance by our OTC participants;
•
our financial and regulatory reporting practices;
•
our record-keeping and record-retention procedures;
•
the licensing of our employees; and
•
the conduct of our directors, officers, employees and affiliates.
The implementation of new regulations 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 OTC 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 only limited regulatory
oversight. 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 recent years,
however, 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. As a result of the foregoing, in 2002 several
significant commercial participants in the energy trading
markets ceased all trading operations. Primarily as a result of
this, our trading volumes declined from 44.0 million
contracts for the year ended December 31, 2002 to
24.3 million contracts for the year ended December 31,2003. While volumes have since increased to 31.0 million
contracts for the year ended December 31, 2004 and
24.8 million contracts for the six months ended
June 30, 2005, we cannot predict whether these trading
volumes will remain at these levels or continue to grow in the
future.
In connection with the above referenced investigations,
governmental bodies became concerned that various market
participants may have used our OTC electronic platform, among
other venues such as voice brokers, to conduct potentially
manipulative trading activity, and, during this time, we were
required to provide extensive information to the authorities in
connection with their investigations. This process was costly
and the resulting publicity may have discouraged other
participants or potential participants from using our platform.
Furthermore, in the wake of suggestions that manipulative
trading practices by certain market participants may have
contributed to unseasonably high prices in the wholesale power
market in California and other western states in the summer of
2000, and in response to a number of other factors, including
the collapse of Enron Corporation and recent energy shortages
following Hurricanes Katrina and Rita, legislative and
regulatory authorities at both the federal and state levels, as
well as political and consumer groups, called for increased
regulation and monitoring of the OTC commodities markets in
general and the North American natural gas and power markets
(currently our most important OTC markets), in particular. For
example, regulators in some states publicly questioned whether
some form of regulation, including price controls, should be
reimposed 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 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 and to require
some participants on 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 addition, the
energy bill that was recently signed into law by the President
on August 8, 2005, grants to 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. Should the Federal Energy Regulatory Commission decide
to exercise its rulemaking powers, such rules could adversely
impact demand for our data products in the United States.
We cannot assure you that future unanticipated events in the
markets for energy commodities trading will not lead to a
recurrence of regulatory scrutiny or to changes in the level of
regulation to which our OTC 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 the power or other
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 our 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 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 recent 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:
•
enhance our existing services and maintain and improve the
functionality and reliability of our electronic platform, in
particular, reducing network downtime;
•
develop or license new technologies that address the
increasingly sophisticated and varied needs of our participants;
•
anticipate and respond to technological advances and emerging
industry practices on a cost-effective and timely basis; and
•
continue to attract and retain highly skilled technology staff
to maintain and develop our existing technology and to adapt to
and manage emerging technologies.
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 this
Offering — The market price of our common stock mayfluctuate significantly, and it may trade at prices below theinitial public 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.
Fluctuations in currency exchange rates may adversely
affect our operating results.
We currently generate 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, 39.4%, 46.1%, 47.1% and 33.7% were
denominated in pounds sterling for the six months ended
June 30, 2005, and for the years ended December 31,2004, 2003 and 2002, respectively, and we expect our exposure to
foreign currency exchange risk to increase to the extent we
are able to expand our futures business. We have foreign
currency translation risk equal to our net investment in these
subsidiaries. As of June 30, 2005, $46.0 million of
our cash and cash equivalents and restricted cash,
$6.9 million of our accounts receivable, $79.5 million
of our goodwill and other intangible assets and
$122.4 million of our net assets were denominated in pounds
sterling.
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. For example,
we had foreign currency transaction gains of $1.1 million
for the six months ended June 30, 2005 and foreign currency
transaction losses of $1.4 million, $644,000 and $149,000
for the years ended December 31, 2004, 2003 and 2002,
respectively. 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.
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.
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 products and
services do not infringe on the rights of others or that others
will not make claims of infringement against us. 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 has announced that it expects to
appeal the court’s findings, which it may do on or before
November 4, 2005. In addition, NYMEX may pursue certain
state law claims in New York state court that were dismissed
from the federal court case on jurisdictional grounds. If NYMEX
successfully appeals the court’s judgment and we are
subsequently found to have infringed on NYMEX’s
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. We derived 26.5% and 17.2% of our consolidated
revenues for the six months ended June 30, 2005 and the
year ended December 31, 2004, respectively, from Henry Hub
natural gas and West Texas Intermediate crude oil contracts
cleared and settled on the basis of, or by reference to, NYMEX
settlement prices. See “Regulation and Legal
Proceedings — Legal Proceedings — NYMEX
Claim of Infringement”. In addition, we recently settled an
ongoing patent infringement litigation with EBS in exchange for
a payment of $15.0 million to EBS. See “Regulation and
Legal Proceedings — Legal Proceedings — EBS
Claim of Infringement”.
In general, 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, to obtain
licenses to develop and market the products or services from the
holders of the patents or to 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. 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. 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.
We have secured trademark registrations for
“IntercontinentalExchange”, “ICE” and our
globe design from the United States Patent and Trademark Office,
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.
Our limited operating history may make it difficult to
evaluate our future prospects, may increase the risk that we
will not continue to be successful and may increase the risk of
your investment.
We began operations in 2000. As a result, we have a limited
operating history for you to evaluate in assessing our future
prospects. In addition, while the IPE was established in 1980,
we did not begin to operate the IPE until we acquired the IPE in
June 2001 and integrated it into our business. We also did not
offer trading in futures contracts or options on futures
contracts exclusively in our electronic markets prior to the
closure of our open-outcry trading floor on April 7, 2005.
Accordingly, our historic and recent financial results may not
be representative of what they may be in the future. We cannot
assure you that our growth will continue at the same rate or at
all, or that we will not experience declines in revenues and
profitability in the future. You must consider our business and
prospects in light of the risks and difficulties we will
encounter as an early-stage company with a limited operating
history.
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:
•
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.Clearnet’s 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.
•
When we introduced new OTC products initially, we obtained order
flow commitments from leading market participants, which were
instrumental in the development of liquid markets for those
products. However, we do not intend to obtain comparable
commitments with regard to new products that we introduce, which
could make successful development of new trading markets
particularly uncertain.
•
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.
•
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.
•
As an early-stage company, 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.
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.
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. To date, we have not offered our
participants similar incentives except as described below.
We have offered our trade execution services to market
participants without charge for trading West Texas Intermediate
crude oil bullets in our OTC market in an effort to increase the
liquidity of this market. This fee waiver began in November 2004
and extends through the end of 2005. We recognized $113,000,
$240,000 and $858,000 in commission fee revenues for West Texas
Intermediate crude oil bullet contracts for the years ended
December 31, 2004, 2003 and 2002, respectively. Assuming
trading volumes for the period would have remained unchanged if
we had charged our customary fee, we would have generated
commission fees for West Texas Intermediate crude oil bullets of
$264,000 during the six months ended June 30, 2005. Similar
efforts by us or our competitors in the future could have an
adverse effect on our profitability.
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:
•
unanticipated disruption in service to our participants;
•
slower response time and delays in our participants’ trade
execution and processing;
•
failed settlement by participants to whom we provide trade
confirmation or clearing services;
•
incomplete or inaccurate accounting, recording or processing of
trades;
•
our distribution of inaccurate or untimely market data to
participants who rely on this data in their trading
activity; and
•
financial loss.
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.
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. These individuals possess extensive
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 chief
operating officer, Richard V. Spencer, our chief financial
officer, Edwin D. Marcial, our chief technology officer,
and David S. Goone, our head of business development and sales,
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 the executive officers and key employees
described in the previous sentence, it is possible that one or
more of these persons could voluntarily terminate their
employment agreements with us. Any loss or interruption of the
services of our executive officers or key product development or
technology 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. In addition, we 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. 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 nine 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 a financial service provider, 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 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 oversight in the United States and regulation in the United
Kingdom. 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.
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.
If appropriate opportunities present themselves, we may acquire
businesses, products or technologies that we believe have
strategic value. We may not be able to identify, 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 the IPE, in
integrating a significant acquisition into our business. The
process of integration may produce unforeseen operating
difficulties and expenditures and may absorb significant
attention of our management that would otherwise be available
for the ongoing development 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.
Risks Relating to this Offering
There has been no prior public market for our common
stock, and we cannot assure you that an active trading market in
our stock will develop or be sustained.
Prior to this offering, there has been no public market for our
common stock. We cannot assure you that an active trading market
will develop or be sustained after this offering. Although we
have applied to list our common stock on the New York Stock
Exchange, we do not know whether third parties will find our
common stock to be attractive or whether firms will be
interested in making a market in our common stock. Also, if you
purchase shares of common stock in this offering, you will pay a
price that was not established in public trading markets. The
initial public offering price of our common stock will be
determined through negotiation between us and the
representatives of the underwriters and thus may not be
indicative of the market price for our common stock after this
offering. Consequently, you may not be able to resell your
shares above the initial public offering price and may suffer a
loss on your investment.
Through their affiliates, the lead underwriters for this
offering are also selling shareholders, and therefore have
interests in this offering beyond customary underwriting
discounts and commissions.
The lead underwriters for this offering, Morgan Stanley &
Co. Incorporated and Goldman, Sachs & Co., are
affiliates of Morgan Stanley Capital Group Inc. and The Goldman
Sachs Group, Inc., respectively, each of which is participating
as a selling shareholder in this offering. In addition, SG
Americas Securities, LLC, an underwriter for this offering, is
an affiliate of Société Générale Financial
Corporation, which is participating as a selling shareholder in
this offering. We expect that Morgan Stanley Capital Group Inc.
will
sell shares,
or %
of its interest in us, The Goldman Sachs Group, Inc. will
sell shares,
or %
of its interest in us, and Société Générale
Financial Corporation will
sell shares,
or %
of its interest in us. There may be a conflict of interest
between their interests as selling shareholders (i.e., to
maximize the value of their investment) and their interests as
underwriters (i.e., in negotiating the initial public offering
price). As affiliates of participants in this offering that are
seeking to realize the value of their investment in us, the lead
underwriters have interests beyond customary underwriting
discounts and commissions.
The market price of our common stock may fluctuate
significantly, and it may trade at prices below the initial
public offering price.
The market price of our common stock after this offering may
fluctuate significantly from time to time as a result of many
factors, including:
•
investors’ perceptions of our prospects;
•
investors’ perceptions of the prospects of the commodities
markets and more broadly, the energy markets;
•
differences between our actual financial and operating results
and those expected by investors and analysts;
•
changes in analysts’ recommendations or projections;
•
fluctuations in quarterly operating results;
•
announcements by us or our competitors of significant
acquisitions, strategic partnerships or divestitures;
•
changes or trends in our industry, including trading volumes,
competitive or regulatory changes or changes in the commodities
markets;
•
changes in valuations for exchanges and other trading facilities
in general;
•
adverse resolution of pending litigation against us;
•
additions or departures of key personnel;
•
changes in general economic conditions; and
•
broad market fluctuations.
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. As a result, our common stock may trade
at prices significantly below the initial public offering price.
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 following this offering, 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. Sales by our existing shareholders might also
make it more difficult for us to raise equity capital by selling
new common stock at a time and price that we deem appropriate.
Based on shares outstanding as of June 30, 2005, upon
completion of this offering, we will have 55,385,868 shares
of common stock outstanding. Of these outstanding shares, the
10,000,000 shares sold in this offering will be freely
tradable in the public market. The remaining
45,385,868 shares will be restricted securities as defined
in the SEC’s Rule 144 and may be sold by the holders
into the public market from time to time in accordance with
Rule 144.
Approximately %
of these restricted shares will be eligible for sale under
Rule 144 following expiration of the lockup agreements
described below.
We and the holders of 94.6% of our shares outstanding and all of
our shares issuable under options and restricted stock award
agreements outstanding as of June 30, 2005 —
including our directors and officers — have agreed to
a 180-day lockup, meaning that, for a period of 180 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 our lead underwriters in their sole
discretion may release any of the securities subject to the
lockup, at any time without notice.
After this offering, we intend to register initially
9,100,000 shares of our common stock for issuance of shares
pursuant to, or upon the exercise of options granted under, our
employee stock option plans, restricted stock plans or equity
incentive plan. We may increase the number of shares registered
for this purpose from time to time. Once we register these
shares, they will be able to be sold in the public market upon
issuance. We also intend to enter into a registration rights
agreement with designated holders of our Class A2 shares.
See “Shares Eligible for Future Sale”.
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 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 will:
•
require that the number of directors be determined, and any
vacancy or new board seat be filled, only by the board;
•
not permit shareholders to act by written consent, other than
for certain class votes by holders of the Class A common
stock;
•
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;
•
allow a meeting of shareholders to be adjourned or postponed
without the vote of shareholders;
•
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;
•
require that notice of shareholder proposals be submitted
between 90 and 120 days prior to the scheduled meeting; and
•
authorize the issuance of undesignated preferred stock, or
“blank check” preferred stock, by our board of
directors without shareholder approval.
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
corporation’s 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 officer’s 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. See
“Management — Employment Agreements and Benefit
Plans — Termination — Termination Following
a Change in Control” for a discussion of these provisions.
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.
Your share ownership in our company will be immediately
and substantially diluted.
If you purchase shares of our common stock in this offering, you
will experience an immediate and substantial dilution of
$17.05 per share (assuming the common stock is offered at
$19.00 per share, the midpoint of the estimated price range
set forth on the cover of this prospectus) because the price
that you pay will be substantially greater than the pro forma
net tangible book value per share of such stock based on the pro
forma net tangible book value per share as of June 30,2005. This dilution is due to the fact that when our existing
shareholders purchased or were otherwise issued shares of our
common stock in the past, they did so at prices that were
significantly lower than the price at which our common stock is
being offered to the public in this offering.
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 SEC and other factors our board deems
relevant.
We will have broad discretion over the use of proceeds to
us from this offering, and we may not use these funds in a
manner of which you will approve.
We will have broad discretion to use the net proceeds to us from
this offering, and you will be relying on the judgment of our
board of directors and management regarding the use and
application of these proceeds. Although we expect to use the net
proceeds for working capital and general corporate purposes, we
have not allocated these net proceeds for specific purposes and
cannot assure you that we will use these funds in a manner of
which you will approve.
This prospectus, including the sections entitled
“Prospectus Summary”, “Risk Factors”,
“Management’s 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”,
“expects”, “intends”, “plans”,
“anticipates”, “believes”,
“estimates”, “predicts”,
“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. 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 include, but are not limited to, our
discussion of the following matters:
•
The statements in “Prospectus Summary — The
Offering” and “Dividend Policy” concerning our
current intention not to pay any cash dividends.
•
The statements in “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Our Business Environment” and
“Industry Overview — Industry Trends —
Increasing Adoption of Energy Commodities as an Investable Asset
Class” and “— New Market Participants”
concerning management’s expectations regarding the business
environment in which it operates and trends in our industry.
•
The statements in “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Sources of Revenues” concerning our
plans not to adjust commission rates and our belief that we will
attract trading without entering into order flow agreements.
•
The statements in “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Components of Expenses” concerning
management’s expectations of various costs.
•
The statements in “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Segment Reporting — Our Futures
Business Segment” concerning the benefits that we
anticipate will result from the closure of our open-outcry
trading floor and the complete transition of all futures trading
in our markets to our electronic platform.
•
The statements in “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Future Capital Requirements”
concerning our belief that cash flows will be sufficient to fund
our working capital needs and capital expenditures through the
end of 2006.
•
The statements in “Business — Our Growth
Strategy” concerning our plans and intentions to attract
new market participants, increase the connectivity to our
marketplace, expand our market data business, develop new
products and services, and pursue select strategic acquisitions
and alliances.
•
The statements “Business — Our Products and
Services” concerning our belief that our electronic trade
confirmation service could attract new market participants.
•
The statements in “Business — Technology”
concerning our electronic platform and disaster recovery system
technologies and our belief that we would be able to gain access
on a timely basis to comparable products and services if our key
technology contracts were terminated.
•
The statements in “Regulation and Legal Proceedings”
concerning regulation and litigation involving our company.
Assuming an initial offering price of $19.00 per share, which is
the midpoint of the estimated price range set forth on the cover
of this prospectus, we expect to receive net proceeds from this
offering of approximately $39.3 million after deducting the
estimated underwriting discount and offering expenses, which are
payable by us. 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.
The principal purposes of this offering are to obtain additional
capital, create a public market for our common stock, facilitate
our future access to public equity markets, enable us to provide
incentives to our employees through equity-linked compensation
programs and provide increased visibility in the market.
Publicly tradable shares of our common stock may also be used as
an acquisition currency. On November 23, 2004, we borrowed
the entire $25.0 million available under our credit
facility with Wachovia Bank, National Association to fund a
portion of the $67.5 million redemption of our Class B
common stock. The borrowings outstanding under the credit
facility mature on November 17, 2006. We intend to use a
portion of the proceeds of this offering for the repayment in
full of all outstanding debt under this facility, which as of
June 30, 2005, amounted to $13.0 million, bearing
interest at a 30-day LIBOR locked interest rate of 4.29%. We
otherwise currently do not have specific plans for the use of
the net proceeds of the offering. We expect that we will use the
net proceeds for general corporate purposes, including expanding
and diversifying our products and services.
We may also use a portion of the net proceeds to acquire
complementary businesses, products and technologies, although we
have no current agreements or commitments to do so. Pending
these uses, we intend to invest the net proceeds of this
offering in short-term money-market and money-market equivalent
securities.
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.
The following table sets forth our cash and cash equivalents,
restricted cash and capitalization as of June 30, 2005 on
an actual basis and on a pro forma as adjusted basis to reflect
the sale of 2,500,000 shares of our common stock offered by
us in this offering at an assumed initial public offering price
of $19.00 per share, the midpoint of the estimated price range
set forth on the cover of this prospectus, after deducting the
estimated underwriting discounts and commissions and our
estimated offering expenses payable by us.
The outstanding share information excludes:
•
5,052,260 shares of our common stock issuable upon the
exercise of stock options outstanding as of June 30, 2005
under our 2000 Stock Option Plan, 1,425,424 shares issuable
pursuant to outstanding awards under the 2004 Restricted Stock
Plan as of June 30, 2005 and 18,984 shares issuable
pursuant to outstanding awards under the 2003 Restricted Stock
Deferral Plan for Outside Directors as of June 30,2005; and
•
166,577 shares of our common stock available for future
issuance under our 2000 Stock Option Plan and
2,125,000 shares available for future issuance under our
2005 Equity Incentive Plan, in each case, as of June 30,2005.
This table should be read in conjunction with “Selected
Consolidated Financial Data”, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements and
related notes included elsewhere in this prospectus.
Preferred Stock, $0.01 par value per share, no shares
authorized, issued or outstanding, actual;
25,000,000 shares authorized and no shares issued or
outstanding, as adjusted for the recapitalization and this
offering
—
—
Common Stock, $0.01 par value per share, no shares
authorized, issued or outstanding and undesignated, actual;
194,275,000 shares authorized and 10,000,000 shares
issued and outstanding, as adjusted for the recapitalization and
this offering(2)
—
100
Class A common stock, Series 1, $0.01 per value
per share, 5,725,159 shares authorized;
2,862,579 shares issued and outstanding, actual;
5,725,000 shares authorized and 2,862,579 shares
issued and outstanding, as adjusted for the recapitalization and
this offering
115
115
Class A common stock, Series 2, $0.01 par value
per share, 75,000,000 shares authorized,
51,557,598 shares issued and 50,023,289 shares
outstanding, actual; 75,000,000 shares authorized,
44,057,598 shares issued and 42,523,289 shares
outstanding, as adjusted for the recapitalization and this
offering
In connection with our recapitalization, effective immediately
prior to the closing of this offering, we will amend our charter
and bylaws to authorize the creation of a new class of common
stock and preferred stock, and effect a 1 for 4 reverse stock
split of our outstanding shares of Class A common stock.
For a description of our recapitalization, see
“Organization and Recapitalization”. All shares to be
sold by the selling shareholders will be converted from the
Class A2 shares held by such holders into shares of new
common stock immediately prior to the closing of this offering.
All references to common as adjusted for the recapitalization
and this offering include these Class A2 shares as new
common stock.
(2)
In November 2004, we exercised the mandatory redemption option
and redeemed all outstanding shares of our Class B
redeemable common stock. Until the effectiveness of our
recapitalization, these shares will be classified as
undesignated shares of common stock.
If you invest in our common stock, your interest will be diluted
to the extent of the difference between the initial public
offering price per share of our common stock and the net
tangible book value per share of common stock upon the
completion of this offering.
The following information is presented on a pro forma basis
reflecting the recapitalization and the creation of a new class
of common stock, which together with our Class A common
stock, we refer to as common stock. The recapitalization is
described in greater detail under the heading “Organization
and Recapitalization”.
The table below illustrates per share dilution to new investors,
beginning with pro forma net tangible book value per share. We
determined pro forma net tangible book value per share by
dividing the pro forma net tangible book value (total book value
of tangible assets less total liabilities) by the pro forma
number of shares of common stock outstanding as of June 30,2005. Our pro forma net tangible book value as of June 30,2005 equaled $68.9 million, or $1.30 per share of common
stock.
After giving effect to the sale of shares of common stock to be
sold in this offering at an assumed initial public offering
price of $19.00 per share, the midpoint of the estimated
price range set forth on the cover of this prospectus, and after
deducting the estimated underwriting discount and offering
expenses payable by us, our pro forma net tangible book value as
adjusted, as of June 30, 2005, would have equaled
$108.2 million, or $1.95 per share of common stock. This
represents an immediate increase in pro forma net tangible book
value of $0.65 per share to our existing shareholders and an
immediate dilution in pro forma net tangible book value of
$17.05 per share to new investors of common stock in this
offering. If the initial public offering price is higher or
lower, the dilution to new investors will be greater or less,
respectively. The following table illustrates this per share
dilution to new investors purchasing our common stock in this
offering:
Assumed initial public offering price per share
$
19.00
Pro forma net tangible book value per share as of June 30,2005
$
1.30
Increase in pro forma net tangible book value per share
attributable to this offering
0.65
Pro forma net tangible book value per share after this offering
1.95
Dilution per share to new investors
$
17.05
The following table summarizes, as of June 30, 2005, the
differences between our existing shareholders and new investors
with respect to the number of shares of common stock issued by
us, the total consideration paid and the average price per share
paid. The calculations with respect to shares purchased by new
investors in this offering reflect an assumed initial public
offering price of $19.00 per share, as specified above, after
deducting the estimated underwriting discount and offering
expenses payable by us.
Shares Purchased
Total Consideration
Average
Price Per
Number
Percentage
Amount
Percentage
Share
Existing shareholders
45,385,868
81.94
%
$
114,797,814
38.70
%
$
2.53
New investors(1)
10,000,000
18.06
181,800,000
61.30
18.18
Total
55,385,868
100
%
$
296,597,814
100
%
(1)
If the underwriters exercise their option to purchase additional
shares in full, the selling shareholders will sell an additional
1,500,000 shares, and new investors will own 20.22% of our
outstanding common stock.
The preceding tables assume no issuance of shares of common
stock under our stock plans after June 30, 2005. As of
June 30, 2005, 5,052,260 shares were subject to
outstanding options under our 2000 Stock Option Plan at a
weighted average exercise price of $8.44 per share. Also,
there were 1,425,424 shares subject to outstanding awards
under the 2004 Restricted Stock Plan and 18,984 shares
subject to outstanding awards under the 2003 Restricted Stock
Deferral Plan for Outside Directors as of June 30, 2005. To
the extent that these outstanding options are exercised or
restricted shares are issued, there will be further dilution to
new investors.
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 as of
and for the six months ended June 30, 2005 and for the six
months ended June 30, 2004 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, 2004, 2003
and 2002 and as of December 31, 2004 and 2003 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 as of December 31, 2002, 2001 and 2000, for the year
ended December 31, 2001, for the period from May 11,2000 through December 31, 2000 and for the period from
January 1, 2000 through May 10, 2000 from our audited
consolidated financial statements, which are not included in
this prospectus. In management’s 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, captioned as
“Predecessor Company”, with respect to the period
January 1, 2000 to May 10, 2000, reflects the
financial statements of our predecessor, Continental Power
Exchange, Inc. Upon our formation on May 11, 2000,
Continental Power Exchange, Inc. contributed all of its assets
and liabilities to us. Continental Power Exchange, Inc.’s
operations prior to our formation on May 11, 2000 qualify
as a predecessor entity under regulations of the SEC and have
therefore been included in our consolidated financial
statements. We converted from a limited liability company to a
corporation on June 15, 2001.
Effective upon the closing of this offering, we will amend our
charter and bylaws to simplify our capital structure and
governance procedures. We describe the transactions that are
part of our planned recapitalization under the heading
“Organization and Recapitalization”.
The historical results presented below are not necessarily
indicative of the results to be expected for any future period.
The following selected consolidated financial data set forth
below should be read in conjunction with our consolidated
financial statements and related notes and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included elsewhere in
this prospectus.
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 six months
ended June 30, 2005 and 2004 and for the years ended
December 31, 2004, 2003 and 2002, see our consolidated
statements of income and note 12 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 “Management’s
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 six months ended June 30, 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, and other
associated costs, including legal costs and asset impairment
charges. No floor closure costs were incurred in prior periods
and no additional closure costs are expected to be incurred. See
note 19 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 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 six months ended June 30, 2005.
See note 14 to our consolidated financial statements that
are included elsewhere in this prospectus.
(5)
Our chief executive officer purchased Continental Power
Exchange, Inc. in October 1997, which resulted in negative
goodwill of $266,000 and a writedown of property and equipment.
The negative amounts of depreciation and amortization expense
during the period from January 1, 2000 through May 10,2000 primarily relate to the amortization of the negative
goodwill in excess of the depreciation of property and
equipment. In connection with our acquisition of the IPE in
June 2001, we amortized $1.7 million in goodwill and
indefinite-lived other intangible assets during the year ended
December 31, 2001. We did not record any amortization
expense on these assets, in accordance with the accounting
standards, subsequent to 2001.
(6)
The financial results for the six months ended June 30,2005 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 ongoing litigation. Excluding these
charges, our consolidated net income for the six months ended
June 30, 2005 would have been $21.4 million,
representing a 113.0% increase from $10.1 million for the
six months ended June 30, 2004. See “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Non-GAAP Financial Measure”.
(7)
We granted a put option to Continental Power Exchange, Inc. in
connection with our formation that could require us under
certain circumstances to purchase its 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. See
“Certain Relationships and Related Transactions —
Continental Power Exchange, Inc. Put Agreement”. We
initially recorded the redeemable stock put at the minimum $5
million redemption threshold. We have adjusted the redeemable
stock put to its redemption amount at each subsequent balance
sheet date. The adjustment to the redemption amount has been
recorded to retained earnings or, in the absence of positive
retained earnings, additional paid-in capital. See note 9
to our consolidated financial statements that are included
elsewhere in this prospectus.
(8)
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.
(9)
We have presented our data for the year ended December 31,2001 on a pro forma basis as if our conversion from a limited
liability company to a corporation, which occurred on
June 15, 2001, had occurred on January 1, 2001. For
more details of this conversion, see the description under the
heading “Organization and Recapitalization”. The share
and per share data for the six months ended June 30, 2005
and 2004 and for the years ended December 31, 2004, 2003
and 2002 are based on actual historical data.
(10)
In connection with our recapitalization, immediately prior to
the completion of this offering we will amend our charter to
effect a 1 for 4 reverse stock split of our common stock. All
share data and per share data have been adjusted retroactively
for all periods presented to give effect to the reverse stock
split. For a description of our recapitalization, see
“Organization and Recapitalization.” The
recapitalization will have no financial impact on our
consolidated statements of income or financial statement
balances.
Restricted cash and restricted short-term investments(1)(2)
12,476
18,421
36,797
8,876
8,157
—
Total current assets
104,662
100,042
105,893
60,841
46,814
13,234
Property and equipment, net
16,105
19,364
25,625
32,843
18,567
9,104
Goodwill and other intangible assets, net
79,911
86,075
81,448
73,950
67,727
—
Total assets
202,540
207,518
214,879
170,053
134,957
22,357
Total current liabilities
32,242
34,440
17,917
17,603
30,023
5,183
Revolving credit facility — current and long-term(1)
13,000
25,000
—
—
—
—
Related-party notes payable — current and long-term
—
—
—
—
16,201
15,540
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
24,176
17,582
17,582
25,960
15,230
9,086
Shareholders’ and members’ equity (deficit)(2)
124,594
132,149
101,194
50,021
19,540
(7,452
)
(1)
The redemption of the Class B redeemable common stock
occurred in November 2004, which resulted in a
$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 early 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.
Our market share — cleared PJM financial power vs.
NYMEX-ClearPort(4)
64.7
%
48.8
%
68.7
%
4.0
%
—
%
—
%
Our Average Daily Trading Fee Revenues(5):
Our futures business average daily exchange fee revenues
$
209
$
190
$
179
$
158
$
125
$
92
Our bilateral OTC business average daily commission fee revenues
77
80
80
112
330
194
Our cleared OTC business average daily commission fee revenues
191
66
94
24
5
—
Our OTC business average daily commission fee revenues
268
146
174
136
335
194
Our total average daily exchange fee and commission fee revenues
$
477
$
336
$
353
$
294
$
460
$
286
Our Trading Volume(6):
Futures volume
18,598
17,758
35,541
33,341
30,441
26,423
Futures average daily volume
150
142
140
132
121
104
OTC volume
24,847
12,447
30,961
24,260
43,982
24,875
OTC average daily volume
199
100
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 of the IPE in June 2001.
(2)
Total crude oil futures contracts traded globally and our
resulting crude oil futures market share is calculated based on
the number of IPE Brent Crude futures contracts traded as
compared to the total IPE Brent Crude futures contracts, NYMEX
Light Sweet Crude and Dublin Brent Crude futures contracts
traded.
(3)
Our cleared Henry Hub market share versus NYMEX-ClearPort is
calculated based on the number of IntercontinentalExchange
cleared Henry Hub natural gas contracts traded as a percentage
of the total IntercontinentalExchange cleared Henry Hub natural
gas contracts and NYMEX-ClearPort Henry Hub natural gas futures
contracts traded.
(4)
Our cleared PJM financial power market share versus
NYMEX-ClearPort is calculated based on the number of
IntercontinentalExchange cleared PJM financial power contracts
traded as a percentage of the total IntercontinentalExchange
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 year divided by the number of trading days during that
year.
(6)
Volume is calculated based on the number of contracts traded in
our markets, or the number of round turn trades. Each round turn
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.
MANAGEMENT’S 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 trading a broad array
of energy products. 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
Internet-based electronic trading platform, our marketplace
brings together buyers and sellers of derivative and physical
energy commodities contracts. We operate our business in two
distinct markets: futures markets and OTC markets. Futures
markets offer trading in standardized derivative contracts on a
regulated exchange and OTC markets offer trading in
over-the-counter derivative contracts, including contracts that
provide for the physical delivery of an underlying commodity and
financial settlement based on the prices of underlying
commodities. During the six months ended June 30, 2005,
18.6 million contracts were traded in our futures markets
and 24.8 million contracts were traded in our OTC markets,
up 4.7% from 17.8 million futures contracts traded during
the six months ended June 30, 2004 and up 99.6% from
12.4 million OTC contracts traded during the six months
ended June 30, 2004. During the year ended
December 31, 2004, 35.5 million contracts were traded
in our futures markets and 31.0 million contracts were
traded in our OTC markets, up 6.6% from 33.3 million
futures contracts traded during the year ended December 31,2003 and up 27.6.% from 24.3 million OTC contracts traded
during the year ended December 31, 2003.
For financial reporting purposes, our business is comprised of
two segments: our futures business segment and our OTC business
segment. Our futures business segment consists of trade
execution in futures contracts and options on futures contracts,
which we conduct through our subsidiary, the IPE. Until
recently, 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. All
of our futures trading is now conducted exclusively in our
electronic markets. We made this decision to maintain and
enhance our competitive position in our futures markets, and to
take advantage of the increasing acceptance and adoption of
electronic trading. 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. As part of both our futures and
OTC business segments, we also offer a variety of market data
services.
We have experienced rapid growth in our revenues, net income and
operating cash flow since trading commenced on our electronic
platform in August 2000. Our consolidated revenues grew to
$108.4 million for the year ended December 31, 2004
from $2.7 million for the combined year ended
December 31, 2000. Our consolidated net income increased to
$21.9 million for the year ended December 31, 2004
from a net loss of $6.8 million for the combined year ended
December 31, 2000. Our consolidated net cash flows from
operating activities grew to $40.2 million in net cash
provided by operating activities for the year ended
December 31, 2004 from $2.9 million in net cash used
in operating activities for the combined year ended
December 31, 2000. On a consolidated basis, we generated
$69.4 million in revenues for the six months ended
June 30, 2005, a 37.4% increase compared to
$50.5 million for the six months ended June 30, 2004,
and $8.7 million in net income for the six months ended
June 30, 2005, a 13.2% decrease compared to
$10.1 million for the six months ended June 30, 2004.
The financial results for the six months ended June 30,2005 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 ongoing litigation.
In 1997, Jeffrey C. Sprecher, our founder, chairman and chief
executive officer, acquired Continental Power Exchange, Inc.,
our predecessor company, to develop a platform to provide a more
transparent and efficient market structure for OTC energy
commodities trading. In May 2000, our company was formed, and
Continental Power Exchange, Inc. contributed all of its assets
to us, which consisted principally of electronic trading
technology, and its liabilities, in return for a minority equity
interest in our company. In connection with our formation, seven
leading wholesale commodities market participants, either
directly or through affiliates, acquired equity interests in our
company and entered into order flow agreements with us. We refer
to these leading commodities market participants (or their
affiliates as the case may be) as our Initial Shareholders. In
November 2000, six leading natural gas and power companies,
which we refer to as the Gas and Power Firms, acquired equity
interests in our business, entered into order flow agreements
with us and made a $30.0 million cash payment to us. The
following firms are our Initial Shareholders: BP Products
North America Inc. (formerly known as BP Exploration and
Oil, Inc.), DB Structured Products, Inc. (formerly known as
Deutsche Bank Sharps Pixley Inc.), The Goldman Sachs Group,
Inc., Morgan Stanley Capital Group Inc., S T Exchange Inc.
(an affiliate of Royal Dutch Shell), Société
Générale Financial Corporation and Total Investments
USA Inc. (an affiliate of Total S.A.). The Gas and Power Firms
that are currently shareholders are affiliated with the
following firms: American Electric Power Company, Duke Energy,
El Paso Energy Partners and Mirant. Two additional Gas and
Power Firms, Aquila and Reliant, are no longer shareholders. The
order flow agreements committed the Initial Shareholders and the
Gas and Power Firms to execute minimum annual volumes of
transactions on our electronic platform. These order flow
agreements expired between 2002 and 2003. See
“— Sources of Revenues — Transaction
Fees” and “Certain Relationships and Related
Transactions”.
On June 18, 2001, we expanded our marketplace to include
futures trading by acquiring IPE Holdings Plc, the owner of the
IPE, in a share-for-share exchange. At that time, the IPE was
operated predominantly as a floor-based open-outcry exchange. In
connection with this acquisition, we converted from a limited
liability company, IntercontinentalExchange, LLC, to our present
corporate form by merging into IntercontinentalExchange, Inc., a
Delaware corporation and the surviving entity of the merger. In
connection with the acquisition, we issued 2,862,579
Class A1 shares and 2,862,579 Class B redeemable
shares to the IPE shareholders in return for their shares in the
IPE. The Class B redeemable shares were subject to
redemption at $23.58 per share under certain circumstances
related to the IPE’s benchmark contracts being traded
exclusively on our electronic platform for a period of time. In
November 2004, we amended our charter to permit early redemption
of the Class B redeemable shares at $23.58 per share,
and redeemed all 2,862,579 Class B redeemable shares for an
aggregate redemption price of $67.5 million.
Effective immediately prior to the closing of this offering, we
will amend our charter and bylaws to create a new class of
common stock, which we refer to as new common stock, and we will
grant conversion rights to our holders of
Class A1 shares and Class A2 shares, which
will permit them to convert their shares into shares of new
common stock, subject to such conditions as our board deems
appropriate. In our amended charter, we will effect a 1 for 4
reverse stock split to reduce the number of outstanding
Class A1 shares and Class A2 shares. For a
detailed discussion of our recapitalization, please refer to
“Organization and Recapitalization” elsewhere in this
prospectus.
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 1990’s,
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 changes in
trading volumes have a direct impact on our business and
profitability. Trading volumes are driven primarily by 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.
In addition to price volatility, changes in global energy
prices, such as those experienced in recent years in crude oil,
can have a significant impact on our trading volumes. While our
trading volumes and transaction fees decreased in our OTC
business segment in 2003 from the levels in 2002, following a
period of reduced liquidity in the OTC markets, our trading
volumes and transaction fees increased in our futures business
segment during the same period. Trends in our trading volumes
and transaction fees 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. Our trading volumes in our
futures business segment may also be affected by our recent
closure of our open-outcry trading floor.
The futures markets are highly regulated and offer trading of
standardized contracts. The futures markets are also more
structured and mature than the institutional markets for OTC
energy trading. According to the Futures Industry Association,
the number of energy futures contracts traded for the year ended
December 31, 2004 was 243.5 million, up from
68.7 million contracts traded for the year ended
December 31, 1995, representing an average compounded
growth rate of 15.1% per annum. In our futures business
segment, rising demand for, among other things, risk management
instruments in the energy sector has driven record trading
volumes for seven consecutive years.
Unlike the futures markets, the OTC markets generally involve
limited regulation and offer customization of contract terms by
counterparties. While the OTC markets are maturing, contracts
traded in the OTC markets generally remain less standardized
than the futures markets and the markets generally have been
characterized by opaqueness and fragmentation of liquidity. We
have introduced a number of structural changes to OTC markets to
increase both transparency and liquidity, including the
introduction of our electronic platform, cleared OTC contracts
and transaction-based indices.
In our OTC business segment, we experienced rapid growth in
trading volumes through the middle of 2002. Beginning in
mid-2002, however, the North American OTC energy markets
experienced a dramatic decline in liquidity and trading volumes
following highly publicized problems involving energy companies,
including widespread credit downgrades, investigations by the
Department of Justice, the Federal Energy Regulatory Commission
and the Federal Trade Commission, relating to alleged
manipulative trading and price reporting practices,
misstatements of financial results, and other matters. As a
result of the foregoing, several significant market participants
reduced or eliminated their energy trading operations near the
end of 2002. While trading volumes in our OTC markets declined
to 24.3 million contracts for the year ended
December 31, 2003 from 44.0 million contracts for the
year ended December 31, 2002, primarily as a result of
these events, we experienced a 9.5% increase from 2002 to 2003
in trading volumes in our futures markets, partially as a result
of some participants migrating their trading to the more
regulated futures markets.
As a result of these events, participants in the OTC markets
became increasingly focused on managing counterparty credit risk
and trading for hedging needs, rather than speculation or
arbitrage. As the credit quality of trading counterparties and
the overall credit environment improved during late 2003 and new
risk management tools were introduced, participants began to
increase their activity in the OTC markets. With the
introduction of cleared OTC contracts, the market began to
experience an influx of new OTC market participants. Financial
services companies, such as financial institutions, hedge funds
and proprietary trading firms began entering the OTC markets in
increasing numbers due to the introduction of new bilateral and
cleared trading products, electronically available markets, risk
management tools, increased price volatility, and the
availability of experienced energy traders displaced from
merchant energy companies.
We launched the industry’s first cleared OTC energy
contracts in March 2002, which reduced the amount of capital
required to trade and the credit risk associated with bilateral
OTC trading by interposing an independent clearinghouse as a
counterparty to trades in these new contracts. Clearing through
a central clearinghouse offers market participants the ability
to cross-margin. 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 transactions. 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 experienced steady growth during the
year ended December 31, 2004 and during the six months
ended June 30, 2005, although we cannot predict whether
this growth will continue in the future. Trading volumes in our
OTC markets increased 27.6% to 31.0 million contracts for
the year ended December 31, 2004 from 24.3 million
contracts for the year ended December 31, 2003. This trend
of volume growth has continued with 24.8 million contracts
traded during the six months ended June 30, 2005, a 99.6%
increase as compared to 12.4 million contracts traded
during the six months ended June 30, 2004 and a 32.4%
increase as compared to 18.5 million contracts traded
during the six months ended December 31, 2004.
We believe that the long-standing move toward electronic trade
execution, together with the lower barriers to entry for new
market participants and the increased adoption of energy
commodities as a tradable, investable asset class, will support
continued growth in our markets. As participants continue to use
more sophisticated financial instruments and risk management
approaches and strategies to help manage their exposure to
energy commodities, we believe there remains considerable
opportunity for further growth in energy derivatives trading on
a global basis.
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, weather, perceived supply and demand
imbalances in underlying energy commodities, the number of
trading days in a quarter and seasonality.
•
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.
Segment Reporting
For financial reporting purposes, our business is divided into
two segments: our futures business segment and our OTC business
segment. For a discussion of these segments and related
financial disclosure, refer to note 16 to our consolidated
financial statements and related notes included elsewhere in
this prospectus.
We conduct our futures business through our subsidiary, the IPE.
The IPE operates as a Recognized Investment Exchange in the
United Kingdom, where it is regulated by the Financial Services
Authority. The IPE was founded in 1980 as a traditional
open-outcry exchange by a group of leading energy and trading
companies. All futures and options trades executed in our
futures markets are cleared by LCH.Clearnet. Only exchange
members may execute trades in our futures markets, for their own
or their clients’ account. Members and their customers
include many of the world’s largest energy companies and
leading financial institutions. We do not risk our own capital
by engaging in any trading activities or by extending credit to
market participants.
Until recently, 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. Since that date, all of our futures trading is conducted
exclusively on our electronic platform. Our decision to close
our open-outcry trading floor was made to take advantage of the
increasing acceptance and adoption of electronic trading and to
maintain and enhance our competitive position in our futures
markets. We believe that the transition of our futures markets
to electronic trading has enhanced our competitive position by
consolidating existing liquidity in our markets that was
previously divided between the open-outcry trading floor and our
platform. We believe that increased liquidity in our electronic
futures markets has attracted new participants interested in
trading energy derivatives. With the growing acceptance of
electronic trade execution due to the advantages it offers over
traditional floor trading — direct market access,
improved speed and quality of trade execution, market
transparency and reduced trading costs — we believe
that we will be competitively positioned to extend electronic
trading on our platform to products for which there is an
interest to trade electronically. During the period following
the closure of our open-outcry trading floor, aggregate trading
volumes in our futures markets have increased from the three
months ended March 31, 2005 and the comparable periods in
2004. Aggregate futures trading volumes were 11.9 million
contracts for the three months ended September 30, 2005, a
31.9% increase compared to 9.0 million contracts for the
three months ended September 30, 2004. Aggregate futures
trading volumes were 30.5 million contracts for the nine
months ended September 30, 2005, a 13.9% increase compared
to 26.8 million contracts for the nine months ended
September 30, 2004. Average daily volumes for the three
months ended September 30, 2005 were 183,000 contracts
compared to 139,000 contracts for the three months ended
September 30, 2004, and 143,000 contracts for the three
months ended March 31, 2005. Average daily volumes
initially decreased to 137,000 contracts traded in
April 2005 from 151,000 contracts traded in
March 2005, 140,000 in February 2005 and 138,000 in
January 2005. However, the 9.1% decrease in average daily
volumes from March 2005 to April 2005 represents a
lesser percentage decrease than the average decrease of 10.4%
from March to April in the years 2000 through 2004. Beginning in
May 2005, trading volumes increased and, in certain cases,
have reached record levels. The initial decline in April was 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. We achieved a record monthly trading volume in our
futures business in May 2005 with average daily trading
volumes of 159,000 contracts. We subsequently achieved a record
monthly average daily trading volume of 173,000 contracts in
June 2005, 189,000 contracts in August 2005 and 190,000
contracts in September 2005. We also achieved daily volume
records for Brent Crude futures and total futures of 231,000 and
296,000 contracts traded, respectively, on August 10, 2005.
As discussed above, the energy markets are subject to
variability in trading volumes between periods in part for
reasons outside of our control. For that reason, we believe it
is more meaningful to compare volumes in the current year period
to the same period in the prior year.
We expect to achieve cost savings of approximately
$1.4 million in 2005 and ranging from approximately
$4.0 million to $5.0 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
the near term, any cost savings will be 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.
We offer market participants trading in two types of instruments
in our futures markets:
•
Futures: A futures contract is a standardized contract to
buy or sell a specified quantity of an underlying asset during a
particular month.
•
Options: An option is a contract that conveys to the
buyer the right, but not the obligation, to call (buy) or
put (sell) an underlying futures contract at a price
determined at the time of execution of the option.
Our IPE 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 six months ended June 30, 2005, on an average
trading day, futures contracts for 109 million barrels of
Brent crude were traded in our markets, with an average notional
daily value of over $5.6 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.
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:
We generate revenues from related parties in the ordinary course
of our business. Revenues attributable to related parties were
$4.7 million and $3.2 million for the six months ended
June 30, 2005 and 2004, respectively, and
$6.4 million, $5.5 million and $9.2 million for
the years ended December 31, 2004, 2003 and 2002,
respectively. For a discussion of our related parties, see
note 12 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 — Transactions Fees”.
(3)
Includes professional service fees and compensation and benefits
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.
The financial results for the six months ended June 30,2005 include $4.8 million in expenses incurred relating to
the closure of the open-outcry trading floor in London.
Excluding these floor closure charges, our futures business net
income for the six months ended June 30, 2005 would have
been $10.4 million, representing a 19.1% increase as
compared to the $8.7 million for the six months ended
June 30, 2004. See “— Non-GAAP Financial
Measure”.
In our futures business segment, we earn fees from both parties
to each futures contract or option on futures contract that is
traded, based on the volume of the commodity underlying the
futures or option contract that is traded. In our futures
business, we refer to these fees as exchange fees. We derived
exchange fees of $25.9 million and $23.6 million for
the six months ended June 30, 2005 and 2004, respectively,
representing 37.4% and 46.7%, respectively, of our consolidated
revenues, and $45.5 million, $40.0 million and
$31.5 million for the years ended December 31, 2004,
2003 and 2002, respectively, representing 42.0%, 42.6% and
25.1%, respectively, of our consolidated revenues. A contract is
a standardized quantity of the physical commodity underlying
each futures contract. For example, the IPE Brent Crude futures
contract trades in a contract size of 1,000 net barrels, or
42,000 U.S. gallons of crude oil.
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:
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:
The following chart presents the futures exchange fee revenues
by contract traded in our markets for the periods presented:
(1)
Presented net of $2.3 million of exchange fee rebates. For
a discussion of these rebates, see “— Sources of
Revenues — Transaction Fees”.
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 the strength of an exchange’s competitive
position 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.
We charge exchange fees to the IPE’s 37 clearing members
for contracts traded for their own account and for contracts
traded on behalf of their customers or local traders. As the
IPE’s operations are currently centered in London, we
consider all revenues derived from exchange fees to be generated
in the United Kingdom. We also provide market data services in
our futures business segment based on trading volumes and prices
in our futures markets. Some indication of the geographical
dispersal of the IPE’s external participants can be
discerned from the location of the market data terminals through
which our futures data is distributed. Of the approximately
19,200 terminals, 48.8% are located in Europe, 43.2% in North
America and the remaining 8.0% are located primarily in Asia.
The revenues generated in our futures business are denominated
in pounds sterling, which is the functional currency of the IPE
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 may experience substantial
gains or losses from foreign currency transactions given the
significant operations of our futures business segment. We
record any translation adjustments in accumulated other
comprehensive income, a separate component of shareholders’
equity.
Our OTC Business Segment
Our OTC business segment consists primarily of the operation of
global OTC commodities markets on our electronic platform. We
offer market participants a wide selection of derivative
contracts, as well as contracts for physical delivery of
commodities, to satisfy their trading objectives, whether they
relate to risk management, asset allocation, ensuring physical
delivery of select commodity products, speculation or arbitrage.
A substantial portion of the trading volume in our OTC business
segment relates to approximately 15-20 highly liquid contracts
in natural gas, power and oil. In addition, we offer trading in
a wide range of complementary “niche” products that
are customized to specific market requirements and preferences.
The OTC products available for trading in our markets fall into
the following general contract types:
•
Forwards and Swaps: Forwards are individually negotiated
agreements between two parties to deliver a specified quantity
of an underlying asset, on a specified date, and at a specified
location. Swaps are financially settled derivative contracts
through which counterparties exchange or “swap” risk
of two different assets with differing risk and performance
profiles.
•
Differentials and Spreads: Differentials, or basis swaps,
are contracts that allow counterparties to “swap”
delivery (or the financial equivalent of delivery) of a
commodity between two different delivery points. Spreads are the
simultaneous purchase and sale of forward or swap contracts for
different months, different commodities or different grades of
the same commodity.
•
Options: Options are contracts that convey to the buyer
the right, but not the obligation, to require the seller to make
or take delivery of a stated quantity of a specified commodity
at a specified price.
Our most liquid and actively traded OTC markets include
contracts that can be traded bilaterally or cleared at the
participant’s option. In order to provide participants with
access to centralized clearing and settlement, we launched the
industry’s first cleared natural gas and global oil
contracts in the OTC markets in March 2002, followed by our
first cleared OTC power contracts in November 2003. Our
participants, representing many of the world’s largest
energy companies and leading financial institutions, as well as
hedge funds, proprietary trading firms, and natural gas and
electric utilities, rely on our platform for price discovery,
hedging and risk management. Unlike the futures market, the OTC
market does not have an exchange membership structure.
Revenues in our OTC business segment are generated primarily
through commission fees earned from trades, and from the
provision of OTC market data and electronic trade confirmation
services. While we charge a monthly minimum commission 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 or clear based on
the underlying commodity volume. Commission fees are payable by
each counterparty to a
trade and, for bilateral trades, are generally due within
30 days of the invoice date. We do not risk our own capital
by engaging in any trading activities or by extending credit to
market participants.
In addition to our commission fees, a participant that chooses
to clear a trade must pay a fee to LCH.Clearnet for the benefit
of clearing 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 North
American natural gas and power traded in our OTC markets.
Transaction or commission fees derived from trading in cleared
OTC contracts represent an increasing percentage of our total
OTC revenues. For the six months ended June 30, 2005, and
for the years ended December 31, 2004, 2003 and 2002, these
transaction fees represented 62.2%, 44.5%, 13.4% and 1.4% 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.
Trading participants located in North America accounted for
88.9% of our OTC commission fee revenues for the year ended
December 31, 2004, trading participants located in Europe
generated 6.0% of our OTC commission fee revenues for the year
ended December 31, 2004, and the remaining 5.1% represents
trading participants located primarily in Asia. We derived
commission fees for OTC trades executed on our electronic
platform of $33.4 million, $43.5 million,
$34.2 million and $84.0 million for the six months
ended June 30, 2005, and for the years ended
December 31, 2004, 2003 and 2002, respectively, or 48.2%,
40.2%, 36.5% and 66.9%, 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.
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:
Selling, general, administrative and hosting expenses(3)
19,266
45.0
16,536
64.0
35,173
58.2
32,806
66.4
39,360
45.0
Intersegment expenses
994
2.3
93
0.4
353
0.6
79
0.2
—
—
Settlement expense(4)
15,000
35.0
—
—
—
—
—
—
—
—
Depreciation and amortization
6,496
15.2
7,010
27.1
14,609
24.2
17,224
34.9
13,406
15.3
Total operating expenses
41,756
97.5
23,639
91.5
50,135
83.0
50,109
101.5
52,766
60.4
Operating income (loss)
1,073
2.5
2,185
8.5
10,302
17.0
(722
)
(1.5
)
34,641
39.6
Other income (expense), net
353
0.8
34
0.1
(599
)
(1.0
)
(185
)
(0.4
)
490
0.6
Income tax expense (benefit)
(40
)
(0.1
)
887
3.4
3,366
5.6
(781
)
(1.6
)
11,679
13.4
Net income (loss)(4)
$
1,466
3.4
%
$
1,332
5.2
%
$
6,337
10.5
%
$
(126
)
(0.3
)%
$
23,452
26.8
%
(1)
We generate revenues from related parties in the ordinary course
of our business. Related party revenues were $2.9 million
and $3.0 million for the six months ended June 30,2005 and 2004, respectively, and $6.5 million,
$6.7 million and $43.6 million for the years ended
December 31, 2004, 2003 and 2002, respectively. For a
discussion of our related parties, see note 12 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 professional service fees and compensation and benefits
expenses.
(4)
The financial results for the six months ended June 30,2005 include a $15.0 million settlement expense related to
the payment made to EBS to settle ongoing litigation. Excluding
this charge, our OTC business net income for the six months
ended June 30, 2005 would have been $11.0 million, as
compared to the $1.3 million for the six months ended
June 30, 2004. See “— Non-GAAP Financial
Measure”.
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:
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.
(5)
Consists of the North American emissions, North American
weather, North American coal, North American natural gas
liquids, European power, European gas, global precious metals
and/or global base 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:
Our participants rely on our platform for price discovery,
hedging of physical commodities and risk management and comprise
a broad range of participant types. At June 30, 2005, we
had over 730 trading participant firms in our OTC markets.
The concentration of commission fees derived in our OTC business
segment from commercial users, including merchant energy
companies, oil producers and utilities, decreased to 56.5% for
the year ended December 31, 2004 from 79.4% for the year
ended December 31, 2001 as a result of the entry of
non-commercial participants into the markets for energy
commodities trading. The fastest growing participant segment of
our OTC commission revenues is the financial services sector,
which includes financial institutions, hedge funds and
proprietary trading firms. The entry of these market
participants is largely the result of the availability of both
electronically traded energy commodity contracts and cleared OTC
contracts. See “Business — Our Participant
Base”.
We also offer trade confirmation and market data services
through our electronic trade confirmation service and market
data business, respectively. In April 2002, we began offering
our electronic trade confirmation service for trades executed in
OTC commodity markets. We do not expect fees from this service
to be a significant source of revenues in the near term,
although we believe that the availability of electronic trade
confirmation attracts a broader range of market participants to
our electronic platform, and increases the operational
incentives for them to trade on our electronic platform. In
November 2002, we launched our market data business in response
to growing demand for objective, transparent and verifiable
energy market data. Through our market data subsidiary, the 10x
Group, or 10x, we generate transaction-based indices based upon
data derived from actual trades executed, and trade
confirmations issued, in our marketplace.
Intersegment Fees
Our OTC business segment provides and supports the platform for
electronic trading in our futures business segment. We determine
the intercompany or intersegment fees to be paid by the futures
business segment for using the electronic platform based on
transfer pricing standards and independent documentation.
Intersegment fees include charges for developing, operating,
managing and supporting the platform for electronic trading in
our futures business. The intersegment fees allocated to our
futures business segment were $4.6 million,
$7.5 million, $4.7 million and $62,000 during the six
months ended June 30, 2005, and for the years ended
December 31, 2004, 2003 and 2002, respectively. 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, data services
fees, trading access fees and other revenues.
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 $60.1 million and $42.6 million
for the six months ended June 30, 2005 and 2004,
respectively, and accounted for 86.7% and 84.4% of our
consolidated revenues for the six months ended June 30,2005 and 2004, respectively. Transaction fees were
$90.9 million, $81.4 million and $118.8 million
for the years ended December 31, 2004, 2003 and 2002,
respectively, and accounted for 83.9%, 86.9% and 94.7% of our
consolidated revenues for the years ended December 31,2004, 2003 and 2002, respectively. Transaction fees, net of
intersegment fees, accounted for 83.3% and 83.1% of revenues
generated by our futures business segment for the six months
ended June 30, 2005 and 2004, respectively, and accounted
for 89.4% and 86.2% of revenues generated by our OTC business
segment for the six months ended June 30, 2005 and 2004,
respectively. Transaction fees, net of intersegment fees,
accounted for 82.0%, 81.4% and 82.7% of revenues generated by
our futures business segment for the years ended
December 31, 2004, 2003 and 2002, respectively, and
accounted for 85.8%, 92.9% and 99.9% of revenues generated by
our OTC business segment for the years ended December 31,2004, 2003 and 2002, respectively. Transaction fees, except for
shortfall payments, are recognized as revenues as services are
provided. Transaction fees in our futures business segment are
denominated in pounds sterling prior to translation and
consolidation.
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 affects 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 blocked into 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 to our platform for registration. 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 granted trade rebates to local floor
members to generate market liquidity. Under this arrangement, we
rebate 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 IPE
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 IPE 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 $136,000 and $383,000 for the six
months ended June 30, 2005 and 2004, respectively, and to
$625,000, $687,000 and $562,000 for the years ended
December 31, 2004, 2003 and 2002, 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. While we do not currently have any
plans to adjust our commission rates, we evaluate these rates on
a regular basis.
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. 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 West Texas Intermediate oil bullet swap contracts for the
period from November 2004 through December 2005. We also reduced
the commission rate charged in our global precious metal trading
in June 2002 and continue to offer reduced commission rates.
While we do not currently have any plans to make any adjustment
to our commission rates, we continue to evaluate these 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. 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 $358,000 and $191,000 for the six
months ended June 30, 2005 and 2004, respectively, and to
$436,000, $283,000 and $325,000 for the years ended
December 31, 2004, 2003 and 2002, 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”.
In order to build and maintain liquidity in the products traded
on our platform, we entered into order flow agreements with our
Initial Shareholders upon our formation and the Gas and Power
Firms in November 2000, in each case pursuant to which these
parties committed collectively to provide a minimum aggregate
amount of order flow. The commission rates for the Initial
Shareholders and Gas and Power Firms 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, $7.1 million and $3.3 million
for the years ended December 31, 2004, 2003 and 2002,
respectively. The order flow agreements with our Initial
Shareholders and the Gas and Power Firms expired in 2002 and
2003, respectively, and the European gas order flow agreements
expired in 2004. For a discussion of our order flow agreements
with our Initial Shareholders and the Gas and Power Firms,
please refer to “Certain Relationships and Related
Transactions” and note 13 to our consolidated financial
statements that are included elsewhere in this prospectus.
We have maintained liquidity following the expiration of all of
our order flow agreements. 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.
The following table presents, for the periods indicated, the
commission fees that were required to be paid under the order
flow agreements and the expiration dates of these agreements.
We generate data services fees in both our futures and OTC
business segments. Data services fees were $5.5 million and
$4.5 million for the six months ended June 30, 2005
and 2004, respectively, and $9.7 million, $7.7 million
and $5.1 million for the years ended December 31,2004, 2003 and 2002, respectively.
In our futures business segment, data services 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 in our futures markets. 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 to which they
relate.
In our OTC business segment, data services fees consist of
subscription fees that we receive from market participants that
subscribe to our data services through 10x. 10x has an exclusive
license to use our OTC market data and publishes the 10x End of
Day report, as well as Market Price Validation curves, which are
available to subscribers for a monthly subscription fee. 10x
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. We invoice view only subscribers either on a monthly or
annual basis. The revenues we receive from data services fees
are deferred and amortized ratably over the period to which they
relate.
Trading access fees are revenues generated from membership and
system user fees charged to our futures exchange members and
from minimum monthly commission fees charged to our OTC
participants. We recorded trading access fees of
$2.0 million and $1.8 million for the six months ended
June 30, 2005 and 2004, respectively, and
$3.6 million, $2.5 million and $490,000 for the years
ended December 31, 2004, 2003 and 2002, respectively.
In our futures business, we generate revenues from, among other
things, annual membership and subscription fees and system user
fees charged to IPE members who access our electronic platform.
We recorded annual fees related to futures exchange membership,
subscription fees and system user fees of $726,000 and $613,000
for the six months ended June 30, 2005 and 2004,
respectively, and $1.2 million, $762,000 and $395,000 for the
years ended December 31, 2004, 2003 and 2002, respectively.
We defer revenues derived from membership and subscription fees
and amortize them ratably over the period to which they relate.
We recognize revenues derived from system user fees as services
are provided.
In our OTC business segment, we charge monthly minimum
commission fees to participants that are registered to trade OTC
natural gas and power products on our electronic platform. For
participants that are not active traders, the minimum commission
fees are 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
minimum commission fee for a given participant and the actual
amount of commission fees generated by such participant for
trading activity in that month as minimum commission trading
access revenues. For the month of June 2005, of the
approximately 730 participant trading firms that had
trading access to our platform, 242 participants were
required to pay monthly minimum commission fees. We recognized
$1.3 million and $1.2 million in minimum commission
trading access revenues for the six months ended June 30,2005 and 2004, respectively, and $2.4 million,
$1.7 million and $95,000 for the years ended
December 31, 2004, 2003 and 2002, respectively.
Other Revenues
Other revenues primarily relate to revenues generated from
training seminars, communication charges and equipment rentals,
as well as licensing, service and technology development fees
charged to the Chicago Climate Exchange. We generated other
revenues of $1.8 million and $1.6 million for the six
months ended June 30, 2005 and 2004, respectively, and
$4.2 million, $2.1 million and $1.1 million for
the years ended December 31, 2004, 2003 and 2002,
respectively. We recognize revenues generated from training
seminars and communication charges and equipment rentals as
services are provided. We charge equipment rentals in advance
and amortize the fee over the period to which it relates. Of the
other revenues, $335,000 and $619,000 during the six months
ended June 30, 2005 and 2004, respectively, and
$1.3 million, $901,000, and $593,000 for the years ended
December 31, 2004, 2003, and 2002, 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.
We have been contracted to provide, design and service an
electronic futures and OTC trading platform on behalf of the
Chicago Climate Exchange. The Chicago Climate Exchange is a
self-regulated exchange that administers a voluntary
multi-sector greenhouse gas reduction and trading program for
North America. We invoice the Chicago Climate Exchange for
license and service fees monthly in advance of the period to
which they apply. We recognize these fees as revenues as the
services are provided, and we recognize technology development
fees as revenues when the development work is completed and
accepted by the Chicago Climate Exchange. Our arrangement with
the Chicago Climate Exchange began in July 2003, and we
recognized revenues of $953,000 and $619,000 for the six months
ended June 30, 2005 and 2004, respectively, and
$1.7 million and $605,000 for the years ended
December 31, 2004 and 2003, respectively, pursuant to our
contractual relationship. For a discussion of this arrangement,
see “Certain Relationships and Related Transactions”.
Cost of hosting primarily consists of hosting and participant
network expenses. Cost of hosting expenses were $624,000 and
$698,000 for the six months ended June 30, 2005 and 2004,
respectively, and $1.3 million, $1.7 million and
$4.0 million for the years ended December 31, 2004,
2003 and 2002, 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.
Compensation and Benefits
Compensation and benefits expenses primarily consist of
salaries, bonuses, payroll taxes, employer-provided medical and
other benefit plan costs and recruiting costs. Compensation and
benefits expenses were $16.4 million and $13.2 million
for the six months ended June 30, 2005 and 2004,
respectively, and $30.1 million, $26.2 million and
$27.9 million for the years ended December 31, 2004,
2003 and 2002, 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 expense will remain consistent with
current levels as a percentage of total revenues due to
additional employees associated with the growth of our business,
partially offset by a reduction in our headcount due to the
closure of our open-outcry trading floor.
Professional Services
Professional services expenses primarily consist of outside
legal, accounting and other professional and consulting services
expenses. Professional expenses were $7.1 million and
$7.6 million for the six months ended June 30, 2005
and 2004, respectively, and $14.5 million,
$15.1 million and $15.9 million for the years ended
December 31, 2004, 2003 and 2002, 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 following the substantial completion of
development relating to futures trading on our electronic
platform and due to the replacement of consultants with
permanent staff over the course of 2004.
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 ongoing legal
fees associated with the NYMEX copyright and EBS patent
infringement litigation. As a public company, we will be subject
to the requirements of the Sarbanes-Oxley Act of 2002, which may
require us to incur significant expenditures in the near term to
establish systems and hire and train personnel to comply with
these requirements. In addition, as a public company, we expect
to 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 the IPE
and the reduction in legal fees due to our settlement of the EBS
case and the court’s grant of summary judgment in our favor
on all claims asserted against us by NYMEX. See “Regulation
and Legal Proceedings — Legal Proceedings”.
Selling, General and Administrative
Selling, general and administrative expenses were
$7.2 million and $6.2 million for the six months ended
June 30, 2005 and 2004, respectively, and
$13.1 million, $12.4 million and $12.4 million
for the years ended December 31, 2004, 2003 and 2002,
respectively. Rent and occupancy expenses and marketing and
market-maker expenses are the two major expense categories in
selling, general and administrative expenses during the periods
discussed herein.
Rent and Occupancy Expenses. Rent and occupancy expenses
were $1.9 million and $2.0 million for the six months
ended June 30, 2005 and 2004, respectively, and
$4.1 million, $3.8 million and $3.2 million for
the years ended December 31, 2004, 2003 and 2002,
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.
See “Business — Property” for a discussion
on our rental properties. Our occupancy expenses primarily
relate to the use of electricity, telephone lines and other
miscellaneous operating costs. As a result of the closure of our
open-outcry trading floor on April 7, 2005, we expect our
rent and occupancy expenses will decrease in future periods.
Marketing and Market-Maker Expenses. Marketing and
market-maker expenses were $1.2 million and $479,000 for
the six months ended June 30, 2005 and 2004, respectively,
and $1.6 million, $1.2 million and $1.4 million
for the years ended December 31, 2004, 2003 and 2002,
respectively. Marketing expenses 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 management’s 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
$348,000 and $130,000 in market-maker expenses for the six
months ended June 30, 2005 and 2004, respectively, and
$778,000 for the year ended December 31, 2004. We began the
market-maker program during 2004. Such amounts are treated as
expenses as we receive no fees from these market makers. As of
June 2005, we maintained market-maker programs only in OTC oil
bullet swaps.
Other. Other costs include all selling, general and
administrative costs not included in separate expense categories
and primarily consist of insurance expense, hardware and
software support 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 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 six
months ended June 30, 2005, and 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, and other associated costs,
including legal costs and asset impairment charges. No floor
closure costs were incurred in prior 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 six months
ended June 30, 2005. No settlement expenses were incurred
in prior periods.
Depreciation and Amortization
Depreciation and amortization expenses were $7.8 million
and $8.2 million for the six months ended June 30,2005 and 2004, respectively, and $17.0 million,
$19.3 million and $14.4 million for the years ended
December 31, 2004, 2003 and 2002, 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. In accordance with SFAS No. 142, beginning
in 2002, we ceased amortizing goodwill and intangible assets
with indefinite lives. We continue to amortize intangible assets
with contractual or finite useful lives, in each case over the
estimated useful life of five years.
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 $1.0 million in both the six months ended
June 30, 2005 and 2004 and $2.0 million,
$2.0 million and $1.5 million for the years ended
December 31, 2004, 2003 and 2002, respectively. 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 other income of $2.2 million and $1.0 million
for the six months ended June 30, 2005 and 2004,
respectively, and $1.3 million, $948,000 and
$1.5 million for the years ended December 31, 2004,
2003 and 2002, respectively. Other income
(expense) consists primarily of interest income and
expense, as well as gains and losses on currency transactions.
In our OTC business segment, we generate interest income from
the investment of our cash and cash equivalents, short-term
investments, restricted cash and restricted short-term
investments. Our OTC business segment strategy is to invest
excess cash in short-term AAA-rated securities. In our futures
business segment, we earn interest income on excess cash
balances that primarily relate to money market deposits in the
United Kingdom. Our futures business segment policy is to invest
two-thirds of all our cash funds at no more than six banks with
an IBCA credit rating of AAA or AA+, with no more than 50% at
any one bank. Under this
policy, the remaining one-third of all cash funds may be
invested at no more than three additional banks with an IBCA
rating of AA or above.
Interest expense currently consists of interest from capitalized
leases and interest on outstanding indebtedness under our
revolving credit facility. Prior to repayment in November 2002,
we also incurred interest expense on the related-parties notes
payable.
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 $3.9 million and
$5.6 million for the six months ended June 30, 2005
and 2004, respectively, and $11.8 million,
$6.5 million and $17.7 million for the years ended
December 31, 2004, 2003 and 2002, 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 we file
separate local country income tax returns and take advantage of
the United Kingdom’s group relief provisions when
applicable. The difference between our actual 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, state income taxes
and the non-deductibility of certain expenses. We have made
provisions for U.S. income taxes on all undistributed
earnings of our foreign subsidiaries as such earnings are not
expected to be permanently reinvested.
(in thousands, except for share and per share data)
Operating income
10,435
14,623
32,394
18,918
50,953
Total other income, net
2,165
1,022
1,328
948
1,492
Income before income taxes
12,600
15,645
33,722
19,866
52,445
Income tax expense
3,871
5,586
11,773
6,489
17,739
Net income(5)
$
8,729
$
10,059
$
21,949
$
13,377
$
34,706
Redemption adjustments to redeemable stock put(6)
(6,594
)
—
—
8,378
(10,730
)
Deduction for accretion of Class B redeemable common
stock(7)
—
—
—
(1,768
)
(3,656
)
Net income available to common shareholders
$
2,135
$
10,059
$
21,949
$
19,987
$
20,320
Earnings per common share(8):
Basic
$
0.04
$
0.19
$
0.42
$
0.37
$
0.37
Diluted
$
0.04
$
0.19
$
0.41
$
0.37
$
0.37
Weighted average common shares outstanding(8):
Basic
52,869,704
52,864,519
52,865,108
54,328,966
54,392,602
Diluted
53,071,797
53,061,615
53,062,078
54,639,708
54,850,095
(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 six months
ended June 30, 2005 and 2004 and the years ended
December 31, 2004, 2003 and 2002, see our consolidated
statements of income and note 12 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. 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, and other associated costs,
including legal costs and asset impairment charges. No floor
closure costs were incurred in prior periods and no additional
closure costs are expected to be incurred. See note 19 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. See note 14 to our consolidated
financial statements that are included elsewhere in this
prospectus.
(5)
The financial results for the six months ended June 30,2005 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 ongoing litigation. Excluding these
charges, our consolidated net income for the six months ended
June 30, 2005 would have been $21.4 million,
representing a 113.0% increase from $10.1 million for the
six months ended June 30, 2004. See
“— Non-GAAP Financial Measure”.
We granted a put option to Continental Power Exchange, Inc. in
connection with our formation that could require us under
certain circumstances to purchase its 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. See
“Certain Relationships and Related Transactions —
Continental Power Exchange, Inc. Put Agreement”. We
initially recorded the redeemable stock put at the minimum
$5 million redemption threshold. We have adjusted the
redeemable stock put to its redemption amount at each subsequent
balance sheet date. The adjustment to the redemption amount has
been recorded to retained earnings or, in the absence of
positive retained earnings, additional paid-in capital. See
note 9 to our consolidated financial statements that are
included elsewhere in this prospectus.
(7)
We recorded our Class B redeemable common stock upon its
issuance on June 18, 2001 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)
Earnings per common share and weighted average common shares
have been adjusted retroactively for all periods presented to
give effect to a 1 for 4 reverse stock split of our
outstanding shares of Class A common stock that will become
effective immediately prior to the closing of this offering. See
“Organization and Recapitalization”.
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.
Percentage of commission fees by the top 20 customers
63.2
%
66.3
%
64.8
%
69.3
%
75.6
%
Percentage of commission fees by our shareholders
16.2
%
26.9
%
25.1
%
40.4
%
61.2
%
(1)
Total crude oil futures contracts traded globally and our
resulting crude oil futures market share is calculated based on
the number of IPE Brent Crude futures contracts traded as
compared to the total number of IPE Brent Crude futures
contracts and NYMEX Light Sweet Crude and Dublin Brent Crude
futures contracts traded.
(2)
Our cleared Henry Hub natural gas market share versus
NYMEX-ClearPort is calculated based on the number of
IntercontinentalExchange cleared Henry Hub natural gas contracts
traded as a percentage of the total IntercontinentalExchange
cleared Henry Hub natural gas contracts and NYMEX-ClearPort
Henry Hub natural gas futures contracts traded.
(3)
Our cleared PJM financial power market share versus
NYMEX-ClearPort is calculated based on the number of
IntercontinentalExchange cleared PJM financial power contracts
traded as a percentage of the total IntercontinentalExchange
cleared PJM financial power contracts and NYMEX-ClearPort
cleared PJM financial power contracts traded. PJM refers to the
Pennsylvania, New Jersey and Maryland power 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 year divided by the number of trading days during that
year.
(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.
Consolidated net income decreased $1.3 million, or 13.2%,
to $8.7 million for the six months ended June 30, 2005
from $10.1 million for the comparable period in 2004. Net
income from our futures business segment decreased
$1.5 million, or 16.8%, to $7.3 million for the six
months ended June 30, 2005, from $8.7 million for the
comparable period in 2004, primarily due to floor closure costs
incurred in connection with the closure of our open-outcry
trading floor. Net income from our OTC business segment
increased $134,000 to $1.5 million for the six months ended
June 30, 2005 from $1.3 million for the comparable
period in 2004. Net income in our OTC business segment increased
primarily due to significantly higher transaction fees revenues,
which were substantially offset by a $15.0 million
settlement expense incurred during the six months ended
June 30, 2005. Consolidated operating income, as a
percentage of consolidated revenues, decreased to 15.0% for the
six months ended June 30, 2005 from 29.0% for the
comparable period in 2004. Consolidated net income, as a
percentage of consolidated revenues, decreased to 12.6% for the
six months ended June 30, 2005 from 19.9% for the
comparable period in 2004.
Our consolidated revenues grew by $18.9 million, or 37.4%,
to $69.4 million for the six months ended June 30,2005 from $50.5 million for the comparable period in 2004.
This increase is primarily attributable to
increased trading volumes on our electronic platform and
increased non-transaction revenues, including data services
fees, trading access fees and the Chicago Climate Exchange
licensing, service and development fees. A significant factor
driving our revenues and volume growth during this period was
the continued growth in trading volumes of our cleared OTC
contracts.
Consolidated operating expenses increased to $58.9 million
for the six months ended June 30, 2005 from
$35.8 million for the comparable period in 2004,
representing an increase of 64.4%. This increase is primarily
attributable to higher compensation expenses during the six
months ended June 30, 2005 due to an increase in our
employee headcount and an increase in our discretionary bonus
accrual, due to floor closure costs incurred in connection with
our decision to close our open-outcry trading floor in London,
and due to the litigation settlement payment made to EBS.
Revenues
Transaction Fees
Consolidated transaction fees increased $17.5 million, or
41.1%, to $60.1 million for the six months ended
June 30, 2005 from $42.6 million for the comparable
period in 2004. Transaction fees, as a percentage of
consolidated revenues, increased to 86.7% for the six months
ended June 30, 2005 from 84.4% for the comparable period in
2004.
Transaction fees generated in our futures business segment
increased $2.3 million, or 9.9%, to $25.9 million for
the six months ended June 30, 2005 from $23.6 million
for the comparable period in 2004, while declining as a
percentage of consolidated revenues to 37.4% for the six months
ended June 30, 2005 from 46.7% for the comparable period in
2004. The increase in transaction fees was primarily due to an
increase in our futures contract volumes and an increase in the
pounds sterling to U.S. dollar exchange rate. Volumes in
our futures business segment increased 4.7% to 18.6 million
contracts traded during the six months ended June 30, 2005
from 17.8 million contracts traded during the comparable
period in 2004. The average exchange rate of pounds sterling to
the U.S. dollar increased 2.7% to 1.8713 for the six months
ended June 30, 2005 from 1.8225 for the comparable period
in 2004. Average transaction fees per trading day increased 9.9%
to $209,000 per trading day for the six months ended
June 30, 2005 from $190,000 per trading day for the
comparable period in 2004.
Transaction fees generated in our OTC business segment increased
$15.2 million, or 79.6%, to $34.2 million for the six
months ended June 30, 2005 from $19.0 million for the
comparable period in 2004, primarily due to increased trading
volumes. Transaction fees in this segment, as a percentage of
consolidated revenues, increased to 49.3% for the six months
ended June 30, 2005 from 37.7% for the comparable period in
2004. The number of transactions or trades executed in our OTC
business segment increased by 99.6% to 887,568 trades for the
six months ended June 30, 2005 from 444,586 trades for the
comparable period in 2004. Average transaction fees per trading
day increased 83.6% to $268,000 per trading day for the six
months ended June 30, 2005 from $146,000 per trading day
for the comparable period in 2004. The increase in trades was
partially offset by a 8.0% decrease in the average revenues per
transaction for the six months ended June 30, 2005 as
compared to the comparable period in 2004. 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 related to commodities
with lower commission rates.
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 and the continued improvement in credit quality in the
merchant energy sector, as well as increased liquidity brought
by new market participants. Transaction fees generated by
trading in North American natural gas contracts increased
$13.4 million, or 116.1%, to $24.9 million for the six
months ended June 30, 2005 from $11.5 million for the
comparable period in 2004. In addition, transaction fees
generated by trading in North American power contracts increased
$3.7 million, or 96.9%, to $7.5 million for the six
months ended June 30, 2005 from $3.8 million for the
comparable period in 2004. 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.
The increase in transaction fees generated by trading in OTC
North American natural gas and power contracts was partially
offset by a decrease in transaction fees generated by our OTC
global oil contracts. Transaction fees derived from trading in
global oil contracts decreased $1.5 million, or 64.1%, to
$836,000 for the six months ended June 30, 2005 from
$2.3 million for the comparable period in 2004. This
decrease is primarily attributable to entrenched competition in
the OTC oil market, our waiver of commission fees on our West
Texas Intermediate oil bullet swap contracts for the period from
November 2004 through December 2005, and, to a lesser extent,
limited sales and marketing resources committed to this market
relative to that in our natural gas and power markets.
Revenues derived from electronic trade confirmation fees in our
OTC business segment increased $467,000 to $753,000 for the six
months ended June 30, 2005 from $286,000 for the comparable
period in 2004. During the six months ended June 30, 2005,
393,374 trades were matched through our electronic trade
confirmation service, compared to 144,142 trades during the
comparable period in 2004. Consolidated electronic trade
confirmation fees, as a percentage of consolidated revenues,
increased to 1.1% for the six months ended June 30, 2005
from 0.6% for the comparable period in 2004.
Revenues derived from order flow shortfall payments in our OTC
business segment decreased $531,000, or 100%, from the six
months ended June 30, 2004 to the six months ended
June 30, 2005. This decrease was due to the expiration of
the European gas order flow agreements as of December 31,2004. No order flow agreements were in effect during the six
months ended June 30, 2005. Consolidated order flow
shortfall payments, as a percentage of consolidated revenues,
were 1.1% for the six months ended June 30, 2004.
Data Services Fees
Consolidated data services fees increased $974,000, or 21.6%, to
$5.5 million for the six months ended June 30, 2005
from $4.5 million for the comparable period in 2004. This
increase was primarily due to increased data services fees in
our OTC business segment from the introduction of the Market
Price Validation service, and due to increased fees from view
only screen access and End of Day reports. Market Price
Validation was launched in March 2004 and 23 companies
subscribed to this service as of June 30, 2005. The number
of companies that subscribe to view only screen access increased
25% to 213 as of June 30, 2005 from 170 as of June 30,2004. We also continued to enroll new individual monthly
subscribers for these services within existing subscriber
companies. Consolidated data services fees, as a percentage of
consolidated revenues, decreased to 7.9% for the six months
ended June 30, 2005 from 8.9% for the comparable period in
2004.
Trading Access Fees
Consolidated trading access fees increased $201,000, or 11.3%,
to $2.0 million for the six months ended June 30, 2005
from $1.8 million for the comparable period in 2004. This
increase was primarily due to the growth in monthly minimum
commission fees received in our OTC business segment and, to a
lesser extent, due to the growth in system user fees to IPE
members who access our electronic platform. The monthly
weighted-average number of participants required to pay monthly
minimum commission fees increased 13% to 241 for the six months
ended June 30, 2005 from 214 for the comparable period in
2004. We continued to increase both the number of participants
subject to monthly minimum commission fees as well as the number
of users accessing the platform at these participants. During
the six months ended June 30, 2005 and 2004, we recognized
$1.3 million and $1.2 million, respectively, in
monthly minimum commission fees in our OTC business segment and
$726,000 and $613,000, respectively, in membership subscriptions
and system user fees in our futures business segment.
Consolidated trading access fees, as a percentage of
consolidated revenues, decreased to 2.9% for the six months
ended June 30, 2005 from 3.5% for the comparable period in
2004.
Consolidated other revenues increased $213,000, or 13.7%, to
$1.8 million for the six months ended June 30, 2005
from $1.6 million for the comparable period in 2004. This
increase was primarily due to increased licensing, service and
technology development fees charged to the Chicago Climate
Exchange, partially offset by a reduction in the communication
charges and equipment rentals to IPE members following the
closure of our open-outcry trading floor. Consolidated other
revenues, as a percentage of consolidated revenues, decreased to
2.5% for the six months ended June 30, 2005 from 3.1% for
the comparable period in 2004.
Expenses
Cost of Hosting
Consolidated cost of hosting expenses decreased $74,000, or
10.7%, to $624,000 for the six months ended June 30, 2005
from $698,000 for the comparable period in 2004. Consolidated
cost of hosting expenses, as a percentage of consolidated
revenues, decreased to 0.9% for the six months ended
June 30, 2005 from 1.4% for the comparable period in 2004.
Compensation and Benefits
Consolidated compensation and benefits expenses increased
$3.2 million, or 24.1%, to $16.4 million for the six
months ended June 30, 2005 from $13.2 million for the
comparable period in 2004. This increase was due to an increase
in our discretionary bonus accrual for the six months ended
June 30, 2005 as compared to the six months ended
June 30, 2004, and to a lesser extent, an increase in our
employee headcount. During the six months ended June 30,2005, we had a month-end average of 203 employees, compared to a
month-end average of 190 employees during the six months ended
June 30, 2004. Our discretionary bonus accrual increased
primarily due to improved operating results for the six months
ended June 30, 2005 as compared to the six months ended
June 30, 2004 and due to an increased number of employees
receiving the bonus accrual. Consolidated compensation and
benefits expenses, as a percentage of consolidated revenues,
decreased to 23.6% for the six months ended June 30, 2005
from 26.2% for the comparable period in 2004.
Professional Services
Consolidated professional services expenses decreased $448,000,
or 5.9%, to $7.1 million for the six months ended
June 30, 2005 from $7.6 million for the comparable
period in 2004. This decrease was primarily due to an aggregate
decrease in legal fees related to ongoing litigation with NYMEX
and EBS, the former of which was subsequently dismissed by a
ruling in our favor on a motion for summary judgment and the
latter of which was subsequently settled. Consolidated
professional services expenses, as a percentage of consolidated
revenues, decreased to 10.3% for the six months ended
June 30, 2005 from 15.0% for the comparable period in 2004.
Selling, General and Administrative
Consolidated selling, general and administrative expenses
increased $1.0 million, or 16.4%, to $7.2 million for
the six months ended June 30, 2005 from $6.2 million
for the comparable period in 2004. This increase was primarily
due to the market-maker program that we initiated during 2004,
an increase in royalty payments made to eSpeed, and increased
marketing efforts relating to our transition to exclusive
electronic trading in futures and the launch of new products.
Consolidated selling, general and administrative expenses, as a
percentage of consolidated revenues, decreased to 10.4% for the
six months ended June 30, 2005 from 12.3% for the
comparable period in 2004.
Floor Closure Costs
Consolidated floor closure costs were $4.8 million for the
six months ended June 30, 2005, due to the closure of our
open-outcry trading floor in London in April 2005. Consolidated
floor closure costs, as a
percentage of consolidated revenues, were 6.9% for the six
months ended June 30, 2005. We did not have floor closure
costs in the comparable period in 2004.
Settlement Expense
Consolidated settlement expense was $15.0 million for the
six months ended June 30, 2005, due to the payment made to
settle ongoing litigation with EBS. Consolidated settlement
expense, as a percentage of consolidated revenues, was 21.6% for
the six months ended June 30, 2005. We did not have
settlement expenses in the comparable period in 2004. See
“Regulation and Legal Proceedings — Legal
Proceedings”.
Depreciation and Amortization
Consolidated depreciation and amortization expenses decreased
$415,000, or 5.1%, to $7.8 million for the six months ended
June 30, 2005 from $8.2 million for the comparable
period in 2004. This decrease was primarily due to certain
property and equipment purchased in 2001 with estimated useful
lives of three years becoming fully depreciated over the course
of 2004. Consolidated depreciation and amortization expenses, as
a percentage of consolidated revenues, decreased to 11.2% for
the six months ended June 30, 2005 from 16.2% for the
comparable period in 2004.
Other Income (Expense)
Consolidated other income increased $1.1 million to
$2.2 million for the six months ended June 30, 2005
from $1.0 million for the comparable period in 2004. This
increase related to an increase of $150,000 in interest income
and an increase of $1.3 million in foreign currency
transaction gains, partially offset by an increase of $276,000
in interest expense related to outstanding balances under the
Wachovia revolving credit agreement. The increase in interest
income was due to our cash balances earning a higher return
during the six months ended June 30, 2005 as compared to
the six months ended June 30, 2004, partially offset by a
decrease in our cash balances due to the cash redemption of the
Class B redeemable common stock in November 2004. Our
average interest rate for the six months ended June 30,2005 was 3.7%, compared to 2.6% for the comparable period in
2004. The average monthly ending cash balance during the six
months ended June 30, 2005, including cash and cash
equivalents, short-term investments, restricted cash and
restricted short-term investments, was $75.6 million,
compared to $98.6 million for the comparable period in 2004.
We recognized net foreign currency transaction gains of
$1.1 million during the six months ended June 30, 2005
as compared to net foreign currency transaction losses of
$173,000 during the six months ended June 30, 2004. 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 currency exchange rate of
pounds sterling to the U.S. dollar decreased 6.5% to 1.7921
as of June 30, 2005 from 1.9160 as of December 31,2004.
Income Taxes
Consolidated tax expense decreased $1.7 million, or 30.7%,
to $3.9 million for the six months ended June 30, 2005
from $5.6 million for the comparable period in 2004,
primarily due to the decrease in our pre-tax income. Our
effective tax rate decreased to 30.7% for the six months ended
June 30, 2005 from 35.7% for the comparable period in 2004.
The effective tax rate for the six months ended June 30,2005 is lower than the statutory rate primarily due to an
increase in anticipated federal and state research and
development tax credits. The decrease in the effective tax rate
from the six months ended June 30, 2004 to the six months
ended June 30, 2005 was also primarily due to an increase
in anticipated research and development tax credits during the
six months ended June 30, 2005 as compared to the six
months ended June 30, 2004.
Consolidated net income increased $8.6 million, or 64.1%,
to $21.9 million for the year ended December 31, 2004
from $13.4 million for the comparable period in 2003.
During this period, net income from our futures business segment
increased $2.1 million, or 15.6%, to $15.6 million for
the year ended December 31, 2004 from $13.5 million
for the comparable period in 2003 and net income from our OTC
business segment increased to $6.3 million for the year
ended December 31, 2004 from a net loss of $126,000 for the
comparable period in 2003. Consolidated operating income, as a
percentage of consolidated revenues, increased to 29.9% for the
year ended December 31, 2004 from 20.2% for the comparable
period in 2003. Consolidated net income, as a percentage of
consolidated revenues, increased to 20.2% for the year ended
December 31, 2004 from 14.3% for the comparable period in
2003.
Our consolidated revenues grew by $14.7 million, or 15.6%,
to $108.4 million for the year ended December 31, 2004
from $93.7 million for the comparable period in 2003. This
increase is attributable to increased trading volumes on our
electronic platform and increased non-transaction revenues,
including data services fees, trading access fees and the
Chicago Climate Exchange licensing, service and development
fees. A significant factor driving our revenues and volume
growth during this period was the growth in trading volumes of
our cleared OTC contracts.
Consolidated operating expenses increased slightly to
$76.0 million for the year ended December 31, 2004
from $74.8 million for the comparable period in 2003,
representing an increase of 1.6%, compared to a 15.6% increase
in consolidated revenues during the same period. Given the fixed
nature of our operating expenses, we generally have been able to
increase revenues through increased trading volumes while
holding operating expenses relatively constant. This operating
leverage has resulted in improved profitability and we believe
is one of the key benefits of operating our electronic platform.
Revenues
Transaction Fees
Consolidated transaction fees increased $9.5 million, or
11.6%, to $90.9 million for the year ended
December 31, 2004 from $81.4 million for the
comparable period in 2003. Transaction fees, as a percentage of
consolidated revenues, decreased to 83.9% for the year ended
December 31, 2004 from 86.9% for the comparable period in
2003.
Transaction fees generated in our futures business segment
increased $5.5 million, or 13.9%, to $45.5 million for
the year ended December 31, 2004 from $40.0 million
for the comparable period in 2003, while declining slightly as a
percentage of consolidated revenues to 42.0% for the year ended
December 31, 2004 from 42.6% for the comparable period in
2003. The absolute increase in transaction fees was primarily
due to increased trading volumes and an increase in the pounds
sterling to U.S. dollar exchange rate, partially offset by
$2.3 million in fees rebated in November and December 2004
as part of our rebate program for IPE Brent Crude futures
contracts traded electronically. Volumes in our futures business
segment increased 6.6%, to 35.5 million contracts traded
for the year ended December 31, 2004 from 33.3 million
contracts traded for the comparable period in 2003. The average
exchange rate of pounds sterling to the U.S. dollar
increased 12.0%, to 1.8296 for the year ended December 31,2004 from 1.6341 for the comparable period in 2003.
Transaction fees generated in our OTC business segment increased
$3.9 million, or 9.5%, to $45.4 million for the year
ended December 31, 2004 from $41.5 million for the
comparable period in 2003, primarily due to increased trading
volumes, which was partially offset by a reduction in our order
flow shortfall payments. Transaction fees in this segment, as a
percentage of consolidated revenues, decreased to 41.9% for the
year ended December 31, 2004 from 44.2% for the comparable
period in 2003. The number of transactions or trades executed in
our OTC business segment increased by 55.1% to 1,061,629 trades
for the year ended December 31, 2004 from 684,495 trades
for the comparable period in 2003. The increase in trades was
partially offset by a 17.9% decrease in the average revenues per
transaction for the year ended December 31,
2004 as compared to the comparable period in 2003. 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
contract sizes, and a change in the mix of contracts traded,
with a larger number of contracts traded related to commodities
with lower commission rates. Increased volumes in our OTC
business segment were primarily due to increased trading volumes
in North American natural gas and power markets as a result of
the availability of cleared OTC contracts and the improvement in
credit quality in the merchant energy sector, as well as
increased liquidity brought by new market participants.
Transaction fees generated by trading in North American natural
gas contracts increased $12.2 million, or 72.7%, to
$29.0 million for the year ended December 31, 2004
from $16.8 million for the comparable period in 2003. In
addition, transaction fees generated by trading in North
American power contracts increased $3.7 million, or 64.9%,
to $9.5 million for the year ended December 31, 2004
from $5.7 million for the comparable period in 2003. The
continued growth in trading volumes in cleared OTC contracts can
be attributed to the following trends:
•
The use of cleared OTC contracts 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 cleared
contracts has facilitated trading by market participants that
otherwise would not have engaged in trading in energy
derivatives.
•
The increase in participants in the markets for energy
commodities trading has increased overall liquidity in our
markets, particularly the liquidity of cleared North American
natural gas and power contracts.
The increase in transaction fees generated by trading in OTC
North American natural gas and power contracts was partially
offset by a decrease in transaction fees generated by our OTC
global oil contracts. Transaction fees derived from trading in
global oil contracts decreased $4.8 million, or 54.8%, to
$4.0 million for the year ended December 31, 2004 from
$8.8 million for the comparable period in 2003. This
decrease is attributable to several factors, including the
expiration of order flow agreements in late 2002, the effect of
which manifested itself in 2003 and 2004, entrenched competition
in the OTC oil market and, to a lesser extent, limited sales and
marketing resources committed to this market relative to that in
our natural gas and power markets.
Revenues derived from order flow shortfall payments in our OTC
business segment decreased $6.0 million, or 84.9%, to
$1.1 million for the year ended December 31, 2004 from
$7.1 million for the comparable period in 2003. This
decrease was due to a $6.4 million shortfall payment
recognized from the Gas and Power Firms for the year ended
December 31, 2003, partially offset by an increase of
$365,000 in the 2004 European gas shortfall payments as compared
to 2003 European gas shortfall payments. Consolidated order flow
shortfall payments, as a percentage of consolidated revenues,
decreased to 1.0% for the year ended December 31, 2004 from
7.6% for the comparable period in 2003. These agreements are no
longer in effect.
Revenues derived from electronic trade confirmation fees in our
OTC business segment increased 378.3% from the year ended
December 31, 2003 to the year ended December 31, 2004.
During the year ended December 31, 2004, 199,290 trades
were matched through our electronic trade confirmation service,
compared to 64,383 trades for the comparable period in 2003.
Consolidated electronic trade confirmation fees, as a percentage
of consolidated revenues, increased to 0.7% for the year ended
December 31, 2004 from 0.2% for the comparable period in
2003.
Data Services Fees
Consolidated data services fees increased $1.9 million, or
25.2%, to $9.7 million for the year ended December 31,2004 from $7.7 million for the comparable period in 2003.
This increase was primarily due to increased data services fees
in our OTC business segment related to fees from 10x view only
screen access and End of Day reports, which we introduced in
November 2002. The number of companies that subscribe for 10x
view only screen access increased to 200 as of December 31,2004 from 185 as of December 31, 2003. We also continued to
enroll new monthly subscribers for these services within these
companies. In March 2004, we
also launched a data service known as Market Price Validation,
which provides monthly price validation curves, and
21 companies subscribed to this service as of
December 31, 2004. Consolidated data services fees, as a
percentage of consolidated revenues, increased to 8.9% for the
year ended December 31, 2004 from 8.3% for the comparable
period in 2003.
Trading Access Fees
Consolidated trading access fees increased $1.1 million, or
46.1%, to $3.6 million for the year ended December 31,2004 from $2.5 million for the comparable period in 2003.
This increase was primarily due to the growth in monthly minimum
commission fees received in our OTC business segment. The
monthly weighted-average number of participants required to pay
monthly minimum commission fees increased to 212 for the year
ended December 31, 2004 from 143 for the comparable period
in 2003. We continued to increase both the number of
participants subject to monthly minimum commission fees as well
as the number of users accessing the platform at these
participants. During the years ended December 31, 2004 and
2003, we received $2.4 million and $1.7 million,
respectively, in monthly minimum commission fees in our OTC
business segment and $1.2 million and $762,000,
respectively, in membership subscriptions and system user fees
in our futures business segment. Consolidated trading access
fees, as a percentage of consolidated revenues, increased to
3.3% for the year ended December 31, 2004 from 2.6% for the
comparable period in 2003.
Other Revenues
Consolidated other revenues increased $2.1 million to
$4.2 million for the year ended December 31, 2004 from
$2.1 million for the comparable period in 2003. This
increase was primarily due to increased licensing, service and
technology development fees charged to the Chicago Climate
Exchange and increased communication charges in our futures
business segment. Consolidated other revenues, as a percentage
of consolidated revenues, increased to 3.9% for the year ended
December 31, 2004 from 2.2% for the comparable period in
2003.
Expenses
Cost of Hosting
Consolidated cost of hosting expenses decreased $436,000, or
25.4%, to $1.3 million for the year ended December 31,2004 from $1.7 million for the comparable period in 2003,
primarily due to reduced costs associated with our move to an
Internet-based platform from a private network connection in
early 2003. During the year ended December 31, 2004, we
paid $1.2 million for hosting expenses and $76,000 for
participant network expenses, compared to $1.3 million for
hosting expenses, $268,000 for participant network expenses and
$111,000 for security services expenses in 2003. Consolidated
cost of hosting expenses, as a percentage of consolidated
revenues, decreased to 1.2% for the year ended December 31,2004 from 1.8% for the comparable period in 2003.
Compensation and Benefits
Consolidated compensation and benefits expenses increased
$3.8 million, or 14.6%, to $30.1 million for the year
ended December 31, 2004 from $26.2 million for the
comparable period in 2003. This increase was primarily due to
the increase in our employee headcount and an increase in our
discretionary bonus payments. Our discretionary bonus payments
increased primarily due to improved operating results in 2004 as
compared to 2003 and an increased number of employees receiving
a bonus in 2004. As of December 31, 2004, we had
200 employees, compared to 186 employees as of
December 31, 2003. Consolidated compensation and benefits
expenses, as a percentage of consolidated revenues, decreased to
27.7% for the year ended December 31, 2004 from 28.0% for
the comparable period in 2003.
Consolidated professional services expenses decreased $615,000,
or 4.1%, to $14.5 million for the year ended
December 31, 2004 from $15.1 million for the
comparable period in 2003. This decrease was primarily due to
the renegotiation of a major vendor consulting contract in 2004
that substantially reduced fees incurred in our futures business
segment, as well as to the replacement of contractors with
permanent staff over the course of 2004. These reduced
professional services expenses were partially offset by an
increase in legal fees primarily related to ongoing litigation
with NYMEX and EBS. Consolidated professional services expenses,
as a percentage of consolidated revenues, decreased to 13.4% for
the year ended December 31, 2004 from 16.1% for the
comparable period in 2003.
Selling, General and Administrative
Consolidated selling, general and administrative expenses
increased $722,000, or 5.8%, to $13.1 million for the year
ended December 31, 2004 from $12.4 million for the
comparable period in 2003. This increase was due to the
market-maker program that we initiated during 2004. Consolidated
selling, general and administrative expenses, as a percentage of
consolidated revenues, decreased to 12.1% for the year ended
December 31, 2004 from 13.2% for the comparable period in
2003.
Depreciation and Amortization
Consolidated depreciation and amortization expenses decreased
$2.3 million, or 12.0%, to $17.0 million for the year
ended December 31, 2004 from $19.3 million for the
comparable period in 2003. This decrease was due to certain
property and equipment purchased in 2000 and 2001 with estimated
useful lives of three years becoming fully depreciated over the
course of 2003 and 2004, as well as to our decision to extend
the useful lives of certain of our property and equipment during
2004. In the first quarter of 2004, we extended the remaining
estimated useful lives of various computer hardware property and
equipment to December 2005. The majority of these assets had
estimated useful lives that ended in March 2005. The decision to
increase the estimated useful lives of these assets was based on
internal analysis that indicated that the useful lives of these
assets would extend beyond the original estimate of three years.
The original three-year life was based on information available
in 2002. However, given our limited operating history, the
information available in 2002 did not include prior experience
of the useful lives of this property and equipment to include in
our initial estimate. The change in estimated useful lives had
the impact of delaying the recognition of $676,000 of
depreciation expense from 2004 to 2005. We will continue to
review the remaining estimated useful lives of our property and
equipment and will make adjustments whenever events or changes
in circumstances indicate that the remaining useful life of an
asset has changed. Consolidated depreciation and amortization
expenses, as a percentage of consolidated revenues, decreased to
15.7% for the year ended December 31, 2004 from 20.6% for
the comparable period in 2003.
Other Income (Expense)
Consolidated other income increased $380,000, or 40.0%, to
$1.3 million for the year ended December 31, 2004 from
$949,000 for the comparable period in 2003. This increase
primarily related to an increase of $1.2 million in
interest income, partially offset by an increase of $754,000 in
foreign currency transaction losses. The increase in interest
income was primarily due to the increase in the cash balances in
2004 compared to 2003, as well as to our cash earning a higher
return during the year ended December 31, 2004 compared to
the comparable period in 2003. The average monthly ending cash
balance for the year ended December 31, 2004, including
cash and cash equivalents, short-term investments, restricted
cash and restricted short-term investments, was
$100.7 million, compared to $78.4 million for the
comparable period in 2003. Our average interest rate for the
year ended December 31, 2004 was 2.9%, compared to 2.2% for
the comparable period in 2003.
The foreign currency transaction losses primarily related to the
revaluation of the U.S. dollar cash balances held by our
foreign subsidiaries due to the increase in the period-end
foreign currency exchange rates
during 2004. The functional currency of our foreign subsidiaries
is pounds sterling. Foreign currency transaction losses
increased to $1.4 million for the year ended
December 31, 2004 from $644,000 for the comparable period
in 2003. The year-end foreign currency exchange rate of pounds
sterling to the U.S. dollar increased 7.4% to 1.9160 as of
December 31, 2004 from 1.7846 as of December 31, 2003.
As of December 31, 2004, our foreign subsidiaries held
$20.6 million in U.S. dollar denominated cash
balances, compared to $4.7 million as of December 31,2003.
Income Taxes
Consolidated tax expense increased $5.3 million, or 81.4%,
to $11.8 million for the year ended December 31, 2004
from $6.5 million for the comparable period in 2003
primarily due to the increase in our pre-tax income. Our
effective tax rate increased to 34.9% for the year ended
December 31, 2004 from 32.7% for the comparable period in
2003. The effective tax rates for the years ended
December 31, 2003 and 2004 are lower than the statutory
rate primarily due to the impact of tax credits, which were
partially offset by state income taxes. The increase in the
effective tax rate from the year ended December 31, 2003 to
the year ended December 31, 2004 was primarily due to lower
tax credits taken during the year ended December 31, 2004
and higher state income taxes for the year ended
December 31, 2004.
Consolidated net income decreased $21.3 million, or 61.5%,
to $13.4 million for the year ended December 31, 2003
from $34.7 million for the comparable period in 2002.
During this period, net income for our futures business segment
increased $2.2 million, or 20.0%, to $13.5 million for
the year ended December 31, 2003 from $11.3 million
for the comparable period in 2002, and we incurred a net loss
for our OTC business segment of $126,000 for the year ended
December 31, 2003 versus net income of $23.5 million
for the comparable period in 2002. Consolidated operating
income, as a percentage of revenues, decreased to 20.2% for the
year ended December 31, 2003 from 40.6% for the comparable
period in 2002. Consolidated net income, as a percentage of
consolidated revenues, decreased to 14.3% for the year ended
December 31, 2003 from 27.7% for the comparable period in
2002.
Our consolidated revenues decreased $31.7 million, or
25.3%, to $93.7 million for the year ended
December 31, 2003 from $125.5 million for the
comparable period in 2002. This decrease was primarily the
result of decreased trading volumes on our electronic platform
as trading volumes in the North American OTC energy market
significantly declined due to the business environment.
Consolidated operating expenses remained relatively flat at
$74.8 million for the year ended December 31, 2003,
compared to $74.5 million for the comparable period in 2002.
Revenues
Transaction Fees
Consolidated transaction fees decreased $37.4 million, or
31.4%, to $81.4 million for the year ended
December 31, 2003 from $118.8 million for the
comparable period in 2002. Consolidated transaction fees, as a
percentage of consolidated revenues, decreased to 86.9% for the
year ended December 31, 2003 from 94.7% for the comparable
period in 2002.
Transaction fees generated by our futures business segment
increased $8.4 million, or 26.7%, to $40.0 million for
the year ended December 31, 2003 from $31.5 million
for the comparable period in 2002. Transaction fees generated by
this segment, as a percentage of consolidated revenues,
increased to 42.6% for the year ended December 31, 2003
from 25.1% for the comparable period in 2002. This increase was
due to a 9.5% increase in the trading volumes in our futures
business segment, a 14.8% increase in our commission rates
instituted in May 2002, as well as an 8.4% increase in the
foreign currency exchange rate. Trading volumes in this segment
increased to 33.3 million contracts traded for the year
ended December 31, 2003 from 30.4 million contracts
traded for the comparable period in 2002. The average exchange
rate of pounds sterling
to the U.S. dollar increased to 1.6341 for the year ended
December 31, 2003 from 1.5071 for the comparable period in
2002. In May 2002, we implemented a fee increase across all
futures markets from 30.5 pence per contract per side to 35
pence per contract per side. In June 2002, we implemented a fee
increase in respect of Exchange for Physical, or EFP, and
Exchange for Swap, or EFS, transactions from 35 pence per
contract per side to 60 pence per contract per side. EFP and EFS
are trades that occur off exchange and are blocked into our
futures markets.
Transaction fees generated by our OTC business segment decreased
$45.8 million, or 52.5%, to $41.5 million for the year
ended December 31, 2003 from $87.3 million for the
comparable period in 2002, primarily due to decreased trading
volumes on our electronic platform, partially offset by an
increase in our order flow shortfall payments. Transaction fees
generated by our OTC business segment, as a percentage of
consolidated revenues, decreased to 44.2% in 2003 from 69.5% in
2002. Transaction fees derived from trading in North American
natural gas contracts decreased $25.0 million, or 59.8%, to
$16.8 million for the year ended December 31, 2003
from $41.8 million for the comparable period in 2002, North
American power contracts decreased $16.5 million, or 74.2%,
to $5.7 million for the year ended December 31, 2003
from $22.3 million for the comparable period in 2002 and
global oil contracts decreased $5.4 million, or 37.7%, to
$8.8 million for the year ended December 31, 2003 from
$14.2 million for the comparable period in 2002. The number
of transactions executed in our OTC business segment decreased
29.6% to 684,495 trades for the year ended December 31,2003 from 971,760 trades for the comparable period in 2002.
In addition, average revenues per OTC transaction decreased
42.1% from the year ended December 31, 2002 to the year
ended December 31, 2003. The reduced number of
transactions, trading volumes, revenue per trade and associated
revenues were due to several factors, including:
•
Highly publicized problems involving merchant energy companies,
including alleged manipulative trading and price reporting
practices, misstatements of financial results, and other
matters, which resulted in many trading companies reducing or
eliminating their energy trading.
•
Severely restricted credit lines for trading desks, limiting
trading to asset-based transactions.
•
A general loss of liquidity in the broader energy market
resulting from fewer participants and reduced trading activity.
Revenues derived from order flow shortfall payments in our OTC
business segment increased to $7.1 million for the year
ended December 31, 2003 from $3.3 million for the
comparable period in 2002. This $3.8 million increase was
due to a $6.4 million shortfall payment from the Gas and
Power Firms recognized for the year ended December 31,2003, partially offset by a $2.2 million shortfall payment
recognized from the Initial Shareholders for the comparable
period in 2002 and a decrease of $373,000 in the 2003 European
gas shortfall payment as compared to the 2002 European gas
shortfall payment. Consolidated order flow shortfall payments,
as a percentage of consolidated revenues, increased to 7.6% for
the year ended December 31, 2003 from 2.6% for the
comparable period in 2002.
Revenues derived from our electronic confirmation fees increased
323.6% from the year ended December 31, 2002 to the year
ended December 31, 2003. We began offering this service in
April 2002. During the year ended December 31, 2003,
64,383 trades were matched, an increase of 109.7% compared
to 30,696 trades matched for the comparable period in 2002.
Data Services Fees
Consolidated data services fees increased $2.6 million, or
50.6%, to $7.7 million for the year ended December 31,2003 from $5.1 million for the comparable period in 2002.
This increase was due to increased data services fees derived
from both our futures business segment and our OTC business
segment of $1.2 million and $1.4 million,
respectively. Data services fees derived from our futures
business segment increased due to changes in the foreign
currency exchange rate. 10x view only screen access and End of
Day reports were both launched in November 2002. The number of
companies that subscribe to 10x view only screen access
increased to 185 as of December 31, 2003 from 105 as of
December 31, 2002. Consolidated data
services fees, as a percentage of consolidated revenues,
increased to 8.3% for the year ended December 31, 2003 from
4.1% for the comparable period in 2002.
Trading Access Fees
Consolidated trading access fees increased to $2.5 million
for the year ended December 31, 2003 from $490,000 for the
comparable period in 2002. This increase was primarily due to
the growth in monthly minimum commission fees in our OTC
business segment, which we introduced in November 2002. We
initiated minimum commission fees during the last two months of
2002. During the years ended December 31, 2003 and 2002, we
received $762,000 and $395,000, respectively, in membership
subscriptions and system user fees in our futures business
segment and $1.7 million and $95,000, respectively, in
monthly minimum commission fees in our OTC business segment.
These system user fees were introduced as part of the addition
of trading in futures contracts to our electronic platform for
the year ended December 31, 2003. Consolidated trading
access fees, as a percentage of consolidated revenues, increased
to 2.6% for the year ended December 31, 2003 from 0.4% for
the comparable period in 2002.
Other Revenues
Consolidated other revenues increased $1.0 million, or
98.1%, to $2.1 million for the year ended December 31,2003 from $1.1 million for the comparable period in 2002.
This increase was due to increased licensing, service and
technology development fees charged to the Chicago Climate
Exchange and to increased training and communication charges in
our futures business segment. Consolidated other revenues, as a
percentage of consolidated revenues, increased to 2.2% for the
year ended December 31, 2003 from 0.8% for the comparable
period in 2002.
Expenses
Cost of Hosting
Consolidated cost of hosting expenses decreased
$2.2 million, or 56.7%, to $1.7 million for the year
ended December 31, 2003 from $4.0 million for the
comparable period in 2002, primarily due to reduced costs
associated with the migration to an Internet-based platform from
a private network connection in early 2003. During the year
ended December 31, 2003, we paid $1.3 million in
hosting expenses, $268,000 in customer network expenses and
$111,000 in security services expenses, compared to
$2.4 million in hosting expenses, $516,000 in customer
network expenses and $1.1 million in security services
expenses during the year ended December 31, 2002.
Consolidated cost of hosting expenses, as a percentage of
consolidated revenues, decreased to 1.8% for the year ended
December 31, 2003 from 3.2% for the comparable period in
2002.
Compensation and Benefits
Consolidated compensation and benefits expenses decreased
$1.7 million, or 6.0%, to $26.2 million for the year
ended December 31, 2003 from $27.9 million for the
comparable period in 2002. This decrease was primarily due to a
reduction in our employee headcount and a reduction in our
discretionary bonus payments. As of December 31, 2003, we
had 186 employees, compared to 201 employees at
December 31, 2002. Our discretionary bonus payments
decreased primarily due to lower bonuses paid in 2003 compared
to 2002, reflecting our reduced operating results for the year
ended December 31, 2003, and fewer employees receiving a
bonus in 2003 as compared to 2002. Consolidated compensation and
benefits expenses, as a percentage of consolidated revenues,
increased to 28.0% for the year ended December 31, 2003
from 22.2% for the comparable period in 2002.
Professional Services
Consolidated professional services expenses decreased $737,000,
or 4.6%, to $15.1 million for the year ended
December 31, 2003 from $15.9 million for the
comparable period in 2002. This decrease was primarily due to a
$2.4 million charge in 2002 relating to legal and
accounting expenses incurred with respect to our
initial public offering that was suspended in 2002, which was
partially offset by an increase in legal fees in 2003 primarily
related to our litigation with NYMEX. Consolidated professional
services expenses, as a percentage of consolidated revenues,
increased to 16.1% for the year ended December 31, 2003
from 12.7% for the comparable period in 2002.
Selling, General and Administrative
Consolidated selling, general and administrative expenses
remained constant at $12.4 million for the years ended
December 31, 2002 and 2003. Consolidated selling, general
and administrative expenses, as a percentage of consolidated
revenues, increased to 13.2% for the year ended
December 31, 2003 from 9.9% for the comparable period in
2002.
Depreciation and Amortization
Consolidated depreciation and amortization expenses increased
$5.0 million, or 34.6%, to $19.3 million for the year
ended December 31, 2003 from $14.4 million for the
comparable period in 2002. This increase was due to additional
depreciation expense recorded on capital expenditures of
$1.6 million incurred for the year ended December 31,2003 and capitalized software development costs of
$5.2 million incurred for the year ended December 31,2003. We also had a full year of depreciation expense recorded
on the $14.8 million in capital expenditures and
$6.0 million in capitalized software development costs
incurred for the year ended December 31, 2002. Consolidated
depreciation and amortization expenses, as a percentage of
consolidated revenues, increased to 20.6% for the year ended
December 31, 2003 from 11.4% for the comparable period in
2002.
Other Income (Expense)
Consolidated other income decreased $544,000, or 36.4%, to
$949,000 for the year ended December 31, 2003 from
$1.5 million for the comparable period in 2002. The
difference primarily related to a decrease of $263,000 in
interest income and an increase of $602,000 in foreign currency
transaction losses, partially offset by a decrease of $320,000
in interest expense. The decrease in interest income and
interest expense were both related to the repayment of our
related-party term loan note agreements in November 2002 for
$16.5 million in cash.
The foreign currency transaction losses related to the
re-valuation of the U.S. dollar cash balances held by our
foreign subsidiaries due to the increase in the period-end
foreign currency exchange rates during 2003. The functional
currency of our foreign subsidiaries is pounds sterling. The
foreign currency transaction losses increased to $644,000 for
the year ended December 31, 2003 from $149,000 for the
comparable period in 2002. The year-end foreign currency
exchange rate of pounds sterling to the U.S. dollar
increased 10.9%, to 1.7846 at December 31, 2003 from 1.6095
at December 31, 2002. As of December 31, 2003, our
foreign subsidiaries held $4.7 million in U.S. dollar
denominated cash balances, compared to $1.6 million as of
December 31, 2002.
Income Taxes
Consolidated tax expense decreased $11.2 million, or 63.4%,
to $6.5 million for the year ended December 31, 2003
from $17.7 million for the comparable period in 2002
primarily due to the decrease in our pre-tax income. Our
effective tax rate decreased to 32.7% for the year ended
December 31, 2003 from 33.8% for the comparable period in
2002. The effective tax rates for the years ended
December 31, 2002 and 2003 are lower than the statutory
rate primarily due to the impact of tax credits, which were
partially offset by state income taxes.
The following table sets forth quarterly unaudited condensed
consolidated statements of income (loss) for the periods
presented. We believe that this data has been prepared on
substantially the same basis as our audited consolidated
financial statements and includes all adjustments, consisting
only of normal recurring adjustments, necessary for the fair
presentation of our consolidated results of operations for the
quarters presented. This unaudited condensed consolidated
quarterly data should be read together with our consolidated
financial statements and related notes included elsewhere in
this prospectus. The historical results for any quarter do not
necessarily indicate the results expected for any future period.
The financial results for the three months ended June 30,2005 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 ongoing litigation. Excluding these
charges, our net income
for the three months ended June 30, 2005 would have been
$12.6 million. See “— Non-GAAP Financial
Measure”.
Liquidity and Capital Resources
Since our inception on May 11, 2000, we have financed our
operations, growth and cash needs primarily through income from
operations, borrowings under our related-party loan agreement
and borrowings under our revolving credit facility. Our
principal capital requirements have been to fund:
•
capital expenditures;
•
working capital;
•
strategic acquisitions; and
•
marketing and development of our electronic platform.
We may need to incur additional debt or issue additional equity
to make strategic acquisitions or investments in the future.
Cash and Cash Equivalents, Short-term Investments,
Restricted Cash and Restricted Short-Term Investments
We had consolidated cash and cash equivalents of
$65.6 million, $61.2 million and $44.9 million as
of June 30, 2005 and December 31, 2004 and 2003,
respectively. We had $5.7 million and $12.0 million in
short-term investments as of December 31, 2004 and 2003,
respectively, and $12.5 million, $18.4 million and
$36.8 million in restricted cash and restricted short-term
investments held as of June 30, 2005 and December 31,2004 and 2003, respectively. We consider all short-term, highly
liquid investments with original maturity dates of three months
or less at the time of purchase to be cash equivalents. We
classify all investments with original maturity dates in excess
of three months as short-term investments. As of June 30,2005, no investments had original maturity dates in excess of
three months. We classify all cash that is not available
for general use, either due to Financial Services Authority
requirements or through restrictions in specific agreements, as
restricted cash or restricted short-term investments.
We invest a portion of our cash in excess of short-term
operating needs in U.S. AAA rated 28-day Auction Rate
Securities, or ARS. We classify these investments as
available-for-sale in accordance with Statement of Financial
Accounting Standards, or SFAS, 115, Accounting for
Certain Investments in Debt and Equity Securities. ARS are
instruments whose interest rates or dividends are reset
frequently, usually every seven to 49 days. The reset
mechanism occurs via a Dutch auction, wherein purchasers and
sellers submit their orders for ARS to registered
broker-dealers. The highest bid that clears the auction is the
interest rate or dividend applied to the entire issue until the
next auction date. While there is no guarantee that a sell order
will be filled, it is rare for it not to be filled due to the
high credit quality of the ARS. Even though we
purchase 28-day auction rate issues, we are required to
classify these securities as short-term investments instead of
cash and cash equivalents as the original maturity of the ARS is
in excess of three months. The ARS investments are classified as
current assets based on our intent and ability to use these
investments as necessary for short-term requirements. We had ARS
investments of $5.7 million and $12.0 million as of
December 31, 2004 and 2003, respectively, and our ARS
investments are presented as short-term investments on our
consolidated balance sheets. We had no ARS investments as of
June 30, 2005.
We had $11.6 million, $12.4 million and
$11.9 million in restricted cash held at the IPE as of
June 30, 2005 and December 31, 2004 and 2003,
respectively. The Financial Services Authority requires the IPE,
as a Recognized Investment Exchange, to restrict the use of the
equivalent of six months’ operating expenditures in cash or
cash equivalents at all times. Our subsidiary,
IntercontinentalExchange Services (UK) Limited, or ICE Services
UK, is authorized and regulated by the Financial Services
Authority as an arranger of deals in investments and as an
agency broker. The Financial Services Authority requires ICE
Services UK to maintain a minimum level of financial resources,
which is calculated annually on the basis of 25% of the relevant
annual
expenditures, adjusted for any illiquid assets. As of
June 30, 2005 and December 31, 2004 and 2003, we had
$910,000, $1.0 million and $874,000, respectively, in
restricted cash held at ICE Services UK.
When we acquired the IPE in June 2001, $24.0 million of
cash collateral was pledged by certain shareholders to secure a
letter of credit issued to support our redemption obligations in
respect of our Class B redeemable common stock, which we
issued as a portion of our payment to the sellers. This cash was
held in a facility that was controlled by the Gas and Power
Firms and originally was not reflected in our consolidated
financial statements. In January 2003, the FASB issued
Interpretation No. 46, or FIN 46, Consolidation of
Variable Interest Entities. FIN 46 requires a variable
interest entity to be consolidated by a company if that company
is subject to a majority of the risk of loss from the variable
interest entity’s activities or entitled to receive a
majority of the entity’s residual returns or both. We
adopted FIN 46 in November 2003. Given our ability to
receive all of the variable interest entity’s expected
residual losses and returns, we were considered the primary
beneficiary under FIN 46 and we were required to
consolidate the entity. The result of the adoption of
FIN 46 and the consolidation of the variable interest
entity was to increase restricted short-term investments by
$24.0 million and to increase additional paid-in capital by
$24.0 million in 2003. In November 2004, in connection with
the redemption of our Class B redeemable common stock, the
letter of credit was paid for the benefit of the holders of our
Class B redeemable common stock and the $24.0 million
was released to the letter of credit bank. We have no further
obligation or interest in respect of this arrangement.
In November 2004, we entered into a $25.0 million revolving
credit agreement with Wachovia Bank, National Association, or
Wachovia. We were required to maintain a $5.0 million money
market account with Wachovia until we had transferred our
primary domestic and international deposit accounts to Wachovia.
As of December 31, 2004, this $5.0 million balance was
reflected as restricted cash. In June 2005, we transferred our
accounts to Wachovia. We are no longer required to maintain a
money market account, and as of June 30, 2005, the balance
is no longer reflected as restricted cash.
We maintain cash and short-term investments in an amount
sufficient to meet our working capital requirements. In our OTC
business segment, in addition to the ARS described above, we
currently invest our excess cash predominantly in commercial
paper and overnight deposits that are highly liquid, are of
high-quality investment grade and have maturities of three
months or less with the intent of having these funds readily
available for operating, acquisition and strategic equity
investment purposes. In our futures business segment, we earn
interest income on our excess cash balances which primarily
relates to interest earned on money market deposits in the
United Kingdom. Our futures business policy is to invest
two-thirds of all cash funds at no more than six banks with an
IBCA credit rating of AAA or AA+, with no more than 50% in any
one bank. Under this policy, the remaining one-third of all cash
funds may be invested in no more than three additional banks
with an IBCA rating of AA or above.
Cash Flow
The following tables present, for the periods indicated, the
major components of net increases (decreases) in cash and
cash equivalents:
Consolidated net cash provided by operating activities was
$16.2 million and $15.1 million for the six months
ended June 30, 2005 and 2004, respectively, and
$40.2 million, $27.1 million and $51.2 million
for the years ended December 31, 2004, 2003 and 2002,
respectively. Net cash provided by operating activities
primarily consists of net income adjusted for certain non-cash
items, including depreciation and amortization and the effects
of changes in working capital. Fluctuations in net cash provided
by operating activities are primarily attributable to increases
and decreases in our net income between periods and, to a lesser
extent, due to fluctuations in working capital. The
$13.1 million increase in net cash provided by operating
activities for the year ended December 31, 2004 from the
comparable period in 2003 is primarily due to the
$6.5 million increase in the OTC business segment’s
net income for the year ended December 31, 2004 from the
comparable period in 2003, the increase in the futures business
segment’s net income and the net increases in accrued
salaries and benefits and other accrued liabilities. The
$24.1 million decrease in net cash provided by operating
activities for the year ended December 31, 2003 from the
comparable period in 2002 is primarily due to the
$23.6 million decrease in the OTC business segment’s
net income for the year ended December 31, 2003 from the
comparable period in 2002.
Investing Activities
Consolidated net cash provided by (used in) investing activities
was $7.5 million and ($7.4 million) for the six months
ended June 30, 2005 and 2004, respectively, and
($4.8 million), ($18.1 million) and
($25.2 million) for the years ended December 31, 2004,
2003 and 2002, respectively. These activities primarily relate
to capital expenditures in each period for software, including
internally developed software, and for computer and network
equipment. We incurred capitalized software development costs of
$2.6 million and $2.3 million during the six months
ended June 30, 2005 and 2004, respectively, and
$4.8 million, $5.2 million and $6.0 million for
the years ended December 31, 2004, 2003 and 2002,
respectively. We had additional capital expenditures of $755,000
and $880,000 during the three months ended June 30, 2005
and 2004, respectively, and $1.7 million, $1.6 million
and $14.8 million for the years ended December 31,2004, 2003 and 2002, respectively. The $14.8 million in
capitalized expenditures for the year ended December 31,2002 included $10.4 million in computer network equipment
relating to the development of our electronic platform and
disaster recovery platform. We had a net decrease (increase) in
short-term investments classified as available-for-sale of
($5.8 million) and $3.9 million during the six months
ended June 30, 2005 and 2004, respectively and a net
decrease (increase) in restricted cash of $5.1 million and
($251,000), respectively, due to changes in the short-term
investments and restricted cash balance between periods. We had
a net (increase) decrease in short-term investments classified
as available-for-sale of $6.5 million, ($7.9 million)
and ($3.8 million) for the years ended December 31,2004, 2003 and 2002, respectively, and a net decrease (increase)
in restricted cash of ($4.7 million), ($2.8 million)
and $142,000, respectively, due to changes in the short-term
investments and restricted cash balances between periods.
Financing Activities
Consolidated net cash used in financing activities was
$15.3 million and $800,000 for the six months ended
June 30, 2005 and 2004, respectively, and
$20.3 million, $1.3 million and $20.1 million for
the years ended December 31, 2004, 2003 and 2002,
respectively. Consolidated net cash used in financing activities
for the six months ended June 30, 2005 primarily relates to
the repayment of $12.0 million of the $25.0 million
revolving credit facility. Consolidated net cash used in
financing activities for the year ended December 31, 2004
primarily relates to $43.5 million paid in connection with
the redemption of the Class B redeemable common stock,
partially offset by $25.0 million in cash drawn down under
our revolving credit facility. Consolidated net cash used in
financing activities for the year ended December 31, 2002
primarily relates to $16.5 million in repayments of
related-party notes payable. We also had payments on capital
lease obligations, primarily related to computer and network
equipment, of $482,000 and $815,000 for the six months ended
June 30, 2005 and 2004, respectively, and
$1.6 million, $1.9 million and $3.6 million for
the years ended December 31, 2004, 2003 and 2002,
respectively. During the six months ended June 30, 2005, we
incurred $3.0 million in professional services expenses
related to the initial public offering of our common stock.
We intend to use a portion of the net proceeds of this offering
to repay all amounts outstanding under our revolving credit
facility, which as of June 30, 2005 was $13.0 million.
Loan Agreements
We entered into our revolving credit agreement with Wachovia on
November 17, 2004. Under this agreement, we may borrow an
aggregate principal amount of up to $25.0 million at any
time through November 17, 2006. The facility includes an
unused line fee that is equal to the unused maximum revolver
amount multiplied by an applicable margin rate and is payable on
a quarterly basis, which as of December 31, 2004 was 0.15%.
Loans under the Wachovia facility bear interest on the principal
amounts outstanding at LIBOR plus an applicable margin rate,
which as of June 30, 2005 and December 31, 2004 was
0.85%. We have the option to select the interest rate and
interest period applicable to any loans at the time of
borrowing, which can be either a daily LIBOR market index loan
or a LIBOR rate loan with a period of one, three or six months.
Interest on each LIBOR market index loans is payable monthly and
the interest on the LIBOR rate loans is payable on the last day
of each interest period generally.
On November 23, 2004, we borrowed the entire
$25.0 million available under the Wachovia facility to fund
a portion of the $67.5 million redemption of our
Class B redeemable common stock. As of December 31,2004, $13.0 million was held in a six-month LIBOR rate loan
with a locked in interest rate, including the applicable margin
rate, of 3.40%. The remaining balance of $12.0 million was
held in a daily LIBOR market index loan with an interest rate at
December 31, 2004, including the applicable margin rate, of
3.25%. The $12.0 million LIBOR market index loan was repaid
in January 2005.
This facility provides for a negative pledge on all of our
assets. The facility also contains affirmative and negative
covenants including, but not limited to, cash flow leverage
ratios, minimum tangible net worth ratios and limitations or
approvals needed from Wachovia for acquisitions, external debt
and other fundamental changes to our business. We historically
have been and are currently in compliance with the financial
covenants of our credit facility.
On May 11, 2000, we entered into a term loan agreement with
Goldman Sachs Credit Partners L.P., an affiliate of The Goldman
Sachs Group, Inc., and Morgan Stanley Capital Group, Inc., two
of our Initial Shareholders that are affiliated with the lead
underwriters of this offering. Under the agreement, we could
borrow an aggregate principal amount of up to $20 million
($10 million from each lender) in two term loans. We
borrowed $16.1 million under the term loan agreement in
2000 and repaid the principal balance and accrued interest of
$16.5 million in 2002. In November 2002, the term loan
agreement was cancelled and all liens were released. The loans
bore interest on the principal amounts at one-month LIBOR, with
interest compounding monthly and payable at the maturity date.
Future Capital Requirements
Our future capital requirements will depend on many factors,
including the rate of our trading volume growth, required
technology initiatives, regulatory compliance costs, the
expansion of sales and marketing activities, the timing and
introduction of new products and enhancements to existing
products, and the continuing market acceptance of our electronic
platform. We currently expect to make capital expenditures
ranging between $5.8 million and $6.3 million in 2005
and ranging between $4.8 million and $5.8 million in
2006 to support the continued expansion of our futures and OTC
businesses. We expect that these expenditures will focus on the
further expansion of our electronic futures and OTC participant
base, the expansion of distribution opportunities via the
possible acquisition of existing businesses, the addition of
products in our market data services business, and the provision
of back office service systems as well as technical improvements
to, and enhancements of, our existing systems, products and
services. We expect our capitalized software development costs
to remain relatively consistent with our 2004 software
development costs.
We believe that cash flows from operations and the net proceeds
of this offering will be sufficient to fund our working capital
needs and capital expenditure requirements at least through the
end of 2006. Our revolving credit agreement is currently the
only agreement or arrangement that we have with third parties to
provide us with sources of liquidity and capital resources
following this offering. In the event that we consummate any
strategic acquisitions or investments, or if we are required to
raise capital for any reason, we may need to incur additional
debt or issue additional equity to help raise the necessary
funds. We cannot assure you that we will be able to obtain any
such financing on acceptable terms or at all.
Off-Balance Sheet Entities
We currently do not have any relationships with unconsolidated
entities or financial partnerships, often referred to as
structured finance or special purpose entities, which have been
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
Contractual Obligations and Commercial Commitments
The following tables present, for the periods indicated, our
contractual obligations (which we intend to fund from
operations) and commercial commitments as of December 31,2004:
Payments Due by Period
Less
Than
1-3
4-5
After 5
Total
1 Year
Years
Years
Years
(in thousands)
Contractual Obligations:
Short-term debt(1)
$
12,000
$
12,000
$
—
$
—
$
—
Capital lease obligations(2)
512
512
—
—
—
Operating leases
4,984
1,867
3,117
—
—
Long-term debt(3)
13,000
—
13,000
—
—
eSpeed licensing agreement(4)
4,000
2,000
2,000
—
—
Total contractual cash obligations
$
34,496
$
16,379
$
18,117
$
—
$
—
(1)
Short-term debt was repaid in full in January 2005.
(2)
The remaining capital lease obligations were paid during the
three months ended March 31, 2005.
(3)
We expect to repay long-term debt in full out of the net
proceeds of this offering.
(4)
The eSpeed licensing agreement also includes a quarterly royalty
payment that is based on trading volume. The royalty payments
were $323,000, $32,000 and $14,000 for the six months ended
June 30, 2005 and for the years ended December 31,2004 and 2003, respectively. The remaining 2005 through 2007
estimates have not been included in the above estimates.
Non-GAAP Financial Measure
We provide adjusted net income as additional information
regarding our operating results. This measure is not in
accordance with, or an alternative to, U.S. generally accepted
accounting principles, or GAAP, and may be different from
non-GAAP measures used by other companies. We believe that our
presentation of adjusted net income provides investors with
meaningful information relating to our financial condition and
results of operations, and is useful for period-to-period
comparison of results because the floor closure costs and the
settlement expense are not reflective of our normal operating
performance. The presentation below compares the operating
performance of the current period, as adjusted, to the normal
operating performance in
Less: Effective tax rate benefit of floor closure costs and
settlement expense
(7,119
)
(7,119
)
(1,685
)
(5,434
)
Adjusted net income
$
21,424
$
12,554
$
10,392
$
11,032
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk in the ordinary course of
business. This market risk consists primarily of interest rate
risk associated with our cash and cash equivalents, short-term
investments, restricted cash and restricted short-term
investments and foreign currency exchange rate risk.
Interest Rate Risk
We have exposure to market risk for changes in interest rates
relating to our cash and cash equivalents, short-term
investments, restricted cash and restricted short-term
investments. As of June 30, 2005 and December 31, 2004
and 2003, our cash and cash equivalents, short-term investments,
restricted cash and restricted short-term investments, were
$78.1 million, $85.3 million and $93.7 million,
respectively, of which $46.0 million, $46.0 million
and $46.5 million, respectively, were denominated in pounds
sterling. The remaining investments are denominated in
U.S. dollars. In general, our investments in the United
Kingdom earn interest at a higher rate than in the United
States. Due to the conservative nature of our investment
portfolio, which is structured with a focus on capital
preservation and is mainly comprised of short-term AAA rated
ARS, commercial paper and money market investments, we would not
expect our operating results or cash flows to be significantly
affected by changes in market interest rates. We do not use our
investment portfolio for trading or other speculative purposes.
Foreign Currency Exchange Rate Risk
We have had significant operations in the United Kingdom since
our acquisition of the IPE in 2001. The revenues, expenses and
financial results of the IPE and other U.K. subsidiaries are
denominated in pounds sterling. Pounds sterling is the
functional currency of our U.K. subsidiaries. We have foreign
currency translation risk equal to our net investment in our
subsidiaries. The financial statements of our U.K. subsidiaries
are translated into U.S. dollars using current rates of
exchange, with gains or losses included in the cumulative
translation adjustment account, a component of
shareholders’ equity. As of June 30, 2005 and
December 31, 2004 and 2003, the portion of our
shareholders’ equity attributable to accumulated other
comprehensive income from foreign currency translation was
$26.3 million, $37.0 million and $26.4 million,
respectively. The year-end foreign currency exchange rate for
pounds sterling to the U.S. dollar increased from 1.6095 as
of December 31, 2002 to 1.7846 as of December 31,2003, and then to 1.9160 as of December 31, 2004. The
foreign currency exchange rate decreased to 1.7921 as of
June 30, 2005.
We also have foreign currency transaction risk related to the
settlement of foreign receivables or payables that occur through
our electronic platform, including for our OTC European gas and
power markets, which are paid in pounds sterling, and for our
foreign subsidiaries’ cash accounts held in
U.S. dollars. We had foreign currency transaction (gains)
losses of ($1.1 million) and $173,000 during the six months
ended June 30, 2005 and 2004, respectively, and
$1.4 million, $644,000 and $149,000 for the years ended
December 31, 2004, 2003 and 2002, respectively, primarily
attributable to the appreciation of pounds sterling relative to
the U.S. dollar.
The average exchange rate of pounds sterling to the
U.S. dollar increased from 1.5071 for the year ended
December 31, 2002 to 1.6341 for the year ended
December 31, 2003, and then to 1.8296 for the year ended
December 31, 2004. The average exchange rate also increased
to 1.8713 for the six months ended June 30, 2005.
We generate a significant portion of our revenues from sales to
participants located outside of the United States, principally
in the United Kingdom. Of our consolidated revenues, 39.4%,
46.1%, 47.1% and 33.7% were denominated in pounds sterling for
the six months ended June 30, 2005 and for the years ended
December 31, 2004, 2003 and 2002, respectively. Of our
consolidated operating expenses, 46.4%, 44.4%, 40.0% and 29.2%
were denominated in pounds sterling for the six months ended
June 30, 2005, and for the years ended December 31,2004, 2003 and 2002, respectively. As the pounds sterling
exchange rate changes, the U.S. equivalent of revenues and
expenses denominated in foreign currencies changes accordingly.
All other sales in our business are denominated in
U.S. dollars, including all sales of our futures market
data generated by the IPE. Our U.K. operations in some instances
function as a natural hedge because most U.K. revenues and
operating expenses are denominated in pounds sterling. We
acquired the IPE in June 2001 and we formed four wholly-owned
U.K. subsidiary companies during 2003. We also began to offer
trading in the OTC European gas commodities market in December
2001 and in the OTC European power commodities market in May
2002. As a result, to date, our exposure to foreign currency
exchange risk has increased. This exposure will continue to
increase as we expand and introduce additional international
products on our electronic platform. The effect of an immediate
10% decline in exchange rates would result in a translation
adjustment loss of $11.5 million which would be recorded as
a foreign currency translation adjustment as a component of
other comprehensive income (loss), as of June 30, 2005.
We currently enter into hedging transactions to help mitigate
our foreign exchange risk exposure. During 2004 and 2003, we
entered into foreign currency hedging activities primarily to
protect our net investment in our foreign subsidiaries. In
accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, we are
required to recognize all derivative financial instruments as
either assets or liabilities on our consolidated balance sheets
at fair value. The effective portion of any gain or loss on
these derivative financial instruments, which have been
designated as a hedge of a net investment in foreign operations,
are reflected in accumulated other comprehensive income. Any
ineffective portion of any gain or loss on these derivative
financial instruments is recognized in earnings. We do not hold
or issue any derivative financial instruments for trading
purposes.
Impact of Inflation
We have not been adversely affected by inflation as
technological advances and competition have generally caused
prices for the hardware and software that we use for our
electronic platform to remain constant or to decline. In the
event of inflation, we believe that we will be able to pass on
any price increases to our participants, as the prices that we
charge are not governed by long-term contracts.
New Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards
Board, or FASB, issued SFAS No. 123 (revised 2004),
Share-Based Payment, which is a revision of
SFAS No. 123. SFAS No. 123(R) supersedes APB
Opinion No. 25 and amends SFAS No. 95,
Statement of Cash Flows. Generally, the approach in
SFAS No. 123(R) is similar to the approach described
in SFAS No. 123. However, SFAS No. 123(R)
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income
statement based on their fair value. Pro forma disclosure is no
longer an alternative.
The SEC announced on April 14, 2005 a phased-in
implementation process for SFAS No. 123 (R) that would
require registrants that are not small business issuers to adopt
SFAS No. 123 (R)’s fair value method of
accounting for share-based payments to employees no later than
the first fiscal year beginning after June 15, 2005. As a
result, registrants with a fiscal year ending December 31,
will not be required to adopt SFAS No. 123 (R) until
January 1, 2006. Early adoption will be permitted in
periods in which financial statements have not been issued. We
expect to adopt SFAS No. 123(R) on January 1, 2006.
SFAS No. 123(R) permits companies to adopt its
requirements using one of two methods:
1. A “modified prospective” method in which
compensation cost is recognized beginning with the effective
date (a) based on the requirements of
SFAS No. 123(R) for all share-based payments granted
after the effective date and (b) based on the requirements
of SFAS No. 123 for all awards granted to employees
prior to the effective date of SFAS No. 123(R) that
remain unvested on the effective date.
2. A “modified retrospective” method which
includes the requirements of the modified prospective method
described above, but also permits entities to restate based on
the amounts previously recognized under SFAS No. 123
for purposes of pro forma disclosures either (a) all prior
periods presented or (b) prior interim periods of the year
of adoption.
We plan to adopt SFAS No. 123(R) using the modified
prospective method.
As permitted by SFAS No. 123, we currently account for
share-based payments to employees using APB Opinion
No. 25’s intrinsic value method and, as such,
generally recognize no compensation cost for employee stock
options. Accordingly, the adoption of
SFAS No. 123(R)’s fair value method will have a
significant impact on our results of operations, although it
will have no impact on our overall financial position. While we
expect that the impact will be significant, we cannot predict
the amount of the impact at this time because it will depend on
levels of share-based payments granted in the future. However,
had we adopted SFAS No. 123(R) in prior periods, the
impact of the standard would have approximated the impact of
SFAS No. 123 as described in the disclosure of pro
forma net income and earnings per share in Notes 2 and 10
to our consolidated financial statements and related notes
included elsewhere in this prospectus. It should be noted that
there are certain differences between the requirements of
SFAS No. 123 and SFAS No. 123(R) that may
result in a material difference in the impact of the fair value
calculations on our net income and earnings per share. This
includes the requirement under SFAS No. 123(R) to
estimate forfeitures, the requirement that an excess tax benefit
reduces taxes payable before it is realized, potential changes
to the capitalization of compensation cost and our use of
industry volatility figures in prior periods.
SFAS No. 123(R) also requires the benefits of tax
deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating
cash flow as required under current literature. This requirement
will reduce net operating cash flows and increase net financing
cash flows in periods after adoption. We cannot estimate what
those amounts may be in the future because they depend on, among
other things, when employees exercise stock options. We did not
recognize any tax deductions in excess of the recognized
compensation cost for the years ended December 31, 2004,
2003 and 2002.
In December 2004, FASB Staff Position No. SFAS 109-2,
Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of
2004 (FSP SFAS 109-2) was issued. FSP SFAS 109-2
provides guidance under SFAS 109, Accounting for Income
Taxes (SFAS No. 109), for recording the potential
impact of the repatriation provisions of the American Jobs
Creation Act of 2004, or the Jobs Act, enacted on
October 22, 2004. FSP SFAS 109-2 allows time beyond
the financial reporting period of enactment to evaluate the
effects of the Jobs Act before applying the requirements of FSP
SFAS 109-2. Accordingly, we are evaluating the potential
effects of the Jobs Act and have not adjusted the tax expense or
deferred tax liability as of June 30, 2005 to reflect the
requirements of FSP SFAS 109-2.
In May 2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections, a replacement of APB No. 20
and FASB Statement No. 3 (SFAS No. 154).
SFAS No. 154 requires retrospective application to
prior periods’ financial statements of a voluntary change
in accounting principle unless it is impracticable. APB Opinion
No. 20 Accounting Changes, previously required that
most voluntary changes in accounting principle be recognized by
including in net income of the period of the change the
cumulative effect of changing to the new accounting principle.
This statement is effective for us as of January 1, 2006.
We do not believe that the adoption of SFAS No. 154 will
have a material impact on our consolidated financial statements.
We have identified the policies below as critical to our
business operations and the understanding of our results of
operations. The impact of, and any associated risks related to,
these policies on our business operations is discussed
throughout “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” where these
policies materially affected our financial results. For a
detailed discussion on the application of these and other
accounting policies, see note 2 to our consolidated
financial statements and related notes included elsewhere in
this prospectus. Our discussion and analysis of our financial
condition and results of operations are based upon our
consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles.
The preparation of financial statements in conformity with these
accounting principles requires us to make estimates and
assumptions that affect the reported amount of assets and
liabilities, and the disclosure of contingent assets and
liabilities, at the date of our financial statements and the
reported amounts of revenues and expenses during the reporting
period.
We evaluate our estimates and judgments on an ongoing basis,
including those related to the accounting matters described
below. We base our estimates and judgments on our historical
experience and other factors that we believe to be reasonable
under the circumstances existing when we make these estimates
and judgments. Based on these factors, we make estimates and
judgments about, among other things, the carrying values of
assets and liabilities that are not readily apparent from market
prices or other independent sources and about the recognition
and characterization of our revenues and expenses. The values
and results based on these estimates and judgments could differ
significantly under different assumptions or conditions and
could change materially in the future.
We believe that the following critical accounting policies,
among others, affect our more significant judgments and
estimates used in the preparation of our consolidated financial
statements and could materially increase or decrease our
reported results, assets and liabilities.
Legal Contingencies
We are subject to an ongoing risk of potential legal proceedings
and claims. We are currently involved in certain legal
proceedings as discussed under the heading “Regulation and
Legal Proceedings”. Whenever we become involved in a legal
proceeding or claim, through consultation with outside counsel
handling our defense and based upon an analysis of potential
results, assuming a combination of litigation and settlement
strategies, we determine if any legal accrual is required. We
are required to assess the likelihood of any adverse judgments
or outcomes to these matters as well as potential ranges of
probable losses. These losses can be difficult to estimate and,
in the case of judgments or other outcomes that may require us
to change our business or operations, can have a long-term cost
that can be impossible to determine. We make a determination of
the amount of reserves required, if any, for these contingencies
after careful analysis of each individual issue. We have not
established any reserves since our inception, and we currently
do not maintain any reserves.
We face potential regulatory demands and threatened legal
claims, as described under the heading “Regulation and
Legal Proceedings”. However, we have concluded that these
matters have not proceeded sufficiently for their likely
outcomes to be determinable. It is possible, however, that
future results of operations for any particular quarterly or
annual period could be materially and adversely affected by new
developments, changes in our assumptions or the effectiveness of
our strategies relating to these matters.
Goodwill and Other Identifiable Intangible Assets
We have significant intangible assets related to goodwill and
other acquired intangibles. Our determination of related
estimated useful lives of intangible assets and whether or not
these assets are impaired requires us to make significant
judgments. If we change our strategy or if market conditions
shift, our judgments may change, which may result in adjustments
to recorded asset balances.
We periodically evaluate acquired intangible assets for
indications of potential impairment. In assessing the
recoverability of the goodwill and other intangibles, we must
make assumptions regarding estimated future
cash flows and other factors to determine the fair value of the
respective assets. If these estimates or their related
assumptions change in the future, we may be required to record
impairment charges against these assets. Future events could
cause us to conclude that indications of impairment exist and
that goodwill associated with our acquired businesses is
impaired. Any resulting impairment loss could have a material
adverse impact on our financial condition and results of
operations. Our goodwill and other intangible assets are
evaluated for impairment annually in our fiscal fourth quarter
or earlier if events indicate that value may be impaired. Such
evaluation includes comparing the fair value of a reporting unit
with its carrying value and analyzing expected future discounted
cash flows at the reporting unit level. The reporting unit level
for our goodwill and the majority of our other intangible assets
is the futures business segment, which relates to the operations
of our subsidiary, the IPE. This analysis has not resulted in
impairment through June 2005.
As of June 30, 2005, we had net goodwill of
$77.1 million and net other intangible assets of
$2.8 million relating to our acquisition of the IPE in 2001
and our purchase of trademarks and internet domain names from
various third parties in 2003. The FASB issued
SFAS No. 141 and SFAS No. 142 in June 2001.
SFAS No. 141 requires business combinations initiated
after June 30, 2001 to be accounted for using the purchase
method of accounting and broadens the criteria for recording
intangible assets separate from goodwill. SFAS No. 142
requires the use of a non-amortization approach to account for
purchased goodwill and certain intangibles with indefinite
lives. Effective January 1, 2002, we adopted
SFAS No. 142. Under the provisions of
SFAS No. 142, we no longer amortize goodwill or other
intangible assets with indefinite useful lives. In the period
between the acquisition of IPE and December 31, 2002,
goodwill and indefinite lived intangibles were amortized on a
straight-line basis over their estimated useful lives, which
were estimated to be 20 years. We recognize specifically
identifiable intangibles when a specific right or contract is
acquired. These intangibles are amortized on a straight-line
basis over the lesser of their contractual and estimated useful
lives, which are estimated to be five years.
The goodwill and other intangible assets balances have increased
since our acquisition of the IPE due to translation adjustments.
Under SFAS No. 52, Foreign Currency
Translation, following a business combination, the amounts
allocated as of the acquisition date to the assets acquired and
liabilities assumed, including goodwill and other intangible
assets, should be translated as if the purchase adjustments were
recorded directly on the books of the foreign subsidiary. The
appreciation of pounds sterling relative to the U.S. dollar
in 2004, 2003 and 2002 has increased our goodwill and other
intangibles with a corresponding increase primarily to
accumulated other comprehensive income. The translation
adjustments have also resulted in additional amortization
expenses being recognized on the increase in the definite-lived
other intangible assets.
Capitalized Software Development Costs
We capitalize costs related to the development of software
developed or obtained for internal use in accordance with AICPA
Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use.
Costs incurred during the preliminary project work stage or
conceptual stage, such as determining the performance
requirements, system requirements and data conversion, are
expensed as incurred. Costs incurred in the application
development phase, such as coding, testing for new software and
upgrades that result in additional functionality, are
capitalized and are amortized using the straight-line method
over the useful life of the software, not to exceed three years.
Amortization of these capitalized costs begins only when the
software becomes ready for its intended use. Costs incurred
during the post-implementation/operation stage, including
training costs and maintenance costs, are expensed as incurred.
We capitalized internally developed software costs of
$2.6 million and $2.3 million during the six months
ended June 30, 2005 and 2004, respectively, and
$4.8 million, $5.2 million and $6.0 million
during the years ended December 31, 2004, 2003 and 2002,
respectively. Determining whether particular costs incurred are
more properly attributable to the preliminary or conceptual
stage, and thus expensed, or to the application development
phase, and thus capitalized and amortized, depends on subjective
judgments about the nature of the development work, and our
judgments in this regard may differ from those made by other
companies. General and administrative costs related to
developing or obtaining such software are expensed as incurred.
We review our capitalized software development costs and our
other long-lived assets for impairment at each balance sheet
date and whenever events or changes in circumstances indicate
that the carrying amount of
our long-lived assets should be assessed. We also write down our
property and equipment, including computers, network equipment,
and software, for estimated obsolescence. Our judgments about
impairment are based in part on subjective assessments of the
usefulness of the relevant software and may differ from
comparable assessments made by others. We have not recorded any
impairment charges since our formation. To analyze
recoverability, we estimate undiscounted net future cash flows
over the remaining life of such assets. If these projected cash
flows are less than the carrying amount, impairment would be
recognized, resulting in a write-down of assets with a
corresponding charge to earnings. We believe that our
capitalized software development costs and our other long-lived
assets are appropriately valued in our consolidated financial
statements and related notes included elsewhere in this
prospectus.
Foreign Currency
We currently generate a significant portion of our revenues and
net income and corresponding accounts receivable and cash
through sales denominated in pounds sterling. As of
June 30, 2005, $46.0 million of our cash and cash
equivalents and restricted cash, $6.9 million of our
accounts receivable, $79.5 million of our goodwill and
other intangible assets and $122.4 million of our total net
assets were denominated in pounds sterling. The foreign currency
gains and losses on these pounds sterling net assets are
currently significant to us, and we have determined that foreign
currency derivative products are required to hedge our exposure.
If there were a significant decline in the pounds sterling
exchange rate, our net assets would be less than the current
reported amount. A decline in the exchange rate of pounds
sterling to the U.S. dollar of 10% from the rate as of
June 30, 2005 would result in a translation loss of
$11.5 million that would be recorded as a foreign currency
translation adjustment as a component of other comprehensive
income (loss).
The functional currency of our U.K. subsidiaries is pounds
sterling. We translate these assets and liabilities into
U.S. dollars using period-end exchange rates, and income
and expenses are translated using the average exchange rates for
the reporting period. Translation adjustments are recorded in
accumulated other comprehensive income, a separate component of
shareholders’ equity. As of June 30, 2005 and
December 31, 2004 and 2003, the accumulated other
comprehensive income translation was $26.3 million,
$37.0 million and $26.4 million, respectively. Gains
and losses from foreign currency transactions, such as those
resulting from the settlement of foreign receivables or payables
or cash accounts of our foreign subsidiaries held in
U.S. dollars, are included in other income
(expense) in the consolidated statements of income and
resulted in net foreign currency transaction (gains) losses of
($1.1 million) and $173,000 during the six months ended
June 30, 2005 and 2004, respectively, and
$1.4 million, $644,000 and $149,000 during the years ended
December 31, 2004, 2003 and 2002, respectively.
During 2004 and 2003, we entered into hedging transactions to
help mitigate our foreign exchange exposure. During 2004 and
2003, we entered into forward exchange contracts as hedges to
protect the net investment in our foreign subsidiaries. As a
matter of policy, our derivative positions are used to reduce
risk by hedging an underlying economic exposure. Because of the
high negative correlation between the hedging instrument and the
underlying exposure, fluctuations in the value of the
instruments are generally offset by reciprocal changes in the
value of the underlying exposure. Our currency derivatives are
generally straightforward over-the-counter instruments with
liquid markets. We do not hold or issue any derivative financial
instruments for trading purposes. In accordance with
SFAS No. 133, we are required to recognize all
derivative financial instruments as either assets or liabilities
in our consolidated balance sheets at fair value. The effective
portion of any gain or loss on these derivative financial
instruments, which have been designated as a hedge of a net
investment in foreign operations, are reflected in accumulated
other comprehensive income. Any ineffective portion of any gain
or loss on these derivative financial instruments are
immediately recognized in earnings. On June 30, 2005, we
settled a £13 million average rate forward net
investment hedge. We recorded this settlement by making a
$1.2 million cash payment and by reducing accrued
liabilities by $1.2 million, the carrying value of the
underlying exposure. The loss on this hedge was $749,000, net of
taxes, and is reflected in accumulated other comprehensive
income. As of June 30, 2005, December 31, 2004 and
2003, the portion of our shareholders’ equity attributable
to accumulated other comprehensive income (loss) from hedging
derivatives account balance was a net loss of $2.5 million,
$2.5 million and $441,000, respectively.
When entered into, we formally designate and document the
derivative financial instrument as a hedge of a specific
underlying exposure, as well as the risk management objectives
and strategies for undertaking the hedge transactions. We
formally assess, both at inception and at least quarterly
thereafter, whether the derivative financial instruments that
are used in hedging transactions are effective at offsetting
changes in either the fair value or cash flows of the related
underlying exposure. Because of the high degree of effectiveness
between the hedging instruments and the underlying exposure
being hedged, fluctuations in the value of the derivative
financial instruments are offset by changes in the fair value or
cash flows of the underlying exposures being hedged.
The counterparties with whom we trade foreign exchange contracts
are major U.S. and international financial institutions,
including one that is a related party. For a discussion of the
foreign exchange contracts with the related parties, see
“Certain Relationships and Related Transactions”. We
continually monitor our position with and the credit quality of
the financial institutions and do not expect nonperformance by
any of the counterparties.
We will continue to offer additional products in the United
Kingdom and potentially in other countries in Europe beginning
in 2005, which will increase our foreign currency exposure as
these sales and receivables will be denominated in the
functional currency of our foreign subsidiaries.
Stock Option
Valuation
We have historically issued one large stock option grant during
the fourth quarter of each year and have on occasion issued
smaller stock option grants during the year, primarily for new
employees. An independent valuation is performed just prior to
the fourth quarter stock option grant to assist our board of
directors in determining the fair market value of our common
stock. The independent valuation includes a discounted cash flow
analysis and a guideline company valuation multiple analysis
primarily based on financial projections provided by us to the
independent party. The independent valuation provides a relevant
range of fair value per share. Our board of directors then
determines a fair value per share amount that is within the
relevant range, based on information provided in the valuation
and based on market conditions.
Our board of directors received an independent valuation in
August 2004 to help it determine the $8.00 per share fair market
value for the stock options we granted in the fourth quarter of
2004. The $8.00 per share price was at the top end of the range
provided by the independent valuation. No stock options were
granted during the first three quarters of 2004. There have been
two large independent sales of our Class A common stock,
Series 2 during the fourth quarter of 2004 and the first
quarter of 2005 representing 8.7% of the total outstanding
Class A common stock, Series 2. Both of these
independent stock sales were at a price less than the $8.00 per
share fair market value as determined by our board of directors
for the exercise price of the stock option grants during 2004
and during the month of January 2005.
The fair market value of our common stock is reviewed throughout
the year for the valuation of the smaller stock option grants
based on various factors, including our financial performance,
updated financial projections, market conditions and any
independent sales of our common stock by existing shareholders
since the date of the last independent valuation. If our
financial performance is consistent with our projections, if our
financial projections and market conditions have not changed and
if any independent sales of our common stock are consistent with
the latest independent valuation, then a contemporaneous
valuation is not performed at the time of the smaller stock
option grants. However, if one of these variables indicates that
the fair market value of our common stock has increased since
the last independent valuation, then we would have a
contemporaneous valuation performed at the time of these smaller
stock option grants.
The markets for energy commodities trading include trading in
both physical commodities contracts and derivative
instruments — instruments that derive their value from
an underlying energy commodity or index — across a
wide variety of commodities, including crude oil, natural gas,
electricity or power, coal, chemicals, weather and emissions.
Derivative instruments provide a means for hedging price risk,
asset allocation, speculation or arbitrage. Contracts for
physical commodities allow counterparties to contract for the
delivery of the underlying physical asset.
Energy Commodities
Crude oil is one of the world’s most widely-used
commodities, and as such is also one of the most widely-traded
commodities. The term “crude” oil refers to petroleum
in its raw form, as it comes out of the earth. There are several
different types or grades of crude oil traded in the market,
each of which is named to reflect the oil field from which it is
extracted. For example, Brent crude oil is named for the Brent
Oil Field in the North Sea, off the coast of Britain, and
Oseberg and Forties are grades of crude oil similar to Brent
crude and are also drawn from the North Sea. Crude oil,
including Brent crude oil, is only useful after refining, which
produces numerous oil-based component products, including
petroleum gas, gasoline, naphtha, kerosene, gas oil, heavy gas
oil, lubricating oils and residuals, among others. The breadth
of these refined oil products is illustrated in the diagram
below.
Natural gas, another widely-used and widely-traded energy
commodity, is a naturally occurring combustible mixture of
hydrocarbon gases that is extracted from the earth. Natural gas
is used extensively on a commercial basis in the production of
chemicals and the generation of electric power. Residential use
of natural gas is on the rise given its availability and price
relative to heating oil and electric power. While natural gas is
comprised primarily of methane, it can also include ethane,
propane, butane and pentane. Natural gas is found in reservoirs
underneath the earth, and its presence is commonly associated
with crude oil deposits. Once brought from underground, natural
gas is refined to remove impurities such as water and sand, as
well as other gases and compounds. After refining, natural gas
is transported through a network of pipelines, thousands of
miles of which exist in the United States and other developed
countries, to delivery points, or “hubs”.
Power can be generated through a number of means, including the
burning of refined crude oil products and natural gas, or
through renewable means such as hydro-electric generation or
wind. In contrast to natural gas and crude oil, power is a
man-made “end” commodity that cannot be
stored — it must be used as it is produced —
and therefore is transported via a network of transmission lines
only within the regions in which it is generated.
Natural gas and power contracts are traded based, in part, upon
the location to which they are delivered. In North America,
there are nearly 100 natural gas hubs (including the benchmark
Henry Hub located in Louisiana), and approximately 15 power
hubs. Market participants can trade contracts for natural gas or
power based on any of these hubs, whose prices are determined by
transportation costs and supply and demand at each hub. An
example of a leading regional power contract is the PJM
financial power contract, which is based on power generated in
the Pennsylvania, New Jersey and Maryland region. Further,
natural gas market participants often enter into basis swaps
that hedge the difference in cost between delivery to the
benchmark Henry Hub and another hub that may be closer to the
participants’ preferred point of delivery. The diagrams
below illustrate the locations of some of the major North
American natural gas and power hubs.
In addition to being characterized by an underlying commodity or
component asset, derivative contracts are further characterized
by physical delivery or financial settlement, as well as the
term of the contract. The contracts with the greatest liquidity
are those that have settlement or expiry dates within the
following one or two months, called the prompt or front months.
Contracts that have settlement dates one year out or longer,
referred to as the back months, tend to be less actively traded.
Participants in the markets for energy commodities trading
include industrial firms that produce or use energy products and
financial institutions, among others. These market participants
pursue a range of trading strategies for a variety of reasons,
including:
•
Risk Management: Firms that produce or consume
commodities may use physical or derivative contracts to hedge
their exposure to future price movements.
•
Asset Allocation: Derivative contracts allow market
participants to gain market exposure to the returns or
diversification offered by a particular commodity or group of
commodities without investing in the underlying physical asset.
•
Speculation: Market participants that have a specific
view on the direction of commodity prices may buy or sell
derivative contracts in anticipation of benefiting from a
commodity’s directional price movement, whether rising or
falling.
•
Arbitrage: Market participants may buy or sell derivative
contracts in an attempt to profit from perceived value
differences among related commodities, or correlated asset
classes, or between the derivatives and physical markets.
•
Physical delivery: Firms that consume or are under
contractual obligations to deliver or purchase energy
commodities in physical form, such as a natural gas distribution
company, may enter into a contract that will give them the right
to receive or sell a specified quantity of the underlying
commodity at a specified time and location in the future.
There are two types of market structures within the energy
commodities trading sector — the futures market and
the OTC market. These market structures are distinguished by
their unique regulatory, participatory, reporting and
operational requirements.
The Futures Industry Association tracks more than 50
government-regulated futures exchanges located in
31 countries, including 9 exchanges located in the United
States. Until the early 1970s, futures markets were restricted
to traditional, physical commodities (e.g., wheat,
copper, sugar). Since that time, futures markets have expanded
to incorporate additional market sectors, including: currencies,
interest rate instruments and stock indices. Futures exchanges
that trade energy commodities include, among others, NYMEX
(which principally trades in futures on energy and precious
metals) and The Tokyo Commodity Exchange (which principally
trades futures on gold, silver, platinum, crude oil, gasoline,
kerosene and rubber) and, to a lesser extent, the Chicago
Mercantile Exchange (which principally trades futures on
interest rates, stock indices, foreign currencies and
agricultural commodities) and the Chicago Board of Trade (which
principally trades futures on financial instruments,
agricultural commodities, precious metals and equity indices).
In addition to offering trading of standardized contracts,
futures exchanges provide access to a centralized clearing
system. Commodity futures exchanges are regulated in the United
States by the CFTC and are required to publish certain
information, such as contract settlement prices and participant
information. Commodity futures exchanges are regulated in the
United Kingdom by the Financial Services Authority.
A futures exchange typically operates as an auction market,
where trading is conducted either on an electronic platform or
on an open-outcry trading floor. In an auction market, prices
are established publicly either on a screen or on the floor by
participants posting bids, or buying indications, and offers, or
indications to sell. In a typical futures market, participants
can trade two types of instruments:
•
Futures: A future is the most common exchange-traded
commodity contract. It is a standardized contract to buy or sell
a specified quantity of an underlying asset during a particular
month (an exact delivery date is not specified). Contract sizes
are standardized and differ by commodity. For example, the IPE
Brent Crude futures contract has a contract quantity of
1,000 net barrels, or 42,000 U.S. gallons. The price
of the futures contract is determined through the auction
process on the exchange. Futures contracts are settled through
either physical delivery or cash settlement, depending on the
contract specification.
•
Options: An option is a contract that conveys to the
buyer the right, but not the obligation, to call (buy) or put
(sell) an underlying futures contract at a price determined at
the time of the execution of the option.
Historically, trading in futures contracts took place
exclusively through face-to-face interaction on a physical
trading floor of an exchange, also known as a “pit”,
through an auction process known as “open-outcry”. In
an open-outcry market, the matching of buyers and sellers is
achieved by traders in the pit locating other traders in the pit
who have an opposite trading interest. As the name implies,
traders “cry out” their bids and offers, often in
combination with a system of hand signals, with the objective of
finding a counterparty with whom to trade.
The trading floor imposes physical limitations on the number of
traders who can trade or observe the market at any one time.
Therefore, exchanges generally restrict direct access to their
trading floor to a limited number of exchange members. This
limited access may drive up the price of membership on the
exchange, and requires non-members to execute trades through
intermediaries, such as brokers known as futures commission
merchants, who are members of the exchange. As a result of these
physical limitations, the open-outcry model is inefficient in
certain respects, including the high cost of operating and
accessing a physical trading floor, the relatively slow speed of
execution, the inefficiencies inherent in requiring participants
to use multiple intermediaries to complete transactions, and the
increased risk of error arising from miscommunication. These
inefficiencies have caused many futures exchanges to develop
electronic trade execution facilities over the last decade,
thereby reducing the access limitations and inefficiencies of
open-outcry trading.
All futures contracts and options on futures contracts are
cleared through a central clearinghouse. Clearing is the
procedure by which each futures and options contract traded on
an exchange is novated, or replaced, with a contract with the
clearinghouse. In this process, the clearinghouse is interposed
between the trading parties and becomes the buyer to each member
firm that is a seller, and the seller to each member firm that
is a buyer. By interposing itself between the member firm
parties of every trade, the clearinghouse guarantees each member
firm party’s performance, and eliminates the need to
evaluate counterparty credit
risk. Futures commission merchants function, in turn, as
intermediaries between market participants and a clearinghouse.
From the participant’s perspective, the futures commission
merchant is the counterparty to a cleared trade, as the contract
is cleared by the clearinghouse in the name of the futures
commission merchant. From the clearinghouse’s perspective,
the futures commission merchant is the counterparty to the
trade. In effect, the clearinghouse takes on the counterparty
credit risk of the futures commission merchant, and the futures
commission merchant assumes the credit risk of each
counterparty, which is partially offset by capital held by the
futures commission merchant with respect to each counterparty.
Some futures exchanges, such as NYMEX, the Chicago Mercantile
Exchange and Eurex, own and operate their own clearinghouse.
Other exchanges contract for their clearing services with a
third party. For example, we clear our futures contracts through
LCH.Clearnet and the Chicago Board of Trade clears its contracts
through the clearinghouse operated by the Chicago Mercantile
Exchange.
The OTC Market
Over-the-counter, or OTC, is a term used to describe trading
activity that does not take place on a regulated exchange.
According to the Bank for International Settlements, at the end
of 2003, the total notional value of outstanding derivative
contracts in the OTC market was over five times that of the
futures market. In this market, commercial market participants
have historically entered into negotiated, bilateral contracts,
although in recent years participants have begun to take
advantage of cleared OTC contracts that, like futures contracts,
are standardized and cleared through a central clearinghouse.
In contrast to the limited range of futures contracts available
for trading on regulated exchanges, participants in the OTC
markets have the ability to trade an unlimited number of
customized contracts, which may specify contract terms, such as
the underlying commodity, delivery date and location, term and
contract size. Furthermore, while exchanges typically limit
their hours of operation and restrict direct trading access to a
limited number of exchange members, OTC markets operate
virtually around the clock and do not impose membership
requirements.
Financially-settled OTC contracts are classified as
derivatives — meaning that the contract is settled
through cash payments based on the value of the underlying
commodity, rather than through physical delivery of the
commodity. Physical contracts provide for settlement through
physical delivery of the underlying commodity. Physical
contracts may be entered into for either immediate delivery of a
commodity, in the cash or “spot” market, or for
delivery of a commodity at a specified time in the future, in
the “forward” market. Forward contract prices are
generally based on the spot market prices of the underlying
commodity, since long-term contracts evolve into short-term
contracts over time.
Several types of contracts are typically traded in the OTC
market:
•
Forwards and Swaps: A forward contract is an agreement
between two parties to deliver a specified quantity of an
underlying asset, on a specified date, and at a specified
location. Unlike futures contracts discussed above, forward
contracts are not standardized, but can be negotiated on an
individual basis between counterparties. Swaps generally are
contracts between the holders of two different assets with
differing risk and performance profiles in which the risk or
performance characteristics are exchanged. Swaps may be settled
against the future price of a single commodity or against an
index of commodity prices.
•
Differentials and Spreads: Differentials, or basis swaps,
are contracts that allow counterparties to “swap”
delivery (or the financial equivalent of delivery) of a
commodity between two different delivery points. For example,
trading parties may enter into a basis swap for natural gas by
swapping delivery of natural gas at the benchmark Henry Hub for
delivery at any hub in North America. This type of contract
allows market participants to hedge or speculate on forward
natural gas prices in various markets. The price of a basis swap
contract is based on the cost differential between delivery at
each hub. Spreads are the simultaneous purchase and sale of
forward contracts for different months, different commodities or
different grades of the same commodity.
Options: Options are contracts that convey to the buyer
the right, but not the obligation, to require the seller to make
or take delivery of a stated quantity of a specified commodity
at a specified price. Options may also be cash settled, based on
the difference between the market price of the underlying
commodity and the price of the commodity specified in the option.
As a general matter, OTC transactions may be entered into
directly between two counterparties, or they may be entered into
through a broker. Trading in the OTC commodities markets has
traditionally been carried out through brokers who conduct
trades with their customers over the telephone, commonly
referred to as “voice brokers”. Upon receiving an
order from a customer, a broker attempts to find a counterparty
for the proposed trade. Once the broker has matched a firm bid
with a firm offer and completes the deal telephonically, the
seller must send a confirmation fax or similar documentation to
the buyer to confirm the trade. Each counterparty then enters
the details of the trade into its respective internal risk
management system. This traditional method of OTC commodities
trading tends to be relatively slow, prone to errors and can
involve relatively high transaction costs.
Since participants in the OTC commodities markets have
traditionally entered into individually negotiated bilateral
contracts, the OTC markets have traditionally been characterized
by fragmented liquidity and a lack of price transparency.
Without a centralized, comprehensive source of pricing data and
an observable, real-time market for a specific contract, it was
often difficult for market participants to determine the best
price available for their trade.
Because bilateral OTC contracts are entered into and settled on
a principal-to-principal basis, each party is exposed to
counterparty credit risk. Therefore, traditionally, OTC market
participants have relied heavily on their internal risk
management systems to monitor and mitigate counterparty credit
and performance risk. In recent years, a growing number of
markets, including ours, have begun to offer clearing for some
of the more commonly traded OTC contracts to address the risks
associated with entering into bilateral agreements. Participants
who choose to trade cleared OTC products must have an account
with a futures commission merchant.
A key structural difference between futures and cleared OTC
forward markets on the one hand and equity markets on the other
hand is the need for a trader in the futures or OTC forward
markets to close out a long or short position through the same
exchange on which the original position was established. This
has the benefit of retaining the open interest at that exchange.
In contrast, traders in equity markets can execute any trade on
any exchange with quality and cost of execution being the only
considerations.
Industry Size and Growth
The volume of energy derivative contracts traded for any
specific commodity tends to be a multiple of the physical
production of that commodity for two principal reasons. First,
many commercial participants hedge their physical commodity
needs with financially-settled derivative contracts, and second,
many market participants that do not have physical commodity
needs use financially-settled derivative contracts to increase
or reduce financial exposure to energy commodity prices. For
example, the equivalent of approximately 310 million
barrels of crude oil was traded on the IPE and NYMEX on average
each day during 2004, or 3.75 times physical consumption and
production during the same period. In the natural gas market,
the volume of financially-settled contracts traded in North
America during 2004 represented 230 trillion cubic feet, or
approximately 8.4 times the 27 trillion cubic feet
reported by the International Energy Agency as consumed during
the same period. While historically these multiples of traded
volumes to physical production have tended to be higher for
crude oil and North American natural gas than North American
power, reflecting more active trading in those markets, it is
difficult to forecast with any certainty the level of these
multiples at any future point in time due to the need to
accurately predict both trading levels and physical production,
both of which may vary greatly in the future from recent levels.
The global growth in consumption of physical energy commodities
is largely tied to global GDP growth. According to the
International Energy Agency, global consumption and production
of crude oil in 2004 totaled 83 million barrels per day. By
2025, the Energy Information Administration, a division of the
U.S. Department of Energy, expects global oil demand to
increase to approximately 120 million barrels per day.
Natural gas consumption in 2004 by the 30 nations comprising the
OECD was 51 trillion cubic feet.
Energy commodities as an investable asset class have experienced
tremendous growth in recent years. For example, for the year
ended December 31, 1996, $2.0 billion was invested in
funds tracking the Goldman Sachs Commodity Index (62% of which
was allocated to energy products). By December 31, 2004,
that amount had risen to more than $30.0 billion (71% of
which was allocated to energy products), implying a 40% compound
annual increase. Additionally, according to the Futures Industry
Association, the number of energy futures contracts traded for
the year ended December 31, 2004 was 243.5 million, up
from 68.7 million contracts traded for the year ended
December 31, 1995, a growth rate of 15% per annum.
The following chart illustrates the growth in the volume of
energy futures contracts traded from 1995 through 2004.
Global Energy Futures Industry
Volume(1)
Industry Trends
We believe that the increasing interest in energy derivatives
trading is being driven primarily by the following key factors:
Growth in Electronic Trading
Innovations in technology have increased the speed of
communications and the availability of information, which have
enabled market participants to access and participate in the
commodities markets more easily and quickly and less
expensively. During the last decade, the use of electronic
trading has become increasingly prevalent, and offers a number
of advantages relative to floor-based trading, including:
•
direct market access and the elimination of physical trading
barriers;
•
the ability to trade multiple products on multiple exchanges
simultaneously;
•
improved speed and quality of trade execution;
•
significant reduction of direct and indirect transaction costs;
•
ease of direct integration with internal risk management systems;
greater transparency for market participants and observers;
•
extended trading hours and the availability of cross-border
trade execution; and
•
improved regulatory oversight and ease of complete and accurate
record-keeping.
These advantages are encouraging an increasing number of market
participants to transition to electronic energy trading. In
addition, a number of market participants only trade
electronically. Because energy commodity futures have
historically traded on open-outcry exchanges, these market
participants, including several proprietary trading firms and
hedge funds, have been unable or unwilling to trade these
products in the past.
The shift toward electronic trading is evident in both futures
and OTC markets. Celent estimates that 17% of U.S. energy
commodities trading is conducted electronically, and expects
this figure to increase to 29% by 2008. In the futures market,
the growth in trading volumes on electronic exchanges such as
Eurex and Euronext.Liffe in Europe, and hybrid markets with both
floor and significant electronic operations such as the Chicago
Mercantile Exchange, has significantly outpaced the volume
growth on historically floor-based exchanges such as the IPE,
NYMEX, and the Chicago Board of Trade during the last five years.
The figure below illustrates the volume growth of six major
global futures exchanges, indexed from 1999 to 2004.
Lower Barriers to Entry for Market Participants
The barriers to entry for trading in energy derivatives have
traditionally been significant, which has limited the ability of
many traders to participate in this market. In recent years, a
considerable erosion of these barriers has occurred largely due
to the availability of electronic trading. In addition to
electronic trading, other changes in market structure
contributing to lower barriers to entry include:
•
Declining exchange membership fees: Growing competition
among exchanges has resulted in some futures exchanges reducing
the cost of exchange membership.
•
Use of independent software vendors: Independent software
vendors are firms that develop and market software that provides
direct access to various electronic markets. Independent
software vendors allow participants to access multiple exchanges
through a single interface and are typically well integrated
with participants’ internal risk management systems. For
example, proprietary trading firms frequently use independent
software vendors to connect to multiple exchanges. Independent
software vendors have significantly expanded market access,
including at multiple locations that are great distances from
major market centers, which has in turn increased the number of
active traders in the market.
Introduction of cleared OTC contracts: As described
above, trading in the OTC markets traditionally has required
participants to assume counterparty credit risk. However, energy
markets now feature cleared OTC contracts, beginning with the
introduction of these contracts in our markets in 2002. Cleared
OTC contracts allow participants to limit counterparty credit
risk and lower the amount of capital required to trade.
Increasing Adoption of Energy Commodities as an Investable
Asset Class
Investors’ interest in energy commodities as an asset class
has experienced significant growth in recent years. A number of
attributes inherent to energy commodities have contributed to
this growth including:
•
Higher Volatility: Energy commodities generally
experience greater price volatility than other asset classes,
such as stocks or bonds, because their prices are impacted by a
greater array of risks, including weather, geopolitical events,
OPEC quotas and supply interruptions. Volatility increases the
need to hedge contractual price risk and creates opportunities
for speculative trading and arbitrage.
The following table illustrates the historical volatility of
natural gas and crude oil, compared to that of stocks and bonds.
•
Geopolitical Risk: The price level and volatility of
energy commodities, and oil in particular, tend to reflect
events in the geopolitical environment. Therefore, market
participants seeking exposure to, or a hedge against, global
events in their investment portfolio, or seeking to speculate on
the directional movement of a price in response to a particular
event, may find energy commodity derivatives attractive.
•
Low/Negative Correlation with Other Asset Classes:
According to a study conducted by the National Bureau of
Economic Research in June 2004, the correlation between price
movements in energy derivatives and those in stock indices and
bonds has historically been negative for holding periods of
greater than one month — meaning that prices in the
energy derivatives markets generally move in the opposite
direction of price movements in the stock and bond markets. For
shorter holding periods (i.e., one month or less), this
correlation has historically been insignificant. This
low/negative correlation has made energy derivatives an
attractive way to hedge and improve the overall risk profile of
an investment portfolio.
Asset Diversification: As investors seek to increase
investment yield while minimizing portfolio risk, investment
professionals have sought to diversify into additional asset
classes. As a result of this trend, use of derivative contracts
related to the energy sector has grown, and with the increased
availability and accessibility of electronic trading we believe
it will continue to grow, as a component of investors’
portfolios.
•
Attractive Investment Returns: Competition for
above-market returns has been driving an increasing number of
money managers to search for, and invest in, new asset classes.
We believe the strong historical performance of commodities
relative to other asset classes is an important factor that has
led to their increasing attractiveness as an investment option.
The following diagram illustrates the performance of selected
energy commodities compared to selected traditional asset
classes over a ten-year period.
10-Year Indexed Performance of Energy Commodities vs.
Traditional Assets
New Market Participants
Recent growth in energy derivatives trading has been driven in
part by increased participation in energy markets by the
following categories of market participants:
•
Financial institutions: Financial institutions are
expanding their capabilities and resources in energy commodities
trading, attempting to capitalize on increased energy market
volatility as well as to leverage their deep client
relationships, strong credit ratings, and sophisticated risk
management controls. For example, some financial institutions in
recent years have become owners of utilities and other energy
production facilities, increasing their participation in these
markets for hedging purposes.
•
Hedge funds: Hedge funds have committed significant
capital in recent years to trading in energy commodities in
search of above-market, uncorrelated investment returns, and
today play a role in providing liquidity in certain energy
markets. Global macro funds are actively increasing their
exposure
to energy commodities, and it is estimated that as many as 300
new energy-focused funds may launch in 2005, according to
Investment Dealers’ Digest.
•
Proprietary trading firms: The number of proprietary
trading firms has increased in conjunction with the migration
toward electronic trading. Definitive data on the number of
these firms, the number of traders they employ, or their
contribution to current daily trading volume is not readily
available, although we believe that their ability to provide
liquidity is and will continue to be significant. Given that the
barriers to entry for traders working at these types of firms
are relatively low — requiring at a minimum a
“screen”, a nominal amount of their own capital, a
credit line and access to execution services — we
expect that the number of these market participants will
continue to increase.
•
Institutional investors: Institutional investors, such as
pension funds, are increasingly allocating a growing percentage
of their funds to commodities to maximize the benefits of
diversification. According to Celent, pension funds currently
allocate an estimated three to five percent of their overall
portfolio to commodities. Additionally, Celent notes that
insurance companies, foundations and endowments have begun to
show interest in the commodities sector.
We operate the leading electronic global futures and
over-the-counter, or OTC, marketplace for trading a broad array
of energy products. 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 futures and 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, the International Petroleum Exchange, or the IPE.
The IPE is the largest energy futures exchange in Europe, as
measured by 2004 traded contract volumes.
During the six months ended June 30, 2005,
43.4 million contracts were traded in our combined futures
and OTC markets, up 43.8% from 30.2 million contracts
traded during the six months ended June 30, 2004. During
the year ended December 31, 2004, 35.5 million
contracts were traded in our futures markets both on our
electronic platform and on our open-outcry trading floor and
31.0 million contracts were traded in our OTC markets, up
6.6% from 33.3 million futures contracts traded during the
year ended December 31, 2003 and up 27.6% from
24.3 million OTC contracts traded during the year ended
December 31, 2003. Our revenues consist primarily of
transaction fees, market data fees and trading access fees. On a
consolidated basis, we generated $69.4 million in revenues
for the six months ended June 30, 2005, a 37.4% increase
compared to $50.5 million for the six months ended
June 30, 2004, and $8.7 million in net income for the
six months ended June 30, 2005, a 13.2% decrease compared
to $10.1 million for the six months ended June 30,2004. The financial results for the six months ended
June 30, 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 ongoing litigation. On a
consolidated basis, we generated $108.4 million in revenues
for the year ended December 31, 2004, a 15.6% increase
compared to $93.7 million for the year ended
December 31, 2003, and $21.9 million in net income for
the year ended December 31, 2004, a 64.1% increase compared
to $13.4 million for the year ended December 31, 2003.
We recorded consolidated net cash provided from operations of
$40.2 million for the year ended December 31, 2004, a
48.2% increase compared to $27.1 million for the year ended
December 31, 2003.
Our History
In 1997, Jeffrey C. Sprecher, our founder, chairman and chief
executive officer, acquired Continental Power Exchange, Inc.,
our predecessor company, to develop a platform to provide a more
transparent and efficient market structure for OTC energy
commodities trading. In May 2000, our company was formed, and
Continental Power Exchange, Inc. contributed to us all of its
assets, which consisted principally of electronic trading
technology, and its liabilities, in return for a minority equity
interest in our company. In connection with our formation, seven
leading wholesale commodities market participants acquired
equity interests in our company and entered into order flow
agreements with us, either directly or through affiliated
entities. We refer to these leading commodities market
participants (or their affiliates as the case may be) as our
Initial Shareholders. In November 2000, six leading natural gas
and power companies, which we refer to as the Gas and Power
Firms, acquired equity interests in our business, entered into
order flow agreements with us and made a $30 million cash
payment to us. The order flow agreements, which committed the
Initial Shareholders and the Gas and Power Firms to execute
minimum annual volumes of transactions on our electronic
platform, expired between 2002 and 2003. We currently have no
order flow agreements in effect with any market participant.
In June 2001, we expanded our business into futures trading by
acquiring IPE Holdings Plc, the owner of the IPE, which, at the
time, was operated predominantly as a floor-based, open-outcry
exchange. The IPE 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 decided to acquire
the IPE to develop a leading platform for energy commodities
trading that would offer liquidity in both the futures and OTC
markets. The IPE, as a regulated futures exchange, had both
established liquidity and a recognizable brand name in global
energy markets. Prior to our acquisition of the IPE, we
conducted trading only in OTC markets.
We believe that we have achieved many strategic benefits through
the successful integration of futures markets into our business.
For example, we have been able to expand our product offerings
through the introduction of the industry’s first cleared
OTC products, which we were able to offer in conjunction with
the IPE’s third-party clearing provider, LCH.Clearnet. Our
acquisition of the IPE included a futures market data business,
which, together with the market data generated by trading
activity in our OTC markets, has given us access to a broad and
valuable range of data related to the energy commodities
markets. We have developed, and intend to continue to develop,
these market data services to increase and diversify our
revenues.
Our Business
Our marketplace is globally accessible, promotes price discovery
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 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 two distinct markets: futures markets
and OTC markets. Futures markets offer trading in standardized
derivative contracts on a regulated exchange and OTC markets
offer trading in over-the-counter 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 third
party clearinghouse, where they are marked to market and
margined daily before final settlement at expiration.
We operate our futures markets through our subsidiary, the IPE,
a Recognized Investment Exchange based in London. To take
advantage of the increasing acceptance and adoption of
electronic trading, and to maintain and enhance our competitive
position, we closed our open-outcry trading floor in London on
April 7, 2005. All of our futures trading is now conducted
exclusively in our electronic markets. We believe that
electronic trading offers substantial benefits to our market
participants. By using our electronic platform, in contrast to
alternate means of trade execution, market participants are able
to achieve price improvement and cost efficiencies through
greater transparency and firm posted prices, reduced trading
errors and the elimination of market intermediaries. In addition
to these benefits, electronic trading offers operational,
technological and regulatory benefits that we believe will make
our markets more attractive to market participants. For a more
detailed discussion of the advantages of electronic trading,
please refer to “Industry Overview — Industry
Trends — Growth in Electronic Trading”. 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 are able to facilitate
straight-through processing of trades, and to provide seamless
integration of front-, back- and mid-office trading
activities. We also offer a variety of market data services for
both the futures and OTC markets.
The following diagram illustrates the range of services we are
able to offer through our electronic platform:
Futures Business
We conduct our futures business through our subsidiary, the IPE.
The IPE operates as a Recognized Investment Exchange in the
United Kingdom, where it is regulated by the Financial Services
Authority. The IPE was founded in 1980 as a traditional
open-outcry auction market by a group of leading energy and
trading companies. Only exchange members may execute trades in
our futures markets, for their own or others’ account. Our
members and their customers include many of the world’s
largest energy companies and leading financial institutions.
In our futures markets, we offer trading in the IPE Brent Crude
futures contract, a benchmark contract relied upon by certain
large oil producing nations to price their oil production. This
contract is the leading benchmark for pricing crude oil produced
and traded outside of the United States, as well as a range of
traded oil products. We believe that market participants are
increasingly relying on the IPE Brent Crude contract for their
hedging and risk management activities, as evidenced by steady
increases in traded volumes over the past several years. During
the six months ended June 30, 2005, the average daily
quantity of Brent crude oil traded was 109 million barrels
with an average daily notional value of over $5.6 billion.
We earn fees from both parties to each futures contract (or
option on a futures contract) traded in our markets, based on
the number of contracts traded. Exchange fees earned from
contracts traded in our futures markets were $25.9 million
and $23.6 million for the six months ended June 30,2005 and 2004, respectively, representing 37.4% and 46.7%,
respectively, of our consolidated revenues, $45.5 million
for the year ended December 31, 2004, representing 42.0% of
our consolidated revenues, and $40.0 million for the year
ended December 31, 2003, representing 42.6% of our
consolidated revenues. During the six months ended June 30,2005, 18.6 million contracts were traded in our futures
markets, up 4.7% from 17.8 million futures contracts traded
during the six months ended June 30, 2004. During the year
ended December 31, 2004, 35.5 million contracts were
traded in our futures markets, representing a 6.6% increase as
compared to 33.3 million contracts traded during the year
ended December 31, 2003. For the period from
November 1, 2004 through March 31, 2005, 27.7% of our
futures trading volume in the IPE Brent Crude futures contract
was executed electronically. Subsequent to April 7, 2005,
all of our futures trading volume has been conducted
electronically. We derived revenues from the provision of
futures market data services of $3.6 million and
$3.2 million for the six months ended June 30, 2005
and 2004, respectively, representing 5.1% and 6.3%,
respectively, of our consolidated revenues, $6.3 million,
or 5.8% of our consolidated revenues for the year ended
December 31, 2004, and $6.3 million, or 6.7% of our
consolidated revenues for the year ended December 31, 2003.
In our OTC business, we operate OTC markets through our globally
accessible electronic platform. We offer trading in thousands of
OTC contracts, which cover a broad range of energy products and
contract types. These products include derivative contracts as
well as contracts that provide for physical delivery of the
underlying commodity, in each case principally relating to
natural gas, power and oil. We are able to offer a wide
selection of derivative contracts in our OTC markets due to the
availability of various combinations of commodities, product
types, “hub” locations and term or settlement dates
for a given contract.
Our participants, representing many of the world’s largest
energy companies and leading financial institutions, as well as
proprietary trading firms, natural gas distribution companies
and utilities, rely on our platform for price discovery, hedging
and risk management. As of June 30, 2005, we had over
7,100 active screens at over 940 OTC participant
firms, and on a typical trading day, over 4,100 individual
screen users connect to our platform for trading, risk
management and price discovery.
In order to provide participants with access to centralized
clearing and settlement, we launched the industry’s first
cleared natural gas and oil OTC products in March 2002, and
introduced our first cleared OTC power contracts in November
2003. Our most liquid OTC markets include contracts that can be
traded bilaterally or cleared, and we have launched over
30 contracts for clearing. During the six months ended
June 30, 2005, 24.8 million contracts were traded on
our OTC markets with an aggregate notional value of
$468.9 billion, of which 18.0 million contracts were
cleared, representing $340.0 billion in aggregate notional
value. During the year ended December 31, 2004,
31.0 million contracts were traded in our OTC markets with
an aggregate notional value of $536.8 billion, of which
18.1 million contracts were cleared, representing
$300.7 billion in aggregate notional value.
Revenues in our OTC business are generated primarily through
commission fees earned for trades executed on our platform and
for the provision of OTC market data and electronic trade
confirmation services. While we charge a monthly minimum
commission fee for access to our platform, we derive a
substantial portion of our OTC revenues from commission fees
paid for trade execution in excess of the monthly minimum volume
requirements. Our OTC commission rates vary by product and
contract, and we charge a fixed commission rate based on the
volume of commodity underlying the contract traded. For example,
power is traded in units of megawatt hours and we have
designated a standard contract size of 800 megawatt hours
for purposes of setting the commission rate. Therefore, each
counterparty to a power trade would pay a commission fee based
on the standard $4 per contract commission rate multiplied by
the number of contracts in the transaction. Commission fees are
payable by both parties to a contract and, for bilateral trades,
are due generally within 30 days of the invoice date. For
cleared OTC contracts, LCH.Clearnet collects our commission fees
as they are incurred and pays these fees to us in full on a
monthly basis. We do not risk our own capital in transactions or
extend credit to market participants.
We derived commission fees for OTC trades executed on our
electronic platform of $33.4 million, or 48.2% of our
consolidated revenues, and $18.2 million, or 36.1% of our
consolidated revenues, during the six months ended June 30,2005 and 2004, respectively. We derived $43.5 million of
these fees for the year ended December 31, 2004, or 40.2%
of our consolidated revenues, and $34.2 million for the
year ended December 31, 2003, or 36.5% of our consolidated
revenues. We derived revenues from the provision of OTC market
data services of $1.9 million, representing 2.8% of our
consolidated revenues, during the six months ended June 30,2005, $1.3 million, representing 2.7% of our consolidated
revenues, for the six months ended June 30, 2004,
$3.4 million, representing 3.1% of our consolidated
revenues for the year ended December 31, 2004 and
$1.5 million, or 1.5% of our consolidated revenues for the
year ended December 31, 2003.
We have significantly broadened and diversified our participant
base since our inception. In the past, our Initial Shareholders
and the Gas and Power Firms were both our principal shareholders
and the principal users of our electronic platform. The total
commission fee revenues earned from these firms and our other
shareholders accounted for 16.2%, 25.1%, 40.4% and 61.2% of our
total OTC commission fee revenues for the six months ended
June 30, 2005 and for the years ended December 31,2004, 2003 and 2002, respectively.
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:
•
highly liquid global markets and benchmark contracts;
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 2004. The IPE Brent Crude futures
contract is a leading benchmark for pricing crude oil produced
and consumed outside of the United States, as well as a range of
refined oil products. We also operate the leading market for
trading in cleared OTC Henry Hub natural gas contracts, with
16.4 million contracts traded during the six months ended
June 30, 2005 and 15.9 million contracts traded during
the year ended December 31, 2004, compared to
4.6 million and 5.3 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.
The following table shows the number and notional value of
commodities futures contracts traded in our futures markets (for
both open-outcry and electronic trading). The notional value of
contracts represents the aggregate value of the underlying
commodities covered by the contracts.
The following table shows the number and notional value of OTC
commodities contracts traded on our electronic platform in our
most significant OTC markets:
Our leading electronic trading platform provides centralized and
direct access to trade execution and real-time price discovery.
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
over 7,100 active screens at over 940 OTC participant
firms and over 300 futures participant firms as of
June 30, 2005.
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. We believe that our
demonstrated ability to develop and launch new products for both
the futures and OTC markets provides us with several competitive
advantages, including:
•
Multi-Product Trading: We operate a globally accessible
platform that offers qualified market participants a seamless
interface between trading in futures products, options on those
futures and a broad range of OTC products. By offering trading
in multiple markets and products we provide our participants
with maximum flexibility to implement their trading and risk
management strategies.
•
Multiple Access Options: Our participants access our
marketplace through a variety of means, including through our
Internet-based electronic trading platform, proprietary
front-end systems, independent software vendors and brokerage
firms. Independent software vendors allow market participants to
access multiple exchanges through a single interface, which is
integrated with the participants’ risk management systems.
•
Cleared and Bilateral OTC Trading: In March 2002, we were
the first marketplace in North America to introduce cleared OTC
energy contracts. We believe that the introduction of cleared
energy contracts in the OTC markets we operate has attracted new
participants to our OTC markets by reducing bilateral credit
risk and by improving capital efficiency. Today, our
participants can trade bilateral and cleared contracts
side-by-side on our platform.
Highly Scalable, Proven Technology Infrastructure
Our Internet-based electronic trading platform provides rapid
trade execution and is, we believe, one of the world’s 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, through
our electronic platform. This is in contrast to the lack of
transparency of traditional open-outcry exchanges and
voice-brokered markets. All participant orders placed on our
platform are executed in the order in which they are received,
ensuring that all orders receive equal execution priority. In
addition, the transparency of our platform facilitates market
regulation through increased market visibility and the
generation of complete records of all transactions executed in
our markets.
Our company has established a board of directors that is
independent from our participants and trading activity on our
electronic platform, which allows the board to act impartially
in making decisions affecting trading activity. In contrast,
many of our competitors are governed by floor traders 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 launch 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 can achieve price improvement over alternate means
of trading. Electronic trade execution offers cost efficiencies
by providing firm posted prices and reducing trade-processing
errors and back office overhead, and 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
settlement. In addition, in our futures business, eligible
participants may trade directly in our markets by paying a
maximum annual membership fee of approximately $11,000 per year.
In contrast, on NYMEX and the Chicago Board of Trade,
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 $2.9 million based on September 2005 NYMEX
seat sale prices). While a “seat” conveys a right of
ownership and other benefits to its member, it poses a
significant barrier to gaining direct access to futures exchange
markets, unlike our futures markets.
Strong Management Team
Our senior management team has on average over 19 years of
experience in the energy and financial services sectors. Our
founding management team includes Jeffrey C. Sprecher, our
chairman and chief executive officer, Charles A. Vice, our chief
operating officer, and Edwin D. Marcial, our chief technology
officer. We enhanced our management team with additional
noteworthy professionals, including Richard V. Spencer, our
chief financial officer and David S. Goone, our head of business
development and sales. Our management team has successfully
developed and deployed our electronic platform, integrated the
IPE into our business, developed and launched our electronic
trade confirmation system and introduced the industry’s
first cleared OTC energy contracts in North America. We believe
that the proven strength and experience of our management team
will continue to provide us with a competitive advantage in
executing our business strategy.
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;
•
increase connectivity to our marketplace;
•
expand our market data business;
•
develop new trading products and services; and
•
pursue select strategic opportunities.
Attract New Market Participants
In recent years, our customer base has expanded and diversified
due to the emergence of new participants in the energy
commodities markets. These new participants include financial
services companies, such as investment banks, hedge funds,
proprietary trading firms and asset managers, as well as
industrial businesses that are increasingly engaging in hedging,
trading and risk management strategies. 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 appeal to 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 nine
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 brokerage
firms. 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. For example, in
2004, we introduced our Market Price Validation service, an
information service that provides a means for subscribers to
mark to market their month-end portfolios. 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
44 data vendors that distribute this information, directly and
through various sub-vendors, to approximately 19,200
subscribers. We believe that the database of information
generated by our platform serves as the single largest
repository of energy market data in North America. 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 2004, we
launched two new electronically-traded futures contracts for
U.K. power, and we, together with the European Climate Exchange,
launched a carbon emissions futures contract on our platform in
April 2005 based on allowances issued under a European Union
sponsored program designed to control and reduce greenhouse gas
emissions. During the past three years, we successfully launched
over 30 new cleared OTC contracts, and we currently plan to
introduce new products at a similar rate going forward. In
particular, we believe there is an opportunity to increase
electronic trading in oil contracts, since historically only a
small percentage of all oil trades have been executed
electronically. We also intend to continue to introduce
bilateral OTC contracts in less liquid, or niche, markets to
satisfy the specific needs of our participants as they arise. We
may also seek to license our platform to other exchanges for the
operation of their market on our platform, as we have with the
Chicago Climate Exchange.
Pursue Select Strategic Opportunities
We intend to pursue strategic acquisitions and alliances that
will enable us to supplement our internal growth, expand our
trading products and related services, advance our technology
and take advantage of new developments in the markets for energy
commodities trading. For example, we have considered, and may
consider in the future, acquiring or entering into a joint
venture agreement with businesses complementary to our market
data business or businesses that offer risk management or other
complementary services. We may also consider establishing our
own clearinghouse, or acquiring or making a strategic investment
in an existing clearinghouse, to provide clearing services
directly to participants in our futures and OTC markets. We
focus on the above key evaluation criteria when identifying and
assessing potential strategic transactions.
We seek to provide our participants with centralized and direct
access to the futures and OTC markets for energy
commodities and derivatives trading as well as access to
services that support their trading activities. The primary
services we provide are electronic price discovery, trade
execution and trade processing. We also offer a broad range of
market data services for the futures and OTC markets.
Futures Trading
We offer trading in futures contracts and options on those
contracts through our subsidiary, the IPE. These include the IPE
Brent Crude futures contract, the IPE Gas Oil futures
contract, the IPE Natural Gas futures contract, IPE
UK Power futures contracts, and options based on the
IPE Brent Crude and IPE Gas Oil futures contracts. The
IPE Brent Crude futures contract is based on forward
delivery of the Brent grade of crude oil and is a leading
benchmark used to price a range of traded oil products. The
IPE Gas Oil futures contract is a European heating oil
contract and serves as a significant pricing benchmark for
refined oil products in Europe and Asia.
Our futures markets are highly regulated. As a Recognized
Investment Exchange, the IPE is responsible for carrying out
certain regulatory and surveillance functions. The IPE has its
own regulatory, compliance and market supervision functions, as
well as a framework for disciplining market participants who do
not comply with exchange rules. Any information that the IPE
obtains in its regulatory capacity is confidential. Trading in
our futures markets is segregated on our platform from our OTC
markets, and access requirements make clear the distinction
between our futures and OTC markets.
We offer trading in each of our futures products exclusively in
our electronic markets following the closure of the open-outcry
floor on April 7, 2005. The percentage of trades in our IPE
Brent Crude futures contract executed on our electronic platform
increased to an average of 27.7% of the total IPE Brent Crude
volumes traded from November 1, 2004 through March 31,2005 as the result of the introduction of an exclusive
electronic morning session on November 1, 2004. We provide
access to trading in our futures contracts and options on
futures contracts on our electronic platform from 1:00 a.m.
to 10:00 p.m. daily, Monday through Friday (GMT).
Electronic trading of our futures products is available to
members and their customers. Following the migration of our
remaining open-outcry futures trading activity to our electronic
platform and the closure of the exchange floor on April 7,2005, our futures membership structure consists solely of
members eligible to trade electronically.
Members may access our trading platform directly via the
Internet or through an independent software vendor. Customers of
our members may obtain order-routing access to our markets
through members. Once trades are executed on our platform, they
are matched and forwarded to a trade registration system that
routes them to LCH.Clearnet for clearing and settlement.
Electronic trading allows some participants who might
traditionally have transmitted orders by telephone to a broker
to execute their orders electronically. However, participants
may also continue to use the services of a broker.
We have taken a number of steps to increase the accessibility
and connectivity of our electronic platform, including opening
our electronic platform to independent software vendors. Futures
traders use either our proprietary software interface, or a
front-end system provided by an independent software vendor or
an IPE member for the purpose of accessing our futures markets.
Independent software vendors’ systems are linked to our
electronic platform via our open application programming
interfaces. Our participants can currently access our platform
using nine independent software vendors. We do not depend on the
services of any one independent software vendor for access to a
significant portion of our participant base.
We have made a number of additions to the functionality of our
electronic platform in order to facilitate trading in futures
contracts, including spread functionality, which allows trades
of certain types to imply prices from one contract month to
another, and the development of administrative and monitoring
tools for use by our staff.
Our electronic platform offers real-time access to, and
transparency of, the liquidity in our OTC markets —
that is the complete range of bids, offers and volumes posted on
our electronic platform. Our platform displays a live ticker for
all contracts traded in our OTC markets and provides information
relating to each trade, such as the cumulative weighted average
price and transacted volumes by contract. We offer fast, secure
and anonymous trade execution services, which we believe
generally are offered at a lower cost compared with traditional
means of execution.
Our electronic platform provides trade execution on the basis of
extensive, real-time price data where trades are processed
accurately, rapidly and at minimal cost. We have designed our
electronic platform to ensure the secure, high-speed flow of
data from trading desks through the various stages of trade
processing. We believe that the broad availability of real-time
OTC energy market access and data, together with the
availability of cleared OTC contracts at the same price as
bilateral products, has allowed us to achieve a critical mass of
liquidity in our OTC markets.
The following diagram illustrates the processing of an OTC trade
from order entry to recording in a company’s risk
management system. This process, depicted below, typically
occurs within a matter of seconds.
OTC Products Overview. We offer market
participants a wide selection of derivative contracts, as well
as contracts for physical delivery of commodities, to satisfy
their trading objectives, whether they relate to risk
management, asset allocation, physical consumption or
production, speculation or arbitrage. We offer trading in over
13,600 unique contracts as a result of the availability of
various combinations of products, locations and
strips — meaning the duration or settlement date of
the contract. Excluding the strip element, over 740 unique
contracts based on products and hub locations were traded in our
OTC market in 2004. A substantial portion of the trading volume
in our OTC markets relates to approximately 15-20 highly
liquid contracts in natural gas, power and oil. For these
contracts, the highest degree of market liquidity resides in the
prompt, or front month, contracts, whereas that liquidity is
reduced for contracts with settlement dates further out, or the
back months.
In addition, we offer trading in a wide range of complementary
niche contracts. The scalability and flexible structure of our
electronic trading platform makes the introduction of these
contracts quick, efficient and relatively low cost. Our platform
also allows us to offer the high degree of customization that
the OTC participant demands to satisfy requirements and
preferences.
We characterize the range of instruments that participants may
trade in our markets in this prospectus by reference to type of
commodity (such as global oil, North American power, North
American gas, etc.), products (such as forwards and swaps,
differentials and spreads, and OTC options) and contracts
(meaning products specified by delivery dates). For a discussion
of these instruments generally, see “Industry
Overview”. The OTC products available for trading in our
markets fall into the following general contract types:
•
Forwards and Swaps: We offer forward contracts on
products in the following commodities: North American power,
European power and global precious metals. We offer swaps in the
following commodities: global oil, North American power, North
American gas, European gas and European power.
•
Differentials and Spreads: We offer basis trades in
various natural gas markets, such as the Chicago pipeline basis
swap (settled against the NGI index). We offer spreads in the
following commodities markets: global oil, and North American
natural gas and power.
•
Options: We offer options on contracts in the following
commodities: oil and North American gas.
The following table indicates the number of unique commodities,
products and contracts traded in our OTC business for the
periods presented:
There is currently little to no liquidity in the commodities
markets for physical global oil, physical and financial North
American coal, North American emissions, North American weather
and physical and financial North American natural gas liquids on
our platform.
Cleared OTC Contracts. We developed the concept of
cleared OTC energy contracts, which provide participants with
access to centralized clearing and settlement arrangements
through LCH.Clearnet. We launched the first cleared OTC natural
gas and oil contracts in March 2002 and our first cleared OTC
power contracts in November 2003. As of June 2005, we listed
8 cleared natural gas contracts, 20 cleared power
contracts and 3 cleared oil contracts, all of which are
financially settled. In addition, in June 2005, we entered into
an agreement with North American Energy Credit and Clearing LLC,
which provides our participants with access to clearing and
settlement arrangements through The Clearing Corporation for
trading in physically-settled OTC natural gas and power
contracts. Transaction fees derived from trade execution in
cleared OTC contracts represented 62.2% and 44.5% of our total
OTC revenues during the six months ended June 30, 2005 and
for the year ended December 31, 2004, respectively, net of
intersegment fees.
The introduction of cleared OTC contracts has reduced bilateral
credit risk and the amount of capital our participants are
required to post on each OTC trade, as well as the resources
required to enter into multiple negotiated bilateral settlement
agreements to enable trading with other counterparties. In
addition, the availability of clearing through LCH.Clearnet for
both OTC and futures contracts traded in our markets enables our
participants to cross-margin their futures and OTC
positions — meaning that a participant’s position
in its futures or OTC trades can be offset against each other,
thereby reducing the total amount of capital the participant
must deposit with the futures commission merchant clearing
member of LCH.Clearnet. LCH.Clearnet, like other clearinghouses,
provides direct clearing services only to its members. In order
to clear transactions executed on our platform, a participant
must therefore either be a member of LCH.Clearnet itself, or
have an account relationship with a futures commission merchant
that is a member of LCH.Clearnet. Futures commission merchants
clear transactions for participants in substantially the same
way they clear futures transactions for customers. Specifically,
each futures commission merchant acts as the conduit for
payments required to be made by participants to the
clearinghouse, and for payments due to participants from the
clearinghouse.
OTC contracts are available for trading on the same screen and
are traded in the same price stream, and are charged the same
commission rate, as bilaterally traded contracts. In a cleared
OTC transaction, LCH.Clearnet acts as the counterparty for each
side to the trade, thereby reducing counterparty credit risk in
the traditional principal-to-principal OTC markets. However,
participants to cleared trades also pay a clearing fee directly
to LCH.Clearnet and to a futures commission merchant. There are
currently 33 futures commission merchants clearing
transactions for 1,180 screens active in our cleared OTC
markets. Participants have the option to trade on a bilateral
basis with the counterparty to avoid paying fees to LCH.Clearnet
and a futures commission merchant subject to the availability of
bilateral credit with the counterparty. While we derive no
revenue directly from providing access to these clearing
services, we believe the availability of clearing services and
attendant improved capital efficiency has attracted new
participants to the markets for energy commodities trading.
We extended the availability of our cleared OTC contracts to
voice brokers in our industry through our block trading
facility, which was launched in March 2004. Block trades are
those trades executed in the voice broker market, typically over
the telephone, and then transmitted to us electronically for
clearing. We charge 50% of our standard commission fee for block
trades. We believe that our block trading facility is a growing
part of our cleared business as it serves to expand our open
interest. As of June 30, 2005, open interest in our cleared
OTC contracts was 1.3 million contracts in North American
natural gas and power and global oil. 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 following tables present:
•
the number of cleared OTC Henry Hub natural gas contracts traded
for the periods presented on our electronic platform compared
with NYMEX-ClearPort; and
•
the number of cleared PJM financial power contracts traded for
the periods presented on our electronic platform compared with
NYMEX-ClearPort.
We offer a broad range of automated OTC trade execution
services, including straight-through trade processing, risk
management functionality and electronic trade confirmation.
Automated Trade Execution Services —
Straight-Through Trade Processing. Our electronic
platform offers the following features:
•
Viewing Live Markets: Traders may view all live, firm
quotes posted by other traders in our markets. These quotes are
arranged on the screen first by price and then, if two quotes
are posted at the same price, by their time of entry. All
participants are able to view the same market information,
although individual participants may also customize the
presentation of this information.
•
Counterparty, Credit and Risk Management Screening:
Quotes visible to a participant’s traders on the screen
are color-coded. One color indicates that quotes have originated
from parties other than that participant. Another color
indicates whether or not particular quotes meet counterparty,
credit and risk management criteria established by the
participant’s risk management personnel.
•
Instant Messaging: Our instant messaging service allows
participants to communicate directly with others in our markets
on a secure, anonymous and real-time basis. For example,
participants may use instant messaging to seek additional
capacity from a party offering a product that they need.
•
Simple Click Execution: Traders may act on a bid or an
offer with one or more clicks of a mouse or use of a shortcut
key programmable set-up. Our electronic platform also
facilitates the implementation of sophisticated, multi-target
trading techniques. Traders may sweep the market, or conduct a
broad or targeted search, for quotes of a certain price or
quantity. This enables them to act on multiple bids or offers at
one time. In addition, traders may link two orders, arranging,
for example, to cancel a second order automatically when the
first is executed.
•
Order Matching: Once an order is placed by a
participant’s trader, it is automatically matched with a
quote meeting the participant’s counterparty, credit and
risk management criteria at the best available price. If there
are two quotes at the same price, priority goes to the one that
was entered first. Orders are matched on an anonymous basis.
•
Application Programming Interfaces: Our application
programming interfaces allow participants to build their own
customized front office trading systems, which can be linked to
our platform, thereby enabling high speed data flow to their
trading desk and back through to their risk management,
settlement and accounting systems.
•
Automated Spreadsheet Trading: Participants may send
orders to, and execute trades on, our platform using their own
proprietary formulas and strategies without the use of our
application programming interfaces or any code level programming.
•
Trade Reporting: A confirmation is automatically
transmitted to each party to a trade. Traders may elect to have
these confirmations automatically printed. They may also elect
to send the confirmations automatically to a computer file,
enabling direct, paperless communication between a
participant’s front and back offices.
•
Order Monitoring and Deal Surveys: Traders are able to
monitor and manage the status of all bids and offers that they
have entered on our platform. Traders and others at a
participant company are also able to view and print
comprehensive survey reports of trades executed by a trader or
by all traders within their company. This facilitates
communication between a participant’s front and mid-offices.
•
Electronic Invoicing: Our platform generates electronic
invoices detailing the fees and trading commissions due from
each participant. Participants can choose to view and receive
invoice data at any time of the month. This reduces paper
handling and the risk of human error. It also affords our
participants greater flexibility in storing and using this
information and promotes greater back office efficiency.
Electronic Trade Confirmation Services. Our
electronic trade confirmation system is accessible through our
website or through our application programming interfaces and
offers market participants a reliable, low-cost automated
alternative to manual trade verification and confirmation. When
trading on a traditional exchange or through OTC voice brokers,
market participants typically manually prepare and exchange
paper confirmations evidencing a trade following execution in
order to create a legal record of the trade. We believe that
this process tends to result in increased back office costs,
delay and risk of human error.
Our electronic trade confirmation system reviews electronic
trade data received from individual traders, screens and matches
this data electronically, then highlights any discrepancies in a
report to the traders’ respective back offices. This allows
back office personnel to focus primarily on those trades that
require correction and verification, rather than also reviewing
the larger percentage of trades without discrepancies. If
discrepancies arise, they may be resolved between the
counterparties, after which an electronic confirmation of the
trade is issued. Where no discrepancies are reported, use of
this service eliminates the need for telephonic verification of
trade data. Participants using this service may elect to use
this confirmation as the official record of the transaction in
place of the fax or telex traditionally generated by
participants’ back offices.
Both participants and third parties may use this service to
confirm trades in products commonly traded in the energy and
metals markets. Our electronic trade confirmation service
accepts data from trades executed on our platform, through other
exchanges or trading facilities or through OTC voice brokers. We
believe that the convenience and cost savings offered by our
electronic trade confirmation service could attract new
participants to our platform, increasing the revenues that we
derive from transaction fees.
OTC Risk Management Functionality. One of the
features of our platform is its risk management functionality.
Trades in the OTC commodities markets historically have been
executed as bilateral contracts in which each counterparty bears
the credit and/or delivery risk of the other and typically
requires that an existing bilateral Master Agreement be in place
with the other counterparty. Participants may pre-approve
trading counterparties and establish parameters for trading with
each counterparty in advance of doing so, thereby enforcing
internal risk management policies. Participants may set
firm-wide limits on tenor (duration) and the total daily value
of trades that its traders may conduct with a particular
counterparty, in a particular market. In addition, participants
are offered a limited view of the parameters established for
that participant by other market participants and may negotiate
in real-time with potential counterparties through our instant
messaging service. We do not assess the creditworthiness of, or
determine trading parameters for, any participant that trades on
our platform and we do not derive revenues directly from our
risk management tools.
OTC and Futures Market Data
The 10x Group, or 10x, is our market data subsidiary. We
established 10x in 2002 in response to growing demand for
objective, transparent and verifiable energy market data.
Through 10x, we generate market information and indices based
solely upon auditable transaction data derived from data on
actual OTC trades executed in our markets. Therefore, this
information is not affected by subjective estimation or
selective polling, the methodologies that currently prevail in
the OTC markets. Each trading day, we deliver proprietary energy
market data directly from our OTC market to the desktops of
thousands of market participants. More specifically, we offer
the following data products and services:
•
ICE Daily Indices: 10x publishes ICE Daily Indices for
our spot natural gas and power markets with respect to over 66
of the most active gas hubs and 21 of the most active power hubs
in North America. These indices are calculated based on the
volume-weighted average price at each delivery point of all
qualifying trades executed on our platform in accordance with
guidelines we have set to provide for transparency in our index
methodology. In contrast to other survey-based indices, all
trades included in our indices can be observed by our
participants, including regulators, as they occur. The ability
to view the real-time creation of market indices encourages the
use of the platform for trade execution for inclusion in the
indices. 10x was recognized by the Federal Energy Regulatory
Commission as the only publisher of natural gas and power
indices to fully comply with all of the natural gas and power
index publishing standards identified in its Policy Statement on
Price Indices. 10x transmits the ICE Daily
Indices via e-mail to 8,100 energy industry participants on a
complimentary basis each trading day. In the future, we may
begin charging recipients for what we believe is increasingly
valuable data.
•
View Only: We offer view only access to market
participants who are not active traders, but who still require
access to real-time prices of physical and financial energy
derivative contracts. Typical view only access subscribers
include marketers, industrial end-users, utilities, analysts,
municipalities and regulatory agencies.
•
End of Day Report: The 10x End of Day Report is a
comprehensive electronic summary of trading activity in our OTC
markets. The report is published daily at 3:00 p.m. Eastern
time and features indicative price statistics, such as last
price, high price, low price, total volume, volume-weighted
average price, best bid, best offer, closing bid and closing
offer, for all natural gas and power contracts that are traded
or quoted on our platform. The End of Day Report also provides a
summary of every transaction, which includes the price, the time
stamp and an indication of whether a bid was hit or an offer was
lifted.
•
Market Price Validation Service: 10x Market Price
Validation service provides independent, consensus forward curve
and option values for long-dated (5-20 years) global energy
contracts on a monthly basis. On the last business day of each
month, Market Price Validation service participant companies,
representing the world’s largest energy commodities trading
entities, submit their month-end forward curve and option prices
for over 200 widely-held global energy contracts, such as Henry
Hub Natural Gas, Brent Crude, AECO Gas Basis, West Texas
Intermediate Crude, Cinergy Peak Power and SP-15 Peak Power. We
audit and average these submissions to create consensus forward
curve and option values that are then published for the benefit
of Market Price Validation service participants. Market Price
Validation service participants use these consensus values to
validate internal forward curves and mark-to-market their
month-end portfolios in accordance with FASB and IAS
recommendations concerning the treatment and valuation of energy
derivative contracts.
We also earn revenues through the distribution of real-time and
historical futures prices and other futures market data derived
from trading in our futures markets through 44 data vendors.
These vendors in turn distribute this information, directly and
through various sub-vendors, to approximately 19,200 subscriber
terminals. These vendors and sub-vendors include Bloomberg,
Reuters and Interactive Data Corporation. Through the IPE’s
website, data related to our futures markets is also available
to subscribers of our EnergyLive service.
Our businesses generate an increasingly broad range of market
data, which we distribute on a real-time and historical basis.
In view of the automated way in which our electronic platform
gathers data from actual transactions, we believe that our data
is more precise, comprehensive and unbiased than most existing
sources of OTC commodities data. Subject to confidentiality
provisions, we generally retain all trade data collected through
our trade-execution, electronic trade confirmation and clearing
services. We believe that market participants value the depth
and precision of our market data and that this value is likely
to increase if our liquidity continues to grow. We continue to
evaluate opportunities to realize the value of this raw data. We
believe our electronic platform comprises the single largest
repository in the world for energy commodities market data.
Our Participant Base
Futures Business Participant Base
Participants currently trade in our futures markets, either
directly as members or through a member. The participant base in
our futures business is globally dispersed, although we believe
a significant proportion of our participants are concentrated in
major financial centers in North America, the United Kingdom,
Continental Europe and Asia. We have obtained regulatory
clearance or received legal advice confirming that there is no
legal or regulatory impediment for the location of screens for
electronic trading in our futures markets in 32 countries,
including the United States, Singapore, Japan and most of the
member countries of the European Union. Memberships in our
futures markets increased by 34.4% during the six months ended
June 30, 2005 and 13.0% for the year ended
December 31, 2004 in response to the addition of exclusive
electronic trading hours and demand for an electronically-traded
crude oil benchmark, our IPE Brent Crude futures contract.
Like our OTC participant base, our participant base in our
futures business has grown significantly since we acquired the
IPE in 2001. The five most active clearing members of the IPE,
which handle cleared trades for their own accounts and on behalf
of their customers, accounted for 39.1% of our futures business
revenues, net of intersegment fees, during the six months ended
June 30, 2005 and 39.5%, 39.1% and 38.4% of our futures
business revenues, net of intersegment fees, for the years ended
December 31, 2004, 2003 and 2002, respectively. Revenues
from one member, Man Financial Limited, accounted for 11.3% of
our futures business revenues, net of intersegment fees, during
the six months ended June 30, 2005 and 13.0%, 15.1% and
13.4% of our futures business revenues, net of intersegment
fees, for the years ended December 31, 2004, 2003 and 2002,
respectively. As a broker, a substantial part of Man Financial
Limited’s trading activity typically represents trades
executed on behalf of its clients, rather than for its own
account. No other member accounted for more than 10% of our
futures business revenues during these periods.
IPE Membership. Trades in our futures markets may
only be executed in the name of an IPE member for its own or
others’ accounts. In order to become an IPE member, an
applicant must complete an application form, undergo a due
diligence review and execute an agreement stating that it agrees
to be bound by IPE regulations.
All futures trades executed on our electronic platform are
overseen by or attributable to “responsible
individuals”. Each electronic member may register one or
more responsible individuals, who are responsible for trading
activities of both the member and its customers, and who are
accountable to the IPE for the conduct of trades executed in the
member’s name. There are currently over
1,100 responsible individuals registered in our futures
market.
OTC Business Participant Base
Our OTC participants include some of the world’s largest
energy companies, financial institutions and other active
contributors to trading volume in global commodities markets.
They include oil and gas producers and refiners, power stations
and utilities, chemical companies, transportation companies,
banks, hedge funds and other energy industry participants. Our
participant base is global in breadth, with traders located in
24 countries. The five most active trading participants
together accounted for 23.8% of our OTC business revenues, net
of intersegment fees, during the six months ended June 30,2005 and 21.4%, 25.1% and 38.1% of our OTC business revenues,
net of intersegment fees, for the years ended December 31,2004, 2003 and 2002, respectively. Revenues from one
participant, AEP Investments, Inc. (formerly known as AEP Energy
Services, Inc.), which is also one of our shareholders, that is
active in the OTC North American natural gas and power
commodities market, accounted for 14.2% of revenues derived from
our OTC business during 2002. No participant accounted for more
than 10% of our OTC business revenues during the six months
ended June 30, 2005 or during the years ended
December 31, 2004 or 2003.
Trading in our OTC markets is not restricted to members, as with
a traditional exchange. Rather, we generally accept as a
participant any party that qualifies as an eligible commercial
entity, as defined by the Commodity Exchange Act and rules
promulgated by the Commodity Futures Trading Commission, or the
CFTC. Eligible commercial entities must satisfy certain
asset-holding and other criteria and include entities that, in
connection with their business, incur risks relating to a
particular commodity or have a demonstrable ability to make or
take delivery of that commodity, as well as financial
institutions that provide risk-management or hedging services to
those entities. In January 2003, we received approval from the
CFTC that allows registered traders and locals with floor or
electronic trading privileges on any regulated U.S. futures
exchange to qualify as eligible commercial entities and
therefore to execute OTC transactions on our platform for their
own account. We also received approval in October 2004 from the
CFTC permitting the IPE’s registered brokers and local
traders to transact in the OTC markets for their own accounts.
This has allowed IPE members and traders access to both the
futures markets and the OTC markets on one screen.
We require each participant to execute a participant agreement,
which governs the terms and conditions of our relationship with
each participant and grants the participant a non-exclusive,
non-transferable, revocable license to access our platform.
While, we generally establish the same contractual terms for all
of our users, in connection with our entry into new commodities
markets, we have from time to time agreed to
minor modifications to the terms of our participant agreement
for trading in new products. We expect that any future services
that we may introduce will also be covered by our participant
agreement, as we generally have a unilateral right to amend its
terms with advance notice. As the OTC markets mature and
conventions change, our participant agreement provides us with
considerable flexibility to manage our relationship with our
participants on an ongoing basis.
The data in the table below reflects the growth of our OTC
business participant base. This table indicates (i) the
total number of participants that have signed participant
agreements with us through the end of the periods presented,
(ii) the number of participants who have actually traded
during the periods presented, and (iii) the number of
desktop screens that logged onto our platform during the month
of December 2004. We believe that there are two main reasons why
some participants access our platform but do not participate in
trading. First, after participants register to use our
electronic platform, they cannot trade until they have
established either a clearing account or bilateral credit with
other participants. Second, we believe that some non-trading
participants use our platform to gain real-time, comprehensive
information regarding the commodities markets as well as to gain
reliable, accurate and full price discovery in these markets. We
regard these non-trading users of our platform as a valuable
potential source of revenues for our business both because such
users may choose to subscribe to other of our market data
services and because such users may in the future trade on our
platform.
OTC Participant firms that executed a trade during the period
472
438
495
466
433
OTC Active screen/user ID’s (end of period)
6,515
5,095
4,812
4,575
5,228
Product Development
We leverage both our technology infrastructure and software
development capabilities to diversify our products and services.
New product development is an ongoing process that is part of
the daily operation of our business. We are continually
developing, evaluating and testing new products for introduction
in our futures and OTC businesses. Our goal is to create
innovative solutions in anticipation of, or in response to,
changing conditions in the markets for energy commodities
trading to better serve our expanding participant base. We also
seek to leverage our existing product base by developing new
applications for their use. We develop and launch new products
both in response to specific participant demand and on the basis
of trends we observe within our participant base. Substantially
all of our product development relates to new contracts for
trading in our markets. We generally are able to develop and
launch new bilateral contracts for trading within a number of
days or weeks. This process involves defining contract
specifications, engaging in quality assurance testing and
marketing the contract. In contrast, because all cleared
contracts traded in our markets are cleared and settled through
LCH.Clearnet, we are required to collaborate with LCH.Clearnet
with respect to a number of aspects of the development process,
including contract specifications, margin requirements, testing
in a staging environment, quality assurance and post-trade
processing and support infrastructure. As a result, the
investment of time and resources required to develop cleared
products is greater than for bilateral contracts and may extend
over a period of two months or more. In addition, new contracts
in our futures markets must be reviewed and approved by the
Financial Services Authority, and possibly foreign regulators.
After a particular product is launched, generally no
modifications are required, as the specifications of a traded
contract do not typically change. We do not incur separate,
identifiable material costs in association with the development
of new products — such costs are embedded in our
normal costs of operation.
In support of our product development goals, we rely on the
input of our product development, clearing, technology and sales
teams, who we believe are positioned to discern and anticipate
our participants’ needs.
We prioritize development of new products based on the degree to
which we believe a new product will provide market liquidity,
serve the greatest number of participants and provide us with a
return on our investment. The availability of trading in new
products is typically communicated by our sales team to
participants simultaneously via e-mail and direct
communications. Where appropriate, we seek to protect our
intellectual property through patents and other forms of
intellectual property protection.
In April 2005, we introduced trading in futures contracts linked
to E.U. Emissions Allowances issued under the European
Union’s mandatory Emissions Trading Scheme. These contracts
are offered in our futures markets in conjunction with the
European Climate Exchange, a subsidiary of the Chicago Climate
Exchange.
While we have historically developed our products and services
internally, we also periodically evaluate our strategic
relationships to try to identify whether any opportunities to
develop meaningful new products and services exist in
conjunction with third parties. If we believe our success will
be enhanced by collaboration with a third party, we will enter
into a licensing arrangement or other strategic relationship.
Technology
Technology is a key component of our business strategy, and we
regard it as crucial to our success. Our operation of electronic
trading facilities for both futures and OTC markets has
influenced the design and implementation of the technologies
that support our operations. We currently employ a team of
67 experienced technology specialists, including project
managers, system architects, software developers, performance
engineers, systems and quality analysts, database administrators
and website designers. We have established a track record of
operating a successful electronic trading platform by developing
and integrating multiple, evolving technologies that support
substantial trading volume. The integrated suite of technologies
that we employ has been designed to support a significant
expansion of our current business and provides us with the
ability to leverage our technology base into new markets and to
develop new products and services rapidly and reliably.
As trading activity has increased, we have continued to improve
matching engine performance and to add functionality as
appropriate as we make available to our participants trading in
new markets and product types. We have adopted a modular
approach to technology development and have engineered an
integrated set of solutions that support multiple specialized
markets. Significant investments in production planning, quality
assurance and certification processes have enhanced our ability
to expedite the delivery of the system enhancements that we
develop for our participants. Our electronic platform is
accessible from anywhere in the world via the Internet. We also
develop and operate other software components used to support
mid and back office services such as clearing, market data and
electronic confirmations. Our clearing infrastructure is
designed to be easily extendable to support integration with
additional clearing interfaces. We currently support clearing
integration to LCH.Clearnet, as well as to The Clearing
Corporation for the purposes of clearing and settling the
Chicago Climate Exchange markets as part of our provision of
services to the Chicago Climate Exchange.
Speed, reliability, scalability, and capacity are critical
performance criteria for electronic trading platforms. Our
electronic platform was designed from the outset to be highly
scalable, enabling us to meet anticipated user growth as demand
increases. A substantial portion of our operating budget is
dedicated to system design, development and operations in order
to achieve high levels of overall system performance. We
continually monitor and upgrade our capacity requirements and
have configured our systems to handle approximately twice our
peak transactions in our highest volume products.
The technology systems supporting our trading operations can be
divided into four major categories:
Distribution
Technologies that support the ability of our participants to
access our marketplace via the Internet or a direct connection
to our platform.
Front-end functionality
Technologies that provide a robust graphical user interface,
application programming interfaces, and enable the delivery of
other front-end tools.
Electronic trade matching
Technologies that aggregate orders and match buy and sell orders
when their trade conditions are met.
Security and redundancy
Technologies that maximize and maintain the security of our
markets, as well as provide for the transition to a redundant
operating environment in the case of system failure caused by
internal or external events.
Distribution
The accessibility of our platform via the Internet
differentiates our markets and serves to attract liquidity and
trading volume to our markets. As of June 30, 2005, we had
over 7,100 active connections to our platform at over
940 OTC participant firms and over 300 futures
participant firms. Of these active connections, over 4,000 are
used during peak hours. Most of our participants access our
electronic platform through the Internet. Over the past two
years, as part of our efforts to provide additional access
choices to participants, we implemented a program to connect
conforming independent software vendors to our platform. As a
result, we now have the potential to attract thousands of
additional participants to trade in our markets through these
independent software vendors. Typically, each independent
software vendor represents a single connection to our platform,
though numerous participants may access our markets through each
independent software vendor. We believe our platform, which is
currently configured to support more than 6,500 simultaneous
connections, will be sufficient to meet anticipated demand for
the foreseeable future. Our electronic platform is highly
scalable and additional capacity above 6,500 simultaneous
connections can be increased by adding additional hardware.
Front-End Functionality
We provide secure access to our electronic platform via a
graphical user interface known as WebICE. The WebICE graphical
user interface serves as a customizable, feature rich front-end
to our platform. Participants can access our platform globally
via the Internet by clicking on a link on our website. Our
platform can be accessed using a number of operating systems,
including Microsoft Windows 2000/XP, Linux and Mac OS.
We selectively offer our participants use of application
programming interfaces that allow users to create customized
applications and services around our electronic platform to suit
their specific needs. Participants using application programming
interfaces are able to link their internal computer systems to
our platform and enable high-speed data flow to their front
office trading systems, as well as their risk management, data
feed, settlement, and accounting systems. Our application
programming interfaces also enable independent software vendors
to adapt their products to our platform, thereby offering our
participants a wide variety of front-end choices in addition to
our own user interface.
Electronic Trade Matching
Order matching constitutes the core of our electronic platform.
Our platform supports functionality for trading in bilateral
OTC, cleared OTC and futures and options contracts. Our core
functionality is available on a single platform for all of the
products that we offer, rendering it highly flexible and
relatively easy to
maintain. As a result, enhancements made for one product are
also easily made for other products. Our order matching
functionality is designed based on a combination of internal and
external software and technology. Clustered Windows 2000
messaging servers act as a communications gateway for our
participants. Large scale enterprise servers provide the
processing capacity for the matching engine which captures price
requests by our participants and matches trades instantaneously
based on the order and price at which trades were entered.
Security and Disaster Recovery
Physical and digital security are each critical to the operation
of our platform. At both our corporate offices as well as at all
of our data centers, physical access controls have been
instituted to restrict access to sensitive areas. We also employ
what we believe are state-of-the-art digital security technology
and processes, including high level encryption technology,
complex passwords, multiple firewalls, network level virus
detection, intrusion detection systems and secured servers.
We use a multi-tiered firewall scheme to control access to our
network. We have also incorporated several protective features
into our electronic platform at the application layers to ensure
the integrity of participant data and connectivity. For example,
we use access control profiles to prevent a given participant
from accessing data affiliated with another participant. We are
also able to restrict the functions that a particular user can
perform with any company data within a given application. Our
electronic platform monitors the connection with each user
connected to the platform. If a connection to a particular
participant can no longer be detected, certain outstanding
orders entered by that participant are automatically withdrawn
and held. Users have the option to allow orders to remain in the
market after logging out or disconnecting from our platform. In
addition, even though our electronic platform is globally
accessible over the Internet, we are able to restrict platform
access to designated IP addresses, if so desired by a
participant.
In July 2002, we established a remote data center to provide a
point of redundancy for our trading technology. Our back-up
facility fully replicates our primary data center and is
designed to ensure the uninterrupted operation of our electronic
platform’s functionality in the face of external threats,
unforeseen disasters or internal failures. In the event of an
emergency, participants connecting to our electronic platform
would be rerouted automatically to the back-up facility. Our
primary data center continuously collects and saves all trade
information and periodically transmits it to our back-up
facility. For that reason, we expect that our disaster recovery
system would have current, and in most cases real-time,
information in the event of a platform outage. In the event that
we were required to complete a changeover to our back-up
disaster facility, we anticipate that our platform would
experience less than six hours of down time.
Support Services
All of our participants have access via e-mail and telephone to
our specialized help desk, which provides support with respect
to general technical, business and administrative questions, and
is staffed 24 hours a day from Sunday at 6:00 p.m.
until Friday at 6:00 p.m. At all other times, support
personnel are available to assist our participants via mobile
phone and e-mail. We utilize a third party system that tracks
inbound calls and e-mails to centralize issue reporting and
resolution tracking. Each week a summary of reported issues is
compiled and sent to operations management for review. In
addition, our participants may access training materials and
user guides which are available on our website.
Technology Partners, Vendors and Suppliers
We maintain relationships with a range of technology partners,
vendors and suppliers in respect of clearing services, software
licensing, hosting facilities and electronic trade routing.
If any of our contracts with our key technology partners, vendor
or suppliers were terminated, we believe that we would be able
to gain access on a timely basis to products and services of
comparable quality, on comparable terms.
The current focus of our internal software development is in the
following areas:
•
enhancement of our existing platform to increase connectivity,
functionality and performance in support of our plan to increase
trading volumes in our markets and for the development of new
products;
•
development of functional enhancements and performance
improvements to our electronic trade confirmation
service; and
•
development of technology infrastructure to support the emerging
data sales component of our OTC business.
Competition
The markets in which we operate are highly competitive and we
expect competition to intensify in the future. We face
competition in all aspects of our business from a number of
different enterprises, both domestic and international,
including electronic platforms, traditional exchanges and voice
brokers. We compete on the basis of a number of factors,
including:
•
depth and liquidity of markets;
•
price transparency;
•
reliability and speed of trade execution and processing;
•
technological capabilities and innovation;
•
breadth of product range;
•
rate and quality of new product developments;
•
quality of service;
•
connectivity;
•
mid- and back- office service offerings, including
differentiated and value-added services;
•
transaction costs; and
•
reputation.
Our Principal Competitors
Currently, our principal competitor is NYMEX. NYMEX is a
predominantly open-outcry commodities exchange for the trading
of energy futures contracts and options on futures contracts.
Among its primary products, NYMEX offers trading in a West Texas
Intermediate light sweet crude oil futures contract and a Henry
Hub natural gas futures contract. NYMEX has recently developed a
number of initiatives that compete with us, directly or
indirectly, including the following:
•
NYMEX established an open-outcry futures exchange located in
Dublin, Ireland for the trading of a competing Brent crude
futures contract. According to NYMEX, this launch was a direct
response to our decision to expand electronic trading and reduce
the open-outcry trading hours for our IPE Brent Crude futures
contract starting on November 1, 2004. In addition to its
Brent crude contract, which was offered beginning
November 1, 2004, NYMEX began offering trading on its
Dublin exchange floor in a Northwest European gas oil futures
contract on April 8, 2005. On September 12, 2005,
NYMEX established an open-outcry trading floor in London,
England, simultaneously closing its Dublin trading floor and
shifting trading in Brent crude futures contracts and Northwest
European gas oil futures contracts to London. It could expand
its products beyond these two contracts by offering new futures
or options contracts, thereby directly competing with all or
most of our futures products. According to data obtained from
the Futures Industry Association and the Financial Services
Authority, as of
NYMEX established its NYMEX Access electronic trading platform
for futures in 1983. Since May 2002, NYMEX has been offering
clearing services for OTC contracts via a facility known as
ClearPort. While these contracts are ultimately converted to
futures contracts, they were termed by NYMEX at the time of
their introduction to be “OTC products” and are
blocked into NYMEX by voice brokers. The availability of these
contracts has reduced reliance on floor-based execution and has
strengthened the competitive position of voice brokers. NYMEX
has listed over 100 contracts available for clearing
through ClearPort.
In addition, we currently compete with:
•
voice brokers active in the commodities markets, including
Amerex, ICAP, Prebon Yamane and Tradition (North America);
•
other electronic trading energy platforms, such as NGX (a
subsidiary of the Toronto Stock Exchange) and HoustonStreet;
•
energy futures exchanges, such as European Energy Derivatives
Exchange, or Endex (formerly known as Amsterdam Power Exchange),
and Powernext; and
•
market data vendors, such as Bloomberg, Reuters, Argus and
Platts (a division of The McGraw-Hill Companies Inc.).
Competition with Our Futures Business
In our futures business, we currently compete with NYMEX and
European natural gas and power exchanges. In the United States,
NYMEX lists the West Texas Intermediate crude oil futures
contract, which competes with the IPE Brent Crude futures
contract as a benchmark for worldwide trading in crude oil
futures. There are also several electronic exchanges in Europe
that may, in the future, offer trading in contracts that compete
with ours. For example, both the Chicago Mercantile Exchange and
Euronext have stated publicly that they intend to enter the
markets for energy commodities trading.
In addition, the recent consolidation of, and development of
alliances between, European exchanges and clearinghouses has
resulted in increasingly large and well-capitalized trading
services providers. For example, in January 2004 the London
Clearing House merged with Clearnet SA. Continued consolidation
among trading services providers would likely require us to
compete in both our futures and OTC businesses against a smaller
number of firms with considerable resources and significant
market shares.
Competition with Our OTC Business
Other financial services or technology companies, in addition to
those named above, have entered the OTC electronic trading
services market. Additional joint ventures and consortia are
forming, or have been formed, to provide services similar to
those that we provide. Others may acquire the capacity to
compete with us through
acquisitions. In particular, we expect that existing,
well-capitalized participants in the electronic trading market
for fixed income products and foreign exchange products will
seek out revenue opportunities in the commodities markets. If we
expand into new markets in the future, we could face significant
competition from other companies.
Intellectual Property
We rely on a wide range of intellectual property. We own or have
a license to use all of the software that is essential to the
operation of our electronic platform, much of which has been
internally-developed by our technology team since our inception.
In addition to our software, we regard certain business methods
and our brand names, marketing elements, logos and market data
to be valuable intellectual property. We protect this
intellectual property by means of patent, trademark, service
mark, copyright and trade secret laws, contractual restrictions
on disclosure and other methods.
We currently have licenses to use several U.S. patents,
including the Wagner patent, which relates to the automated
matching of bids and offers for futures contracts traded in the
United States, and the Togher family of patents, which relate to
the way in which bids and offers are displayed on an electronic
trading system in a manner that permits parties to act only on
those bids and offers from counterparties with whom the party
has available credit. We have been granted a non-exclusive
license from eSpeed, Inc. to use the Wagner patent for the
trading of futures contracts where at least one of the screens
is located in the United States or where the contract provides
for delivery of the underlying commodity in the United States.
Under the terms of the eSpeed license, which expires on the
expiration of the Wagner patent in February 2007, we are
required to pay eSpeed a minimum of $2 million per year,
plus a royalty fee equal to the greater of 10 cents for each
side to a contract or generally 20 cents per contract. We paid
eSpeed $323,000 in royalty fees for the six months ended
June 30, 2005 and $32,000 and $14,000 in royalty fees for
the years ended December 31, 2004 and 2003, respectively.
For every 25 million applicable contracts executed on our
electronic platform in a given year beyond the first
25 million contracts, we must pay eSpeed an additional
$2 million (in addition to the per-contract charge). In the
event that the notional value of any contract subject to the
license exceeds $50,000 as of the date on which such contract is
first available for trading, then the number of contracts used
to calculate the payments described above will equal the
notional value divided by $50,000, with the result rounded up to
the next whole number. eSpeed has agreed that to the extent it
enters into more favorable licensing terms with any third party,
it will modify our license agreement to incorporate those more
favorable terms. In addition, in connection with the settlement
of patent infringement litigation with EBS, we obtained from EBS
a worldwide, fully paid-up, non-exclusive license to use
technology covered under patents known as the Togher patents
(presently issued or issued in the future claiming priority to
U.S. patent application 07/830,408). As a fully paid-up license,
we pay no royalties to EBS on an ongoing basis. The EBS license
expires on the latest expiration of the underlying patents.
We cannot guarantee that the Wagner patent, the Togher patents
or any other patents that we may license or acquire in the
future, are or will be valid and enforceable. If the Wagner
patent is found to be invalid, our license will terminate.
We have several U.S. and foreign patent applications pending,
including with respect to our electronic trade confirmation
service, our method to allow a user to engage in program trading
while protecting their proprietary data and software (known as
ICEMaker), our method for displaying both cleared OTC products
and bilateral OTC products in a single price stream in
connection with our OTC business, 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. Our electronic trade
confirmation service and our OTC clearing service are also the
subject of applications pending in the European Patent Office
and the Canadian Patent Office. In addition, a Patent
Cooperation Treaty application has been filed with respect to
the ICEMaker system. Through the IPE, we are joint owners with
NYMEX of a patent application related to an implied market
trading system. We can provide no assurance that any of these
applications will result in the issuance of patents.
We have received several federal registrations on trademarks
used in our business, including
“IntercontinentalExchange”, “ICE” and our
globe design. We have also received federal registrations on
other services or products we provide, including “10x”
and “ICEMaker”. In addition, we have several foreign
and U.S.
applications pending for other marks used in our business. We
can provide no assurance that any of these applications will
mature into registered trademarks.
This prospectus also contains additional trade names, trademarks
and service marks of ours and of other companies. We do not
intend our use or display of other parties’ trademarks,
trade names or service marks to imply, and this use or display
should not be construed to imply, our endorsement or sponsorship
of these other parties, their endorsement or sponsorship of us,
or any other relationship between us and these other parties.
Sales
As of June 30, 2005, we employed 22 full-time sales
personnel. Our sales team is managed by a futures industry sales
and marketing professional and is comprised mainly of former
brokers and traders with extensive experience and established
relationships within the commodities trading community. Since
our futures business is highly regulated, we also employ staff
who understand the regulatory constraints upon marketing in this
field.
Our marketing strategy is designed to expand relationships with
existing participants through the provision of value-added
products and services, as well as to attract new participants,
including those in markets and geographic areas where we do not
currently have a strong presence. We also seek to build brand
awareness and promote greater public understanding of our
business, including how our technology can improve current
approaches to price discovery and risk management in the energy
markets.
In 2004, we began to develop a cross-promotional marketing team
for our futures and OTC businesses. We believe this
repositioning of our marketing team is consistent with, and will
provide more effective support of, the underlying emphasis of
our business model — an open architecture and
flexibility that allows us to anticipate and respond rapidly to
evolving trends in the markets for energy commodities trading.
We typically pursue our marketing goals through a combination of
on-line promotion through our website, third party websites,
e-mail, print advertising, one-on-one client relationship
management and participation in trade shows and conferences.
From time to time, we also provide commission rate discounts of
limited duration to support new product launches.
Property
Our most valuable property is our technology and the
infrastructure underlying it. Our intellectual property is
described above under the heading
“— Technology”. In addition to our
intellectual property, our other primary assets include computer
equipment and real property.
We own an array of computers and related equipment. The net book
value of our computer equipment, software and internally
developed software was $2.6 million, $1.0 million and
$7.6 million, respectively, as of June 30, 2005.
Our principal executive offices are located in Atlanta, Georgia.
We occupy 22,332 square feet of office space under a lease
that expires in June 2008 and 3,080 square feet under a
lease that expires in April 2006. We also lease an aggregate of
39,419 square feet of office space in Calgary, Chicago,
Houston, London, New York and Singapore. Our largest physical
presence outside of Atlanta is in London, England, where we have
leased 29,578 square feet of office space. We believe that
our facilities are adequate for our current operations and that
we will be able to obtain additional space as and when it is
needed. The various leases covering these spaces generally
expire between 2008 and 2010. We also own property that houses
disaster recovery facilities for our open-outcry exchange floor,
which we closed on April 7, 2005. The net book value of
this property was $3.6 million as of June 30, 2005. We
intend to dispose of this property in the near future. However,
we have not committed to an active program to locate a buyer and
the property is currently not being actively marketed for sale.
Employees
As of June 30, 2005, we had a total of 192 employees, with
93 employees at our headquarters in Atlanta, 82 in
London and a total of 17 employees in our New York,
Houston, Chicago, Singapore and Calgary offices. None of our
employees is subject to a collective bargaining agreement. We
have not experienced any work stoppages, and we believe our
relationship with our employees is good.
We are subject to the jurisdiction of regulatory agencies in the
United States and the United Kingdom. We are also subject to a
number of legal proceedings.
Regulation of Our Business in the United States
We operate our OTC electronic platform as an exempt commercial
market under the Commodity Exchange Act and regulations of the
Commodity Futures Trading Commission, or the CFTC. The CFTC
generally oversees, but does not substantively regulate, the
trading of OTC derivative contracts on our platform. All of our
participants must qualify as eligible commercial entities, as
defined by the Commodity Exchange Act, and each participant must
trade for its own account, as a principal. Eligible commercial
entities include entities with at least $10 million in
assets that incur risks (other than price risk) relating to a
particular commodity or have a demonstrable ability to make or
take delivery of that commodity, as well as entities that
regularly purchase or sell commodities or related contracts that
are either (i) funds offered to participants that do not
meet specified sophistication standards that have (or are part
of a group of funds that collectively have) at least
$1 billion in assets, or (ii) have, or are part of a
group that has, at least $100 million in assets. We have
also obtained orders from the CFTC permitting us to treat floor
brokers and floor traders on U.S. exchanges and the IPE as
eligible commercial entities, subject to their meeting certain
requirements. As an exempt commercial market, we are required to
comply with access, reporting and record-keeping requirements of
the CFTC. Both the CFTC and the Federal Energy Regulatory
Commission have view only access to our trading screens on a
real-time basis. In addition, we are required to (i) report
to the CFTC certain information regarding transactions in
products that are subject to the CFTC’s jurisdiction and
that meet certain specified trading volume levels,
(ii) record and report to the CFTC complaints that we
receive of alleged fraud or manipulative trading activity, and
(iii) if it is determined by the CFTC that any of our
markets for products that are subject to CFTC jurisdiction serve
a significant price discovery function (that is, they are a
source for determining the best price available in the market
for a particular contract at any given moment), publicly
disseminate certain market and pricing information free of
charge on a daily basis. Presently, we do not believe that any
of our markets that are subject to CFTC jurisdiction serve a
significant price discovery function. We are not permitted to
represent to our participants that we are regulated by the CFTC.
Currently, our OTC business is not otherwise subject to
substantive regulation by the CFTC or other U.S. regulatory
authorities.
At various times in the last several years, legislative and
regulatory authorities at both the federal and state levels, as
well as media, political and consumer groups, have called for
increased regulation and monitoring of OTC commodities markets
in general, and the North American natural gas and power
commodities markets, our most important markets, in particular.
These calls have been associated, in part, with suggestions that
manipulative trading practices may have contributed to
unseasonably high prices in the wholesale power market in
California and other western states in the summer of 2000, the
collapse of Enron in 2001, recent energy shortages following
Hurricanes Katrina and Rita and other events that have adversely
affected the operations and public image of participants in
energy markets. In May 2002, leading market participants in the
energy sector, including users of our electronic platform,
acknowledged that significant percentages of their trades in
recent periods did not generate a profit or a loss for either
trading party and instead were carried out to generate higher
trading volumes than would otherwise have been achieved by those
parties and for other non-bona fide reasons.
In light of these developments, 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 and to require some participants on
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.
We cannot predict whether this legislation will be adopted.
Although these legislative proposals have not been enacted, the
same types of legislation, or similar legislation, could be
introduced in the near future. If such legislation or other
legislation were to be enacted into law, it could have an
adverse effect on our business.
In addition, in April 2002, the Federal Energy Regulatory
Commission adopted rules requiring that all public utilities and
power marketers file quarterly reports about their power trading
activities beginning July 31, 2002. These reports must
contain, among other data, transaction information on all power
sales that the reporting entity has effected during the quarter.
In addition, the energy bill that was recently signed into law
by the President on August 8, 2005 grants to 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. Should the Federal Energy
Regulatory Commission decide to exercise its rulemaking powers,
such rules could adversely impact demand for our data products
in the United States.
At various times in recent history, regulators in some states,
including California and Texas, have publicly questioned whether
some form of regulation, including price controls, should be
reimposed in OTC commodities markets, particularly in states
where the power markets were recently deregulated. We or our
participants may, in the future, become subject to additional
legislative or regulatory measures. These could require us to
incur significant compliance costs or to modify our business
strategy. Any measures affecting our participants in connection
with their OTC commodities trading activities could potentially
discourage participants from trading on our electronic platform
and adversely affect our competitive position.
Regulation of Our Business in the United Kingdom and
Europe
Operating as a Recognized Investment Exchange in the United
Kingdom (i.e., an investment exchange recognized by
the Financial Services Authority), the IPE has regulatory
responsibility in its own right. The IPE is subject to
supervision by the Financial Services Authority pursuant to the
Financial Services and Markets Act 2000, or the FSMA. The IPE is
required under the FSMA to meet various regulatory requirements,
including a requirement to maintain sufficient financial
resources, adequate systems and controls and effective
arrangements for monitoring and disciplining its members. The
IPE is also required to make available adequate resources to
ensure that it can continue to perform its regulatory functions.
Failure to comply with its regulatory requirements could subject
the IPE to significant penalties, including termination of its
ability to conduct our regulated business.
The FSMA also contains provisions making it an offense to engage
in certain market behavior and prohibits market abuse through
the misuse of information, the giving of false or misleading
impressions or the creation of market distortions. Breaches of
those provisions give rise to the risk of criminal or civil
sanctions, including financial penalties. The E.U. Market Abuse
Directive, which was due to be adopted in each member state by
October 12, 2004, supplements the provisions of the FSMA
regarding market abuse but will also introduce a specific
prohibition against insider dealing in commodity derivative
products. U.K. regulations designed to implement the E.U. Market
Abuse Directive are presently before Parliament. Under the FSMA,
the IPE enjoys statutory immunity in respect of any claims for
damages brought against it relating to any actions it has
undertaken (or in respect of any action it has failed to take)
in good faith, in the discharge of its regulatory function.
In the United Kingdom, we also engage in a variety of activities
related to our OTC business through subsidiary entities that are
subject to Financial Services Authority regulation. We engage in
sales and marketing activities through our subsidiary
IntercontinentalExchange Services (UK) Limited, or ICE
Services UK, which is authorized and regulated by the Financial
Services Authority as an arranger of deals in investments and as
an agency broker, and is subject to the Financial Services
Authority’s Alternative Trading Systems regime. Under the
Alternative Trading Systems regime, ICE Services UK is subject
to various reporting, record keeping, and monitoring obligations
with respect to use by its participants of our electronic
trading platform.
Some jurisdictions in which our participants reside, in Europe
and elsewhere, have laws relating to commodities trading. We
have reviewed these laws and have concluded that our existing
business activities do not require us to obtain licenses in
those jurisdictions. However, the E.U.’s Directive on
Investment Services
in the securities field, which requires each member state of the
E.U. to regulate and impose licensing requirements on
professional investment services firms, is to be replaced by a
new E.U. directive, the Markets in Financial Instruments
Directive, which will cover participants in commodity
derivatives markets. The Markets in Financial Investments
Directive must come into force in each E.U. member state by
April 2007. Service providers in the commodities markets do not
currently fall within the scope of the E.U.’s Directive on
Investment Services. The Markets in Financial Investments
Directive brings commodity derivatives within the scope of the
E.U. financial regulation and will harmonize the regulatory
approach to licensing services relating to commodity derivatives
across Europe. The proposals also impose greater regulatory
burdens on E.U.-based operators of alternative trading systems
through which instruments regulated under the directive are
traded and will potentially affect non-E.U. based operators of
alternative trading systems. The finer details of the Markets in
Financial Investments Directive are still being discussed by
E.U. member states — most notably in relation to the
definition of commodity derivatives — and, pending the
outcome of this debate, we may need to obtain licenses in
various E.U. member states in which our participants are
based.
Legal Proceedings
NYMEX Claim of Infringement
On September 29, 2005, the U.S. District Court for the
Southern District of New York granted our motion for summary
judgment dismissing all claims brought by NYMEX against us in an
action commenced in November 2002. NYMEX’s complaint
alleged copyright infringement by us on the basis of our use of
NYMEX’s publicly available settlement prices in two of our
cleared OTC contracts. The complaint also alleged that we
infringe and dilute NYMEX’s trademark rights by referring
to NYMEX trademarks in certain of our swap contract
specifications and that we tortiously interfered with a contract
between NYMEX and the data provider that provides us with the
NYMEX settlement prices pursuant to a license. In dismissing all
of NYMEX’s claims, the court found that NYMEX’s
settlement prices were not copyrightable works as a matter of
law, and we had not engaged in copyright or trademark
infringement in referencing NYMEX’s publicly available
settlement prices. The trademark dilution and tortious
interference claims, which are state law claims, were dismissed
on jurisdictional grounds. While the court granted summary
judgment in our favor on all claims, NYMEX has announced that it
expects to appeal the court’s findings, which it may do on
or before November 4, 2005. NYMEX may also proceed with its
dilution and tortious interference claims in state court. If
NYMEX files an appeal, or proceeds with a claim in state court,
we intend to vigorously defend these actions and we believe
these claims lack merit. We cannot assure you that the appeal or
litigation would be resolved in our favor. We do not believe
that the resolution of this matter will have a material adverse
effect on our consolidated financial condition, results of
operations or liquidity.
EBS Claim of Infringement
On January 29, 2004, EBS filed a complaint against us in
Federal District Court in the Southern District of New York
alleging that we are infringing on two patents held by EBS,
referred to as the Togher patents, relating to the way in which
bids and offers are displayed on an electronic system in a
manner that permits parties to act only on those bids and offers
from counterparties with whom the party has available credit.
EBS is a provider of foreign exchange and precious metals
trading and data solutions. EBS claimed that the credit filter
functionality of our trading platform infringes EBS’
patented systems and methods for displaying a so-called
“dealable” price. On September 1, 2005, we
entered into a settlement agreement with EBS without admitting
liability. The settlement agreement resulted in the dismissal of
the litigation with prejudice and settles all claims that have
or could be asserted in connection with the Togher patents (as
presently issued or to be issued in the future claiming priority
to U.S. patent application 07/830,408) in exchange for
a payment of $15.0 million to EBS. In addition, the
settlement agreement grants us a worldwide, fully paid-up,
non-exclusive license to use technology covered under the Togher
patents (as presently issued or to be issued in the future
claiming priority to U.S. patent application 07/830,408).
Senior Vice President, Business Development and Sales
Edwin D. Marcial
38
Chief Technology Officer and Senior Vice President
Richard Ward, Ph.D.
48
Chief Executive Officer, the IPE
David J. Peniket
39
Chief Operating Officer, the IPE
Johnathan H. Short
39
Senior Vice President, General Counsel and Corporate Secretary
Directors
Jeffrey C. Sprecher. Mr. Sprecher has been a
director and our Chief Executive Officer since our inception and
has served as our Chairman of the Board since November 2002. As
our Chief Executive Officer, he is responsible for our strategic
direction, operation, and financial performance.
Mr. Sprecher purchased Continental Power Exchange, Inc.,
our predecessor company, in 1997. Prior to joining Continental
Power Exchange, Inc., Mr. Sprecher held a number of
positions, including President, over a fourteen-year period with
Western Power Group, Inc., a developer, owner and operator of
large central-station power plants. While with Western Power,
Mr. Sprecher was responsible for a number of significant
financings. In 2002, Mr. Sprecher was recognized by
Business Week magazine as one of its Top Entrepreneurs.
Mr. Sprecher holds a B.S. degree in Chemical Engineering
from the University of Wisconsin and an MBA from Pepperdine
University.
Charles R. Crisp. Mr. Crisp, who has been a
director since November 2002, is the retired President and Chief
Executive Officer of Coral Energy, a Shell Oil affiliate
responsible for wholesale gas and power activities. He served in
this position from 1999 until his retirement in October 2000,
and was President and Chief Operating Officer from January 1998
through February 1999. Prior to that, Mr. Crisp served as
President of the power generation group of Houston Industries
and, between 1988 and 1996, served as President and Chief
Operating Officer of Tejas Gas Corporation. Mr. Crisp
currently serves as a director of EOG Resources, Inc., AGL
Resources, Inc. and Targa Resources, Inc.
Jean-Marc Forneri. Mr. Forneri, who has been
a director since November 2002, is founder and senior partner of
Bucephale Finance, a boutique M&A firm specializing in large
transactions for French corporations, foreign investors and
private equity firms. For the seven years prior to
Bucephale’s founding, Mr. Forneri headed the
investment banking business of Credit Suisse First Boston in
Paris. He was Managing Director and Head of Credit Suisse First
Boston France S.A., and Vice Chairman, Europe. Prior to that,
Mr. Forneri was a
Partner of Demachy Worms & Cie Finance from 1994 to
1996, where he was in charge of investment banking activities of
Group Worms. Mr. Forneri is also a Director of Balmain SA,
Banque Lyonnaise Bonnasse, SAGEM, SNECMA and Friends of Paris
Museum of Modern Art.
Sir Robert Reid. Sir Robert Reid, who has been a
director since June 2001, was the Deputy Governor of the Halifax
Bank of Scotland from 1997 until 2004 and has served since 1999
as the Chairman of The International Petroleum Exchange of
London. He spent much of his career at Shell International
Petroleum Company Limited, and served as Chairman and Chief
Executive of Shell U.K. Limited from 1985 until 1990. He became
Chairman of the British Railways Board in 1990, and retired from
that post in 1995. From 1994 to 1997, he was Chairman of London
Electricity. He was Chairman of the Council of The Industrial
Society between 1993 and 1997, Chairman of Sears plc from 1995
until 1999, Chairman of Sondex Limited from 1999 until 2002 and
Chairman of Kings Cross Partnership from 1999 until 2003. He
also served as a Non-Executive Director on the boards of Avis
Europe from 2002 until 2004 (Chairman) and Sun Life Financial
Services of Canada from 1999 until 2004. He has served on the
boards of directors of The Merchants Trust since 1995, Siemens
plc since 1998 and CHC Helicopter Corporation since 2004. He
received his Knighthood in Queen Elizabeth’s 1990 Birthday
Honours.
Frederic V. Salerno. Mr. Salerno, who has
been a director since November 2002, is the former Vice Chairman
of Verizon Communications, Inc. Before the merger of Bell
Atlantic and GTE, Mr. Salerno was Senior Executive Vice
President, Chief Financial Officer and served in the Office of
the Chairman of Bell Atlantic from 1997 to 2001. Prior to
joining Bell Atlantic, he served as Executive Vice President and
Chief Operating Officer of New England Telephone from 1985 to
1987, President and Chief Executive Officer of New York
Telephone from 1987 to 1991 and Vice Chairman —
Finance and Business Development at NYNEX from 1991 to 1997.
Mr. Salerno served on the boards of directors of Verizon
Communications, Inc. from 1991 to 2001, AVNET, Inc. from 1993 to
2003 and was Chairman of Orion Power from 1999 until its sale in
2001. He has served on the boards of directors of The Bear
Stearns Companies, Inc. since 1993, Viacom, Inc. since 1996,
Consolidated Edison, Inc. since 2002, Akamai Technologies, Inc.
since 2002, Popular, Inc. since 2003 and Gabelli Asset
Management since 2003.
Richard L. Sandor, Ph.D. Dr. Sandor, who
has been a director since November 2002, is the Chairman and
Chief Executive Officer of the Chicago Climate Exchange, Inc.,
and has served as Chairman and Chief Executive Officer of
Environmental Financial Products, L.L.C. since 1998. Prior to
the creation of Environmental Financial, Dr. Sandor was a
senior financial markets executive with Kidder Peabody from 1991
to 1993, Banque Indosuez from 1990 to 1991 and Drexel Burnham
Lambert from 1982 to 1990. Dr. Sandor has served as a
Non-Resident Director of the Chicago Board of Trade, as its
Second Vice-Chairman of Strategy and, for more than three years,
as its Chief Economist. Dr. Sandor is currently a director
of Nasdaq Liffe Markets, American Electric Power, the
Zurich-based Sustainable Performance Group, Millenium Cell, Bear
Stearns Financial Products, Inc. and its subsidiary, Bear
Stearns Trading Risk Management Inc. He is also a member of the
design committee of the Dow Jones Sustainability Index.
Dr. Sandor is currently a Research Professor at the Kellogg
Graduate School of Management at Northwestern University and has
been a faculty member of the School of Business Administration
at the University of California, Berkeley and at Stanford
University.
Judith A. Sprieser. Ms. Sprieser, who has
been a director since April 2004, was the Chief Executive
Officer of Transora, Inc., a technology software and services
company that she helped found in 2000, from 2000 until its
merger with UCCnet 2005. Ms. Sprieser was previously
Executive Vice President of Sara Lee Corporation, serving as
Chief Executive of Sara Lee’s Food and Foodservice
operations from 1999 to 2000. Prior to assuming that post, she
served as Chief Financial Officer for Sara Lee Corporation, and
in various other financial and operating positions.
Ms. Sprieser currently is a member of the boards of
directors of Allstate Insurance Company, USG Corporation,
Kohl’s Corporation, Reckitt Benckiser, plc, and is a member
of the American Institute of CPAs and Northwestern
University’s Board of Trustees. She has a B.A. degree and
an MBA from Northwestern University.
Vincent Tese. Mr. Tese, who has been a
director since April 2004, currently serves as Chairman of
Wireless Cable International, Inc., a position he has held since
1995. Previously, he served as New York State
Superintendent of Banks from 1983 to 1985, Chairman and Chief
Executive Officer of the Urban Development Corporation from 1985
to 1994, Director of Economic Development for New York State
from 1987 to 1994, and Commissioner and Vice Chairman of the
Port Authority of New York and New Jersey from 1991 to 1995.
Mr. Tese also served as a Partner in the law firm of
Tese & Tese from 1973 to 1977. He was a Partner in the
Sinclair Group, a commodities trading and investment management
company from 1977 to 1982, where he traded on the COMEX. He was
also a co-founder of Cross Country Cable TV. Mr. Tese is a
member of the boards of directors of The Bear Stearns Companies,
Inc., Bowne & Co., Inc., Cablevision, Inc., Gabelli
Asset Management and National Wireless Holdings, Inc., and
serves as a trustee of New York University School of Law and New
York Presbyterian Hospital. Mr. Tese has a B.A. degree in
accounting from Pace University, a J.D. degree from Brooklyn Law
School and a LL.M. degree in taxation from New York University
School of Law.
Executive Officers
Jeffrey C. Sprecher. See biography of
Mr. Sprecher under “Directors”.
Charles A. Vice. Mr. Vice, who has been our
Chief Operating Officer since July 2001, oversees our
operations, including market development, customer support and
business development activities. Mr. Vice has over
15 years of experience in applying information technology
in the energy industry. Mr. Vice joined Continental Power
Exchange, Inc. as a Marketing Director during its startup in
1994. Prior to joining Continental Power Exchange, Inc.,
Mr. Vice was a Principal with Energy Management Associates
for five years, providing consulting services to energy firms.
From 1985 to 1988, he was a Systems Analyst with Electronic Data
Systems. Mr. Vice holds a Bachelor’s of Science degree
in Mechanical Engineering from the University of Alabama and an
MBA from Vanderbilt University.
Richard V. Spencer. Mr. Spencer, who has been
our Chief Financial Officer since December 2001, is responsible
for all aspects of our finance and accounting functions,
including treasury, tax, cash management and investor relations.
Mr. Spencer joined us from Crossroads Investment Advisers,
L.P., a venture capital and strategic private equity investment
organization, where he served as President from 1998 to 2001.
Previously, he was a senior vice-president with the Private
Funds Group of Donaldson, Lufkin & Jenrette, or DLJ.
Prior to joining DLJ, Mr. Spencer was a director with the
Private Equity Group of Merrill Lynch in Atlanta. From 1990 to
1994, he oversaw the Canadian operations of First Chicago. He
also worked in corporate finance, marketing and underwriting
roles for Bear, Stearns and Co., Inc. and Goldman,
Sachs & Co. Mr. Spencer earned his Bachelor’s
Degree in Economics from Rollins College. He has also completed
the Advanced Management Program at Duke University’s Fuqua
School of Business.
David S. Goone. Mr. Goone joined us in March
2001 and became our Senior Vice President, Business Development
and Sales in April 2004. He is responsible for the expansion of
our product line, including futures products and trading
capabilities for our electronic platform. Prior to joining us,
Mr. Goone served as the Managing Director, Product
Development and Sales at the Chicago Mercantile Exchange where
he worked for nine years. From 1989 through 1992, Mr. Goone
was Vice President at Indosuez Carr Futures, where he developed
institutional and corporate business. Prior to joining Indosuez,
Mr. Goone worked at Chase Manhattan Bank, where he
developed and managed their exchange-traded foreign currency
options operation at the Chicago Mercantile Exchange.
Mr. Goone holds a B.S. degree in Accountancy from the
University of Illinois at Urbana-Champaign.
Edwin D. Marcial. Mr. Marcial, who has been
our Chief Technology Officer since February 2000, is responsible
for all systems development and our overall technology strategy.
He oversees the software design and development initiatives of
our information technology professionals in the areas of project
management, software development and quality assurance.
Mr. Marcial joined the software development team at
Continental Power Exchange, Inc. in 1996 and has 12 years
of IT experience building large-scale systems in the energy
industry. Prior to joining Continental Power Exchange, Inc., he
led design and development teams at GE-Harris building software
applications for the company’s energy management systems.
Mr. Marcial earned a B.S. degree in Computer Science from
the College of Engineering at the University of Florida.
Richard Ward, Ph.D. Dr. Ward, who was a
director from May 2001 until June 2002, has been Chief Executive
Officer of the IPE since 1999. He is responsible for the
IPE’s financial performance, technology and market
operations, human resources, business development and regulation
and risk management. Prior to assuming the role of Chief
Executive Officer of the IPE, Dr. Ward served as the
Executive Vice President of Business Development for the IPE,
responsible for establishing networks between the IPE’s
board of directors and members and key outside parties,
implementing business improvement programs and leading design
and development of the innovative futures gas market. Before
joining the IPE in 1995, Dr. Ward was Head of Marketing and
Business Development for energy derivatives worldwide at
Tradition Financial Services and was the Manager of Business
Development for BP Oil Trading International. Dr. Ward
currently serves as a Non-Executive Director of LCH.Clearnet
Group Limited and served as a director of the Futures and
Options Association until January 2005. Dr. Ward has a
B.Sc. (1st Class Hons.) in Chemistry and a Ph.D. in
Physical Chemistry from Exeter University.
David J. Peniket. Mr. Peniket has been Chief
Operating Officer of the IPE since January 2005.
Mr. Peniket is responsible for the IPE’s technology
and market operations and finance function. Prior to assuming
the role of Chief Operating Officer, Mr. Peniket served as
Director of Finance of the IPE, a position he assumed in May
2000. Before joining the IPE in 1999, Mr. Peniket worked
for seven years at KPMG, where he trained as an accountant and
was a consultant in its financial management practice.
Mr. Peniket was Research Assistant to John Cartwright MP
from 1988 to 1991. He holds a B.Sc. (Econ) degree in Economics
from the London School of Economics and Political Science and is
a Chartered Accountant.
Johnathan H. Short. Mr. Short has been our
Senior Vice President, General Counsel and Corporate Secretary
since June 2004. In his role as General Counsel, he is
responsible for managing our legal and regulatory affairs. As
Corporate Secretary, he is also responsible for a variety of our
corporate governance matters. Prior to joining us,
Mr. Short was a partner at McKenna Long & Aldridge
LLP, a national law firm with approximately 350 attorneys.
Mr. Short practiced in the corporate law group of McKenna,
Long & Aldridge (and its predecessor firm, Long
Aldridge & Norman LLP) from November 1994 until he
joined us in June 2004. From April 1991 until October 1994, he
practiced in the commercial litigation department of Long
Aldridge & Norman LLP. Mr. Short holds a J.D. from
the University of Florida, College of Law, and a B.S. in
Accounting from the University of Florida, Fisher School of
Accounting.
Board of Directors
Our board of directors consists of eight members. Our board of
directors is elected annually, and each director holds office
for a one-year term.
Board Committees
Our board of directors has an audit committee and a compensation
committee. Prior to the completion of this offering, our board
will also establish a nominating and corporate governance
committee.
Audit Committee. Our audit committee consists of
Messrs. Salerno, Forneri and Crisp. Mr. Salerno serves
as the chair of the audit committee. Mr. Salerno will be
our audit committee financial expert under SEC rules and
regulations. We believe that the composition of our audit
committee meets the requirements for independence under current
rules and regulations of the SEC and the New York Stock
Exchange, and we intend to comply with future requirements to
the extent they become applicable to us. Our audit committee
will, among other things, oversee the engagement of our
independent public accountants, review our financial statements
and the scope of annual external and internal audits and
consider matters relating to accounting policies and internal
controls. The audit committee will be governed by a charter that
complies with the rules of the SEC and the New York Stock
Exchange.
Compensation Committee. Our compensation committee
consists of Ms. Sprieser and Messrs. Tese and Forneri.
Ms. Sprieser serves as the chair of our compensation
committee. We believe that the composition of our compensation
committee meets the requirements for independence under, and the
functioning of our compensation committee complies with, current
rules and regulations of the SEC and the New York Stock
Exchange. We intend to comply with future requirements to the
extent they become applicable to us. The
compensation committee will, among other things, review, approve
and make recommendations to our board of directors concerning
our compensation practices, policies and procedures for our
executive officers. The compensation committee will be governed
by a charter that complies with the rules of the SEC and the New
York Stock Exchange.
Nominating and Corporate Governance Committee.
Prior to the completion of this offering, our board of directors
will establish a nominating and corporate governance committee.
The nominating and corporate governance committee will, among
other things, identify, nominate and recommend individuals to
the board of directors and develop and recommend to the board of
directors a set of corporate governance principles applicable to
us. The nominating and corporate governance committee will be
governed by a charter that complies with the rules of the New
York Stock Exchange.
Compensation Committee Interlocks and Insider
Participation
None of the members of our compensation committee has at any
time been one of our officers or employees. None of our
executive officers currently serves, or in the past year has
served, as a member of the board of directors or compensation
committee of any entity that has one or more executive officers
serving on our board of directors or compensation committee.
Director Compensation
Directors who are also our employees do not receive additional
compensation for serving as directors. Non-employee directors
are paid an annual retainer of $30,000, which amount may be
taken as restricted shares of our common stock that vest over
three years under our 2003 Restricted Stock Deferral Plan for
Outside Directors. Non-employee directors receive a fee of
$1,500 for attendance at each meeting of the board of directors
and each committee meeting. Members of the audit committee
receive a fee of $3,000 for attendance at each meeting of the
audit committee. Both of these meeting fees may be taken in the
form of restricted shares of our common stock that vest over
three years under our 2003 Restricted Stock Deferral Plan for
Outside Directors. Non-employee directors are also reimbursed
for out-of-pocket expenses incurred in attending meetings of our
board of directors. Directors are eligible for grants of stock
options under the 2000 Stock Option Plan and grants of
restricted stock under our 2004 Restricted Stock Plan, in each
case in an amount determined from time to time by our board of
directors.
IPE Board of Directors
At the time of our acquisition of the IPE, we committed to
maintain an appropriate corporate governance structure for the
IPE to ensure its compliance with the obligations imposed by
U.K. law and the regulations applicable to it as a Recognized
Investment Exchange. We agreed that the IPE’s board of
directors should continue to have primary responsibility for
ensuring this compliance, and the IPE agreed that it would
retain at least two independent non-executive directors. We may
accept nominations of possible candidates for the IPE’s
board from a nominations committee of the IPE’s board of
directors, comprised of its chairperson, chief executive
officer, one of its non-executive, independent directors and one
of its directors representative of its members. In addition, we
are able to nominate and elect the board of IPE Holdings Plc,
and thereby, indirectly, to control the management of the IPE.
The IPE’s board of directors operates in accordance with a
code of practice that the IPE adopted in April 2000. The code of
practice, which is not legally binding, provides for
consultation with market participants on various matters.
The following table sets forth all compensation paid by us for
each of the years ended December 31, 2004, 2003 and 2002 to
our chief executive officer and our five most highly compensated
executive officers other than our chief executive officer who
were serving as executive officers at the end of the last fiscal
year. We refer to these individuals as the named executive
officers elsewhere in this prospectus.
The long-term compensation awards have been adjusted to give
effect to the 1 for 4 reverse stock split of the
Class A common stock, which will become effective
immediately prior to the completion of this offering.
(2)
Restricted stock units were the only awards granted to the named
executive officers between 2002 and 2004, and were granted at a
fair market value of $8.00 per share as determined by our board
of directors primarily based on a valuation performed by an
independent third party. 50% of the shares are time-vesting
shares that vest over four years (25% after one year and the
balance vesting ratably over the remaining 36 months), and
the other 50% of the shares are performance-vesting shares that
vest based on the achievement of cumulative earnings before
interest, taxes, depreciation and amortization performance vs.
pre-established targets between 2005 and 2007.
(3)
Effective as of January 1, 2005, Mr. Sprecher’s
annual salary was increased from $603,750 to $675,750 in
conjunction with the elimination of his $72,000 annual housing/
travel allowance. Other annual compensation includes loan
forgiveness and related gross up of tax allowance amount
(Continental Power Exchange, Inc.’s portion of LLC tax
liability) of $349,498 in 2004 ($201,136 plus gross up of
$148,362), $174,749 in 2003 ($100,568 plus gross up of $74,181)
and $185,664 in 2002 ($100,568 plus gross up of $85,096) and
payment of an Atlanta housing and travel allowance ($72,000 in
2004, $72,000 in 2003 and $124,000 in 2002). All other
compensation includes payment of an individual disability income
policy ($8,988 in 2004, $9,478 in 2003 and $9,201 in 2002),
payment of a term life insurance policy ($1,998 in 2004, $1,790
in 2003 and $1,790 in 2002) and the employer match in our 401(k)
plan ($10,250 in 2004, $10,000 in 2003 and $10,000 in 2002).
(4)
All other compensation for Mr. Vice includes the employer
match in our 401(k) plan ($10,250 in 2004, $10,000 in 2003 and
$10,000 in 2002), payment of an individual disability income
policy ($5,822 in 2004) and payment of a term life insurance
policy ($877 in 2004).
Mr. Spencer’s 2002 bonus is comprised of a signing
bonus ($200,000) and a year-end performance bonus ($300,000).
All other compensation includes the employer match in our 401(k)
plan ($10,250 in 2004, $10,000 in 2003 and $10,000 in 2002),
payment of an individual disability income policy ($6,134 in
2004) and payment of a term life insurance policy ($1,879 in
2004).
(6)
All figures for Dr. Ward have been converted to
U.S. dollars using the average exchange rate of pounds
sterling per U.S. dollar in each year (1.8296 pounds
sterling per U.S. dollar in 2004, 1.6341 in 2003 and 1.5071
in 2002). All other compensation includes a pension contribution
of 20% of salary.
(7)
In March 2005, the compensation committee approved a salary
increase for Mr. Goone from $338,000 to $400,000 per year,
effective as of January 1, 2005. All other compensation for
Mr. Goone includes the employer match in our 401(k) plan
($10,250 in 2004, $10,000 in 2003 and $10,000 in 2002), payment
of an individual disability income policy ($5,072 in 2004) and
payment of a term life insurance policy ($830 in 2004).
(8)
All other compensation for Mr. Marcial includes the
employer match in our 401(k) plan ($10,250 in 2004, $10,000 in
2003 and $10,000 in 2002), payment of an individual disability
income policy ($3,946 in 2004) and payment of a term life
insurance policy ($425 in 2004).
Employment Agreements and Benefit Plans
We have entered into employment agreements with each of
Messrs. Sprecher, Spencer, Vice, Marcial, Goone and Short
and Dr. Ward. Below are summaries of the material
provisions of these agreements, which are qualified in their
entirety by reference to the respective agreements.
Term of Employment
Each agreement (other than Dr. Ward’s) provides for an
initial employment term of two or three years, depending on the
employee. The term of each agreement will be automatically
extended every six months unless either we or the employee,
prior to the date of extension, give written notice to the other
that there will be no extension. The extension will be for a
term equal to the initial term — that is, two or three
years, depending on the employee. The effect of this provision
is to ensure that the term remaining under any of these
agreements is never more than six months less than the initial
term. The initial term is three years for Messrs. Sprecher,
Spencer and Vice, and two years for Messrs. Goone, Marcial
and Short. Dr. Ward’s agreement provides for a rolling
one year employment, terminable upon 12 months’ notice
by either party.
Compensation
Each employment agreement provides for an initial annual base
salary. See “— Executive Compensation”
above. Each of these employees is also eligible to receive an
annual bonus and to receive from time to time grants of awards
under our 2000 Stock Option Plan and 2004 Restricted Stock Plan,
in each case as set by the compensation committee of our board
of directors or by our board of directors as a whole.
Termination
If we terminate an employee for “cause”, as such term
is defined below, or gross misconduct or any such employee
resigns other than for “good reason”, as such term is
defined below, we must pay the employee, among other benefits,
all accrued but unpaid salary, annual bonus, if any, and
unreimbursed expenses. In the event that we terminate any
employee other than for cause or the employee resigns for good
reason, we must compensate the employee as follows:
Termination Following a Change in Control. If the
termination occurs after the effective date of a change in
control of us, we must pay the employee a lump sum amount of
cash equal to a multiple of his salary and bonus. This multiple
is three for Messrs. Sprecher, Spencer and Vice, and two
for Messrs. Goone, Marcial and Short. In these
circumstances, the applicable bonus amount will be the greater
of the employee’s last annual bonus and the employee’s
target bonus, as previously determined by the board, for the
year in which the employee is terminated. We will also provide
gross up payments to the terminated employee as necessary
to compensate him for liability for certain excise taxes that
may become due as a result of payments called for under the
employment agreement.
A U.S. executive terminated following, or as a result of, a
change in control will be entitled to exercise his stock options
that had been granted after entering into the employment
agreement for the same period as if the employee had continued
in employment through the remainder of his term. All of
employee’s stock options granted after the date of the
employment agreement will become exercisable upon the
executive’s termination. For a U.K. executive terminated
following, or as a result of, a change in control, all options
will become exercisable and all restricted stock will vest upon
such executive’s termination, pursuant to agreements
entered into under the 2000 Stock Option Plan and 2004
Restricted Stock Plan.
Termination Unrelated to a Change in Control. If
the termination of a U.S. executive is unrelated to a
change in control, we must continue to pay his salary and bonus
for the remainder of the employment term, over time as it would
normally be paid, with the bonus so paid equal to the greater of
the last annual bonus paid to him prior to termination and his
target bonus for the applicable year. In addition, any stock
options granted after the date of the applicable employment
agreement will become exercisable upon the employee’s
termination.
“Cause”, as used in the employment agreements,
generally means: (1) the employee is convicted of, pleads
guilty to, or otherwise admits to any felony or act of fraud,
misappropriation or embezzlement; (2) the employee
knowingly engages or fails to engage in any act or course of
conduct that is (a) reasonably likely to adversely affect
our rights or qualification under applicable laws, rules or
regulations to serve as an exchange or other form of a
marketplace for trading commodities or (b) that violates
the rules of any exchange or market on which we effect trades
(or at such time are actively contemplating effecting trades)
and is reasonably likely to lead to a denial of our right or
qualification to effect trades on such exchange or market;
(3) there is any act or omission by the employee involving
malfeasance or gross negligence in the performance of his duties
and responsibilities or the exercise of his powers to the
material detriment of us; or (4) the employee
(a) breaches any of the covenants made under his employment
agreement or (b) violates any provision of any code of
conduct adopted by us that applies to him if the consequence to
such violation ordinarily would be a termination of his
employment.
“Good reason” generally means: (1) there is a
material reduction or, after a change in control, any reduction,
in the employee’s base salary or opportunity to receive any
annual bonus and stock option grants without the employee’s
express written consent; (2) there is a material reduction
or, after a change in control, any reduction in the scope,
importance or prestige of the employee’s duties;
(3) we transfer the employee’s primary work site to a
site that is more than thirty miles from his then current work
site; (4) we, after a change in control change the
employee’s job title or fail to continue to make available
to the employee the same or equivalent plans, programs and
policies; (5) there is a material breach or, after a change
in control, any breach of his employment agreement; or
(6) we fail to nominate the employee for re-election to our
board of directors (in the case of Mr. Sprecher).
Exclusivity
Each employment agreement (other than Dr. Ward’s) permits
the employee to serve on the board of directors of those
business, civic and charitable organizations on which he was
serving on the date that we signed his employment agreement, as
long as doing so has no significant and adverse effect on the
performance of his duties and responsibilities or the exercise
of his powers under his employment agreement. Each employee
(other than Dr. Ward) is not permitted, however, to serve on any
other boards of directors and shall not provide services to any
for-profit organization on or after the date that we signed his
employment agreement without the written consent of the chair of
the compensation committee of our board of directors (in the
case of Messrs. Sprecher, Spencer and Vice) or our chief
executive officer (in the case of Messrs. Short, Goone and
Marcial).
We expect to receive the exclusive use of Dr. Ward’s
services during the term of his contract of employment with us.
He is not permitted under the terms of his employment agreement
to carry out any work or render any services without our prior
written consent, which is not to be unreasonably withheld.
Each employee (other than Dr. Ward) agrees under his employment
agreement that for the term of his employment agreement or, if
less, for the one-year period which starts on the date that his
employment terminates, not to assume or perform any managerial
or supervisory responsibilities and duties that are
substantially the same as those that he performs for us for any
other business entity that engages in any business-to-business
electronic exchange for trading commodities in which we are
engaged as of the date of termination of the employee’s
employment or in which we propose to engage under our business
plan as in effect on such date, if any site of any of the
offices or equipment of such competitive business is located in
the United States, Canada, Mexico, Central America, South
America or in any country that is a member of the European
Union. The employment agreements of Messrs. Goone, Marcial,
Short, Spencer and Vice provide that they may own up to five
percent of the stock of a publicly traded company that engages
in such competitive business so long as they are only passive
investors and are not actively involved in such company in any
way.
Non-solicitation
Each employee (other than Dr. Ward) is restricted from
soliciting, for the purpose of competing with us or our
affiliates, any of our customers or customers of our affiliates
with whom the employee had contact, knowledge or association at
any time during the employee’s employment with us or our
affiliates (1) at any time during the employee’s employment
with us or our affiliates and (2) at any time during the
twenty-four month period immediately preceding the beginning of
the “restricted period.”“Restricted period”
means the remainder of the employee’s term of employment
without regard to the reason for the employee’s termination
of employment (as such initial term may have been extended under
the agreement).
Each employee (other than Dr. Ward) is restricted from
soliciting, for the purpose of competing with us or our
affiliates, any other officer, employee or independent
contractor of us or our affiliates with whom the employee had
contact, knowledge or association to terminate his or her
employment or business relationship with us or our affiliates
(1) at any time during the employee’s employment with us or
our affiliates and (2) at any time during the twelve month
period immediately preceding the beginning of the
“restricted period.”
Bonuses
Each employee (other than Dr. Ward) is eligible, under his
employment agreement, to receive an annual bonus each year that
is reasonable in light of his contribution for that year in
relation to the contributions made and bonuses paid to other
senior company executives for such year. Dr. Ward is eligible,
under his employment agreement, for a performance bonus of up to
fifty percent of his total salary depending on the achievement
of goals.
Other Provisions
Each of the employees named above is subject to customary
confidentiality provisions during the term of employment and for
a specified period after termination, and each must not use or
disclose any of our trade secrets for as long as they remain
trade secrets.
Benefit Plans
Our U.S. employees are eligible to participate in our
401(k) and Profit Sharing Plan, which was implemented on
October 1, 2001. We offer to match 100% of the first 5% of
the eligible employee’s compensation contributed to the
plan, subject to plan and statutory limits. Total matching
contributions under our plans for the six months ended
June 30, 2005 were $226,000 and for the years ended
December 31, 2004, 2003 and 2002 were $617,000, $556,000
and $473,000, respectively. No discretionary or profit sharing
contributions were made during the six months ended
June 30, 2005 or during the years ended December 31,2004, 2003 or 2002.
Our U.K.-based subsidiaries have a defined contribution pension
plan for eligible employees. We contribute a percentage of the
employee’s base salary to the plan each month and employees
are able to make
additional voluntary contributions, subject to plan and
statutory limits. Our contributions range from 10% to 20% of an
employee’s base salary. Total pension contributions made by
us under this plan for the six months ended June 30, 2005
were $483,000 and for the years ended December 31, 2004,
2003 and 2002 were $789,000, $750,000 and $617,000, respectively.
2000 Stock Option Plan
We adopted the 2000 Stock Option Plan for the purposes of
attracting, retaining and rewarding our employees and directors.
Prior to the completion of this offering, our board of directors
will amend the plan to take into account the recapitalization by
giving effect to the 1 for 4 reverse stock split of the
Class A common stock (and related adjustments) and the
substitution of new common stock for Class A2 common stock
authorized for issuance under the plan. The 2000 Stock Option
Plan authorizes the issuance of up to 5,250,000 shares of
Class A2 common stock upon the exercise of options under
the plan. Following the recapitalization and the amendment of
the plan, 194,275,000 shares of the new common stock will
be authorized for issuance. Both incentive and nonqualified
options may be granted under and generally vest over four years.
Options may be exercised up to ten years after the date of
grant, but generally expire 14 days after termination of
employment or service as a director.
In the event of any increase or decrease in the number of issued
shares resulting from a subdivision or consolidation of shares
or the payment of a stock dividend or any other increase or
decrease in the number of issued shares effected without
consideration received by us, the compensation committee will
conclusively determine the adjustment to the number of shares
covered by the 2000 Stock Option Plan, the number of shares
covered by each outstanding option and the exercise price of
each option.
In connection with our June 2001 reorganization, our board of
directors effected a 2.841 for 1 split of the options
outstanding under the 2000 Stock Option Plan on June 15,2001. All references to the number of shares and stock options
have been adjusted to reflect the stock split on a retroactive
basis.
Eligibility. Options may be granted to any individual
employed by us, within the meaning of Section 3401 of the
Internal Revenue Code of 1986, or to any of our directors, as
the compensation committee may determine.
Administration. The compensation committee administers
the 2000 Stock Option Plan. The compensation committee has the
authority to interpret and construe the plan, grant options and
determine who will receive options and the number of shares to
be granted subject to exercise of options issued under the plan.
All determinations of the compensation committee with respect to
the interpretation and construction of the 2000 Stock Option
Plan are final.
Nonassignability. Options may be exercised only by the
grantee and may not be assigned or transferred during the
grantee’s lifetime.
Restrictions on Shares Acquired. In connection with an
underwritten registered offering of any of our securities, we
may require that optionees not sell, dispose of, transfer, make
any short sale of, grant any option for the purchase of, or
enter into any hedging or similar transaction having the same
economic effect as a sale with respect to any shares or other
securities of our company held by the optionee, for a period of
time specified by the underwriters (not to exceed
12 months) following the effective date of registration.
Amendment; Termination. The board of directors may
terminate or amend the 2000 Stock Option Plan, except that no
such termination or amendment may increase the number of shares
subject to the 2000 Stock Option Plan or change the class of
individuals eligible to receive options without the approval of
our shareholders. In addition, no amendment may, without the
grantee’s consent, materially adversely affect a previously
granted option.
2003 Restricted Stock Deferral Plan for Outside
Directors
We adopted the 2003 Restricted Stock Deferral Plan for Outside
Directors, or the 2003 Directors Plan, for the purpose of
attracting and retaining outside directors. Under the
2003 Directors Plan, members of the
board of directors can elect to receive up to 100% of their
retainer and meeting fees in restricted stock or restricted
stock units. Shares of restricted stock will be issued, or
restricted stock units will be credited, as of the end of each
calendar quarter with respect to retainer and meeting fees
otherwise payable in that quarter. The restricted stock or
restricted stock units generally vest over a three-year period,
and one-third of the shares will vest each year on the
anniversary of the end of the calendar quarter when fees were
payable.
Reservation of shares. The compensation committee will
reserve a number of our shares sufficient to cover our
obligations under the 2003 Directors Plan for issuance to
eligible grantees in lieu of fees otherwise payable in cash.
In the event of any increase or decrease in the number of issued
shares resulting from a subdivision or consolidation of shares
or the payment of a stock dividend or any other increase or
decrease in the number of issued shares effected without
consideration received by us, the compensation committee will
conclusively determine the adjustment to the number of unissued
shares of restricted stock or the number of restricted stock
units. Prior to the completion of this offering, our board of
directors will amend the plan to take into account the
recapitalization by giving effect to the 1 for 4
reverse stock split of the Class A common stock (and
related adjustments) and the substitution of new common stock
for Class A2 common stock.
Eligibility. Restricted stock may be issued, or
restricted units credited, to any member of the board of
directors who is not a full-time employee of our company.
Administration. The compensation committee administers
the 2003 Directors Plan. The compensation committee has the
authority to interpret and construe the 2003 Directors
Plan, and all such determinations are final.
Nonassignability. Restricted stock issued under the
2003 Directors Plan is not transferable and may not be
sold, exchanged, transferred, pledged, hypothecated or otherwise
disposed of at any time prior to the vesting of such shares. The
right to receive payments with respect to restricted stock units
is generally not assignable or transferable.
Restrictions on Shares Issued. In connection with an
underwritten registered offering of any of our securities, we
may require that eligible directors not sell, dispose of,
transfer, make any short sale of, grant any option for the
purchase of, or enter into any hedging or similar transaction
having the same economic effect as a sale with respect to any
shares or other securities of our company held by the director,
for a period of time specified by the underwriters (not to
exceed 12 months) following the effective date of
registration.
Amendment; Termination. The board of directors may at any
time terminate or amend the 2003 Directors Plan. No such
termination or amendment may adversely affect any outstanding
restricted stock or restricted stock units.
2004 Restricted Stock Plan
In September 2004, we adopted the 2004 Restricted Stock Plan.
The purpose of the 2004 Restricted Stock Plan is to attract,
retain and reward individuals performing services for us.
Type of Awards. The 2004 Restricted Stock Plan allows us
to issue awards of restricted stock or restricted stock units
that convert into shares of our stock. Prior to the completion
of this offering, our board of directors will amend the plan to
take into account the recapitalization by giving effect to the
1 for 4 reverse stock split of the Class A common
stock (and related adjustments) and the substitution of new
common stock for Class A2 common stock.
In the event of any increase or decrease in the number of issued
shares resulting from a subdivision or consolidation of shares
or the payment of a stock dividend or any other increase or
decrease in the number of issued shares effected without
consideration received by us, the compensation committee will
conclusively determine the adjustment to the number of shares
covered by each outstanding award.
Eligibility. Awards may be made at the sole discretion of
the compensation committee to any of our employees that are
members of a select group of management or highly compensated
employees within the
meaning of Sections 201(1), 301(a)(3) and 401(a)(1) of the
Employee Retirement Income Security Act of 1974, or to any of
our directors.
Vesting may be time-based or performance-based. Vesting may be
accelerated by events such as a change in control, an initial
public offering, or a sale of our company or of substantially
all of our assets, but may not be deferred for more than ten
years.
Administration. The compensation committee administers
the 2004 Restricted Stock Plan. The compensation committee has
the authority to interpret and construe the plan, grant awards
and determine who will receive awards and in what amounts. The
determination of the compensation committee with respect to the
interpretation and construction of the 2004 Restricted Stock
Plan is final.
Nonassignability. Awards under the 2004 Restricted Stock
Plan are not assignable or transferable during the lifetime of
the grantee.
Restrictions on Shares Issued. In connection with an
underwritten registered offering of any of our securities, we
may require that eligible directors not sell, dispose of,
transfer, make any short sale of, grant any option for the
purchase of, or enter into any hedging or similar transaction
having the same economic effect as a sale with respect to any
shares or other securities of our company held by the grantee,
for a period of time specified by the underwriters (not to
exceed 12 months) following the effective date of
registration.
Amendment; Termination. The board of directors may, with
respect to shares at the time not subject to awards, terminate
or amend the plan. No such termination or amendment may, without
the grantee’s consent, materially adversely affect a
previously granted award.
2005 Equity Incentive Plan
The 2005 Equity Incentive Plan was adopted by our board of
directors in April 2005 and was approved by our shareholders in
June 2005. The purpose of the 2005 Equity Incentive Plan is to
attract, retain and reward individuals performing services for
us and to motivate those individuals to contribute to the growth
and profitability of our business. The 2005 Equity Incentive
Plan will terminate on the tenth anniversary of its adoption.
Type of Awards. The 2005 Equity Incentive Plan allows us
to grant incentive stock options, nonstatutory stock options,
stock appreciation rights, restricted stock and restricted stock
units.
The maximum number of shares that may be issued pursuant to
awards granted under the 2005 Equity Incentive Plan is
2,125,000, subject to certain adjustments. The maximum number of
shares with respect to which options or stock appreciation
rights may be granted during any calendar year to any grantee is
250,000 (or 500,000 for an individual hired on or after the date
of the plan’s adoption), and the maximum number of shares
with respect to which restricted stock or restricted stock units
may by granted during any calendar year to any grantee is
125,000 (or 250,000 for an individual hired on or after the date
of the plan’s adoption). Prior to the completion of this
offering, our board of directors will amend the plan to take
into account the recapitalization by giving effect to the
1 for 4 reverse stock split of the Class A common
stock (and related adjustments) and the substitution of new
common stock for Class A2 common stock.
For incentive stock options and nonstatutory stock options that
are intended to qualify as “performance-based
compensation” within the meaning of Section 162(m) of
the Internal Revenue Code of 1986, the exercise price may not be
less than 100% of the fair market value of the underlying shares
as of the grant date. If the aggregate fair market value of
shares as of the date of grant with respect to which incentive
stock options are exercisable by an individual during a calendar
year exceeds $100,000, then the option will be treated as a
nonstatutory stock option. Incentive stock options granted to an
individual who owns more than 10% of the combined voting power
of all classes of stock of our company expire five years after
the date of grant and must have an exercise price of at least
110% of the fair market value of a share as of the date of grant.
Options granted under our 2005 Equity Incentive Plan may be
exercised by payment in cash or cash equivalent, by the tender
of shares owned by the exercising party or cashless exercise.
In the event of any merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, reverse stock
split, separation, liquidation or other change in the corporate
structure or capitalization affecting the shares, the
compensation committee of the board of directors will
conclusively determine the adjustment in the kind, exercise
price (or purchase price, if applicable), and number of shares
that are subject to awards, provided that adjustments to options
or stock appreciation rights must comply with Section 424
of the Internal Revenue Code of 1986.
Eligibility. Awards may be granted to any employee,
consultant or director of our company, as selected in the sole
discretion of the committee administering the 2005 Equity
Incentive Plan.
Vesting of awards may be time-based or performance-based. In the
case of options and stock appreciation rights, if employment is
terminated for any reason other than for cause, the grantee may
exercise vested awards for a period of three months after the
date of termination. If employment is terminated for cause, the
awards will terminate immediately. If employment is terminated
for any or no reason, shares that have not vested may be
repurchased by us at the lesser of the original exercise price
or the shares’ fair market value. In the case of restricted
stock and restricted stock units, if employment is terminated
during the applicable restricted period as defined in the 2005
Equity Incentive Plan, any unvested shares of restricted stock
and restricted stock units will be forfeited and we will pay the
grantee $0.01 for each unvested share of restricted stock.
In the event of a change in control as defined in the 2005
Equity Incentive Plan, outstanding awards will become fully
vested and exercisable if the surviving corporation does not
assume our rights and obligations with respect to outstanding
awards or does not substitute for substantially equivalent
awards. Options and stock appreciation rights that are not
assumed or substituted for by the surviving corporation and that
are not exercised as of the date of the change in control will
terminate and cease to be outstanding. Shares that have not
previously been issued under restricted stock or restricted
stock units and that are not assumed or substituted for by the
surviving corporation will be issued. The 2005 Equity Incentive
Plan also provides that issuance or payment of restricted stock
and restricted stock units may be accelerated by an initial
public offering of our company.
Administration. The 2005 Equity Incentive Plan is
administered by a committee consisting of two or more members of
our board of directors, each of whom is an “outside
director” within the meaning of Section 162(m) of the
Internal Revenue Code of 1986 and a “non-employee
director” within the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934. The committee’s
composition will also comply with the rules of the New York
Stock Exchange. The committee has the authority to determine who
will be granted awards, the number of shares granted subject to
such awards and all matters relating to the administration of
the plan. The determination of the committee with respect to the
interpretation and application of the 2005 Equity Incentive Plan
is final. The committee may only grant awards that either comply
with the requirements of Section 409A of the Internal
Revenue Code of 1986 or do not result in the deferral of
compensation within the meaning of Section 409A.
Nonassignability. Awards may be exercised only by the
grantee and generally may not be assigned or transferred during
the grantee’s lifetime.
Restrictions on Shares Issued. In connection with the
first underwritten registration of the offering of any of our
securities, we may require that the grantee not sell, dispose
of, transfer, make any short sale of, grant any option for the
purchase of, or enter into any hedging or similar transaction
having the same economic effect as a sale with respect to any
shares or other securities of our company held by the grantee,
for a period of time specified by the underwriters (not to
exceed 12 months) following the effective date of
registration.
Amendment; Termination. The board of directors may at any
time amend or terminate the 2005 Equity Incentive Plan, subject
to shareholder approval of certain amendments. No such amendment
or termination may impair the rights of any grantee unless
mutually agreed otherwise between the committee and the grantee.
There were no options to purchase our stock granted to our named
executive officers during the year ended December 31, 2004.
Aggregated Option Exercises in the Last Fiscal Year and
Fiscal Year End Option Values
The following table contains information with respect to options
exercised during the year ended December 31, 2004 and the
value of unexercised options held by our named executive
officers as of December 31, 2004.
The number of securities underlying unexercised options has been
adjusted to give effect to the 1 for 4 reverse stock split of
the Class A common stock, which will become effective
immediately prior to the completion of this offering.
(2)
The value of unexercised in-the-money options at fiscal year-end
was calculated by multiplying the number of securities
underlying unexercised options at fiscal year-end by the
difference between $8.00 (the fair value as of December 31,2004 as determined by the board of directors) and the strike
price (between $4.20 and $8.00) of the option.
(3)
Mr. Sprecher is the controlling shareholder of Continental
Power Exchange, Inc., which holds 2,406,935 of our common
shares. Pursuant to the Continental Power Exchange, Inc. Stock
Option Plan, Continental Power Exchange, Inc. granted options on
shares that it owned to eight employees, two of whom
(Messrs. Vice and Marcial) are current executive officers
of our company. As of December 31, 2004, there were options
on 292,511 shares of our stock owned by Continental Power
Exchange, Inc. under the Continental Power Exchange, Inc. Stock
Option Plan. Based on the fair market value of $8.00 per share
as of December 31, 2004 as determined by our board of
directors, the total value of Continental Power Exchange,
Inc.’s shares in our company is $19.9 million, and the
value of the unexercised in-the-money Continental Power
Exchange, Inc. options (which are exercised against the
outstanding Continental Power Exchange, Inc. shares) is
$1.9 million.
(4)
Mr. Vice also holds options exercisable for 144,222 of our
common shares held by Continental Power Exchange, Inc. pursuant
to the Continental Power Exchange, Inc. Stock Option Plan. Based
on the fair market value of $8.00 per share as of
December 31, 2004 as determined by our board of directors,
the value of the unexercised in-the-money Continental Power
Exchange, Inc. options (which are exercised against the
outstanding Continental Power Exchange, Inc. shares) is
$1.0 million. These options may be exercised by payment to
Continental Power Exchange, Inc. and will have no effect on the
dilution of our common stock.
Mr. Marcial also holds options exercisable for 36,055 of
our common shares held by Continental Power Exchange, Inc.
pursuant to the Continental Power Exchange, Inc. Stock Option
Plan. Based on the fair market value of $8.00 per share as of
December 31, 2004 as determined by our board of directors,
the value of the unexercised in-the-money Continental Power
Exchange, Inc. options (which are exercised against the
outstanding Continental Power Exchange, Inc. shares) is
$250,944. These options may be exercised by payment to
Continental Power Exchange, Inc. and will have no effect on the
dilution of our common stock.
Limitation of Liability and Indemnification of Officers and
Directors
Our charter generally provides that our directors will not be
liable to us or to our shareholders for breach of a fiduciary
duty. Our bylaws generally provide for indemnification against
all losses actually incurred by directors and senior officers in
connection with any action, suit or proceeding relating to their
position as a director or senior officer. These provisions of
our charter and bylaws are discussed further under the heading
“Description of Capital Stock — Limitation of
Liability and Indemnification Matters”.
In May 2000, our Initial Shareholders entered into a limited
liability company operating agreement, which specified the
equity interests in our business of each Initial Shareholder,
MHC Investment Company and Continental Power Exchange, Inc. The
Initial Shareholders also each agreed to enter into order flow
agreements with us, as discussed below. In consideration of its
equity interest, Continental Power Exchange, Inc. contributed
all of its assets, including software, operational know-how and
intellectual property, and liabilities to us. Our chief
executive officer, Mr. Sprecher, owns substantially all of
the equity of Continental Power Exchange, Inc., with the
remaining equity owned by members of Mr. Sprecher’s
family. MHC Investment Company issued a perpetual, royalty-free
license to use a patent related to trading in electrical energy,
and Morgan Stanley Capital Group Inc. and The Goldman Sachs
Group, Inc. agreed to execute a term loan agreement, as
discussed below.
In November 2000, the limited liability company operating
agreement was amended and restated to provide an additional
equity interest to the Gas and Power Firms, representing an
aggregate 32% interest in our business. In exchange for this
equity interest, the Gas and Power Firms agreed to make an
aggregate cash payment of $30 million in three
installments: $10 million upon issuance of the new equity
interests and two additional payments of $10 million
payable when our electronic platform became substantially
operational with respect to North American natural gas and power
products. In April 2001, the Gas and Power Firms advanced the
remaining $20 million to fulfill their agreement. The Gas
and Power Firms also entered into order flow agreements with us,
as discussed below.
Relationships with Our Initial Shareholders
Continental Power Exchange, Inc. Stock Option Plan
Four of our executives and employees hold options that were
granted between 1998 and 1999 under the Continental Power
Exchange, Inc. Stock Option Plan. These option holders include
our chief operating officer and our chief technology officer.
These options give the option holder the right to purchase
shares of our common stock from Continental Power Exchange,
Inc., and are fully vested. The exercise price for these options
ranges from $1.04 to $1.72 per share. In total, there are
209,122 options outstanding under the Continental Power
Exchange, Inc. Stock Option Plan, which could be exercised
against Continental Power Exchange, Inc.’s total equity
stake in our business of 2,406,935 shares. This could
result in a 8.7% dilution of the equity stake in our business
held by Mr. Sprecher and certain family members through
Continental Power Exchange, Inc. Because the shares of our
common stock that will be issued upon exercise of these options
will be issued from the shares owned by Continental Power
Exchange, Inc., and not our shares, the proceeds from the
exercise of these stock options will go directly to Continental
Power Exchange, Inc.
Continental Power Exchange, Inc. Put Agreement
As a part of the transactions surrounding our formation as
described in “— Our Formation/Original
Investment”, we entered into an agreement with our
predecessor company, Continental Power Exchange, Inc., on
May 11, 2000. Our chief executive officer,
Mr. Sprecher, owned then and continues to own substantially
all the equity interests in Continental Power Exchange, Inc.
Pursuant to the agreement, Continental Power Exchange, Inc.
conveyed all of its assets and liabilities to us. These assets
included intellectual property that we used to develop our
electronic platform. In return, we issued to Continental Power
Exchange, Inc. a 7.2% equity interest in our business and we
agreed to give Continental Power Exchange, Inc. a put option, by
which Continental Power Exchange, Inc. could require us to buy
its equity interest in our business at the purchase price
described below, payable in cash. Upon the closing of this
offering, Continental Power Exchange, Inc.’s equity
interest in our business will consist of
approximately %
of our outstanding common stock. Under this put option, the
purchase price of the Continental Power Exchange, Inc. equity
interest equals either its fair market value or a specified
minimum amount, whichever is greater. If our securities are not
publicly traded when the put option is exercised, then fair
market value is to be determined by an investment banking
firm selected by both parties. If our securities are publicly
traded, then fair market value equals the average of bid prices
for our publicly traded securities at the close of trading on
the 20 business days before the put option is exercised. The
minimum amount will equal $5 million unless
Mr. Sprecher is terminated for cause or terminates his
employment agreement without good reason, in which case the
minimum amount will equal $4 million. Continental Power
Exchange, Inc. owns 2,406,935 of our common shares of which
2,197,813 shares are subject to the put agreement and,
based on an $11.00 estimated fair market value of these shares
as of June 30, 2005, the fair market value of Continental
Power Exchange, Inc.’s shares is in excess of the
$5 million threshold. Upon exercise of the put option, we
can either pay cash within 30 days of the exercise or, in
certain circumstances, we can elect to issue a promissory note
and defer payment for one year, with interest accruing on the
note at a rate of LIBOR plus 1%. Continental Power Exchange,
Inc. currently has the right to exercise the put option within
six months of the termination, retirement, death or disability
of Mr. Sprecher.
Mr. Sprecher currently owns 92.5% of the equity interest in
Continental Power Exchange, Inc. and holds an irrevocable proxy
enabling him to vote the remaining 7.5%. Continental Power
Exchange, Inc. currently has no assets other than its equity
interest in IntercontinentalExchange, Inc. and conducts no
operations.
Term Loan Agreement
As part of the transactions surrounding our formation as
described in “— Our Formation/ Original
Investment”, on May 11, 2000 we entered into a term
loan agreement with Goldman Sachs Credit Partners L.P., an
affiliate of The Goldman Sachs Group, Inc., and Morgan Stanley
Capital Group Inc., two of our Initial Shareholders that are
affiliated with the lead underwriters of this offering. The
agreement provided that we could borrow an aggregate principal
amount of up to $20 million, or up to $10 million from
each lender, in two term loans, with each lender advancing one
half of the amount borrowed under each loan. The first term loan
was to expire on May 10, 2002 and the second term loan was
to expire on September 8, 2002. On May 8, 2002, we
amended the term loan agreement to provide that such loans would
mature on the earlier of November 11, 2002, or the fifth
day after the closing of an initial public offering of our
stock. These loans bore interest at the one-month LIBOR rate,
with interest to be compounded monthly and paid on the maturity
date. We borrowed $16.1 million under the term loan
agreement in 2000, and the entire amount, including accrued
interest, of $16.5 million was paid off in 2002. The term
loan expired on November 11, 2002, all liens associated
with the loans have been released and we have no obligations
outstanding with respect to these loans.
Other
From time to time, we have received investment banking services
from Morgan Stanley & Co. Incorporated and Goldman,
Sachs & Co., the lead underwriters of this offering and
each an affiliate of one of our Initial Shareholders. From time
to time, we have also received consulting services from Goldman,
Sachs & Co. and have entered into several foreign
exchange forward contracts with Morgan Stanley Capital Group
Inc. In the current fiscal year, we have paid Morgan
Stanley & Co. Incorporated $500,000 in financial
advisory fees. In connection with the foreign exchange
contracts, we paid Morgan Stanley & Co. Incorporated
$1.2 million and $353,000 for the six months ended
June 30, 2005 and for the year ended December 31,2004, respectively.
In connection with our launch of our electronic trade
confirmation service in April 2002, we entered into promotional
services agreements with J. Aron & Company, an
affiliate of The Goldman Sachs Group, Inc., and Morgan Stanley
Capital Group Inc., two of our Initial Shareholders that are
also affiliated with the lead underwriters of this offering, and
the Gas and Power Firms. These agreements provided that these
signatories would receive discount rates for use of our
electronic trade confirmation service through November 2003, and
have since expired. No firm commitments to use this service were
made in these agreements.
We were a party to the following order flow agreements with our
Initial Shareholders, the Gas and Power Firms and other market
participants:
•
Global Precious Metals — Under these
order flow agreements, the following shareholders (or affiliates
of such shareholders) were each obligated to execute trades in
global precious metals products on our electronic platform
covering 15 million gold ounce equivalents per year: DB
Structured Products, Inc. (formerly known as Deutsche Bank
Sharps Pixley Inc.), The Goldman Sachs Group, Inc., Morgan
Stanley Capital Group Inc. and Société
Générale Financial Corporation, each of which is one
of our Initial Shareholders. The order flow commitments for
global precious metals trading became effective in September
2000 and expired in August 2002. Under the terms of the order
flow agreements, in the event that these shareholders failed to
meet the minimum volume of transactions specified in the
agreements, they were billed for the difference between the
minimum commitment and the actual executed transactions by them,
multiplied by an imputed commission rate. The imputed commission
rate was equal to the total commission received by us for
transactions in the product group during the period divided by
the total volume underlying such transactions. In 2002, these
shareholders in the aggregate made order flow shortfall payments
to us of $32,000 pursuant to these order flow agreements in
global precious metals.
•
Global Oil — Under these order flow
agreements, the following shareholders (or affiliates of such
shareholders) were each obligated to execute trades in contracts
for crude oil and related products on our electronic platform
covering 500 million barrel equivalents per year: BP
International Limited, Total Investments USA Inc. (an affiliate
of Total S.A., formerly known as Elf Trading Inc.), The Goldman
Sachs Group, Inc., Morgan Stanley Capital Group Inc.,
Société Générale Financial Corporation and S
T Exchange Inc. Each of these entities is one of our Initial
Shareholders or an affiliate of one of our Initial Shareholders.
The order flow agreements for global oil became effective in
November 2000 and expired in October 2002. Under the terms of
the order flow agreements, in the event that these shareholders
failed to meet the minimum volume of transactions specified in
the agreements, they were billed for the difference between the
minimum commitment and the actual executed transactions by them,
multiplied by an imputed commission rate. The imputed commission
rate was equal to the total commission received by us for
transactions in the product group during the period divided by
the total volume underlying such transactions. In 2002 and 2001,
these shareholders in the aggregate made order flow shortfall
payments to us of $2.2 million and $2.3 million,
respectively, pursuant to these order flow agreements in global
oil.
•
North American Natural Gas and Power —
Under this order flow agreement, the Gas and Power Firms, which
are shareholders of our company, were obligated as a group to
execute trades in North American natural gas and power contracts
on our electronic platform covering, in the aggregate,
48 billion million British thermal units per year. The
order flow agreement for North American natural gas and power
became effective in July 2001 and expired in June 2003. Under
the terms of the order flow agreement, in the event that these
shareholders failed to meet the minimum volume of transactions
specified in the agreement, they were billed for the difference
between the minimum commitment and the actual executed
transactions by them, multiplied by an imputed commission rate.
The imputed commission rate was equal to the total commission
received by us for transactions in the product group during the
period divided by the total volume underlying such transactions.
In 2003, these shareholders in the aggregate made order flow
shortfall payments to us of $6.4 million pursuant to the
order flow agreement in North American natural gas and power.
•
European Gas and Power — The following
shareholder affiliates were each obligated to execute trades in
European gas and power contracts on our electronic platform
which would result in annual minimum commission payments of
£200,000 in commission revenues per year: BP Gas Marketing
Limited, Shell Energy Trading Limited, Gaseyls (an affiliate of
Société Générale) and TotalFinaElf
Gas & Power
Limited. Non-shareholding market participants were also parties
to these agreements. The order flow agreements became effective
in January 2002 with respect to European gas contracts, were
amended in April and May of 2003 to include European power
contracts, and expired in December 2004. The order flow
agreements also provided for revenue sharing arrangements that
survive the expiration of the agreements and continue annually
through 2006. Pursuant to these arrangements, if an order flow
provider meets a threshold for trading volumes generated in a
given period, ranging from 1.5 billion therms to
3.0 billion therms, that provider is entitled to share in a
pool of 20% of our total commission revenues derived from
trading in European gas products for that period by all
participants, including those that are not or were not parties
to the order flow agreements. As of December 31, 2003, none
of the order flow providers qualified as eligible order flow
providers in accordance with the threshold and we are no longer
required to accrue or pay any revenue sharing amounts under
these agreements. The order flow providers also received access
to a specialized application programming interface that allows
our participants to link their computer systems to our
electronic platform. European gas order flow agreements were
entered into with one Initial Shareholder, Morgan Stanley
Capital Group Inc. and one affiliate of an Initial Shareholder,
J. Aron & Company, which was similar to the other
European gas commitments, except that minimum commitments and
shortfalls were determined monthly and these order flow
providers did not participate in the revenue sharing
arrangement. Under the terms of the order flow agreements, in
the event that these order flow providers failed to pay the
annual or monthly required minimum commission payments for
transactions specified in the agreements, they paid to us the
difference between the annual or monthly required minimum
commission payments and the actual commission fees paid to us
during these periods for such transactions. For the years ended
December 31, 2004, 2003 and 2002, we recognized
$1.1 million, $764,000 and $1.3 million, respectively,
in order flow shortfall revenues, including $728,000, $409,000
and $540,000, respectively, relating to our shareholders.
We received total consolidated revenues of $15.6 million
and $13.8 million during the six months ended June 30,2005 and 2004, respectively, and $29.4 million,
$34.0 million and $63.5 million during the years ended
December 31, 2004, 2003 and 2002, respectively, from our
Initial Shareholders, the Gas and Power Firms, or affiliates of
those entities. Revenues from one of the Gas and Power Firms
comprised 10.0% of our total consolidated revenues during 2002.
No other shareholder accounted for more than 10% of total
consolidated revenues during the six months ended June 30,2005 and 2004 and during the years ended December 31, 2004,
2003 or 2002.
Shareholders’ Agreement
On June 14, 2001, the Initial Shareholders, Gas and Power
Firms, Continental Power Exchange, Inc. and MHC Investment
Company entered into a Shareholders’ Agreement. This
agreement provides, among other things, that the Gas and Power
Firms as a group may nominate four directors to our board of
directors and each of BP Products North America Inc. (formerly
known as BP Exploration & Oil, Inc.), Continental Power
Exchange, Inc., Total Investments USA Inc. (an affiliate of
Total S.A.), The Goldman Sachs Group, Inc., Morgan Stanley
Capital Group Inc., Société Générale
Financial Corporation and S T Exchange Inc., or the Nominating
Shareholders, may each nominate one director, and that the
Nominating Shareholders and the Gas and Power Firms would vote
their shares in favor of each other’s nominee. Although the
Shareholders’ Agreement gives the Gas and Power Firms the
power to nominate four directors, when the independent board was
elected, the parties to the Shareholders’ Agreement
(including the Gas and Power Firms) voluntarily agreed not to
exercise their right under the Shareholders’ Agreement to
nominate directors. Instead, the Nominating Shareholders, acting
as a group, collectively nominated and elected the members of
the independent board. This agreement also provided that the
Nominating Shareholders would nominate and elect the chief
executive officer and the chairman of IPE Holdings Plc to our
board of directors as long as our Class B redeemable common
stock remained outstanding. Pursuant to this agreement, since
the elimination of our Class B redeemable common stock, the
Nominating Shareholders have been required to nominate either
the chief executive officer or the chairman of IPE Holdings Plc
to our board of directors, rather than both. This agreement also
provides for the Gas and Power Firms to receive shares from the
Initial Shareholders in
order to ensure that the value of their shares is not diluted,
and provides for a right of first refusal with respect to
certain transfers. In addition, the agreement places
restrictions on the use of proxies and voting trusts with
unaffiliated entities. The Shareholders’ Agreement will
terminate upon the closing of this offering.
Loan to Mr. Sprecher
In December 2001, our board of directors agreed to loan
Mr. Sprecher, our chief executive officer, an amount
corresponding to the income tax liability that accrued in
Continental Power Exchange, Inc. as a result of Continental
Power Exchange, Inc.’s ownership interest in our business
from the time of the formation of IntercontinentalExchange, LLC
until our conversion into corporate form on June 15, 2001.
This loan was made pursuant to the requirements of the limited
liability company operating agreement of
IntercontinentalExchange, LLC, dated as of May 11, 2000. As
of December 2001, Continental Power Exchange, Inc. had accrued a
tax liability of $500,000. The board of directors agreed to
forgive this loan over a five-year period, with the first
installment (20% of the $500,000 tax liability) forgiven in
December 2001, and the remaining amount forgiven in equal
installments in December of each of the four following years,
provided that Mr. Sprecher continued to serve as our chief
executive officer. The board also agreed to gross up
Mr. Sprecher’s compensation for the tax liability
associated with this loan forgiveness. In December 2004, the
board accelerated forgiveness of the final two installments. As
a result, no balance remained outstanding with respect to this
loan as of December 31, 2004. The amounts forgiven under
this arrangement and related gross ups are included in
Mr. Sprecher’s compensation as described under the
heading “Management — Executive
Compensation”.
Relationships with Our Directors
Chicago Climate Exchange Agreements
One of our directors, Richard L. Sandor, is also the Chairman,
Chief Executive Officer and principal owner of the Chicago
Climate Exchange, Inc., which operates futures and OTC markets
for the trading of emissions. In July 2003, we entered into an
agreement with the Chicago Climate Exchange to provide hosting
services for the trading of the Chicago Climate Exchange
emissions on our electronic platform. Under this agreement, the
Chicago Climate Exchange is required to pay us an annual license
fee of $725,000 and an annual service fee of $500,000. The
Chicago Climate Exchange is also required to pay us for certain
technology development work at an agreed upon rate. During the
six months ended June 30, 2005 and 2004, we recognized
$953,000 and $619,000, respectively, and during the years ended
December 31, 2004 and 2003 we recognized $1.7 million
and $605,000, respectively, pursuant to this agreement. The
initial term of this agreement expires in December 2006. The
terms of this agreement provide for automatic renewal for
additional one year periods following the expiration of the
initial term, unless either party provides at least six
months’ notice of its intention not to renew.
In May 2004, we entered into a listing agreement with the
Chicago Climate Exchange under which we agreed to allow the
Chicago Climate Exchange to make certain emissions contracts
available for trading in its emissions trading market, which we
host on our platform, and to delist such contracts from trading
on our platform. Pursuant to this agreement, the Chicago Climate
Exchange is obligated to pay us 10% of the gross revenues earned
by the Chicago Climate Exchange in connection with trading in
these contracts.
In August 2004, we entered into a license agreement with the
Chicago Climate Exchange in respect of certain of its
intellectual property relating to an emission reduction trading
system and method. Pursuant to our agreement, the Chicago
Climate Exchange granted to us, our affiliates (including the
IPE) and any of our contractors, agents and service providers a
perpetual, non-exclusive, royalty-free license, including any
patents or related applications thereto, in relation to such
intellectual property. Pursuant to the terms of this agreement,
we also acknowledged the Chicago Climate Exchange’s
ownership of the intellectual property and agreed not to
challenge the ownership, validity or enforceability of the
intellectual property.
In addition, in August 2004, the IPE entered into a Cooperation
and Licensing Agreement with the Chicago Climate Exchange.
Pursuant to this agreement, the Chicago Climate Exchange and the
IPE formed a cooperative relationship for the purposes of
promoting the development of a European emissions trading market
through, in particular, the trading of emissions contracts on
our electronic platform. The agreement provides for the Chicago
Climate Exchange to fund IPE development and operating costs in
relation to the emissions contracts. The Chicago Climate
Exchange will then receive 75% of net transaction fee income
from the emissions contracts (after the deduction of operating
costs). In December 2004, the European Climate Exchange, which
is a subsidiary of the Chicago Climate Exchange, acceded to the
terms of the Cooperation and Licensing Agreement. Emissions
contracts refer to any cash or spot or futures contract for
European emissions allowances traded on our platform pursuant to
this agreement. Consistent with, and subject to, its legal and
regulatory obligations and the provisions of this agreement, the
IPE has agreed, among other obligations, to:
•
use commercially reasonable efforts to cooperate with the
Chicago Climate Exchange in the design and listing of the
emissions contracts;
•
manage, in cooperation with us, the process of modifying our
electronic platform and other hardware and software as necessary
to allow the trading of the emissions contracts;
•
provide required market supervision, compliance and regulatory
arrangements; and
•
obtain the necessary regulatory approvals to allow the trading
of the emissions contracts from trading screens located in the
United Kingdom, Germany, France, the Netherlands, Switzerland,
Sweden, Norway, the United States, and such other countries as
the IPE and the Chicago Climate Exchange from time to time agree.
The initial term of this agreement concludes on the later of
December 31, 2007 and the date on which Phase I of the
European Emissions Allowances Trading Scheme terminates, unless
sooner terminated pursuant to special termination provisions of
the agreement. The terms of this agreement provide for automatic
renewal periods of one year following the conclusion of the
initial term, unless terminated earlier by either party upon
written notice provided no later than twelve months prior to the
end of the initial term, or three months prior to the end of any
renewal period.
Financial Printing
One of our directors, Vincent Tese, is a member of the board of
directors of Bowne & Co., Inc., a financial printer. We
have engaged the services of Bowne in connection with this
offering and expect to pay Bowne customary fees. We have not
made any payments under this arrangement to date.
Intercompany Agreements
License and Services Agreements
In May 2003, we entered into a Software License Agreement and an
Atlanta Services Agreement with our subsidiary, the IPE,
pursuant to which we provide the IPE with access to our
electronic platform. Pursuant to the Software License Agreement,
we have granted the IPE a license to use software related to our
electronic platform, which the IPE may sub-license to its
members and their customers. The Atlanta Services Agreement
requires us to provide hosting, helpdesk and other services to
the IPE. These agreements are designed to assist the IPE in
meeting certain of its regulatory obligations as a Recognized
Investment Exchange. The IPE is required to pay us for the
license and related services pursuant to the terms of the
agreements, which have been set on the same basis as we would
negotiate with an unrelated third party. Similar agreements
exist between the IPE and two of our other U.K.-based
subsidiaries in respect of disaster recovery services and U.K.
helpdesk services.
In December 2002, we entered into a Recharge Agreement with the
IPE under which the IPE agreed to incur costs associated with
stock issued to IPE employees upon their exercise of options
granted under the 2000 Stock Option Plan. Under the terms of the
agreement, the IPE is required to pay us as soon as reasonably
practicable after the exercise of an option an amount equal to
the difference between the option exercise price and the value
of the shares on the date of exercise. The agreement, which was
amended in April 2004, limits the IPE’s maximum liability
under the Recharge Agreement to $18 million. To date, there
have been no intercompany payments made under this agreement.
Other
Kelly L. Loeffler, a corporate officer and our Vice
President, Investor and Public Relations, is married to
Jeffrey C. Sprecher, our Chairman and Chief Executive
Officer. Since joining our company in September 2002,
Ms. Loeffler has reported directly to Richard V. Spencer,
our Chief Financial Officer. In 2004, Ms. Loeffler received
total cash compensation of approximately $200,000.
The table below sets forth information regarding the beneficial
ownership of our common stock on an actual basis as of the date
of this prospectus (giving effect to the 1 for 4 reverse stock
split and assuming full conversion of all outstanding
Class A shares into shares of new common stock), and as
adjusted to reflect the sale of our common stock in this
offering with respect to:
•
each person we know to be the beneficial owner of 5% or more of
our outstanding shares of common stock;
•
each of our executive officers named in the Summary Compensation
Table above under the heading “Management”;
•
each of our directors;
•
all of our executive officers and directors as a group; and
•
the selling shareholders.
The shares of common stock sold in the offering by the selling
shareholders will result from the conversion of Class A2
shares concurrently with the consummation of such sale. The
shareholders listed below will not own any shares of new common
stock until the first date designated for optional conversion.
Beneficial ownership is determined under the rules of the SEC
and generally includes voting or investment power over
securities. Except in cases where community property laws apply
or as indicated in the footnotes to this table, we believe that
each shareholder identified in the table possesses sole voting
and investment power over all shares of common stock shown as
beneficially owned by the shareholder. Percentage of beneficial
ownership is based on 52,966,753 shares of common stock
outstanding as of September 30, 2005. Shares of common
stock subject to options that are currently exercisable or
exercisable within 60 days of the date of this prospectus
are considered outstanding and beneficially owned by the person
holding the options for the purpose of computing the percentage
ownership of that person but are not treated as outstanding for
the purpose of computing the percentage ownership of any other
person. This table does not reflect 1,500,000 shares that
the underwriters have an option to purchase from the selling
shareholders. As of the date of this prospectus, our common
stock was held by 116 shareholders of record. Certain
selling shareholders are affiliates of broker-dealers (but are
not themselves broker-dealers). Each of these broker-dealer
affiliates purchased the securities identified in the table as
beneficially owned by it in the ordinary course of business and,
at the time of that purchase, had no agreements or
understandings, directly or indirectly, with any person to
distribute those securities. Unless indicated below, the address
of each individual listed below is 2100 RiverEdge Parkway,
Suite 500, Atlanta, Georgia30328.
Shares Beneficially
Owned Before the
Shares Beneficially
Offering
Owned After the
Offering
Class A
Common Stock
Shares
Common Stock
Being
Name and Address of Beneficial Owner
Shares
Percentage
Offered
Shares
Percentage
Morgan Stanley Capital Group Inc.(1)
2000 Westchester Avenue, Floor 1, Purchase, NY10577
7,847,959
14.82
%
The Goldman Sachs Group, Inc.(2)
85 Broad Street New York, NY10004
7,528,659
14.21
Total Investments USA Inc.
1105 N. Market Street, Suite 1442, Wilmington, DE19899
4,992,714
9.43
BP Products North America Inc.(3)
28100 Torch Parkway Warrenville, IL60555
Includes 34,180 Class A1 shares held by Morgan
Stanley & Co. International Limited, an affiliate of
Morgan Stanley Capital Group Inc. Morgan Stanley Capital Group
Inc. is an affiliate of Morgan Stanley & Co. Incorporated, a
broker-dealer, and a lead underwriter for this offering.
(2)
Includes 34,180 Class A1 shares held by Goldman Sachs
International, an affiliate of The Goldman Sachs Group, Inc. The
Goldman Sachs Group, Inc. is an affiliate of Goldman, Sachs
& Co., a broker-dealer, and a lead underwriter for this
offering.
(3)
Includes 34,180 Class A1 shares held by BP Oil
International Limited and one Class A1 share held by BP Gas
Marketing Ltd., each of which is an affiliate of
BP Products North America Inc.
(4)
Includes 111,085 Class A1 shares held by Fimat
International Banque SA, an affiliate of Société
Générale Financial Corporation. Société
Générale Financial Corporation is an affiliate of SG
Cowen & Co., LLC and SG Americas Securities, LLC, each of
which is a broker-dealer. SG Americas Securities, LLC is also an
underwriter for this offering.
(5)
Includes 34,180 Class A1 shares held by Shell
International Trading & Shipping Company, an affiliate
of S T Exchange Inc.
(6)
Continental Power Exchange, Inc. beneficially owns 2,406,935 of
our common shares. In addition, 219,038 stock options
exercisable within 60 days of the date of this prospectus
granted to Mr. Sprecher under the 2000 Stock Option
Plan and 69,012 restricted stock units that vest within
60 days of the date of this prospectus granted to
Mr. Sprecher under the 2004 Restricted Stock Plan,
respectively, are deemed to be beneficially owned by Continental
Power Exchange, Inc. by virtue of Mr. Sprecher’s
ownership and control of Continental Power Exchange, Inc. The
shares held directly by Continental Power Exchange, Inc. underly
options granted pursuant to the Continental Power Exchange, Inc.
Stock Option Plan, to eight employees, two of whom are current
executive officers of our company. As of the date of this
prospectus under this plan, there are options on
209,122 shares of our stock owned by Continental Power
Exchange, Inc.
(7)
Although this party is not a five percent shareholder, it is
included in this table because it is a party to a
shareholders’ agreement with the five percent shareholders.
See “Certain Relationships and Related
Transactions — Relationships with Certain
Shareholders”.
(8)
Director beneficial ownership levels include stock options
exercisable within 60 days of the date of this prospectus
under the 2000 Stock Option Plan, restricted stock unit awards
that vest within 60 days of the date of this prospectus
under the 2004 Restricted Stock Plan, and restricted stock unit
awards that vest within 60 days of the date of this
prospectus under the 2003 Restricted Stock Deferral Plan for
Outside Directors.
(9)
Beneficial ownership of each executive officer includes stock
options exercisable within 60 days of the date of this
prospectus under the 2000 Stock Option Plan, and restricted
stock unit awards that vest within 60 days of the date of
this prospectus under the 2004 Restricted Stock Plan.
(10)
Mr. Marcial beneficially owns options exercisable for
36,055 of our common shares held by Continental Power Exchange,
Inc. pursuant to the Continental Power Exchange, Inc. Stock
Option Plan. These options may be exercised by payment to
Continental Power Exchange, Inc. and will have no effect on the
dilution of our common stock.
(11)
Includes 2,406,935 shares held by Continental Power Exchange,
Inc. Mr. Sprecher currently owns 92.5% of the equity
interest in Continental Power Exchange, Inc. and holds an
irrevocable proxy enabling him to vote the remaining 7.5%.
Continental Power Exchange, Inc. currently has no assets other
than its equity interest in us and conducts no operations.
(12)
Mr. Vice beneficially owns options exercisable for 144,222
of our common shares held by Continental Power Exchange, Inc.
pursuant to the Continental Power Exchange, Inc. Stock Option
Plan. These options may be exercised by payment to Continental
Power Exchange, Inc. and will have no effect on the dilution of
our common stock.
On May 11, 2000, IntercontinentalExchange, LLC, or the LLC,
our predecessor entity, was formed as a Delaware limited
liability company. Subsequent to its formation, the LLC created
a wholly-owned subsidiary, IntercontinentalExchange, Inc., a
Delaware corporation, to provide stock options to our employees.
The original members of the LLC were BP Products North
America Inc. (formerly known as BP Exploration & Oil,
Inc.), Continental Power Exchange, Inc., DB Structured
Products, Inc. (formerly known as Deutsche Bank Sharps Pixley
Inc.), Elf Trading Inc. (now known as Atlantic Trading and
Marketing Inc., and an affiliate of Total S.A.), The Goldman
Sachs Group, Inc., MHC Investment Company, Morgan Stanley
Capital Group Inc., Société Générale
Financial Corporation and S T Exchange Inc. Upon the LLC’s
formation, Continental Power Exchange, Inc., a company owned by
our founder, chairman and chief executive officer, Jeffrey C.
Sprecher, contributed to the LLC all of its assets and
liabilities. At the same time, MHC Investment Company
contributed intellectual property rights related to our
electronic platform, and our Initial Shareholders (or their
affiliates) entered into order flow agreements with us,
providing for these Initial Shareholders (or their affiliates)
to execute a minimum annual volume of transactions through our
electronic platform.
In November 2000, the original members of the LLC amended and
restated the LLC agreement to provide for the issuance of
additional membership interests to the Gas and Power Firms. The
Gas and Power Firms that are currently shareholders are: AEP
Investments, Inc. (formerly known as AEP Energy Services, Inc.),
Duke Energy Trading Exchange, LLC, El Paso Merchant Energy
North America Company and Mirant Americas Energy Marketing, L.P.
Two additional Gas and Power Firms, Aquila Southwest Processing,
L.P. and Reliant Energy Trading Exchange, Inc., are no longer
shareholders. The Gas and Power Firms entered into an order flow
agreement providing for these members, in the aggregate, to
execute a minimum annual volume of transactions on our
electronic platform and they made a combined $30.0 million
cash payment. In connection with their acquisition of an
interest in the LLC, the LLC granted the Gas and Power Firms
warrants to purchase additional membership interests
representing an additional 10% profit-sharing and voting
interest in our business, subject to dilution. The warrants
expired unvested on September 30, 2004.
On June 15, 2001, in connection with our acquisition of the
IPE described below, the LLC merged into its subsidiary,
IntercontinentalExchange, Inc., which was the surviving entity.
Each of the members of the LLC exchanged its rights and
interests in the LLC for a proportionate number of shares of
Class A common stock, Series 2 of
IntercontinentalExchange, Inc., which we refer to as our
Class A2 shares, and the LLC ceased to exist by
operation of the merger.
Acquisition of IPE Holdings Plc/ Subsequent Redemption of
Class B Redeemable Common Stock
On June 18, 2001, we acquired IPE Holdings Plc in a
share-for-share exchange. IPE Holdings Plc is the owner of the
IPE. In this exchange, each IPE Holdings Plc shareholder
received one share of Class B redeemable common stock,
which we refer to as our Class B shares, and one share of
our Class A common stock, Series 1, which we refer to
as our Class A1 shares, in exchange for each of their
IPE Holdings Plc shares. Under the terms of the Class B
shares, the holders had the right to require us to redeem their
shares one year after the IPE’s two principal futures
contracts traded exclusively on our electronic platform for a
ten consecutive day period. The Class B shares were
redeemable at a price of $23.58 per share, or
$67.5 million in the aggregate.
In November 2004, although the conditions for a redemption
callable by the holders of the Class B shares had not yet
been met, we determined that it was advisable to undertake an
early redemption of the Class B shares. Pursuant to an
amendment to our charter approved by our shareholders, we
undertook an early redemption of the Class B shares on
November 23, 2004. In connection with the early redemption,
we redeemed the Class B shares of all holders at a price of
$23.58 per share, for an aggregate redemption price of
$67.5 million. The Class B shares cannot be reissued,
and upon their redemption became undesignated shares of common
stock.
Our board of directors has approved a plan for the
recapitalization of our outstanding equity that will take effect
immediately prior to the closing of this offering. This plan,
which we refer to as the recapitalization, will simplify our
capital structure following this offering and will bring our
corporate governance procedures in line with those of other
public companies. The recapitalization will include the
following events:
•
Creation of a new class of common stock. Our
charter will be amended and restated to provide for a new class
of common stock, par value $0.01 per share, which we refer
to as our new common stock, to be issued to investors who
purchase shares in this offering.
•
Addition of an optional conversion right to the
outstanding Class A1 shares and
Class A2 shares. Our charter will also be
amended to provide holders of our outstanding
Class A1 shares and Class A2 shares a right
to convert these shares into shares of our new common stock at
the holder’s option, subject to such conditions as our
board of directors may deem appropriate. All other rights and
restrictions on our Class A1 shares and
Class A2 shares will remain intact unless and until
these shares are converted. The optional conversion right may be
exercised by any holder of Class A2 shares as necessary to
enable it to sell shares of new common stock in this offering
and otherwise at any time (i) by any holder of
Class A1 shares (other than holders who also own
Class A2 shares) beginning on the date 90 days after
the completion of this offering or (ii) by any holder of
Class A2 shares beginning on the date 180 days after
the completion of this offering.
•
Creation of a new class of undesignated preferred
stock. Our charter will be amended to create a class of
undesignated preferred stock, the terms of which may be
established by our board of directors from time to time.
•
Modification of our corporate governance
provisions. Our charter and bylaws will be amended and
restated to add, delete and change various provisions relating
to the governance of our company to include provisions customary
for public companies, such as customary anti-takeover provisions.
•
Other changes. Our charter and bylaws will also be
amended and restated to make other changes, such as:
•
a reclassification, or reverse stock split, of our authorized
and outstanding Class A1 shares and
Class A2 shares based on a ratio of 1 share of new
common stock for 4 shares of Class A common stock; and
•
the removal of references to the Class B shares from the
charter.
We describe the material terms of the amended and restated
charter and bylaws as they will be in effect as of the closing
of this offering under the heading “Description of Capital
Stock”.
The recapitalization, including all the steps discussed above,
will take effect immediately prior to the closing of this
offering. We have obtained the approval of our shareholders to
carry out various aspects of the recapitalization. Consequently,
all information in this prospectus assumes that the
recapitalization has occurred, including the 1 for 4
reverse stock split of the Class A common stock, unless
otherwise specified.
In this prospectus, we refer to our Class A1 shares
and our Class A2 shares, collectively, as our
Class A common stock. We refer to our Class A common
stock and shares of our new common stock, collectively, as our
common stock. Any shares of common stock to be sold by the
selling shareholders in this offering will be
Class A2 shares held by such holder that will be
converted into shares of new common stock immediately prior to
the closing of this offering.
The following descriptions are summaries of the material
terms of our amended and restated charter and bylaws as each
will be in effect upon the closing of this offering. They may
not contain all of the information that is important to you. To
understand them fully, you should read our amended and restated
charter and bylaws, copies of which are filed with the SEC as
exhibits to the registration statement of which this prospectus
is a part. The following descriptions are qualified in their
entirety by reference to the amended and restated charter and
bylaws and applicable law.
Pursuant to our amended and restated charter, our authorized
capital stock consists of 300,000,000 shares, each with a
par value of $0.01 per share, of which:
•
25,000,000 shares are designated as preferred
stock; and
•
275,000,000 shares are designated as common stock, divided
into the following classes:
•
194,275,000 shares are designated as common stock, which we
refer to as new common stock, 10,000,000 shares of which
will be outstanding upon the completion of this
offering; and
•
80,725,000 shares are designated as Class A common
stock, divided into two series: Class A common stock,
Series 1 and Class A common stock, Series 2, of
which 2,862,579 shares and 42,523,289 shares,
respectively, will be outstanding upon the completion of this
offering.
In this prospectus, unless the context otherwise requires, we
refer to the new common stock and the Class A common stock,
collectively, as our common stock. All outstanding shares of
common stock are, and the shares of common stock offered hereby
will be, when issued and sold, validly issued, fully paid and
nonassessable.
Preferred Stock
Our authorized capital stock includes 25,000,000 shares of
preferred stock, none of which will be outstanding upon the
completion of this offering. Our board of directors is
authorized to divide the preferred stock into series and, with
respect to each series, to determine the designations and the
powers, preferences and rights, and the qualifications,
limitations and restrictions thereof, including the dividend
rights, conversion or exchange rights, voting rights, redemption
rights and terms, liquidation preferences, sinking fund
provisions and the number of shares constituting the series. Our
board of directors could, without shareholder approval, issue
preferred stock with voting and other rights that could
adversely affect the voting power of the holders of common stock
and which could have certain anti-takeover effects.
Subject to the rights of the holders of any series of preferred
stock, the number of authorized shares of any series of
preferred stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by resolution adopted
by our board of directors and approved by the affirmative vote
of the holders of a majority of the voting power of all
outstanding shares of capital stock entitled to vote on the
matter, voting together as a single class.
Common Stock
Except for the conversion rights and restrictions on transfer
relating to our Class A1 shares and our Class
A2 shares and other matters described below, and subject to
the rights and preferences of the holders of preferred stock at
any time outstanding, our new common stock, our
Class A1 shares and our Class A2 shares have
the same rights and privileges and rank equally, share ratably
and are identical in respect as to all matters, including rights
in liquidation.
•
Voting: Each holder of shares of new common stock and
Class A common stock is entitled to one vote for each share
owned of record on all matters submitted to a vote of
shareholders. Except as otherwise required by law or as
described below, holders of shares of new common stock,
Class A1 shares and Class A2 shares will
vote together as a single class on all matters presented to the
shareholders for their vote or approval, including the election
of directors.
There are no cumulative voting rights. Accordingly, the holders
of a majority of the total shares of new common stock,
Class A1 shares and Class A2 shares voting
for the election of directors can elect all the directors if
they choose to do so, subject to the voting rights of holders of
any preferred stock to elect directors.
In the event of a class or series vote to approve a change in
the rights or special powers of any class or series of
Class A common stock, two-thirds of the affected class or
series must approve the change, except that in the case of an
amendment to the rights or special powers of the
Class A1 shares, the holders of
Class A1 shares who also hold
Class A2 shares and their affiliates are excluded.
•
Dividends and distributions: The holders of shares of new
common stock and Class A common stock have an equal right
to receive dividends and distributions, whether payable in cash
or otherwise, as may be declared from time to time by our board
of directors from legally available funds. If a dividend or
distribution is payable on the Class A common stock, we
must also make a pro rata and simultaneous dividend or
distribution on the new common stock. Conversely, if a dividend
or distribution is paid or payable on the new common stock, we
must also make a pro rata and simultaneous dividend or
distribution on the Class A common stock.
•
Liquidation, dissolution or winding-up: In the event of
our liquidation, dissolution or winding-up, holders of the
shares of new common stock and Class A common stock are
entitled to share equally, share-for-share, in the assets
available for distribution after payment of all creditors and
the liquidation preferences of our preferred stock.
•
Restrictions on transfer: Our charter continues to
restrict the transfer of shares of Class A common stock.
Class A1 shares may be transferred only with the
board’s consent, which may not be unreasonably withheld.
Class A2 shares may be transferred only in accordance
with our bylaws or with the approval of our board of directors,
in its sole discretion, other than transfers to an affiliate or
to another holder of Class A2 shares. Neither our
charter nor our bylaws contain any restrictions on the transfer
of shares of new common stock. In the case of any transfer of
shares, there may be restrictions imposed by applicable
securities laws. We describe these transfer restrictions under
the heading “Shares Eligible for Future Sale”.
•
Redemption, conversion or preemptive rights: Holders of
shares of new common stock and Class A common stock have no
redemption or conversion rights or preemptive rights to purchase
or subscribe for our securities, except that holders of shares
of our Class A common stock have an optional conversion
right to convert any shares of Class A common stock into
shares of new common stock at a ratio of one-to-one, after
giving effect to the reverse stock split. The board may specify
any conditions to conversion the board deems to be appropriate
and has determined that, other than shares of Class A
common stock to be converted and sold by the selling
shareholders in this offering, the holders of
Class A1 shares may only exercise the conversion right
at any time or from time to time following the date 90 days
after the closing of this offering and the holders of
Class A2 shares may do so only following the date
180 days after the closing of this offering. Once
authorized by the board, the shares of Class A common stock
are convertible at the holder’s option. Upon conversion,
the shares of common stock would not be subject to restrictions
on transfer that applied to the shares of Class A common
stock prior to conversion, except to the extent such
restrictions are imposed under applicable securities laws.
•
Other Provisions: There are no redemption provisions or
sinking fund provisions applicable to either the new common
stock or the Class A common stock, nor is the new common
stock or Class A common stock subject to calls or
assessments by us.
The rights, preferences, and privileges of the holders of new
common stock and Class A common stock are subject to and
may be adversely affected by, the rights of the holders of any
series of preferred stock that we may designate and issue in the
future. As of the date of this prospectus, there are no shares
of preferred stock outstanding.
Limitation of Liability and Indemnification Matters
Our charter provides that none of our directors will be liable
to us or our shareholders for monetary damages for breach of
fiduciary duty as a director, except in those cases in which
liability is mandated by the Delaware General Corporation Law,
and except for liability for breach of the director’s duty
of loyalty, acts or omissions not in good faith or involving
intentional misconduct or a knowing violation of law, or any
transaction from which the director derived any improper
personal benefit. Our bylaws provide for indemnification, to the
fullest extent permitted by law, of any person made or
threatened to be made a party to any action, suit or proceeding
by reason of the fact that such person is or was one of our
directors or senior officers or, at our request, serves or
served as a director, officer, employee or agent of any other
enterprise, against all expenses, liabilities, losses and claims
actually incurred or suffered by such person in connection with
the action, suit or proceeding. Our bylaws also provide that, to
the extent authorized from time to time by our board of
directors, we may provide to any one or more other persons
rights of indemnification and rights to receive payment or
reimbursement of expenses, including attorneys’ fees.
Section 203 of the Delaware General Corporation Law
We are subject to the provisions of Section 203 of the
Delaware General Corporation Law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in
a business combination with an interested shareholder for a
period of three years after the date of the transaction in which
the person became an interested shareholder, unless the business
combination is approved in a prescribed manner. A business
combination includes a merger, asset sale or a transaction
resulting in a financial benefit to the interested shareholder.
An interested shareholder is a person who, together with
affiliates and associates, owns (or, in certain cases, within
three years prior, did own) 15% or more of the
corporation’s outstanding voting stock. Under
Section 203, a business combination between us and an
interested shareholder is prohibited during the relevant
three-year period unless it satisfies one of the following
conditions:
•
prior to the time the shareholder became an interested
shareholder, our board of directors approved either the business
combination or the transaction that resulted in the shareholder
becoming an interested shareholder;
•
on consummation of the transaction that resulted in the
shareholder becoming an interested shareholder, the interested
shareholder owned at least 85% of our voting stock outstanding
at the time the transaction commenced (excluding, for purposes
of determining the number of shares outstanding, shares owned by
persons who are directors and officers); or
•
the business combination is approved by our board of directors
and authorized at an annual or special meeting of the
shareholders by the affirmative vote of at least
662/3%
of our outstanding voting stock that is not owned by the
interested shareholder.
Certain Anti-Takeover Matters
Our charter and bylaws include a number of provisions that may
have the effect of encouraging persons considering unsolicited
tender offers or other unilateral takeover proposals to
negotiate with our board of directors rather than pursue
non-negotiated takeover attempts. These provisions include:
Board of Directors
Vacancies and newly created seats on our board may be filled
only by our board of directors. Only our board of directors may
determine the number of directors on our board. The inability of
shareholders to determine the number of directors or to fill
vacancies or newly created seats on the board makes it more
difficult to change the composition of our board of directors,
but these provisions promote a continuity of existing management.
Our bylaws establish advance notice procedures with regard to
shareholder proposals relating to the nomination of candidates
for election as directors or new business to be brought before
meetings of our shareholders. These procedures provide that
notice of such shareholder proposals must be timely given in
writing to our secretary prior to the meeting at which the
action is to be taken. Generally, to be timely, notice must be
received at our principal executive offices not less than
90 days nor more than 120 days prior to the first
anniversary date of the annual meeting for the preceding year.
The notice must contain certain information specified in the
bylaws.
Adjournment of Meetings of Shareholders Without a
Shareholder Vote
Our bylaws permit the chairman of the meeting of shareholders,
who is appointed by the board of directors, to adjourn any
meeting of shareholders for a reasonable period of time without
a shareholder vote.
Special Meetings of Shareholders
Our bylaws provide that special meetings of the shareholders may
be called by the board of directors, the chairman of the board,
the chief executive officer, or at the request of holders of at
least 50% of the shares of common stock outstanding at the time.
No Written Consent of Shareholders
Our charter requires all shareholder actions to be taken by a
vote of the shareholders at an annual or special meeting. Our
charter generally does not permit our shareholders to act by
written consent without a meeting, other than for certain class
votes by holders of the Class A common stock.
Our charter requires the approval of not less than
662/3%
of the voting power of all outstanding shares of our capital
stock entitled to vote to amend any bylaw by shareholder action
or to amend the charter provisions described in this section.
This supermajority voting requirement makes it more difficult to
alter the anti-takeover provisions of our bylaws and our
charter. Our charter also authorizes the board of directors to
amend the bylaws at any time without shareholder action.
Blank Check Preferred Stock
Our charter provides for 25,000,000 authorized shares of
preferred stock. The existence of authorized but unissued shares
of preferred stock may enable the board of directors to render
more difficult or to discourage an attempt to obtain control of
us by means of a merger, tender offer, proxy contest or
otherwise. For example, if in the due exercise of its fiduciary
obligations, our board of directors were to determine that a
takeover proposal is not in our best interests, the board of
directors could cause shares of preferred stock to be issued
without shareholder approval in one or more private offerings or
other transactions that might dilute the voting or other rights
of the proposed acquirer or insurgent shareholder or shareholder
group. In this regard, the charter grants our board of directors
broad power to establish the rights and preferences of
authorized and unissued shares of preferred stock. The issuance
of shares of preferred stock could decrease the amount of
earnings and assets available for distribution to holders of
shares of common stock. The issuance may also adversely affect
the rights and powers, including voting rights, of such holders
and may have the effect of delaying, deterring or preventing a
change in control. The board of directors currently does not
intend to seek shareholder approval prior to any issuance of
shares of preferred stock, unless otherwise required by law.
Listing
We have applied to list our common stock on the New York Stock
Exchange under the symbol “ICE”.
Transfer Agent
The transfer agent for our common stock is Computershare
Investor Services.
Prior to this offering, there has been no public market for our
common stock. Future sales of substantial amounts of common
stock (or Class A common stock prior to its conversion into
new common stock) in the public market, or the perception that
such sales may occur, could adversely affect the market price of
our common stock.
Upon the completion of this offering, we will have
55,385,868 shares of common stock outstanding, which
includes the 10,000,000 shares of new common stock sold by
us and the selling shareholders in this offering, 2,862,579
Class A1 shares and 42,523,289 Class A2 shares.
All of the shares of our common stock to be sold in this
offering will be freely tradable without restriction or further
registration under the Securities Act of 1933, or the Securities
Act, except for any such shares that may be held or acquired by
our affiliates, as that term is defined in Rule 144
promulgated under the Securities Act, which shares will be
subject to the volume limitations and other restrictions of
Rule 144 described below.
Sales of Restricted Shares
An aggregate of 45,385,868 shares of common stock
(representing 2,862,579 Class A1 shares and 42,523,289
Class A2 shares) held by our existing shareholders upon
completion of this offering will be “restricted
securities”, as that phrase is defined in Rule 144.
These shares may not be resold in the absence of registration
under the Securities Act or pursuant to an exemption from such
registration, including among others, the exemptions provided by
Rule 144, 144(k) or 701 under the Securities Act, which
rules are summarized below. Taking into account the lockup
agreements described below and the provisions of Rules 144,
144(k) and
701, shares
of Class A common stock will be available for sale in the
public market as follows:
•
2,862,579 Class A1 shares will be available for
immediate sale on the date of this prospectus pursuant to
Rule 144(k); and
•
Class A2
shares will be available for sale after the date of this
prospectus and the expiration date for the lockup agreements
pursuant to Rule 144(k).
Assuming all outstanding Class A1 shares are converted into
shares of common stock, 2,862,579 shares of common stock
will be available for sale beginning on the date 90 days
following the closing of this offering pursuant to
Rule 144(k). Assuming all outstanding Class A2 shares
are converted into shares of common
stock, shares
of common stock will be available for sale beginning on the date
180 days following the closing of this offering pursuant to
Rule 144(k).
Rule 144
In general, under Rule 144 as currently in effect,
beginning 90 days after the date of this prospectus, a
person who has beneficially owned restricted shares for at least
one year, including a person who may be deemed to be our
affiliate, would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of:
•
1.0% of the number of shares of common stock then outstanding,
which will equal approximately 553,858 shares immediately
after this offering; or
•
the average weekly trading volume of our common stock on the New
York Stock Exchange during the four calendar weeks before a
notice of the sale on Form 144 is filed.
For purposes of applying this volume limit, sales by certain
related persons and sales by persons acting in concert must be
aggregated. In addition, sales under Rule 144 must be made
in unsolicited brokers’ transactions and must be disclosed
in a notice filing with the SEC. For an affiliate, some of these
requirements would also apply to sales of unrestricted shares.
Under Rule 144(k), a person who is not deemed to have been
one of our affiliates at any time during the three months
preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, including the
holding period of any prior owner other than an affiliate, is
entitled to sell these shares without complying with the manner
of sale, public information, volume limitation or notice
provisions of Rule 144.
Rule 701
Securities issued in reliance on Rule 701, such as shares
of common stock acquired upon exercise of options granted under
our stock option plans, are also restricted and, beginning
90 days after the effective date of this prospectus, may be
sold by shareholders other than our affiliates subject only to
the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its one-year holding
period requirement.
Lockup Agreements
Notwithstanding the foregoing, we and the holders of
approximately 94.6% of our shares outstanding and all of our
shares issuable under options and grants outstanding as of
June 30, 2005 — including our directors and
officers, the Initial Shareholders and the Gas and Power
Firms — have agreed that, for a period of
180 days following the date of this prospectus, we and they
will not, without the prior written consent of Morgan
Stanley & Co. Incorporated and Goldman,
Sachs & Co., dispose of, directly or indirectly
(including by means of any hedge that results in a short sale or
any swap or other arrangement that transfers any of the economic
consequences of ownership of the shares to another party), any
shares of our common stock, any option to acquire our common
stock or any securities convertible into or exchangeable for our
common stock, subject to certain exceptions including:
•
sales made in this offering and the conversion of
Class A2 shares into new common stock in connection
therewith; and
•
in our case, issuances upon exercise of outstanding options or
pursuant to existing employee plans.
However, Morgan Stanley & Co. Incorporated and Goldman,
Sachs & Co., in their sole discretion, may release any
of the securities subject to lockup agreements, at any time
without notice.
Additional Shares that May be Registered
After this offering, we intend to register initially
9,100,000 shares of our common stock for issuance upon the
exercise or vesting of options or awards granted under our 2000
Stock Option Plan, 2003 Restricted Stock Deferred Plan for
Outside Directors, 2004 Restricted Stock Plan and 2005 Equity
Incentive Plan. We may increase the number of shares registered
for this purpose from time to time. Once we register these
shares, they can be sold in the public market upon issuance.
This section summarizes the material United States federal
income and estate tax consequences of the ownership and
disposition of common stock by a non-U.S. holder. You are a
non-U.S. holder if you are, for United States federal
income tax purposes:
•
a nonresident alien individual;
•
a foreign corporation; or
•
an estate or trust that in either case is not subject to United
States federal income tax on a net income basis on income or
gain from common stock.
This section does not consider the specific facts and
circumstances that may be relevant to a particular
non-U.S. holder and does not address the treatment of a
non-U.S. holder under the laws of any state, local or
foreign taxing jurisdiction. This section is based on the tax
laws of the United States, including the Internal Revenue Code
of 1986, as amended, existing and proposed regulations, and
administrative and judicial interpretations, all as currently in
effect. These laws are subject to change, possibly on a
retroactive basis.
If a partnership holds the common stock, the United States
federal income tax treatment of a partner will generally depend
on the status of the partner and the tax treatment of the
partnership. A partner in a partnership holding the common stock
should consult its tax advisor with regard to the United States
federal income tax treatment of an investment in the common
stock.
You should consult a tax advisor regarding the United States
federal tax consequences of acquiring, holding and disposing of
common stock in your particular circumstances, as well as any
tax consequences that may arise under the laws of any state,
local or foreign taxing jurisdiction.
Dividends
Except as described below, if you are a non-U.S. holder of
common stock, dividends paid to you are subject to withholding
of United States federal income tax at a 30% rate or at a lower
rate if you are eligible for the benefits of an income tax
treaty that provides for a lower rate. Even if you are eligible
for a lower treaty rate, we and other payors will generally be
required to withhold at a 30% rate (rather than the lower treaty
rate) on dividend payments to you, unless you have furnished to
us or another payor:
•
a valid Internal Revenue Service Form W-8BEN or an
acceptable substitute form upon which you certify, under
penalties of perjury, your status as (or, in the case of a
United States alien holder that is a partnership or an estate or
trust, such forms certifying the status of each partner in the
partnership or beneficiary of the estate or trust as) a
non-United States person and your entitlement to the lower
treaty rate with respect to such payments; or
•
in the case of payments made outside the United States to an
offshore account (generally, an account maintained by you at an
office or branch of a bank or other financial institution at any
location outside the United States), other documentary evidence
establishing your entitlement to the lower treaty rate in
accordance with U.S. Treasury regulations.
If you are eligible for a reduced rate of United States
withholding tax under a tax treaty, you may obtain a refund of
any amounts withheld in excess of that rate by filing a refund
claim with the United States Internal Revenue Service.
If dividends paid to you are “effectively connected”
with your conduct of a trade or business within the United
States, and, if required by a tax treaty, the dividends are
attributable to a permanent establishment that you maintain in
the United States, we and other payors generally are not
required to withhold tax from the
dividends, provided that you have furnished to us or another
payor a valid Internal Revenue Service Form W-8ECI or an
acceptable substitute form upon which you represent, under
penalties of perjury, that:
•
you are a non-United States person; and
•
the dividends are effectively connected with your conduct of a
trade or business within the United States and are includible in
your gross income.
“Effectively connected” dividends are taxed at rates
applicable to United States citizens, resident aliens and
domestic United States corporations.
If you are a corporate non-U.S. holder, “effectively
connected” dividends that you receive may, under certain
circumstances, be subject to an additional “branch profits
tax” at a 30% rate or at a lower rate if you are eligible
for the benefits of an income tax treaty that provides for a
lower rate.
Gain on Disposition of Common Stock
If you are a non-U.S. holder, you generally will not be
subject to United States federal income tax on gain that you
recognize on a disposition of common stock unless:
•
the gain is “effectively connected” with your conduct
of a trade or business in the United States, and the gain is
attributable to a permanent establishment that you maintain in
the United States, if that is required by an applicable income
tax treaty as a condition for subjecting you to United States
taxation on a net income basis; or
•
you are an individual, you hold the common stock as a capital
asset, you are present in the United States for 183 or more days
in the taxable year of the sale and certain other conditions
exist.
If you are a corporate non-U.S. holder, “effectively
connected” gains that you recognize may also, under certain
circumstances, be subject to an additional “branch profits
tax” at a 30% rate or at a lower rate if you are eligible
for the benefits of an income tax treaty that provides for a
lower rate.
Federal Estate Taxes
Common stock held by a non-U.S. holder at the time of death
will be included in the holder’s gross estate for United
States federal estate tax purposes, unless an applicable estate
tax treaty provides otherwise.
Backup Withholding and Information Reporting
If you are a non-U.S. holder, you are generally exempt from
backup withholding and information reporting requirements with
respect to:
•
dividend payments; and
•
the payment of the proceeds from the sale of common stock
effected at a United States office of a broker;
as long as the income associated with such payments is otherwise
exempt from United States federal income tax and the payor or
broker does not have actual knowledge or reason to know that you
are a United States person and you have furnished to the payor
or broker:
•
a valid Internal Revenue Service Form W-8BEN or an
acceptable substitute form upon which you certify, under
penalties of perjury, that you are (or, in the case of a
non-U.S. holder that is a partnership or an estate or
trust, such forms certifying that each partner in the
partnership or beneficiary of the estate or trust is) a
non-United States person; or
•
other documentation upon which it may rely to treat the payments
as made to a non-United States person in accordance with
U.S. Treasury regulations; or
Payment of the proceeds from the sale of common stock effected
at a foreign office of a broker generally will not be subject to
information reporting or backup withholding. However, a sale of
common stock that is effected at a foreign office of a broker
will be subject to information reporting and backup withholding
if:
•
the proceeds are transferred to an account maintained by you in
the United States;
•
the payment of proceeds or the confirmation of the sale is
mailed to you at a United States address; or
•
the sale has some other specified connection with the United
States as provided in U.S. Treasury regulations;
unless the broker does not have actual knowledge or reason to
know that you are a United States person and the documentation
requirements described above are met or you otherwise establish
an exemption.
In addition, a sale of common stock will be subject to
information reporting if it is effected at a foreign office of a
broker that is:
•
a United States person;
•
a controlled foreign corporation for United States tax purposes;
•
a foreign person 50% or more of whose gross income is
effectively connected with the conduct of a United States trade
or business for a specified three-year period; or
•
a foreign partnership, if at any time during its tax year:
•
one or more of its partners are “U.S. persons”,
as defined in U.S. Treasury regulations, who in the
aggregate hold more than 50% of the income or capital interest
in the partnership; or
•
such foreign partnership is engaged in the conduct of a United
States trade or business;
unless the broker does not have actual knowledge or reason to
know that you are a United States person and the documentation
requirements described above are met or you otherwise establish
an exemption. Backup withholding will apply if the sale is
subject to information reporting and the broker has actual
knowledge that you are a United States person.
You generally may obtain a refund of any amounts withheld under
the backup withholding rules that exceed your income tax
liability by filing a refund claim with the Internal Revenue
Service.
IntercontinentalExchange, the selling shareholders and the
underwriters for this offering named below have entered into an
underwriting agreement with respect to the shares being offered.
Subject to certain conditions, each underwriter has severally
agreed to purchase, and IntercontinentalExchange and the selling
shareholders have agreed to sell, the number of shares indicated
in the following table. Morgan Stanley & Co.
Incorporated and Goldman, Sachs & Co. are acting as
joint book-running managers of this offering and as the
representatives of the underwriters.
Number of
Underwriters
Shares
Morgan Stanley & Co. Incorporated
Goldman, Sachs & Co.
William Blair & Company, L.L.C.
Sandler O’Neill & Partners, L.P.
SG Americas Securities, LLC
Total
10,000,000
The underwriters are committed to take and pay for all of the
shares being offered, if any are taken, other than the shares
covered by the option described below unless and until this
option is exercised.
If the underwriters sell more shares than the total number set
forth in the table above, the underwriters have an option to buy
up to an additional 1,500,000 shares from the selling
shareholders to cover such sales. The underwriters may exercise
this option solely for the purpose of covering over-allotments,
if any, made in connection with the offering of the shares of
common stock offered by this prospectus. They may exercise that
option for 30 days. If any shares are purchased pursuant to
this option, the underwriters will severally purchase shares in
approximately the same proportion as set forth in the table
above.
The following table shows the per share and total underwriting
discounts and commissions to be paid to the underwriters by
IntercontinentalExchange and the selling shareholders. For the
selling shareholders, such amounts are shown assuming both no
exercise and full exercise of the underwriters’ option to
purchase additional shares.
Price Paid by the Selling
Shareholders
Price Paid by
IntercontinentalExchange
No Exercise
Full Exercise
Per Share
$
$
$
Total
$
$
$
Shares sold by the underwriters to the public will initially be
offered at the initial public offering price set forth on the
cover of this prospectus. Any shares sold by the underwriters to
securities dealers may be sold at a discount of up to
$ per
share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the
underwriters to certain other brokers or dealers at a discount
of up to
$ per
share from the initial public offering price. If all the shares
are not sold at the initial public offering price, the
representatives may change the offering price and the other
selling terms.
IntercontinentalExchange and the holders of approximately 94.6%
of the shares outstanding and all of the shares issuable under
options outstanding as of June 30, 2005, including
IntercontinentalExchange’s directors and officers, the
Initial Shareholders and the Gas and Power Firms, have agreed
with the underwriters not to dispose of, directly or indirectly
(including by means of any hedge that results in a short sale or
any swap or other arrangement that transfers any of the economic
consequences of ownership of the shares to another party), any
shares of the common stock, any option to acquire the common
stock or any securities convertible into or exchangeable for the
common stock, for a period of 180 days following the date of
this prospectus, without the prior written consent of Morgan
Stanley & Co. Incorporated and Goldman,
Sachs & Co., subject to certain exceptions, including:
•
sales made in this offering; and
•
in the case of IntercontinentalExchange, issuances upon exercise
of outstanding options or pursuant to existing employee plans.
The 180-day restricted period described in the preceding
paragraph will be automatically extended if: (1) during the
last 17 days of the 180-day restricted period,
IntercontinentalExchange issues an earnings release or announces
material news or a material event; or (2) prior to the
expiration of the 180-day restricted period,
IntercontinentalExchange announces that it will release earnings
results during the 15-day period following the last day of the
180-day period, in which case the restrictions described in the
preceding paragraph will continue to apply until the expiration
of the 18-day period beginning on the issuance of the earnings
release or the announcement of the material news or material
event.
Morgan Stanley & Co. Incorporated and Goldman,
Sachs & Co., in their discretion, may release any of
the securities subject to the lockup agreements, at any time
without notice.
At the request of IntercontinentalExchange, the underwriters
have reserved up to 500,000 shares of common stock offered
by this prospectus for sale, at the initial public offering
price, to its directors, officers, employees and friends through
a directed share program. IntercontinentalExchange cannot assure
you that any of the reserved shares will be purchased. The
number of shares of common stock available for sale to the
general public in the public offering will be reduced to the
extent these persons purchase these reserved shares. Any shares
not so purchased will be offered by the underwriters to the
general public on the same basis as the other shares offered
hereby. All shares purchased through the directed share program
will be subject to the same 180-day lockup described above.
IntercontinentalExchange has applied to list the common stock on
the New York Stock Exchange under the symbol “ICE”. In
order to meet one of the requirements for listing the common
stock on the New York Stock Exchange, the underwriters have
undertaken to sell round lots of 100 or more shares to a minimum
of 2,000 beneficial holders.
Prior to the offering, there has been no public market for the
shares. The initial public offering price will be negotiated
among IntercontinentalExchange and the representatives. Among
the factors to be considered in determining the initial public
offering price of the shares, in addition to prevailing market
conditions, will be IntercontinentalExchange’s historical
performance, estimates of its business potential and its
earnings prospects, an assessment of its management and the
consideration of the above factors in relation to market
valuation of companies in related businesses.
In connection with the offering, the underwriters may purchase
and sell shares of common stock in the open market. These
transactions may include short sales, stabilizing transactions
and purchases to cover positions created by short sales. Shorts
sales involve the sale by the underwriters of a greater number
of shares than they are required to purchase in the offering.
“Covered” short sales are sales made in an amount not
greater than the underwriters’ option to purchase
additional shares in the offering. The underwriters may close
out any covered short position by either exercising their option
to purchase additional shares or purchasing shares in the open
market. In determining the source of shares to close out the
covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase
shares through the overallotment option. “Naked” short
sales are any sales in excess of such option. The underwriters
must close out any naked short position by purchasing shares in
the open market. A naked short position is more likely to be
created if the underwriters are concerned that there may be
downward pressure on the price of the common stock in the open
market after pricing that could adversely affect investors who
purchase in the offering. Stabilizing transactions consist of
various bids for or purchases of common stock made by the
underwriters in the open market prior to the completion of this
offering.
The underwriters may also impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of such underwriter in stabilizing or short covering
transactions.
This document is only being distributed to and is only directed
at (i) persons who are outside the United Kingdom or
(ii) to investment professionals falling within
Article 19(5) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005 (the “Order”) or
(iii) high net worth entities, and other persons to whom it
may lawfully be communicated, falling within
Article 49(2)(a) to (d) of the Order (all such persons
together being referred to as “relevant persons”). The
shares of common stock are only available to, and any
invitation, offer or agreement to subscribe, purchase or
otherwise acquire such common stock will be engaged in only
with, relevant persons. Any person who is not a relevant person
should not act or rely on this document or any of its contents.
To the extent that the offer of the common stock is made in any
Member State of the European Economic Area that has implemented
the Prospectus Directive before the date of publication of a
prospectus in relation to the common stock which has been
approved by the competent authority in the Member State in
accordance with the Prospectus Directive (or, where appropriate,
published in accordance with the Prospectus Directive and
notified to the competent authority in the Member State in
accordance with the Prospectus Directive), the offer (including
any offer pursuant to this document) is only addressed to
qualified investors in that Member State within the meaning of
the Prospectus Directive or has been or will be made otherwise
in circumstances that do not require us to publish a prospectus
pursuant to the Prospectus Directive.
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a
“Relevant Member State”), each underwriter has
represented and agreed that with effect from and including the
date on which the Prospectus Directive is implemented in that
Relevant Member State (the “Relevant Implementation
Date”) it has not made and will not make an offer of shares
to the public in that Relevant Member State prior to the
publication of a prospectus in relation to the shares which has
been approved by the competent authority in that Relevant Member
State or, where appropriate, approved in another Relevant Member
State and notified to the competent authority in that Relevant
Member State, all in accordance with the Prospectus Directive,
except that it may, with effect from and including the Relevant
Implementation Date, make an offer of shares to the public in
that Relevant Member State at any time:
(a) to legal entities which are authorized or regulated to
operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities,
(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the last
financial year; (2) a total balance sheet of more than
€43,000,000 and
(3) an annual net turnover of more than
€50,000,000, as
shown in its last annual or consolidated accounts, or
(c) in any other circumstances which do not require the
publication by the Issuer of a prospectus pursuant to
Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an
“offer of shares to the public” in relation to any
shares in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and the shares to be offered so as to enable an
investor to decide to purchase or subscribe the shares, as the
same may be varied in that Member State by any measure
implementing the Prospectus Directive in that Member State and
the expression “Prospectus Directive” means Directive
2003/71/ EC and includes any relevant implementing measure in
each Relevant Member State.
The EEA selling restriction is in addition to any other selling
restrictions set out below.
Each of the underwriters has represented and agreed that:
(a) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated an
invitation or inducement to engage in investment activity
(within the meaning of Section 21 of the FSMA) received by
it in connection with the issue or sale of the shares in
circumstances in which Section 21(1) of the FSMA does not
apply to the Issuer, and
(b) it has complied with, and will comply with all
applicable provisions of the FSMA with respect to anything done
by it in relation to the shares in, from or otherwise involving
the United Kingdom.
The shares of common stock may not be offered or sold by means
of any document other than to persons whose ordinary business is
to buy or sell shares or debentures, whether as principal or
agent, or in circumstances which do not constitute an offer to
the public within the meaning of the Companies Ordinance (Cap.
32) of Hong Kong, and no advertisement, invitation or document
relating to the shares of common stock may be issued, whether in
Hong Kong or elsewhere, which is directed at, or the contents of
which are likely to be accessed or read by, the public in Hong
Kong (except if permitted to do so under the securities laws of
Hong Kong) other than with respect to shares which are or are
intended to be disposed of only to persons outside Hong Kong or
only to “professional investors” within the meaning of
the Securities and Futures Ordinance (Cap. 571) of Hong
Kong and any rules made thereunder.
The shares of common stock have not been, and will not be,
registered under the Securities and Exchange Law of Japan and
are not being offered or sold and may not be offered or sold,
directly or indirectly, in Japan or to, or for the benefit of,
any resident of Japan (which term as used herein means any
person resident in Japan, including any corporation or other
entity organized under the laws of Japan), or to others for
re-offering or resale, directly or indirectly, in Japan or to
any resident of Japan, except: (1) pursuant to an exemption
from the registration requirements of, or otherwise in
compliance with, the Securities and Exchange Law of Japan and
(2) in compliance with any other applicable requirements of
Japanese law.
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation or subscription or purchase, of the
securities may not be circulated or distributed, nor may the
securities be offered or sold, or be made the subject of an
invitation for subscription or purchase, whether directly or
indirectly, to persons in Singapore other than under
circumstances in which such offer, sale or invitation does not
constitute an offer or sale, or invitation for subscription or
purchase, of the securities to the public in Singapore.
Purchases to cover a short position and stabilizing transactions
may have the effect of preventing or retarding a decline in the
market price of the company’s stock, and together with the
imposition of the penalty bid, may stabilize, maintain or
otherwise affect the market price of the common stock. As a
result, the price of the common stock may be higher than the
price that otherwise might exist in the open market. If these
activities are commenced, they may be discontinued at any time.
These transactions may be effected on the New York Stock
Exchange, in the OTC market or otherwise.
Morgan Stanley & Co. Incorporated and Goldman,
Sachs & Co. may be deemed to be our
“affiliates”, as defined, by Rule 2720 of the
Conduct Rules of the NASD (“Rule 2720”).
Accordingly, this offering will be conducted in compliance with
the requirements of Rule 2720. Under the provisions of
Rule 2720, when an NASD member distributes securities of an
affiliate, the public offering price of the securities can be no
higher than that recommended by a “qualified independent
underwriter”, as such term is defined in Rule 2720. In
accordance with such requirements, Sandler
O’Neill & Partners, L.P. has agreed to serve as a
“qualified independent underwriter” and has conducted
due diligence and will recommend a maximum price for the shares
of common stock. IntercontinentalExchange has agreed to pay
Sandler O’Neill & Partners, L.P. $175,000 for
serving as the “qualified independent underwriter”, as
well as to reimburse its reasonable expenses in connection with
such services. IntercontinentalExchange has agreed to indemnify
Sandler O’Neill & Partners, L.P. for acting as a
“qualified independent underwriter” against certain
liabilities, including liabilities under the Securities Act of
1933.
A prospectus in electronic format may be made available on the
websites maintained by one or more underwriters participating in
this offering. The underwriters may agree to allocate a number
of shares to underwriters for sale to their online brokerage
account holders. Internet distribution will be allocated by
Morgan Stanley & Co. Incorporated and Goldman,
Sachs & Co. to underwriters that may make Internet
distributions on the same basis as other allocations.
No sales may be made to discretionary accounts without the prior
written approval of the customer.
IntercontinentalExchange has agreed that it will pay all
expenses of the offering on behalf of itself and the selling
shareholders, except that the selling shareholders will pay the
fees of their counsel, any transfer taxes incident to the
transfer of their shares to the underwriters and the
underwriting discount with respect to the shares to be sold by
them in the offering. IntercontinentalExchange and the selling
shareholders estimate that the total expenses of the offering to
be paid by IntercontinentalExchange, Inc., excluding
underwriting discounts and commissions, will be approximately
$4.7 million.
IntercontinentalExchange and the selling shareholders have
agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of
1933.
Two of IntercontinentalExchange’s Initial Shareholders are
affiliates of Morgan Stanley & Co. Incorporated and
Goldman, Sachs & Co., the lead underwriters for this
offering. In addition, one Initial Shareholder is an affiliate
of SG Americas Securities, LLC, also an underwriter for
this offering. Upon the closing of this offering, these Initial
Shareholders will own
approximately %, %
and %,
respectively, of our common stock. The underwriters and their
affiliates have engaged in, and may in the future engage in,
investment banking and other commercial dealings in the ordinary
course of business with IntercontinentalExchange and its
affiliates. They have received customary fees and commissions
for these transactions.
The validity of the common stock offered hereby will be passed
upon for us by Sullivan & Cromwell LLP, New York, New
York, and for the underwriters by Cleary Gottlieb
Steen & Hamilton LLP, New York, New York.
EXPERTS
Our consolidated financial statements and schedule as of
December 31, 2004 and 2003 and for each of the three years
in the period ended December 31, 2004, all included in this
prospectus and registration statement, have been audited by
Ernst & Young LLP, independent registered public
accounting firm, as set forth in their report. We have included
our consolidated financial statements and schedule in this
prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP’s report, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1 under the Securities Act of 1933 that registers
the shares of our common stock to be sold in this offering. The
registration statement, including the attached exhibits and
schedules, contains additional relevant information about us and
our capital stock. The rules and regulations of the SEC allow us
to omit various information included in the registration
statement from this document. You may read and copy this
information at the public reference room of the SEC at
100 F Street, N.E., Room 1580, Washington, D.C.
20549. You may also obtain copies of this information by mail
from the public reference section of the SEC,
100 F Street, N.E., Room 1580, Washington, D.C.
20549, at prescribed rates. You may obtain information on the
operation of the public reference rooms by calling the SEC at
(800) SEC-0330. Our filings with the SEC are also available
to the public through the SEC’s internet site at
http://www.sec.gov.
In addition, upon completion of this offering, we will become
subject to the reporting and informational requirements of the
Securities Exchange Act of 1934, as amended, and, as a result,
will file periodic reports, proxy statements and other
information with the SEC. You will be able to read and copy
these reports, proxy statements and other information at the
addresses set forth above.
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
IntercontinentalExchange, Inc.
We have audited the accompanying consolidated balance sheets of
IntercontinentalExchange, Inc. and Subsidiaries as of
December 31, 2004 and 2003, and the related consolidated
statements of income, changes in shareholders’ equity,
comprehensive income (loss), and cash flows for each of the
three years in the period ended December 31, 2004. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of IntercontinentalExchange, Inc. and
Subsidiaries at December 31, 2004 and 2003, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
The foregoing report is in the form that will be signed upon the
effectiveness of the reverse stock split described in
Note 20 to the financial statements.
Accrued liabilities (including $1,307 to a related-party at
December 31, 2004)
22,141
6,431
4,638
Income taxes payable
2,333
6,000
5,709
Current portion of revolving credit facility
—
12,000
—
Current portion of obligations under capital leases
—
482
1,648
Current deferred tax liability, net
300
—
—
Deferred revenue
1,859
1,553
1,310
Total current liabilities
32,242
34,440
17,917
Noncurrent liabilities:
Obligations under capital leases
—
—
482
Long-term portion of revolving credit facility
13,000
13,000
—
Noncurrent deferred tax liability, net
7,062
9,093
9,191
Other noncurrent liabilities
1,466
1,254
1,013
Total noncurrent liabilities
21,528
23,347
10,686
Total liabilities
53,770
57,787
28,603
Commitments and contingencies
Class B redeemable common stock, $.01 par value; none
authorized, issued or outstanding at June 30, 2005 and
December 31, 2004; 2,863 shares authorized, issued and
outstanding at December 31, 2003; $23.58 per share
redemption value
—
—
67,500
Redeemable stock put
24,176
17,582
17,582
SHAREHOLDERS’ EQUITY:
Class A, Series 1 common stock, $.01 par value;
5,725 shares authorized; 2,863 shares issued and
outstanding at June 30, 2005, and December 31, 2004
and 2003
115
115
115
Class A, Series 2 common stock, $.01 par value;
75,000 shares authorized; 51,558, 51,537 and
51,534 shares issued at June 30, 2005, and
December 31, 2004 and 2003, respectively, and 50,023,
50,002 and 50,000 shares outstanding at June 30, 2005,
and December 31, 2004 and 2003, respectively
2,062
2,061
2,061
Treasury stock, at cost; 1,534 Class A, Series 2
common stock shares
Transaction fees, net (including $6,370 and $5,514 with
related-parties for the six months ended June 30, 2005 and
2004, respectively, and $10,861, $11,556 and $52,785 with
related-parties in 2004, 2003 and 2002, respectively)
$
60,120
$
42,621
$
90,906
$
81,434
$
118,794
Data services fees (including $111 and $62 with related-parties
for the six months ended June 30, 2005 and 2004,
respectively, and $178 with related-parties in 2004)
5,486
4,512
9,691
7,742
5,141
Trading access fees
1,985
1,784
3,595
2,461
490
Other (including $1,164 and $665 with related-parties for the
six months ended June 30, 2005 and 2004, respectively, and
$1,869 and $605 with related-parties in 2004 and 2003,
respectively)
1,767
1,554
4,222
2,109
1,065
Total revenues
69,358
50,471
108,414
93,746
125,490
Operating expenses:
Cost of hosting
624
698
1,279
1,715
3,962
Compensation and benefits
16,399
13,218
30,074
26,236
27,906
Professional services
7,114
7,562
14,523
15,138
15,876
Selling, general and administrative
7,217
6,200
13,120
12,398
12,425
Floor closure costs
4,814
—
—
—
—
Settlement expense
15,000
—
—
—
—
Depreciation and amortization
7,755
8,170
17,024
19,341
14,368
Total operating expenses
58,923
35,848
76,020
74,828
74,537
Operating income
10,435
14,623
32,394
18,918
50,953
Other income (expense):
Interest income
1,410
1,260
2,885
1,694
1,956
Interest expense
(315
)
(39
)
(137
)
(80
)
(400
)
Other income (expense), net
1,070
(199
)
(1,420
)
(666
)
(64
)
Total other income, net
2,165
1,022
1,328
948
1,492
Income before income taxes
12,600
15,645
33,722
19,866
52,445
Income tax expense
3,871
5,586
11,773
6,489
17,739
Net income
$
8,729
$
10,059
$
21,949
$
13,377
$
34,706
Redemption adjustments to redeemable stock put
(6,594
)
—
—
8,378
(10,730
)
Deduction for accretion of Class B redeemable common stock
Foreign currency translation adjustments, net of tax of $68 and
$24 for the six months ended June 30, 2005 and 2004,
respectively, and $344, $355 and $291 for the years ended
December 31, 2004, 2003 and 2002, respectively
(10,694
)
1,623
10,693
13,129
10,134
Change in fair value of derivatives, net of tax of $40 and
($239) for the six months ended June 30, 2005 and 2004,
respectively, and ($1,250) and ($266) for the years ended
December 31, 2004 and 2003, respectively
IntercontinentalExchange, Inc. (the “Company”) (a
Delaware corporation) owns and operates an Internet-based,
global electronic marketplace for facilitating trading in
futures and over-the-counter (“OTC”) commodities and
derivative financial products (the “Platform”). The
Company owns 100% of IPE Holding Plc, which is the sole
shareholder of the International Petroleum Exchange of London
Limited (the “IPE”). The IPE operates as a United
Kingdom (“U.K.”) Recognized Investment Exchange in
London, England, for the purpose of trading energy commodity
futures and options contracts both electronically through the
Platform and through floor-based open-outcry trading in London.
Headquartered in Atlanta, Georgia, the Company also has offices
in London, New York, Chicago, Houston, Singapore and recently
opened a new office in Calgary in January 2005.
The Company currently operates the Platform as an exempt
commercial market (“ECM”) pursuant to the Commodity
Exchange Act and regulations of the Commodity Futures Trading
Commission (“CFTC”). As an ECM, the Company is
required to file a notice with the CFTC, provide the CFTC with
access to its trading system and respond to requests for
information or records from the CFTC.
The IPE is subject to supervision in the U.K. by the Financial
Services Authority in accordance with the Financial Services and
Markets Act 2000. The IPE is responsible for maintaining
financial resources sufficient for the proper performance of its
functions as a Recognized Investment Exchange, and, in order to
satisfy this requirement, is obligated to maintain a minimum
amount of liquid financial assets at all times.
The Company also owns 100% of IntercontinentalExchange Services,
Inc. (“ICE Services US”), The 10x Group, L.P. and The
10x Group (UK) L.L.P (collectively, “10x”),
IntercontinentalExchange Services (UK) Ltd. (“ICE Services
UK”) and IntercontinentalExchange Technologies Ltd.
(“ICE Tech”). ICE Services US is based in New York and
performs global marketing and business development services for
the Company, including, but not limited to, targeted promotions
and client development. 10x is a market data services company
based in Houston and London that offers subscriptions to OTC end
of day reports, market price validation curves, customized data
packages, real-time IPE price information through terminal and
license fees and real-time view only screen access to the
Platform through WebICE. The IPE began selling its market data
services through 10x in November 2004. WebICE is a web-based
desktop service whose subscribers can view every bid, offer and
trade as well as depth of market across all of the North
American power and gas commodity markets traded on the Platform.
ICE Services UK, which is based in London, supports trading of
European energy commodities, performs helpdesk functions and
received authorization by the Financial Services Authority in
January 2003 to act as an arranger of deals in investments. ICE
Tech operates the fully functional disaster recovery facility
for the Platform.
2. Summary of Significant
Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements are presented
in accordance with U.S. generally accepted accounting
principles. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
intercompany balances and transactions between the Company and
its wholly-owned subsidiaries have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires the
Company’s management to make estimates and assumptions that
affect the reported amounts of
Notes to Consolidated Financial
Statements — (Continued)
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Estimates
also affect the reported amounts of expenses during the
reporting period. Actual amounts could differ from those
estimates.
Segment and Geographic Information
The Company currently has two reportable operating segments: its
OTC business segment and its futures business segment. Both
segments operate across domestic and international markets.
Substantially all of the Company’s identifiable assets are
in the U.S. and the U.K.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments
with original maturity dates of three months or less at the time
of purchase to be cash equivalents.
Short-Term Investments
The Company invests a portion of its cash in excess of
short-term operating needs and a portion of its restricted cash
in U.S. AAA rated 28-day Auction Rate Securities
(“ARS”). The Company classifies these investments as
available-for-sale in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities. ARS are long-term instruments whose interest
rates or dividends are reset frequently, usually every seven to
49 days. The reset mechanism occurs via a Dutch auction,
wherein purchasers and sellers submit their orders for ARS to
registered broker-dealers. The highest bid that clears the
auction is the interest rate or dividend applied to the entire
issue until the next auction date. While there is no guarantee
that a sell order will be filled, it is rare for it not to be
filled due to the high credit quality of the ARS. Even though
the Company only purchases 28-day auction rate issues, the
Company is required to classify these securities as short-term
investments instead of cash equivalents in the accompanying
consolidated balance sheets as the original maturity of the ARS
is in excess of 90 days. As of December 31, 2004, the
contractural maturities of these securities are in excess of ten
years. The ARS investments are classified as current assets
based upon the Company’s intent and ability to use these
investments as necessary for short-term requirements.
Available-for-sale investments are carried at their fair value.
Based on the short-term nature of these 28-day auction rate
issues and their market rates, the estimated fair value of the
ARS approximates carrying value. Therefore, the net unrealized
gains or losses are immaterial. Proceeds from sales of
available-for-sale investments, including the restricted
short-term investments, were $78.7 million,
$11.1 million and $49.2 million during the years ended
December 31, 2004, 2003 and 2002, respectively. Purchases
of available-for-sale investments, including the restricted
short-term investments, were $48.0 million,
$43.0 million and $53.0 million during the years ended
December 31, 2004, 2003 and 2002, respectively. Gross
realized gains on the short-term investments, including the
restricted short-term investments, were $394,000, $116,000 and
$165,000 during the years ended December 31, 2004, 2003 and
2002, respectively, and have been classified as interest income
in the accompanying consolidated statements of income.
Restricted Cash and Restricted Short-Term Investments
The Company classifies all cash and short-term investments that
are not available for general use by the Company, either due to
Financial Services Authority requirements or through
restrictions in specific agreements, as restricted in the
accompanying consolidated balance sheets (Note 3).
Notes to Consolidated Financial
Statements — (Continued)
Property and Equipment
Property and equipment are recorded at cost, reduced by
accumulated depreciation (Note 4). Depreciation and
amortization expense is computed using the straight-line method
based on estimated useful lives of the assets, or in the case of
leasehold improvements, the shorter of the initial lease term or
the estimated useful life of the asset. The Company reviews the
remaining estimated useful lives of its property and equipment
at each balance sheet date and will make adjustments to the
estimated remaining useful lives whenever events or changes in
circumstances indicate that the remaining useful lives have
changed. Gains on disposals of property and equipment are
included in other income and losses on disposals of property and
equipment are included in depreciation expense. Maintenance and
repairs are expensed as incurred.
Software Development Costs
The Company capitalizes costs, both internal and external direct
and incremental costs, 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. Software development
costs incurred during the preliminary or maintenance project
stage are expensed as incurred, while costs incurred during the
application development stage are capitalized and are amortized
using the straight-line method over the useful life of the
software, not to exceed three years. Amortization of these
capitalized costs begins only when the software becomes ready
for its intended use. General and administrative costs related
to developing or obtaining such software are expensed as
incurred.
Interest Costs
The Company’s policy is to capitalize qualified interest
costs incurred on internally developed software projects that
are in the application development stage and that extend beyond
six months. For the years ended December 31, 2004, 2003 and
2002, the Company incurred interest costs of $137,000, $80,000
and $400,000, respectively. No interest was capitalized during
the years ended December 31, 2004, 2003 and 2002 as no
internally developed software projects extended beyond six
months.
Goodwill and Other Intangible Assets
The Company has recorded goodwill for the excess of the purchase
price for its acquisition of the IPE during June 2001 over the
fair value of identifiable net assets acquired, including other
identified intangible assets (Note 5). The Company
recognizes specifically identifiable intangibles when a specific
right or contract is acquired. Finite-lived intangible assets
are amortized on a straight-line basis over the lesser of their
contractual or estimated useful lives.
The Company’s indefinite-lived intangible assets are
evaluated for impairment annually in its fiscal fourth quarter
or sooner if events indicate that the asset may be impaired.
Such evaluation includes comparing the fair value of the asset
with its carrying value. If the fair value of the
indefinite-lived intangible asset is less than its carrying
value, an impairment loss is recognized in an amount equal to
the difference. The reporting unit level for the Company’s
goodwill and the majority of its other intangible assets is the
futures business segment, which relates to the operations of the
IPE. This analysis did not result in an impairment charge during
the years ended December 31, 2004, 2003 or 2002.
The Company tests its goodwill for impairment at the reporting
unit level utilizing a two-step methodology. The initial step
requires the Company to determine the fair value of each
reporting unit and compare it to the carrying value, including
goodwill and other intangible assets, of such reporting unit. If
the fair value exceeds the carrying value, no impairment loss is
recognized and the second step, which is a calculation of the
impairment, is not performed. However, if the carrying value of
the reporting unit exceeds
Notes to Consolidated Financial
Statements — (Continued)
its fair value, an impairment charge is recorded equal to the
extent that the carrying amount of goodwill exceeds its implied
fair value.
Intellectual Property
All costs related to internally developed patents and trademarks
are expensed as incurred. All costs related to purchased
patents, trademarks and internet domain names are recorded as
other intangible assets and are amortized on a straight-line
basis over their estimated useful lives. All costs related to
licensed patents are capitalized and amortized on a
straight-line basis over the term of the license.
Long-Lived Assets and Finite-Lived Intangible Assets
The Company reviews its property and equipment and finite-lived
intangible assets, for impairment at each balance sheet date and
whenever events or changes in circumstances indicate that the
carrying amount may not be fully recoverable. To analyze
recoverability, the Company projects undiscounted net future
cash flows over the remaining life of such assets. If these
projected cash flows are less than the carrying amount, an
impairment would be recognized, resulting in a write-down of
assets with a corresponding charge to earnings. The impairment
loss is measured based upon the difference between the carrying
amount and the fair value of the assets.
Income Taxes
The Company and its U.S. subsidiaries file a consolidated
U.S. federal income tax return. State income tax returns
are filed on a separate, combined or consolidated basis in
accordance with relevant state laws and regulations. The
Company’s foreign subsidiaries are based in the U.K. and
they file separate local country income tax returns and take
advantage of the U.K.’s group relief provisions when
applicable. The Company utilizes the liability method of
accounting for income taxes. Under the liability method,
deferred taxes are determined based on the difference between
the financial and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the
differences are expected to reverse. Deferred tax expenses and
benefits are recognized for changes in deferred tax assets and
liabilities.
The difference between our actual income tax rate and our
effective tax rate for a given period is primarily a reflection
of the tax effects of our foreign operations, general business
and tax credits, state income taxes and the non-deductibility of
certain expenses. We have provided for U.S. income taxes on
all undistributed earnings of our foreign subsidiaries as they
are not expected to be permanently reinvested.
Revenue Recognition
The Company’s revenues primarily consist of commission and
exchange fee revenues for OTC transactions executed over the
Platform and for futures transactions executed through the IPE
and are recognized on the date the transactions occur. The
Company calculates the commission fee revenues based on the
volume of each commodity traded on the Platform multiplied by
the commission rate for each commodity type. The IPE exchange
fee revenues are determined on the basis of an exchange fee
charged for each “lot” or contract traded on the
exchange. Exchange fees are calculated by LCH.Clearnet (formerly
the London Clearing House or “LCH”) on the IPE’s
behalf and are transferred to the IPE on a monthly basis. The
LCH, which is a leading clearinghouse based in London, also
calculates and collects fees for cleared OTC contracts traded on
the Platform.
Transaction fees are recorded net of rebates of
$3.3 million, $981,000 and $887,000 for the years ended
December 31, 2004, 2003 and 2002, respectively. The Company
rebates a portion of the exchange fees paid by IPE independent
local traders for lots bought and sold on the same day for the
same price. The Company also
Notes to Consolidated Financial
Statements — (Continued)
rebates a portion of the commission fees paid by certain market
makers in the OTC business. The 2004 rebates include
$2.3 million for a two month rebate program in November and
December 2004 designed to promote electronic futures trading in
the Brent Crude futures market on the Platform.
Data services revenues include terminal and license fees
received from data vendors in exchange for the provision of
real-time IPE price information. Data services fees are charged
to data vendors on a monthly basis based on the number and type
of terminals they have carrying IPE data. Each data vendor also
pays an annual license fee to the IPE, which is deferred and
recognized as revenue ratably over the period of the annual
license. Data services revenues include view-only access charges
to subscribers to view real-time OTC price information on the
Platform through 10x. 10x also publishes end of day trading and
price reports and provides Market Price Validation services. The
Market Price Validation service provides validation of
long-dated and illiquid swaps and options valuations based on
inputs from counterparties in the marketplace submitting their
trader valuations for open positions. 10x invoices its
subscribers either on a monthly or annual basis. For those 10x
subscribers billed on an annual basis, the revenues are deferred
and amortized ratably over the period of the annual
subscriptions.
Trading access revenues include monthly minimum commission
shortfall fees charged to customers that are signed up to trade
on the OTC Platform. The monthly minimum commission amount for
each company is based on the number of users at each company
signed up to trade on the Platform. The difference between the
monthly minimum commission total for each company and the actual
amount of commissions paid that month for trading activity is
recognized as monthly minimum commission shortfall trading
access revenues. The actual amount of commissions paid that
month for trading activity is recognized as transaction fee
revenues. Trading access revenues also relate to annual member
subscription and system user fees charged to IPE customers,
which are deferred and amortized ratably over the periods to
which they relate.
Other revenues primarily relate to revenue generated from IPE
equipment rentals, IPE communications charges and IPE training
seminars, and are recognized as services are provided. The IPE
equipment rentals are charged in advance and are amortized
ratably over the period to which they relate. Other revenues
also include licensing and service fees charged to the Chicago
Climate Exchange, Inc. The Chicago Climate Exchange is a
self-regulated exchange that administers a voluntary
multi-sector greenhouse gas reduction and trading program for
North America. The Company has been contracted to provide,
design and service the Chicago Climate Exchange’s
electronic trading platform. The license and service fees are
billed in advance to the Chicago Climate Exchange on a monthly
basis and are recognized as services are provided. We recognize
technology development fees as revenues when the development
work is completed and accepted by the Chicago Climate Exchange.
Sources of Supplies
The Company uses ten primary vendors for equipment used in the
Platform and its network. If these vendors were unable to meet
the Company’s needs, management believes that the Company
could obtain this equipment from other vendors on comparable
terms and that its operating results would not be materially
adversely affected.
Credit Risk and Significant Customers
The Company’s accounts receivable related to its OTC
business segment subjects the Company to credit risk, as the
Company does not require its customers to post collateral for
bilateral trades. The Company does not risk its own capital in
transactions or extend credit to market participants in any
commodities markets. The Company limits its risk of loss by
allowing trading access to the Platform to companies that
qualify as eligible commercial entities, as defined in the
Commodity Exchange Act, and by terminating access to the
Platform by entities with delinquent accounts.
Notes to Consolidated Financial
Statements — (Continued)
Beginning in January 2003, the Company received approval from
the CFTC permitting registered traders and locals with floor or
electronic trading privileges on any regulated U.S. futures
exchange to qualify as eligible commercial entities and,
therefore, to execute OTC transactions on the Platform. The
Company also received approval in October 2004 from the CFTC
permitting IPE’s registered brokers and local traders to
transact in the OTC markets for their own accounts. This has
allowed IPE members and traders access to both the futures
markets and the OTC markets on one screen via the Platform. The
launch and growth of cleared OTC products also limits the
Company’s risk of loss in its OTC business as the LCH
collects cleared transaction fees on the date the transactions
occur and transfers these fees to the Company on a monthly
basis. The LCH serves as the central counterparty to all trades
executed by its members. During the year ended December 31,2004, 54% of the OTC business segment commission fee revenues
were from cleared trades.
The Company’s large customer base also mitigates the
concentration of credit risk as the Company had over
660 companies registered to trade on the Platform as of
December 31, 2004 and another 200 companies with
view-only access rights through 10x. There were no accounts
receivable balances greater than 10% of total consolidated
accounts receivable as of June 30, 2005, December 31,2004 or December 31, 2003.
Revenues from one customer, which was a related-party for a
portion of the year ended December 31, 2002, comprised 10%
of total consolidated revenues for the year ended
December 31, 2002. No other customer accounted for more
than 10% of total consolidated revenues during any of the
periods presented in the accompanying consolidated statements of
income, including the six months ended June 30, 2005 and
2004 and the years ended December 31, 2004 and 2003. See
Note 12 where related-parties are discussed in more detail.
Stock-Based Compensation
The Company currently sponsors an employee stock option plan,
described more fully in Note 10. The Company accounts for
the stock-based compensation plan under the intrinsic value
method in accordance with Accounting Principles Board
(“APB”) Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations. Therefore,
the Company recognizes no compensation expense for the stock
option grants as long as the exercise price is equal to or more
than the fair value of the shares at the date of grant. The
Company has adopted the disclosure-only provisions under
SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation —
Transaction and Disclosure. Please refer to the New
Accounting Pronouncements section of Note 2 for information
regarding the Company’s plans regarding the implementation
of SFAS No. 123 (revised 2004), Share-Based
Payment. Had the Company elected to adopt the fair value
recognition provisions of SFAS No. 123, pro forma net
Notes to Consolidated Financial
Statements — (Continued)
income available to common shareholders and earnings per common
share for the six months ended June 30, 2005 and 2004 and
for the years ended December 31, 2004, 2003 and 2002 would
be as follows:
Net income available to common shareholders, as reported
$
2,135
$
10,059
$
21,949
$
19,987
$
20,320
Add: Stock-based compensation expense included in reported net
income, net of tax
544
3
243
4
—
Deduct: Total stock-based compensation expense determined under
the fair value method for all awards, net of tax
(3,726
)
(2,056
)
(4,970
)
(3,494
)
(2,638
)
Net income (loss) available to common shareholders, pro forma
$
(1,047
)
$
8,006
$
17,222
$
16,497
$
17,682
Earnings (loss) per common share:
Basic — as reported
$
0.04
$
0.19
$
0.42
$
0.37
$
0.37
Basic — pro forma
$
(0.02
)
$
0.15
$
0.33
$
0.30
$
0.33
Diluted — as reported
$
0.04
$
0.19
$
0.41
$
0.37
$
0.37
Diluted — pro forma
$
(0.02
)
$
0.15
$
0.32
$
0.30
$
0.32
Earnings Per Common Share
Basic earnings per common share is calculated using the weighted
average common shares outstanding during the year. Common
equivalent shares from stock options, restricted stock awards
and warrants, using the treasury stock method, are also included
in the diluted per share calculations unless their effect of
inclusion would be antidilutive (Note 17).
Treasury Stock
The Company records treasury stock activities under the cost
method whereby the entire cost of the acquired stock is recorded
as treasury stock (Note 10).
Fair Value of Financial Instruments
SFAS No. 107, Disclosure about the Fair Value of
Financial Instruments, requires the disclosure of the fair
value of financial instruments, including assets and liabilities
recognized in the consolidated balance sheets. The
Company’s financial instruments include cash and cash
equivalents, short-term investments, restricted cash, accounts
receivable, short-term and long-term debt and other short-term
assets and liabilities. Based on the short-term nature of these
financial instruments or their market rates, the estimated fair
values of the Company’s financial instruments approximate
their carrying values as of December 31, 2004 and 2003.
Foreign Currency Transaction Adjustments and Transactions
The functional currency of the Company’s foreign
subsidiaries is the U.K. pounds sterling. The Company translates
these assets and liabilities into U.S. dollars using
period-end exchange rates and revenues and
Notes to Consolidated Financial
Statements — (Continued)
expenses are translated using the average exchange rates for the
reporting period. Translation adjustments are recorded in
accumulated other comprehensive income, a separate component of
shareholders’ equity in the accompanying consolidated
balance sheets and in the consolidated statements of
comprehensive income. Gains and losses from foreign currency
transactions, such as those resulting from the settlement of
foreign receivables or payables or the Company’s foreign
subsidiaries cash accounts held in U.S. dollars, are
included in other income (expense) in the accompanying
consolidated statements of income and resulted in net gains
(losses) of $1.1 million and ($173,000), during the six
months ended June 30, 2005 and 2004, respectively, and
($1.4 million), ($644,000) and ($149,000) for the years
ended December 31, 2004, 2003 and 2002, respectively.
Hedging
During the years ended December 31, 2004 and 2003, the
Company entered into foreign currency hedging activities
primarily to protect the net investment in its foreign
subsidiaries (Note 14). In accordance with
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, the Company is required to recognize
all derivative financial instruments as either assets or
liabilities in the accompanying consolidated balance sheets at
fair value. The effective portion of any gain or loss on these
derivative financial instruments, which have been designated as
a hedge of a net investment in foreign operations, are reflected
in accumulated other comprehensive income. Any ineffective
portion of any gain or loss on these derivative financial
instruments are immediately recognized in earnings. The
Company’s foreign exchange forward contracts entered into
during the years ended December 31, 2004 and 2003 met the
requirements for hedge accounting, including correlation, and
qualified as effective hedges. Therefore, all gains or losses on
these foreign exchange forward contracts have been reflected in
other comprehensive income in the accompanying consolidated
statements of comprehensive income and balance sheets.
Marketing and Promotional Fees
Advertising costs, including print advertising and production
costs, product promotion campaigns and seminar, conference and
convention costs related to trade shows and other industry
events, are expensed as incurred. The Company incurred
advertising costs of $849,000, $1.2 million and
$1.4 million during the years ended December 31, 2004,
2003 and 2002, respectively.
New Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards
Board (“FASB”) issued SFAS No. 123 (revised
2004), Share-Based Payment, which is a revision of
SFAS No. 123. SFAS No. 123(R) supersedes APB
Opinion No. 25 and amends SFAS No. 95,
Statement of Cash Flows. Generally, the approach in
SFAS No. 123(R) is similar to the approach described
in SFAS No. 123. However, SFAS No. 123(R)
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income
statement based on their fair value. Pro forma disclosure is no
longer an alternative.
The SEC announced on April 14, 2005 that it would provide
for a phased-in implementation process for SFAS No. 123(R).
The SEC would require that registrants that are not small
business issuers adopt SFAS No. 123(R)’s fair value
method of accounting for share-based payments to employees no
later than the beginning of the first fiscal year beginning
after June 15, 2005. As a result, non-small business
registrants with a fiscal year ended December 31 will not
be required to adopt SFAS No. 123(R) until January 1,2006, a delay of six months. Early adoption will be permitted in
periods in which financial statements have not been issued. The
Company expects to adopt SFAS No. 123(R) on
January 1, 2006.
Notes to Consolidated Financial
Statements — (Continued)
SFAS No. 123(R) permits companies to adopt its
requirements using one of two methods:
1. A “modified prospective” method in which
compensation cost is recognized beginning with the effective
date (a) based on the requirements of
SFAS No. 123(R) for all share-based payments granted
after the effective date and (b) based on the requirements
of SFAS No. 123 for all awards granted to employees
prior to the effective date of SFAS No. 123(R) that
remain unvested on the effective date.
2. A “modified retrospective” method which
includes the requirements of the modified prospective method
described above, but also permits entities to restate based on
the amounts previously recognized under SFAS No. 123
for purposes of pro forma disclosures either (a) all prior
periods presented or (b) prior interim periods of the year
of adoption.
The Company plans to adopt SFAS No. 123(R) using the
modified prospective method.
As permitted by SFAS No. 123, the Company currently
accounts for share-based payments to employees using APB Opinion
No. 25’s intrinsic value method and, as such,
generally recognizes no compensation cost for employee stock
options. Accordingly, the adoption of
SFAS No. 123(R)’s fair value method will have a
significant impact on our result of operations, although it will
have no impact on our overall financial position. The impact of
adoption of SFAS No. 123(R) cannot be predicted at
this time because it will depend on levels of share-based
payments granted in the future. However, had the Company adopted
SFAS No. 123(R) in prior periods, the impact of the
standard would have approximated the impact of
SFAS No. 123 as described in the disclosure of pro
forma net income and earnings per share in Notes 2 and 10.
It should be noted that there are certain differences between
the requirements of SFAS No. 123 and
SFAS No. 123(R) that may result in a material
difference in the impact of the fair value calculations on the
Company’s net income and earnings per share. This includes
the requirement under SFAS No. 123(R) to estimate
forfeitures, the requirement that an excess tax benefit reduces
taxes payable before it is realized, potential changes to the
capitalization of compensation cost and the Company’s use
of industry volatility figures in prior periods.
SFAS No. 123(R) also requires the benefits of tax
deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating
cash flow as required under current literature. This requirement
will reduce net operating cash flows and increase net financing
cash flows in periods after adoption. The Company cannot
estimate what those amounts may be in the future because they
depend on, among other things, when employees exercise stock
options. The Company did not recognize any tax deductions in
excess of the recognized compensation cost for the years ended
December 31, 2004, 2003 and 2002.
In December 2004, FASB Staff Position No. SFAS 109-2,
Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of
2004 (“FSP SFAS 109-2”) was issued. FSP
SFAS 109-2 provides guidance under SFAS 109,
Accounting for Income Taxes
(“SFAS No. 109”), for recording the
potential impact of the repatriation provisions of the American
Jobs Creation Act of 2004 (the “Jobs Act”), enacted on
October 22, 2004. FSP SFAS 109-2 allows time beyond
the financial reporting period of enactment to evaluate the
effects of the Jobs Act before applying the requirements of FSP
SFAS 109-2. Accordingly, the Company is evaluating the
potential effects of the Jobs Act and has not adjusted the tax
expense or deferred tax liability as of December 31, 2004
to reflect the requirements of FSP SFAS 109-2
(Note 11).
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, a replacement of
APB No. 20 and FASB Statement No. 3
(“SFAS No. 154”). SFAS No. 154
requires retrospective application to prior periods’
financial statements of a voluntary change in accounting
principle unless it is impracticable. APB Opinion No. 20
Accounting Changes, previously required that most
voluntary changes in accounting principle be recognized by
including in net income of the period of the change the
cumulative effect of changing to the new accounting principle.
This statement is effective for the Company as
Notes to Consolidated Financial
Statements — (Continued)
of January 1, 2006. We do not believe that the adoption of
SFAS No. 154 will have a material impact on the
Company’s consolidated financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to
the current year’s financial statement presentation.
Unaudited Interim Financial Information
The accompanying unaudited consolidated financial statements
have been prepared by the Company pursuant to the rules and
regulations of the SEC regarding interim financial reporting.
Accordingly, the unaudited interim consolidated financial
statements do not include all of the information and footnotes
required by generally accepted accounting principles for
complete financial statements and should be read in conjunction
with the audited consolidated financial statements and related
notes thereto. The accompanying unaudited consolidated financial
statements reflect all adjustments that are, in the opinion of
the Company’s management, necessary for a fair presentation
of results for the interim periods presented. Preparing
financial statements requires management to make estimates and
assumptions that affect the amounts that are reported in the
consolidated financial statements and accompanying disclosures.
Although these estimates are based on management’s best
knowledge of current events and actions that the Company may
undertake in the future, actual results may be different from
the estimates. The results of operations for the six months
ended June 30, 2005 are not necessarily indicative of the
results to be expected for any future period or the full fiscal
year.
3.
Restricted Cash and Short-Term Investments
As a Recognized Investment Exchange, the Financial Services
Authority requires the IPE to restrict the use of the equivalent
of six months of operating expenditures in cash or cash
equivalents at all times. As of December 31, 2004 and 2003,
this amount was equal to $12.4 million and
$11.9 million, respectively, and is reflected as restricted
cash in the accompanying consolidated balance sheets.
ICE Services UK is regulated by the Financial Services Authority
as an agency broker. The Financial Services Authority requires
ICE Services UK to maintain a minimum level of financial
resources, which is calculated annually on the basis of
1/4
of the relevant annual expenditures, adjusted for any illiquid
assets. As of December 31, 2004 and 2003, the resource
requirement was equal to $1.0 million and $874,000,
respectively, and is reflected as restricted cash in the
accompanying consolidated balance sheets.
In November 2004, the Company entered into a $25.0 million
revolving credit agreement with Wachovia Bank, National
Association (“Wachovia”) (Note 7). The Company is
required to maintain a $5.0 million money market account
with Wachovia until it has transferred the primary domestic and
international deposit accounts to the lender, which will likely
occur during 2005. As of December 31, 2004, this
$5.0 million balance is reflected as restricted cash in the
accompanying consolidated balance sheets.
In January 2003, the FASB issued Interpretation No. 46
(“FIN 46”), Consolidation of Variable Interest
Entities. FIN 46 requires a variable interest entity to
be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest
entity’s activities or entitled to receive a majority of
the entity’s residual returns or both. Previously, entities
were generally consolidated by a company that has a controlling
financial interest through ownership of a majority voting
interest in the entity. The Company was required to adopt
FIN 46 in the first quarter of 2004, but chose to adopt it
early during November 2003.
The Company had an interest in a special purpose or variable
interest entity that it previously was not required to
consolidate based on preexisting authoritative accounting
guidance. However, given that the Company had the ability to
receive all of the variable interest entity’s expected
residual losses and returns, the
Notes to Consolidated Financial
Statements — (Continued)
Company was considered the primary beneficiary under FIN 46
and was required to consolidate the entity. The result of the
adoption of FIN 46 and the consolidation of the variable
interest entity in November 2003 was an increase to
restricted short-term investments and a corresponding increase
to additional paid-in capital for $24.0 million. The
$24.0 million held by the special purpose entity was
pledged to a bank as a guarantee to secure a letter-of-credit
facility for the Company’s Class B redeemable common
stock and was invested in ARS investments. Therefore, these
amounts were classified as restricted short-term investments in
the accompanying consolidated balance sheets as of
December 31, 2003. The Class B redeemable common stock
was redeemed in November 2004 and the entire $24.0 million
in restricted short-term investments was used for a portion of
the redemption (Note 8).
For the years ended December 31, 2004, 2003 and 2002,
amortization of software and internally developed software was
$8.3 million, $9.1 million and $6.0 million,
respectively, and depreciation of all other property and
equipment was $5.2 million, $7.3 million and
$6.0 million, respectively.
In January 2004, the Company extended the remaining estimated
useful lives of various computer and network equipment from
March 2005 to December 2005. The Company’s decision to
extend the useful lives of these assets was based on an internal
analysis that indicated the estimated useful lives would extend
beyond the original estimate of three years. This had the impact
of deferring $676,000 of depreciation expense, $440,000 on an
after tax basis, that would have otherwise been recorded during
the year ended December 31, 2004. The change in estimate
had no impact on earnings per share as reported during the year
ended December 31, 2004. We will continue to review the
remaining estimated useful lives of our property and equipment
and will make adjustments whenever events or changes in
circumstances indicate that the remaining useful lives have
changed.
The IPE has contractual customer relationships with its members
and quote vendors. A member is defined as a company and/or an
individual who has rights to execute and/or clear exchange
trades directly through the IPE’s exchange. A quote or data
vendor is defined as a data reseller who distributes IPE
real-time price information to its customers. These customer
relationships have been classified as intangible assets and are
being amortized over their estimated useful lives of five years.
As of December 31, 2004 and 2003, the net carrying value of
these customer relationships totaled $1.8 million and
$2.7 million, respectively.
As discussed in Note 1, the IPE is a Recognized Investment
Exchange that is regulated by the Financial Services Authority
in accordance with the Financial Services and Markets Act 2000.
The Recognized Investment Exchange status allows the IPE to
carry out its business as a futures and options exchange. The
process of obtaining recognition as an Investment Exchange in
the U.K. involves applicants incurring significant time and
legal expense, which the Company avoided by its acquisition of
the IPE. The IPE’s Recognized Investment Exchange status
has therefore been classified as an intangible asset due to its
operating agreement/license with the Financial Services
Authority. In accordance with the adoption of
SFAS No. 142 on January 1, 2002 as discussed in
Note 2, the Company did not recognize any amortization
expense on the Recognized Investment Exchange license intangible
asset during the years ended December 31, 2004, 2003 and
2002 as it has an indefinite useful life. As of
December 31, 2004 and 2003, the carrying value of the
Recognized Investment Exchange license totaled $1.4 million
and $1.3 million, respectively.
During 2003, the Company purchased trademarks and internet
domain names from various third parties for $665,000. These
trademarks and internet domain names have been classified as
intangible assets and are being amortized over their estimated
useful lives of five years. As of December 31, 2004 and
2003, the carrying value of these trademarks and internet domain
names totaled $433,000 and $566,000, respectively.
In accordance SFAS No. 142, the Company did not
recognize any amortization expense on goodwill during the years
ended December 31, 2004, 2003 and 2002. As of
December 31, 2004 and 2003, the Company’s goodwill
balance totaled $82.5 million and $76.8 million,
respectively. The increase in goodwill and other intangible
assets primarily resulted from translation adjustments.
Notes to Consolidated Financial
Statements — (Continued)
For the years ended December 31, 2004, 2003 and 2002,
amortization of other intangible assets was $1.5 million,
$1.0 million and $876,000, respectively. The Company
expects future amortization expense from other intangible assets
as of December 31, 2004 to be as follows (in thousands):
2005
$
1,329
2006
691
2007
133
2008
34
$
2,187
6.
Deferred Revenue
Deferred revenue relates to the unamortized annual billings for
IPE member subscription and user fees, IPE equipment rentals and
IPE and 10x market data services, reports and subscriptions
which are recognized as revenue as services are provided.
Deferred revenue also includes the Chicago Climate Exchange
license and service fees that are billed monthly in advance and
for certain IPE training seminars that are pre-billed.
7.
Current and Long-Term Debt
Revolving Credit Facility
On November 17, 2004, the Company entered into a
$25.0 million revolving credit agreement (the
“Facility”) with Wachovia. Under the terms of the
Facility, the Company can borrow an aggregate principal amount
of up to $25.0 million at any time from the closing date of
the Facility through the termination date of the Facility, which
is November 17, 2006. The Company also has the right to
repay and reborrow loans or to permanently reduce in whole or in
part the amount available under the Facility at any time prior
to the termination date of the Facility without premium or
penalty. The Facility includes an unused line fee that is equal
to the unused maximum revolver amount multiplied by an
applicable margin rate and is payable on a quarterly basis. The
applicable margin rate ranges from 0.15% to 0.25% based on a
cash flow leverage ratio calculated on a trailing twelve month
period. Based on this calculation, the applicable margin rate
was 0.15% as of December 31, 2004.
The loans under the Facility bear interest on the principal
amounts outstanding at a rate of LIBOR plus an applicable
margin. The Company has the option to select the interest period
applicable to any loans at the time of borrowing. The interest
periods shall either be a daily LIBOR market index loan or a
LIBOR rate loan with a period of one, three or six months.
Interest on each LIBOR market index loan shall be payable on a
monthly basis and the interest on the LIBOR rate loans shall be
payable on the last day of each interest period. However, if the
interest period is six months, interest shall be payable at and
on the last day of each three month period during the interest
period. The applicable margin rate ranges from 0.85% to 1.05%
based on a cash flow leverage ratio calculated on a trailing
twelve month period. As of December 31, 2004, the
applicable margin rate was 0.85%.
The Company borrowed the entire $25.0 million available
under the Facility on November 23, 2004. These funds were
used for a portion of the $67.5 million redemption of the
Company’s Class B redeemable common stock that
occurred in November 2004 (Note 8). As of December 31,2004, $13.0 million was held in a six month LIBOR rate loan
with a locked-in interest rate, including the applicable margin
rate, of 3.40%. The remaining balance of $12.0 million was
held in a daily LIBOR market index loan with an interest rate,
including the applicable margin rate, of 3.25% as of
December 31, 2004. The Company repaid the
$12.0 million LIBOR market index loan in January 2005 with
excess cash. Therefore, the $12.0 million was shown as a
current liability in the accompanying consolidated balance
sheets as of December 31, 2004.
Notes to Consolidated Financial
Statements — (Continued)
The Facility has a negative pledge on all the assets of the
Company. The Facility also contains certain affirmative and
negative covenants including, but not limited to, cash flow
leverage ratios, minimum tangible net worth ratios and
limitations or approvals needed from Wachovia for acquisitions,
investments, external debt and other fundamental changes to the
business.
Term Notes Payable
In May 2000, the Company entered into a related-party term loan
note agreement with two of the founding shareholders of the
Company (the “Term Notes”). The Term Notes bore
interest on the principal amounts at one-month LIBOR, with
interest compounding monthly and payable at the maturity date.
Interest of $264,000 was accrued to the principal balance of the
Term Notes during the year ended December 31, 2002 in
accordance with the terms of the Term Notes agreements. The Term
Notes matured and $16.5 million was repaid in November
2002. The Term Notes were cancelled and all liens associated
therewith were released in November 2002.
8.
Class B Redeemable Common Stock
In June 2001, the Company purchased the IPE. The Company
acquired the share capital of the IPE in a tax-free
stock-for-stock exchange. Each IPE shareholder received, for
each share tendered to the Company, one Class A,
Series 1 common share and one Class B redeemable
common share of the Company, for an aggregate total of 2,862,579
Class A, Series 1 shares and 2,862,579
Class B redeemable shares.
Under the terms of the offer and the Company’s charter, the
Class B redeemable shares had an aggregate redemption value
of $67.5 million and were subject to redemption at the
holder’s option for $23.58 per share following the
first anniversary of the date on which the IPE Brent Crude
futures contract and the IPE Gas Oil futures contract have
traded exclusively for ten consecutive days through an
electronic trading platform. The Class B redeemable shares
were also subject to redemption at the holder’s option if
certain redemption trigger events occurred including, but not
limited to, if the Company decided not to proceed with an
electronic trading platform for the IPE Brent Crude futures
contract and the Gas Oil futures contract.
The Company recorded the issuance of the Class B redeemable
shares at their discounted present value of $60.2 million
at the date of issuance, and accreted to the redemption value
based on the effective interest method over a two-year period
ended in June 2003. June 15, 2003 was the earliest
potential redemption date under the terms of the Class B
redeemable shares. During the years ended December 31, 2003
and 2002, the Company recorded $1.8 million and
$3.7 million, respectively, in accretion directly to
retained earnings related to the Class B redeemable shares.
On November 5, 2004, pursuant to a vote of the
Company’s shareholders, the Company amended its charter to
provide the Company with a mandatory right of redemption with
respect to the Class B redeemable shares. The Company could
redeem all but not less than all of the outstanding shares of
the Class B redeemable shares at the redemption price at
its option with a five day notice period. On November 23,2004, the Company exercised the mandatory redemption option and
redeemed all 2,862,579 Class B redeemable shares at the
$23.58 redemption value for an aggregate redemption price of
$67.5 million. The Company used the $25.0 million
available under the Facility (Note 7), the
$24.0 million available under the letter-of-credit facility
(Note 3) and $18.5 million of its excess cash for the
$67.5 million redemption. The Class B redeemable
shares received in connection with the redemption hold the
status of undesignated shares of common stock (Note 10).
The Company exercised the mandatory redemption option for
several reasons. Facilitating an early redemption of the
Class B redeemable stock permitted the Company to eliminate
existing credit support arrangements attached to the unfulfilled
redemption obligations that existed with respect to the
Class B
Notes to Consolidated Financial
Statements — (Continued)
redeemable stock. Such credit support arrangements have in
practice restricted the Company’s ability to incur material
debt, to expand its business and to finance potential
acquisitions. The Company also anticipated that the IPE would
move to exclusive electronic trading during 2005, at which time
the Company would have been obligated to redeem the Class B
redeemable stock at the $23.58 cash redemption value following
the anniversary date.
9.
Redeemable Stock Put
Continental Power Exchange, Inc. is owned by a senior officer of
the Company. The Company currently has a put agreement with
Continental Power Exchange, Inc. Under the terms of the put
agreement, in certain circumstances, Continental Power Exchange,
Inc. has the right to require the Company to purchase a portion
of the Company’s common stock held by Continental Power
Exchange, Inc. for an amount equal to the greater of fair market
value at the date the put is exercised, or $5 million. Of
the 2,406,935 shares of the Company’s common stock
currently owned by Continental Power Exchange, Inc.,
2,197,813 shares are subject to the put agreement. Based on
the $8.00 estimated fair value of the Company’s common
stock as of December 31, 2004, the fair market value of the
common stock held by Continental Power Exchange, Inc. is in
excess of the $5 million threshold. Upon exercise of the
put option, the Company can either pay cash within 30 days
of the exercise or can elect to issue a promissory note and
defer payment for one year, with interest accruing on the note
at LIBOR plus 1%. Continental Power Exchange, Inc. currently has
the right to exercise the put option upon the termination,
retirement, death or disability of the senior officer,
exercisable at any time within six months of such an event.
The Company initially recorded the put agreement with
Continental Power Exchange, Inc. (the “Redeemable Stock
Put”) at the minimum $5 million redemption threshold.
The Company has adjusted the Redeemable Stock Put to its
redemption amount at each subsequent balance sheet date. The
adjustment to the redemption amount has been recorded directly
to retained earnings or, in the absence of positive retained
earnings, by charges against paid-in capital. The Company
reduced the Redeemable Stock Put by $8.4 million during the
year ended December 31, 2003 and increased it by
$10.7 million during the year ended December 31, 2002.
These adjustments resulted from changes in the estimated fair
value of the Company’s common stock of $7.04 per share
as of December 31, 2001, $12.00 per share as of
December 31, 2002 and $8.00 per share as of
December 31, 2003. The Company increased the Redeemable
Stock Put by $6.6 million during the six months ended
June 30, 2005 resulting from an increase in the estimated
fair value of the Company’s common stock from
$8.00 per share as of December 31, 2004 to
$11.00 per share as of June 30, 2005.
10.
Shareholders’ Equity
Common Stock
The following table summarizes the number and classes of shares
of common stock authorized for issuance by the Company as of
December 31, 2004 and 2003:
Number of Shares Authorized
as of December 31,
Par
2004
2003
Value
Class A common stock, Series 1
5,725,159
5,725,159
$
.01
Class A common stock, Series 2
75,000,000
75,000,000
$
.01
Class B redeemable common stock (Note 8)
—
2,862,579
$
.01
Undesignated shares of common stock
2,862,579
—
—
Shares of Class A and Class B common stock are
identical in all respects and entitle the holders to the same
rights and privileges with respect to dividends, liquidation
preferences and voting rights, except that the Class B
shares were redeemable, as described in Note 8.
Notes to Consolidated Financial
Statements — (Continued)
As discussed in Note 8, the Company redeemed the
Class B redeemable shares in November 2004. The
Company’s charter provides that upon payment of the
redemption price, all rights in respect of the Class B
redeemable shares ceased, no Class B redeemable shares may
be reissued and all such re-acquired shares shall hold the
status of undesignated shares of common stock.
Stock Option Plan
The Company has adopted the IntercontinentalExchange, Inc. 2000
Stock Option Plan (the “Plan”). As of
December 31, 2004, there are 5,250,000 shares of
common stock reserved for issuance under the Plan.
Stock options are granted at the discretion of the compensation
committee of the board of directors. The Company may grant,
under provisions of the Plan, both incentive stock options and
nonqualified stock options. The options generally vest over four
years, but can vest at different intervals based on the
compensation committee’s determination. Generally, options
may be exercised up to ten years after the date of grant, but
generally expire 14 days after termination of employment.
The following is a summary of options for the years ended
December 31, 2004, 2003 and 2002:
Details of options outstanding as of December 31, 2004 are
as follows:
Weighted
Average
Remaining
Options
Contractual
Options
Exercise Price
Outstanding
Life
Exercisable
$4.20
379,484
5.54
379,484
7.04
162,833
6.31
148,390
8.00
3,351,233
9.37
424,240
12.00
980,522
7.46
617,031
Of the options outstanding at December 31, 2004, 1,569,147
were exercisable at a weighted-average exercise price of $8.56.
Of the options outstanding at December 31, 2003, 1,255,796
were exercisable at a weighted-average exercise price of $9.52.
Of the options outstanding at December 31, 2002, 320,063
were exercisable at a weighted-average exercise price of $4.88.
All stock options were granted at a price equal to the estimated
fair value of the common stock at the date of grant as
determined by the compensation committee. This determination was
primarily based on a valuation performed by an independent third
party.
Notes to Consolidated Financial
Statements — (Continued)
Of the 1,661,645 options granted during 2004, all were granted
during the quarter ended December 31, 2004. These options
were granted at an exercise price of $8.00 per share, which was
equal to the estimated fair value of the common stock at the
dates of grant as determined by the Company’s board of
directors, primarily based on a contemporaneous valuation
performed by an independent third party. These options had no
intrinsic value due to the exercise price being equal to the
fair value on the dates of grant.
The Company has historically issued one large stock option grant
during the fourth quarter of each year and has on occasion
issued smaller stock grants during the year, primarily for new
employees. An independent valuation is performed just prior to
the fourth quarter stock option grant to assist the
Company’s board of directors in determining the fair market
value of the Company’s common stock. The fair market value
is reviewed by the Company’s board of directors throughout
the year for the valuation of the smaller stock option grants
based on various factors, including the Company’s financial
performance and any independent sales of the Company stock by
existing shareholders since the date of the last independent
valuation.
Pro forma information regarding net income and earnings per
share, as presented in Note 2, is required by
SFAS No. 123, as amended by SFAS No. 148,
and has been determined as if the Company has accounted for its
employee stock options under the fair value method of
SFAS No. 123 as of its effective date. The fair value
of these options was estimated at the date of grant using a
Black-Scholes option-pricing model. The Black-Scholes
option-pricing model is the most common method under
SFAS No. 123 for computing fair value. The
Black-Scholes option pricing model was originally developed for
use in estimating the fair value of traded options which have
different characteristics than the Company’s employee stock
options. The model is also sensitive to changes in subjective
assumptions which can materially affect fair value estimates. As
a result, management believes that the Black-Scholes model may
not necessarily provide a reliable single measure of the fair
value of employee stock options. The pro forma results are not
intended to be indicative of or a projection of future results.
For SFAS No. 123 disclosure purposes, the Company,
using the Black-Scholes option pricing model and the
weighted-average assumptions included in the table below, has
computed the value of all options for shares of common stock
granted to employees. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over
the options’ vesting period.
Year Ended December 31,
Assumptions
2004
2003
2002
Risk-free interest rate
3.4
%
3.2
%
4.4
%
Expected life in years
5
5
5
Expected volatility
49
%
40
%
59
%
Expected dividend yield
0
%
0
%
0
%
Estimated weighted-average fair value of options granted per
share
$
3.72
$
3.28
$
6.52
On January 5, 2005, the compensation committee granted
options to members of the board of directors to
purchase 175,000 shares of common stock under the Plan
at $8.00 per share. All options were granted at a price
equal to the estimated fair value of the common stock on the
date of grant as determined by the compensation committee. These
options vest over four years and expire ten years after the date
of grant.
Restricted Stock Deferral Plan for Outside Directors
The Company has adopted the IntercontinentalExchange, Inc. 2003
Restricted Stock Deferral Plan for Outside Directors (the
“Director Plan”). Directors can elect to receive up to
100% of their board compensation in restricted stock or
restricted stock units. All restricted stock is granted at a
price equal to the estimated fair value of the common stock at
the date of grant as determined by the compensation committee.
The restricted stock generally vests over a three-year period.
Under the Director Plan, the compensation committee reserved a
number of the Company’s common stock treasury shares
sufficient to cover obligations
Notes to Consolidated Financial
Statements — (Continued)
under the Director Plan for issuance to the board of directors
in lieu of fees otherwise payable in cash. During the years
ended December 31, 2004 and 2003, 3,093 and
3,770 shares, respectively, of restricted stock units were
granted to members of the board of directors under the Director
Plan.
The weighted-average grant date fair value of restricted stock
units granted during the years ended December 31, 2004 and
2003 was $8.00 and $10.52, respectively. The fair value of the
restricted shares on the date of the grant is recognized as
expense ratably over the vesting period. During the years ended
December 31, 2004 and 2003, deferred stock compensation of
$25,000 and $39,000, respectively, was recorded for the
restricted stock grants issued during the years based on the
fair value of the shares on the date of grant and is being
amortized over three years.
During the years ended December 31, 2004 and 2003, $17,000
and $5,000, respectively, was amortized as compensation and
benefits expenses in the accompanying consolidated statements of
income. The unamortized balance of deferred stock compensation
on restricted stock is included as a separate component of
shareholders’ equity in the accompanying consolidated
balance sheets.
Restricted Stock Plan
The Company has adopted the IntercontinentalExchange, Inc. 2004
Restricted Stock Plan (the “Restricted Plan”). Under
the Restricted Plan, the compensation committee reserved a
number of the Company’s common stock treasury shares
sufficient to cover obligations under the Restricted Plan for
issuance to the employees and board of directors of the Company.
As of December 31, 2004, 1,425,424 restricted shares under
the Restricted Plan were subject to outstanding awards of
restricted stock units made to senior officers of the Company
and members of the board of directors. Of these shares, 800,212
were granted as time-based restricted shares and vest based on a
four-year vesting schedule. Until the shares vest and are
issued, the participants have no voting or dividend rights and
the shares may not be sold, assigned, transferred, pledged or
otherwise encumbered. As of December 31, 2004, no
restricted treasury shares have been issued.
The weighted-average grant date fair value of the time-based
restricted stock units granted during the year ended
December 31, 2004 was $8.00. The grant date fair value is
determined by the compensation committee primarily based on a
valuation performed by an independent third party. The fair
value of the restricted shares on the date of the grant is
recognized as expense ratably over the vesting period. During
the year ended December 31, 2004, deferred stock
compensation of $6.4 million was recorded for the
time-based restricted stock grants issued during the year based
on the fair value of the shares on the date of grant and is
being amortized over four years. During the year ended
December 31, 2004, $357,000 was amortized as compensation
and benefits expenses in the accompanying consolidated
statements of income. Granted but unvested shares would be
forfeited upon termination of employment. When restricted stock
is forfeited, compensation costs previously recognized for
unvested shares are reversed. The unamortized balance of
deferred stock compensation on restricted stock is included as a
separate component of shareholders’ equity in the
accompanying consolidated balance sheets.
An additional 208,404 to 625,212 restricted shares under the
Restricted Plan have been reserved for potential issuance as
performance-based restricted shares for the Company’s
senior officers and vest based on Company financial performance
relative to three-year cumulative performance targets (the
“Performance Targets”) set by the compensation
committee for the period from January 1, 2005 to
December 31, 2007. The measurement of compensation costs
under the performance-based restricted shares at the date the
Performance Targets have been met determines the ultimate
compensation to be recognized in the consolidated financial
statements. The fair market value of the performance-based
restricted stock at the date of vesting will be recorded as
compensation expense. Because this type of plan is classified as
a variable plan, interim estimates of compensation are required
Notes to Consolidated Financial
Statements — (Continued)
based on a combination of the then fair market value of the
stock at the end of the reporting periods and the extent or
degree of achievement relative to the performance criteria. No
compensation costs or deferred stock compensation costs have
been recorded in the accompanying consolidated financial
statements as of December 31, 2004, as the performance
period has not commenced and it is not possible at this time to
determine which, if any, of the Performance Targets will be
achieved. If the Performance Targets are not reached, the
corresponding performance-based restricted shares will not be
issued.
Restricted shares are used as an incentive to attract and retain
qualified senior officers and to increase shareholder returns
with actual performance-based awards based on enhanced
shareholder value. As part of the implementation of the
Restricted Plan and the granting of 1,425,424 restricted shares
as discussed above, the Company’s senior officers and
members of the board of directors exchanged a total of 942,600
stock options that had been granted in 2002 at an exercise price
of $12.00. The date of the offer to exchange the outstanding
$12.00 options for the restricted stock units was
September 30, 2004 and the offer was open until
October 28, 2004. All individuals eligible for the offer to
exchange accepted and tendered their options on or before
October 8, 2004. The time-based and performance-based
restricted stock units were granted on October 11, 2004.
The Restricted Plan includes a change in control provision that
may accelerate vesting on both the time-based and
performance-based restricted shares if employment is terminated
or if the individual resigns for “good reason” within
12 months after the effective date of a change in control.
This would result in all unamortized deferred stock compensation
relating to the time-based restricted shares being recognized as
compensation expense at the date of the acceleration, which is
the date when both the change in control and the termination in
employment have occurred. All performance-based restricted
shares would also immediately vest and the Company would take a
one time compensation expense charge equal to the maximum number
of performance-based restricted shares multiplied by the fair
market value of the restricted shares at the date of the
acceleration.
Warrants
In connection with their initial investment in the Company,
certain shareholders in the gas and power industries (the
“Gas and Power Firms”) were granted warrants to
purchase an additional 10% ownership interest in the Company,
subject to dilution under certain events. The Gas and Power
Firms could have purchased up to 5,804,095 shares of
Class A, Series 2 common stock upon vesting and
exercise of the warrants at an aggregate exercise price of
$75 million, or $12.92 per share. The warrants would
have vested and become exercisable if the Company’s average
monthly revenue from transaction commissions and ancillary and
back-office services related to North American power and gas
products traded on the Platform (the “Gas and Power
Revenues”) exceeded certain revenue thresholds (the
“Revenue Threshold”) over a consecutive 12-month
period. The measurement period for the Revenue Threshold began
on October 1, 2001 and expired on September 30, 2004.
If such warrants had vested, the fair value of the warrants
would have been recorded as a reduction to revenues in the month
that vesting occurred based on the value of the Company at the
date of vesting.
For all 12-month periods during the vesting period, the Gas and
Power Revenues were substantially less than the Revenue
Thresholds. Accordingly, such warrants did not vest and
therefore, the Company did not assign any value to the warrants.
The warrants expired unvested on September 30, 2004.
Treasury Stock
During the year ended December 31, 2003, the Company
received 1,676,232 Class A, Series 2 shares from
certain shareholders of the Company related to an order flow
commitment shortfall in lieu of cash payments to the Company
(Note 13). The Company recorded the receipt of the shares
as treasury stock. The
Notes to Consolidated Financial
Statements — (Continued)
Company subsequently reissued 141,924 treasury shares during the
year ended December 31, 2003. During the year ended
December 31, 2004, the compensation committee reserved
1,425,424 treasury shares for potential issuance under the
Restricted Plan and 6,864 for potential issuance under the
Restricted Stock Deferral Plan for Outside Directors. Treasury
stock activity is presented in the accompanying consolidated
statements of changes in shareholders’ equity.
11.
Income Taxes
For the years ended December 31, 2004, 2003 and 2002,
income before income taxes from domestic operations was
$10.0 million, $386,000 and $35.1 million,
respectively, and income before income taxes from foreign
operations was $23.7 million, $19.5 million and
$17.3 million, respectively. Details of the income tax
provision in the accompanying consolidated statements of income
for the years ended December 31, 2004, 2003 and 2002, are
as follows:
Notes to Consolidated Financial
Statements — (Continued)
The tax effects of temporary differences between the carrying
amount of assets and liabilities in the consolidated financial
statements and their respective tax bases which give rise to
deferred tax assets (liabilities) as of December 31,2004 and 2003 are as follows:
Capitalization and amortization of software development costs
(2,787
)
(3,027
)
Tax depreciation in excess of books
—
(315
)
Property and intangible costs
(2,001
)
(2,448
)
Tax accrued on undistributed earnings of foreign subsidiaries
(pre and post acquisition earnings)
(5,030
)
(3,401
)
Other
(498
)
(350
)
Total deferred tax liabilities
(10,316
)
(9,541
)
Net deferred tax liabilities
(8,667
)
(8,846
)
Net current deferred tax assets
426
345
Net noncurrent deferred tax liabilities
$
(9,093
)
$
(9,191
)
A reconciliation of the statutory U.S. federal income tax
rate to the Company’s effective income tax rate for the
years ended December 31, 2004, 2003 and 2002 are as follows:
The pre and post acquisition undistributed earnings of the
Company’s foreign subsidiaries based on the period-end
exchange rates totaled $71.5 million and $54.1 million
as of December 31, 2004 and 2003, respectively, which will
not be subject to U.S. income tax until distributed. The
Company has provided for U.S. federal income taxes on these
undistributed earnings in the accompanying consolidated
statements of income as they are not expected to be permanently
reinvested.
The Jobs Act provides for a temporary 85% dividends received
deduction on certain foreign earnings repatriated during a
one-year period. The deduction would result in an approximate
5.25% federal tax rate on
Notes to Consolidated Financial
Statements — (Continued)
the repatriated earnings. To qualify for the deduction, the
earnings must be reinvested in the U.S. pursuant to a
domestic reinvestment plan established by the Company’s
chief executive officer and approved by the Company’s board
of directors. Certain other criteria in the Jobs Act must be
satisfied as well. The maximum amount of the Company’s
foreign earnings that qualify for the temporary deduction is
$71.5 million as of December 31, 2004.
The Company is in the process of evaluating whether it will
repatriate foreign earnings under the repatriation provisions of
the Jobs Act, and if so, the amount that will be repatriated. As
substantially all of the Company’s foreign earnings have
been subject to tax at a local country rate of approximately 30%
or greater, the application of this new repatriation provision
to these earnings may result in insignificant or no benefit to
the Company. The Company is awaiting the issuance of further
regulatory guidance and passage of statutory technical
corrections with respect to certain provisions in the Jobs Act
prior to deciding whether to repatriate funds under the Jobs
Act. It anticipates making a decision within a reasonable time
period following the issuance of such clarifying regulations and
enactment of technical corrections legislation. The range of
reasonably possible amounts that the Company is considering for
repatriation under the Jobs Act is zero to $71.5 million.
The reasonably possible range of related tax expense is zero to
the amount of deferred taxes currently provided for
undistributed earnings of foreign subsidiaries.
12.
Related-Parties
Related-parties include principal owners of the Company and
other parties that control or can significantly influence the
management or operating policies of the Company. Principal
owners include any party that owns more than 10% of the voting
interest in or common stock of the Company. The Company has
classified all companies that had board of director
participation as a related-party due to their significant
influence over the Company. Through the end of October 2002, ten
shareholders had a seat on the Company’s board of
directors. Beginning in November 2002, these companies no longer
had representation on the Company’s board of directors and,
except for two shareholders who held more than 10% of the common
stock of the Company, were no longer considered related-parties.
The Chicago Climate Exchange is considered a related-party due
to the founder and Chief Executive Officer of the Chicago
Climate Exchange being a member of the Company’s board of
directors. Revenues earned from related-parties of the Company
totaled $12.9 million, $12.2 million and
$52.8 million for the years ended December 31, 2004,
2003 and 2002, respectively. As of December 31, 2004 and
2003, the Company had $1.3 million and $1.1 million,
respectively, in accounts receivable from related-parties.
On May 11, 2000, the Company entered into the Term Note
agreements with two related-parties, which were repaid in
November 2002. See Note 7 for more detail of these
related-party notes.
The Company entered into annual order flow commitments with
related-party companies, which committed these companies to
execute a minimum annual volume of transactions through the
Platform. See Note 13 for more detail on these
related-party order flow commitments.
The Company entered into several foreign exchange forward
contracts with a related-party company during the year ended
December 31, 2004 (Note 14). The Company paid $353,000
relating to these hedges during the year ended December 31,2004 to this related-party company. The Company also had an
additional $1.3 million accrued to this related-party
company as of December 31, 2004 relating to a hedge that
expires in June 2005, which is included in accrued liabilities
in the accompanying consolidated balance sheets.
During 2001, the Company advanced $500,000 to a senior officer
of the Company, with the loan due in five installments of
$100,000 over a five-year period. The payments would be forgiven
each year based on continued employment by the officer. The
forgiveness each year was recorded as compensation and benefits
expense in the accompanying consolidated statements of income.
As of December 31, 2003, the balance of the
Notes to Consolidated Financial
Statements — (Continued)
note totaled $201,000. The remaining balance was forgiven during
the year ended December 31, 2004 in connection with the
officer entering into a new employment agreement (Note 14).
The Company currently has a stock put agreement with Continental
Power Exchange, Inc., which is the Company’s predecessor
company and which is owned by a senior officer of the Company.
See Note 9 for more detail on this related-party stock put
agreement.
13.
Order Flow Commitments
Certain of the Company’s founding shareholders (the
“Founding Shareholders”) and the Gas and Power Firms
executed annual order flow commitments in connection with the
formation of, and their investment in, the Company, which
committed them to transact a minimum volume of various
transactions through the Platform. The Company also entered into
order flow commitments with seven companies (the “Euro Gas
Order Flow Providers”) during November 2001 to trade
European gas products on the Platform.
Founding Shareholders’ Commitments
The Founding Shareholders entered into annual order flow
commitments with the Company, whereby such members individually
committed to enter into an annual minimum volume of executed oil
and/or precious metals transactions through the Platform. The
Founding Shareholders’ annual order flow commitments reset
each year and were for a two-year period, which began in
September 2000 and expired in August 2002 for precious metals
transactions and began in November 2000 and expired in October
2002 for oil transactions.
Under the terms of the Founding Shareholders’ annual order
flow commitments, in the event that such members failed to meet
the minimum volume of transactions specified in the agreements,
imputed on a month-to-date basis, such members were billed for
the difference between the imputed monthly minimum commitment
and any actual executed transactions by such members or their
affiliates, multiplied by an imputed commission rate. To the
extent that the Founding Shareholders transacted sufficient
volume to satisfy the order flow commitments at any point in the
annual commitment period, any amounts previously billed as order
flow shortfall were refunded to the Founding Shareholders.
Therefore, monthly billings related to unmet order flow
commitments were recorded as deferred revenue and not recognized
until the end of the annual commitment periods as these amounts
were potentially refundable. For the year ended
December 31, 2002, the Company recognized $2.2 million
in transaction fee revenues related to unmet Founding
Shareholders’ annual order flow commitments for the
commitment periods that expired during the year.
Gas and Power Firms’ Commitments
Under the terms of the Gas and Power Firms’ annual order
flow agreement, the Gas and Power Firms committed as a group to
enter into an annual minimum volume of executed North American
power and gas transactions through the Platform. The Gas and
Power Firms’ annual order flow commitments reset each year
and were for a two-year period, which began in July 2001 and
expired in June 2003. Under the terms of this agreement, in the
event that the Gas and Power Firms failed to meet the minimum
volume of transactions specified in the agreement, imputed on a
month-to-date basis, the Gas and Power Firms were billed for the
difference between the imputed monthly minimum commitment and
any actual executed transactions by the members or their
affiliates, multiplied by an imputed commission rate. To the
extent that the Gas and Power Firms transacted sufficient volume
to satisfy the order flow commitments at any point in the annual
commitment period, any amounts previously billed as order flow
shortfall were refunded to the Gas and Power Firms. Therefore,
monthly billings related to unmet order flow commitments were
recorded as deferred revenue and not recognized until the end of
the annual commitment periods as these amounts were potentially
refundable.
Notes to Consolidated Financial
Statements — (Continued)
For the year ended December 31, 2003, the Company
recognized $6.4 million in transaction fee revenues related
to unmet Gas and Power Firms’ annual order flow commitment
for the commitment period that expired during the year. A
portion of the shortfall was paid in cash and the remainder was
satisfied through the delivery to the Company of shares of the
Company’s Class A, Series 2 common stock
(Note 10). The fair market value of the Company’s
common stock received from the Gas and Power Firms was in excess
of the contractual obligation owed under the order flow
shortfall. However, the Company only recognized revenues to the
extent of the contractual order flow commitment.
There were no revenues recognized during the year ended
December 31, 2002 relating to the Gas and Power Firms’
annual order flow agreement as the Gas and Power Firms exceeded
their commitment in the first annual commitment period.
Euro Gas Order Flow Providers’ Commitments
The Euro Gas Order Flow Providers individually committed to
enter into executed transactions for European gas (“Euro
Gas”) product groups through the Platform which resulted in
annual or monthly minimum transaction payments to the Company.
The Euro Gas Order Flow Providers’ order flow commitments
began in January 2002 and continued through December 2004. Under
the terms of such order flow agreements, in the event that the
Euro Gas Order Flow Providers failed to execute the annual or
monthly required minimum transactions, the Euro Gas Order Flow
Providers paid to the Company the difference in transaction fees
actually paid and minimum payments required under the order flow
agreements. During the years ended December 31, 2004, 2003
and 2002, the Company recognized $1.1 million, $764,000 and
$1.3 million, respectively, in transaction fee revenues
related to unmet Euro Gas Order Flow Providers’ order flow
commitments for commitment periods that expired during such
years.
The Euro Gas Order Flow Providers originally received reduced
commission rates for executed transactions for Euro Gas products
as a result of their commitments in the order flow agreements.
However, beginning in March 2003, the Company reduced commission
rates for all other customers to be equal to the Euro Gas Order
Flow Providers commission rates. The order flow agreements also
required the Company to distribute to the Euro Gas Order Flow
Providers their respective share of a revenue sharing pool
annually through 2006. The revenue sharing pool was equal to 20%
of the transaction fee revenues earned by the Company from
trading of all Euro Gas product groups, subject to certain
adjustments. The Euro Gas Order Flow Providers do not share in
the revenue sharing pool, for the current year and for all
future years, if they do not trade a minimum annual volume of
executed transactions for Euro Gas product groups through the
Platform to become an eligible order flow provider. For the
years ended December 31, 2003 and 2002, the Company paid
$61,000 and $188,000, respectively, relating to the revenue
sharing pool to certain Euro Gas Order Flow Providers that
qualified as eligible order flow providers. The Company recorded
the revenue sharing pool amounts payable to the Euro Gas Order
Flow Providers as a reduction to transaction fee revenues.
As of December 31, 2003, none of the Euro Gas Order Flow
Providers qualified as eligible order flow providers. Under the
terms of the Euro Gas Order Flow Providers’ commitments,
the Company is therefore, no longer required to accrue or pay
any amounts relating to the revenue sharing pools subsequent to
December 31, 2003.
Notes to Consolidated Financial
Statements — (Continued)
14.
Commitments and Contingencies
Leases
The Company leases office space, equipment facilities, and
certain computer equipment. As of December 31, 2004, future
minimum lease payments under these noncancelable agreements are
as follows:
Operating
Capital
(in thousands)
2005
$
1,867
$
512
2006
1,309
—
2007
1,047
—
2008
761
—
$
4,984
512
Less amounts representing interest and tax
30
Present value of minimum lease payment, current portion
$
482
As of December 31, 2004, 2003 and 2002, the Company had
capital lease obligations of $482,000, $2.1 million and
$2.7 million, respectively. The amortization of assets
recorded under capital leases is included in depreciation
expense in the accompanying consolidated statements of income
and totaled $1.2 million, $2.8 million and
$2.3 million for the years ended December 31, 2004,
2003 and 2002, respectively. Rental expense amounted to
$5.3 million, $5.2 million and $5.6 million for
the years ended December 31, 2004, 2003 and 2002,
respectively.
Licensing Agreement
In March 2002, the Company entered into a long-term,
non-exclusive licensing agreement with a third party, which
granted the use of the third party’s patent to the Company
and its majority-owned and controlled affiliates. The patent
relates to automated futures trading systems in which
transactions are completed by a computerized matching of bids
and offers of futures contracts on an electronic platform. The
license of the patent provides legal certainty to traders,
clearing banks and brokers wishing to utilize the Company’s
Platform for trading futures contracts from within the
U.S. Under the agreement, the Company is required to pay
minimum annual license fees of $2.0 million beginning
April 5, 2002 through the expiration date of the patent in
February 2007 along with additional royalty payments calculated
quarterly, which have been insignificant through December 2004.
The agreement covers the Company’s use of the patent in
certain markets including energy, certain metals, weather,
sulfur and nitrogen pollution allowances and financial products
specifically related to products in these markets.
The Company recorded amortization expense of $2.0 million,
$2.0 million and $1.5 million during the years ended
December 31, 2004, 2003 and 2002, respectively, relating to
the licensing agreement. As of December 31, 2004 and 2003,
the balance of $500,000 relating to the unamortized annual
license fee payment is included in prepaid expenses in the
accompanying consolidated balance sheets.
Employment Agreements
The Company has entered into employment agreements with all of
its corporate officers. If the corporate officers are terminated
without cause, the employment agreements result in separation
payments ranging from six months to three years of the corporate
officer’s annual base salary. In some cases, the employment
agreements also stipulate an additional payment for bonus
compensation for the balance of the term of the
Notes to Consolidated Financial
Statements — (Continued)
employment agreement. Also, certain employment agreements have
provisions that provide for termination payments following a
change of control and corresponding loss of employment, which
generally provide for base salary, bonus payment, benefits
continuation for the full term of the employment agreement
(ranging from one to three years), gross up payment for any
excise taxes due under Section 4999 of the Internal Revenue
Code of 1986 and the acceleration of vesting of any stock
options granted after the execution of the employment agreements.
The Company’s U.K. subsidiaries, in accordance with normal
U.K. practice, have entered into employment agreements with all
of its employees. The employment agreements require a severance
notice ranging from one to six months.
Legal Proceedings
In November 2002, the New York Mercantile Exchange, Inc.
(“NYMEX”) filed suit against the Company in United
States District Court, Southern District of New York. In the
suit, NYMEX alleges that the Company has infringed certain
intellectual property rights of NYMEX through the use of
settlement prices of futures contracts listed on NYMEX and
references to NYMEX in describing products traded on the
Platform. The Company filed an answer and counterclaims in
January 2003. NYMEX filed a motion to dismiss the Company’s
counterclaims, which was denied in part and granted in part,
with leave for the Company to amend its counterclaims. The
Company filed an amended and restated answer and counterclaims
in August 2003. The Company’s amended counterclaims
asserted that NYMEX has engaged in violations of the federal
antitrust laws by, among other things, seeking to prevent the
Company from accessing its settlement prices. The counterclaims
also sought a declaratory judgment that NYMEX does not hold a
copyright in its settlement prices, that any copyright found
cannot be enforced against the Company, and that the Company has
not infringed any copyright.
NYMEX filed a motion to dismiss the Company’s amended
counterclaims, and the court granted NYMEX’s motion and
dismissed the Company’s antitrust counterclaims in June
2004. In September 2004, the Company filed a motion for summary
judgment seeking judgment as a matter of law with respect to the
claims in NYMEX’s complaint. In November 2004, NYMEX filed
a cross motion for summary judgment seeking judgment as a matter
of law regarding the issue of copyrightability of its settlement
prices and with respect to its claim that the Company tortuously
interfered with a contract between NYMEX and the party from
which the Company licenses NYMEX’s settlement prices. The
Court heard oral argument on the cross motions for summary
judgment in February 2005. On September 29, 2005, the court
granted the Company’s motion for summary judgment
dismissing all claims brought by NYMEX. In dismissing all of
NYMEX’s claims, the court found that NYMEX’s
settlement prices were not copyrightable works as a matter of
law, and that the Company had not engaged in copyright or
trademark infringement in referencing NYMEX’s publicly
available settlement prices. The trademark dilution and tortious
interference claims, which are state law claims, were dismissed
on jurisdictional grounds. While the court granted summary
judgment in the Company’s favor on all claims, NYMEX has
announced that it expects to appeal the court’s findings,
which it may do on or before November 4, 2005. NYMEX may
also proceed with its dilution and tortious interference claims
in state court. The Company does not believe that the resolution
of this matter will have a material adverse effect on the
Company’s consolidated financial condition, results of
operations, or liquidity.
In January 2004, EBS Dealing Resources, Inc., or EBS, filed a
complaint against the Company in United States District
Court, Southern District of New York, alleging that the Company
infringed upon two patents held by EBS related to credit filter
technology for electronic brokerage systems. EBS dropped its
claims related to one of its patents. In September 2005, the
Company settled the legal action brought by EBS related to the
alleged patent infringement. Under the settlement agreement, the
Company made a payment of $15.0 million to EBS, and was
released from the legal claims brought against it without
admitting liability.
Notes to Consolidated Financial
Statements — (Continued)
The payment was classified as “Settlement expense” in
the accompanying consolidated statements of income.
The Company is subject to other potential legal proceedings and
claims which arise in the ordinary course of business. The
Company has concluded that these proceedings and claims have not
proceeded sufficiently for their likely outcomes to be
determinable. It is possible, however, that future results of
operations for any particular quarterly or annual period could
be materially and adversely affected by any new developments
relating to these proceedings and claims.
Foreign Currency Hedging Transactions
A significant portion of the Company’s revenues, earnings
and net assets are exposed to changes in foreign exchange rates,
primarily relating to the operations of the IPE and the other
U.K.-based subsidiaries in relation to pounds sterling. For the
years ended December 31, 2004, 2003 and 2002, the U.K.
subsidiaries’ average exchange rate of pounds sterling to
the U.S. dollar, which was used to translate the U.K.
subsidiaries’ revenues and expenses into U.S. dollars,
was 1.8296, 1.6341 and 1.5071, respectively, and for the six
months ended June 30, 2005 and 2004, was 1.8713 and 1.8225,
respectively. The appreciation of pounds sterling relative to
the U.S. dollar has had a significant impact on the
Company’s operating results due to the significance of our
U.K-based subsidiaries’ operations (Note 16). The
Company seeks to manage its foreign exchange risk and exposure
in part through operational means, including managing expected
local currency revenues in relation to local currency expenses
(primarily through billing certain IPE fees in
U.S. dollars) and local currency assets in relation to
local currency liabilities (primarily through converting the
U.K. subsidiaries cash to U.S. dollar denominated
investments). In addition, as discussed in Note 2, the
Company entered into forward exchange instruments during the
years ended December 31, 2004 and 2003 to protect a portion
of the net investments in its foreign subsidiaries from adverse
fluctuations in foreign exchange rates.
The foreign exchange forward contract derivative financial
instruments had maturities ranging from two months to eight
months. As of December 31, 2004 and 2003, the Company had
hedged $24.9 million and $36.6 million, respectively,
of the $58.2 million and $52.5 million, respectively,
in foreign subsidiaries net assets held in pounds sterling based
on the year-end exchange rates. Under SFAS No. 133,
changes in the fair value of these derivative financial
instruments are recognized as a component of accumulated other
comprehensive income, to offset the change in value of the net
investment being hedged. For the years ended December 31,2004 and 2003, $2.1 million and $441,000, respectively, of
losses, net of taxes, relating to the derivative financial
instruments were recorded in accumulated other comprehensive
income in the accompanying consolidated statements of
comprehensive income. As of December 31, 2004 and 2003,
$1.3 million and $708,000, respectively, relating to the
derivative financial instruments were included in accrued
liabilities in the accompanying consolidated balance sheets.
When entered into, the Company formally designates and documents
the derivative financial instrument as a hedge of a specific
underlying exposure, as well as the risk management objectives
and strategies for undertaking the hedge transactions. The
Company formally assesses, both at inception and at least
quarterly thereafter, whether the derivative financial
instruments that are used in hedging transactions are effective
at offsetting changes in either the fair value or cash flows of
the related underlying exposure. Because of the high degree of
effectiveness between the hedging instruments and the underlying
exposure being hedged, fluctuations in the value of the
derivative financial instruments are offset by changes in the
fair value or cash flows of the underlying exposures being
hedged. The Company’s derivatives are OTC financial
instruments with liquid markets.
The Company does not enter into derivative financial instruments
for trading purposes. The counterparties with whom the Company
trades foreign exchange contracts are major U.S. and
international financial institutions, including one which is a
related-party (Note 12). The Company continually monitors
its position
Notes to Consolidated Financial
Statements — (Continued)
with and the credit quality of the financial institutions and
does not expect nonperformance by the counterparties.
15.
Employee Benefit Plans
Employees of the Company are eligible to participate in the
Company’s 401(k) and Profit Sharing Plan (the “401(k)
Plan”). The Company offers a match of 100% of the first 5%
of the eligible employee’s compensation contributed to the
401(k) Plan, subject to plan and statutory limits. Total
matching contributions under the Company’s 401(k) Plan for
the years ended December 31, 2004, 2003 and 2002 were
$617,000, $556,000 and $473,000, respectively. No discretionary
or profit sharing contributions were made during the years ended
December 31, 2004, 2003 or 2002.
The Company’s U.K.-based subsidiaries have a defined
contribution pension plan for eligible employees. The Company
contributes a percentage of the employee’s base salary to
the plan each month and employees are also able to make
additional voluntary contributions, subject to plan and
statutory limits. The Company’s contribution ranges from
10% to 20% of the employee’s base salary. Total pension
contributions made by the Company for the years ended
December 31, 2004, 2003 and 2002 were $789,000, $750,000
and $617,000, respectively.
16.
Segment Reporting
The Company’s principal business segments consist of its
OTC business and its futures business. The operations of ICE
Services U.S., 10x, ICE Services UK and ICE Tech have been
included in the OTC business segment as they primarily support
the Company’s OTC business operations. Prior to the
Company’s acquisition of the IPE in June 2001, the Company
had only one reportable business segment, the OTC business,
which was limited to the U.S.
Intersegment revenues and transactions attributable to the
performance of services are recorded at cost plus an agreed
market percentage intercompany profit. Intersegment revenues
attributable to licensing transactions have been priced in
accordance with comparable third party agreements. The Company
had $5.6 million and $3.8 million in intersegment
revenues during the six months ended June 30, 2005,
respectively, and $7.9 million and $4.8 million in
intersegment revenues during the years ended December 31,2004 and 2003, respectively, primarily relating to fees paid
from the futures business segment to the OTC business segment as
required under the technical services agreement.
Notes to Consolidated Financial
Statements — (Continued)
The accounting policies of the business segments are the same as
those described in the summary of significant accounting
policies. Financial data for the Company’s business
segments and geographic areas are as follows:
Revenues from one customer of the futures business segment
comprised 11% of the Company’s futures revenues for the six
months ended June 30, 2005. No additional customers
accounted for more than 10% of the Company’s segment
revenues or consolidated revenues during the six months ended
June 30, 2005.
Revenues from one customer of the futures business segment
comprised 14% of the Company’s futures revenues for the six
months ended June 30, 2004. No additional customers
accounted for more than 10% of the Company’s segment
revenues or consolidated revenues during the six months ended
June 30, 2004.
Revenues from one customer of the futures business segment
comprised 13% of the Company’s futures revenues for the
year ended December 31, 2004. No additional customers
accounted for more than 10% of the Company’s segment
revenues or consolidated revenues during the year ended
December 31, 2004.
Revenues from one customer of the futures business segment
comprised 15% of the Company’s futures revenues for the
year ended December 31, 2003. No additional customers
accounted for more than 10% of the Company’s segment
revenues or consolidated revenues during the year ended
December 31, 2003.
Revenues from one customer of the OTC business segment comprised
10% of the Company’s consolidated revenues and 14% of the
Company’s OTC revenues for the year ended December 31,2002. Revenues from one customer of the futures business segment
comprised 13% of the Company’s futures revenues for the
year ended December 31, 2002.
Notes to Consolidated Financial
Statements — (Continued)
17.
Earnings Per Common Share
The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per common share
computations for the six months ended June 30, 2005 and
2004 and for the years ended December 31, 2004, 2003 and
2002:
Diluted weighted average common shares outstanding
53,072
53,062
53,062
54,640
54,850
Diluted earnings per common share
$
0.04
$
0.19
$
0.41
$
0.37
$
0.37
The 2,862,579 Class B redeemable common shares, the
unvested restricted shares granted and substantially all of the
Gas and Power Firms’ warrants to purchase 5,804,095
common shares have not been included in the computation of
diluted earnings per share in the applicable periods when they
were outstanding because their effects would be antidilutive.
Notes to Consolidated Financial
Statements — (Continued)
18.
Quarterly Financial Data (Unaudited)
The following table has been prepared from the financial records
of the Company, and reflects all adjustments that are, in the
opinion of management, necessary for a fair presentation of the
results of operations for the interim periods presented.
The Company recognized $6.4 million in revenues during the
second quarter of 2003 relating to unmet order flow commitments
for commitment periods that expired during the quarter
(Note 13).
(b)
The Company recognized $2.3 million in a special fee rebate
program during the fourth quarter of 2004. The fee rebate was
shown as a reduction to revenues and was designed to promote the
electronic futures trading on our Platform (Note 2).
(c)
The Company recognized $8.4 million in redemption
adjustments to the Redeemable Stock Put during the fourth
quarter of 2003. This resulted from a reduction in the per share
fair market value of the Company’s common stock that
occurred during the fourth quarter of 2003 (Note 9).
19.
Floor Closure Costs (Unaudited)
On April 7, 2005, the Company closed its open-outcry
trading floor in London. This was done to take advantage of the
increasing acceptance and adoption of electronic trading, and to
maintain and enhance the Company’s competitive position.
All futures trading is now conducted exclusively on the
Company’s electronic platform. The Company recorded floor
closure costs of $4.8 million during the second quarter of
2005 in connection with the closure of the open-outcry trading
floor. These 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, and other associated costs, including legal costs
and asset impairment charges. This expense was classified as
“Floor closure costs” in the accompanying consolidated
statements of income, and recorded in accordance with
SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, and SFAS No. 112,
Employer’s Accounting for Postemployment Benefits.
Liabilities related to the closure costs are classified as
“Accrued liabilities” in the accompanying consolidated
balance sheets as of
No floor closure costs were incurred in prior periods and no
additional closure costs are expected to be incurred. The
difference between floor closure expenses incurred during the
six months ended June 30, 2005, and the related accrued
liability remaining at June 30, 2005, is attributable to
cash payments of closure costs, non-cash closure costs, and the
effects of foreign exchange rates on the closure costs. Payments
of floor closure costs for the six months ended June 30,2005 were $1.9 million. All of the Company’s floor
closure costs are attributable to the futures business segment.
20.
Subsequent Events (Unaudited)
On March 21, 2005, the board of directors approved a plan
of recapitalization that would amend and restate the
Company’s Certificate of Incorporation effective
immediately prior to the closing of the initial public offering
of the Company’s common stock. The plan of recapitalization
and the amendment and restatement of the Company’s
Certificate of Incorporation has been approved by the
Company’s shareholders. The plan of recapitalization:
(i) authorizes a 1 for 4 reverse stock split of
the Company’s outstanding common stock;
(ii) authorizes the creation of 194,275,000 shares of
a new class of common stock and 25,000,000 shares of a new
class of preferred stock; and (iii) authorizes the
Company’s board of directors to grant holders of its
Class A, Series 1 and Class A, Series 2
common shares the right to convert these shares into shares of
new common stock on a 1 for 1 basis at the
holder’s option, subject to such conditions as the
Company’s board of directors may deem appropriate. All
share and per share data relating to the Company’s capital
stock, stock options and restricted share grants in the
consolidated financial statements have been adjusted
retroactively for all periods presented to give effect to the
plan of recapitalization and the reverse stock split.
F-42
No
dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this
prospectus. You must not rely on any unauthorized information or
representations. This prospectus is an offer to sell only the
shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information
contained in this prospectus is current only as of its date.
Unless
otherwise indicated, all information in this prospectus assumes
that the underwriters’ over-allotment option will not be
exercised.
Through
and
including ,
2005 (the 25th day after the date of this prospectus), all
dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer’s obligation to
deliver a prospectus when acting as an underwriter with respect
to an unsold allotment or subscription.
The following is a statement of the estimated expenses, to be
paid solely by the Registrant, to be incurred in connection with
the distribution of the securities registered under this
registration statement:
Amount to
be Paid
SEC registration fee
$
27,071
NASD fees and expenses
23,500
Legal fees and expenses
2,400,000
Fees and expenses of qualification under state securities laws
(including legal fees)
10,000
New York Stock Exchange listing fees and expenses
260,000
Accounting fees and expenses
985,000
Printing and engraving fees
850,000
Registrar and transfer agent’s fees
1,500
Miscellaneous
142,929
Total
$
4,700,000
Item 14.
Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the
“DGCL”) provides that a corporation may indemnify
directors and officers, as well as other employees and
individuals, against expenses (including attorneys’ fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with any
threatened, pending or completed actions, suits or proceedings
in which such person is made a party by reason of such person
being or having been a director, officer, employee or agent of
the Corporation, subject to certain limitations. The statute
provides that it is not exclusive of other rights to which those
seeking indemnification may be entitled under any by-law,
agreement, vote of shareholders or disinterested directors or
otherwise. Section 7.6 of our bylaws provides for
indemnification by us of our directors, officers and employees
to the fullest extent permitted by the DGCL.
Section 102(b)(7) of the DGCL permits a corporation to
provide in its charter that a director of the corporation shall
not be personally liable to the corporation or its shareholders
for monetary damages for breach of fiduciary duty as a director,
except for liability (1) for any breach of the
director’s duty of loyalty to the corporation or its
shareholders, (2) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation
of law, (3) for payments of unlawful dividends or unlawful
stock purchases or redemptions, or (4) for any transaction
from which the director derived an improper personal benefit.
Our charter provides for such limitation of liability.
We expect to maintain standard policies of insurance under which
coverage is provided (1) to our directors and officers
against loss rising from claims made by reason of breach of duty
or other wrongful act, and (2) to us with respect to
payments which may be made by us to such officers and directors
pursuant to the above indemnification provision or otherwise as
a matter of law.
The proposed form of Underwriting Agreement filed as
Exhibit 1.1 to this Registration Statement provides for
indemnification to our directors and officers by the
underwriters against certain liabilities.
During the past three years, the Registrant has issued
securities that were not registered under the Securities Act as
described below. As discussed below, the Registrant offered and
sold the securities that it issued in such transactions in
reliance on the exemption from registration under Rule 701
of the Securities Act, relating to offers and sales of
securities pursuant to benefit plans and contracts relating to
compensation. None of these transactions involved any
underwriters, underwriting discounts or commissions, or any
public offering.
2000 Stock Option Plan
Pursuant to its 2000 Stock Option Plan, the Registrant granted
stock options to its employees and members of the board of
directors to purchase shares of its Class A common stock,
Series 2 (the “Class A2 shares”), and
issued Class A2 shares upon exercise of vested stock
options previously granted under this plan as follows:
Option Grants
•
On January 21, 2002, the Registrant granted options to
purchase 1,467,096 Class A2 shares at an exercise
price of $12.00 per share, representing a total value of
$17,605,155 as of that date.
•
On December 16, 2002, the Registrant granted options to
purchase 715,990 Class A2 shares at an exercise
price of $12.00 per share, representing a total value of
$8,591,880 as of that date.
•
On February 17, 2003, the Registrant granted options to
purchase 44,875 Class A2 shares at an exercise
price of $12.00 per share, representing a total value of
$538,500 as of that date.
•
On December 11, 2003, the Registrant granted options to
purchase 1,739,713 Class A2 shares at an exercise
price of $8.00 per share, representing a total value of
$13,917,704 as of that date.
•
On October 11, 2004, the Registrant granted options to
purchase 1,639,645 Class A2 shares at an exercise
price of $8.00 per share, representing a total value of
$13,117,160 as of that date.
•
On December 14, 2004, the Registrant granted options to
purchase 22,000 Class A2 shares at an exercise
price of $8.00 per share, representing a total value of
$176,000 as of that date.
•
On January 5, 2005, the Registrant granted options to
purchase 175,000 Class A2 shares at an exercise price of
$8.00 per share, representing a total value of $1,400,000 as of
that date.
•
On April 11, 2005, the Registrant granted options to
purchase 65,125 Class A2 shares at an exercise price of
$8.00 per share, representing a total value of $521,000 as of
that date.
•
On June 13, 2005, the Registrant granted options to
purchase 51,750 Class A2 shares at an exercise price of
$8.00 per share, representing a total value of $414,000 as of
that date.
Stock Issuances
•
On January 2, 2002, the Registrant issued 2,663
Class A2 shares for cash upon exercise of vested
options at an exercise price of $4.20 per share for total
consideration of $11,186.
•
On August 31, 2002, the Registrant issued 1,627
Class A2 shares for cash upon exercise of vested
options at an exercise price of $4.20 per share for total
consideration of $6,836.
•
On August 31, 2002, the Registrant issued 1,250
Class A2 shares for cash upon exercise of vested
options at an exercise price of $7.04 per share for total
consideration of $8,800.
•
On January 23, 2003, the Registrant issued 1,250
Class A2 shares for cash upon exercise of vested
options at an exercise price of $12.00 per share for total
consideration of $15,000.
•
On July 18, 2003, the Registrant issued 1,250
Class A2 shares for cash upon exercise of vested
options at an exercise price of $7.04 per share for total
consideration of $8,800.
On January 27, 2004, the Registrant issued 1,500
Class A2 shares for cash upon exercise of vested
options at an exercise price of $7.04 per share for total
consideration of $10,560.
•
On March 12, 2004, the Registrant issued 500
Class A2 shares for cash upon exercise of vested
options at an exercise price of $4.20 per share for total
consideration of $2,100.
•
On April 16, 2004, the Registrant issued 250
Class A2 shares for cash upon exercise of vested
options at an exercise price of $7.04 per share for total
consideration of $1,760.
•
On March 16, 2005, the Registrant issued 250 Class A2
shares for cash upon exercise of vested options at an exercise
price of $8.00 per share for total consideration of $2,000.
•
On May 20, 2005, the Registrant issued 752 Class A2
shares for cash upon exercise of vested options at an exercise
price of $8.00 per share for total consideration of $6,020.
•
On May 20, 2005, the Registrant issued 911 Class A2
shares for cash upon exercise of vested options at an exercise
price of $12.00 per share for total consideration of $10,935.
•
On May 20, 2005, the Registrant issued 1,770 Class A2
shares for cash upon exercise of vested options at an exercise
price of $8.00 per share for total consideration of $14,166.
•
On May 20, 2005, the Registrant issued 2,187 Class A2
shares for cash upon exercise of vested options at an exercise
price of $12.00 per share for total consideration of $26,247.
•
On May 27, 2005, the Registrant issued 8,750 Class A2
shares for cash upon exercise of vested options at an exercise
price of $4.20 per share for total consideration of $36,750.
•
On June 16, 2005, the Registrant issued 6,250 Class A2
shares for cash upon exercise of vested options at an exercise
price of $4.20 per share for total consideration of $26,250.
•
On July 1, 2005, the Registrant issued 468 Class A2
shares for cash upon exercise of vested options at an exercise
price of $8.00 per share for total consideration of $3,748.
•
On August 23, 2005, the Registrant issued 35,512
Class A2 shares for cash upon exercise of vested options at
an exercise price of $4.20 per share for total consideration of
$149,152.50.
•
On September 3, 2005, the Registrant issued 5,208
Class A2 shares for cash upon exercise of vested options at
an exercise price of $8.00 per share for total consideration of
$41,666.
•
On September 3, 2005, the Registrant issued 3,958
Class A2 shares for cash upon exercise of vested options at
an exercise price of $12.00 per share for total consideration of
$47,499.
•
On September 29, 2005, the Registrant issued 10,653
Class A2 shares for cash upon exercise of vested options at
an exercise price of $4.20 per share for total consideration of
$44,745.75.
•
On September 29, 2005, the Registrant issued 25,092
Class A2 shares for cash upon exercise of vested options at
an exercise price of $8.00 per share for total consideration of
$200,740.
The Registrant offered and sold the securities in these
transactions in reliance on the exemption from registration
under Rule 701 of the Securities Act based on the value of
the options granted or securities issued in each of 2002, 2003
and 2004 under this plan, which did not exceed 15% of the
Class A2 shares (together with securities offered and
sold pursuant to the 2003 Restricted Stock Deferral Plan for
Outside Directors and the 2004 Restricted Stock Plan).
2003 Restricted Stock Deferral Plan for Outside Directors
Pursuant to the 2003 Restricted Stock Deferral Plan for Outside
Directors, the Registrant granted awards of restricted stock
units to members of the board of directors as follows:
•
On March 31, 2003, the Registrant granted 1,177 restricted
stock units at a fair market value of $12.00 per share,
representing $14,124 in restricted stock compensation.
On June 30, 2003, the Registrant granted 625 restricted
stock units at a fair market value of $12.00 per share,
representing $7,500 in restricted stock compensation.
•
On September 30, 2003, the Registrant granted 562
restricted stock units at a fair market value of $12.00 per
share, representing $6,750 in restricted stock compensation.
•
On December 31, 2003, the Registrant granted 1,406
restricted stock units at a fair market value of $8.00 per
share, representing $11,250 in restricted stock compensation.
•
On March 31, 2004, the Registrant granted 843 restricted
stock units at a fair market value of $8.00 per share,
representing $6,750 in restricted stock compensation.
•
On June 30, 2004, the Registrant granted 750 restricted
stock units at a fair market value of $8.00 per share,
representing $6,000 in restricted stock compensation.
•
On September 30, 2004, the Registrant granted 750
restricted stock units at a fair market value of $8.00 per
share, representing $6,000 in restricted stock compensation.
•
On December 31, 2004, the Registrant granted 750 restricted
stock units at a fair market value of $8.00 per share,
representing $6,000 in restricted stock compensation.
•
On March 31, 2005, the Registrant granted 6,937 restricted
stock units at a fair market value of $8.00 per share,
representing $55,500 in restricted stock compensation.
•
On June 30, 2005, the Registrant granted 5,181 restricted
stock units at a fair market value of $11.00 per share,
representing $57,000 in restricted stock compensation.
•
On September 30, 2005, the Registrant granted 3,061
restricted stock units at a fair market value of $15.68 per
share, representing $48,000 in restricted stock compensation.
As of September 30, 2005, no Class A2 shares have
been issued under this plan.
The Registrant offered the restricted stock units in these
transaction in reliance on the exemption from registration under
Rule 701 of the Securities Act based on the value of the
stock granted or securities issued in each of 2003, 2004 and
2005 under this plan, which did not exceed 15% of the
Class A2 shares (together with securities offered and
sold pursuant to the 2000 Stock Option Plan and 2004 Restricted
Stock Plan).
2004 Restricted Stock Plan
Pursuant to the 2004 Restricted Stock Plan, the Registrant
granted awards of restricted stock units to its senior officers
and members of the board of directors as follows:
•
On October 11, 2004, the Registrant granted 1,425,425
restricted stock units at a fair market value of $8.00 per
share, representing $11,403,400 in restricted stock compensation.
As of September 30, 2005, no Class A2 shares have
been issued under the 2004 Restricted Stock Plan.
The Registrant offered the restricted stock units in these
transactions in reliance on the exemption from registration
under Rule 701 of the Securities Act based on the value of
the stock granted or securities issued in 2004 under this plan,
which did not exceed 15% of the Class A2 shares
(together with securities offered and sold pursuant to the 2000
Stock Option Plan and 2003 Restricted Stock Deferral Plan for
Outside Directors).
Employment Agreement, dated as of May 9, 2003, between
IntercontinentalExchange, Inc. and David S. Goone*
10
.5
—
Employment Agreement, dated as of May 9, 2003, between
IntercontinentalExchange, Inc. and Edwin D. Marcial*
10
.6
—
Letter, dated as of November 12, 1999, and Statement of
Terms and Conditions of Employment between The International
Petroleum Exchange of London Limited and Richard Ward*
10
.7
—
Employment Agreement, dated as of May 24, 2004, between
IntercontinentalExchange, Inc. and Johnathan H. Short*
10
.8
—
IntercontinentalExchange, Inc. 2000 Stock Option Plan**
10
.9
—
IntercontinentalExchange, Inc. 2003 Restricted Stock Deferral
Plan for Outside Directors**
10
.10
—
IntercontinentalExchange, Inc. 2004 Restricted Stock Plan**
10
.11
—
IntercontinentalExchange, Inc. 2005 Equity Incentive Plan**
10
.12
—
Amendment and Restatement Agreement, dated as of October 9,2003, between The London Clearing House Limited and
IntercontinentalExchange, Inc.†
10
.13
—
Clearing Services Agreement, dated as of October 2003, between
The International Petroleum Exchange of London Limited and The
London Clearing House Limited†
10
.14
—
TRS — Application Services Agreement, dated as of
April 21, 2001, between The International Petroleum
Exchange of London Limited and LIFFE Services Company
Limited†
10
.15
—
Credit Agreement, dated as of November 17, 2004, between
IntercontinentalExchange, Inc. and Wachovia, National
Association**
10
.16
—
Patent License Agreement, dated as of March 29, 2002,
between eSpeed, Inc. and IntercontinentalExchange, Inc.**
10
.17
—
Office Lease, dated as of June 8, 2000, as amended, between
CMD Realty Investment Fund IV, L.P. and
IntercontinentalExchange, LLC**†
10
.18
—
Licensing and Services Agreement, dated as of July 1, 2003,
between IntercontinentalExchange, Inc. and Chicago Climate
Exchange, Inc.**
10
.19
—
AT&T Master Agreement (MA Reference No. MA 35708)
and Addendum to Master Agreement, dated as of April 8,2002, between AT&T Corporation and IntercontinentalExchange,
Inc.**
10
.20
—
Lease of Part (Offices) (WTC/Q/W) (Part): 2.18.1), dated
April 24, 1996, between Clipper Investments Limited and The
International Petroleum Exchange of London Limited**†
10
.21
—
Resident Member’s Agreement, dated as of December 2,
1983, between St. Katherine-By-The-Tower Limited and Aegis
Insurance Services Limited**†
10
.22
—
Resident Member’s Agreement, dated as of November 28,
1991, between St. Katherine-By-The-Tower Limited and The
International Petroleum Exchange of London Limited**†
Lease of Part (Offices) (Suite Ref. 2.17), dated as of
April 28, 2003, between Inter One Limited and Inter Two
Limited and The International Petroleum Exchange of London
Limited**†
10
.24
—
First Amendment to Credit Agreement, dated as of June 9,2005, between
IntercontinentalExchange, Inc. and Wachovia Bank, National
Association
10
.25
—
Deed of Novation, dated July 22, 2005, between The
International Petroleum Exchange of London Limited, LIFFE
Services Limited, Atos Euromont Market Solutions Limited, and
LIFFE Administration and Management
10
.26
—
Settlement Agreement, dated as of September 1, 2005, by and
between EBS Group Limited and
IntercontinentalExchange, Inc.
10
.27
—
Lease Amendment Six, dated as of October 12, 2005, by and
between CMD Realty Investment Fund IV, L.P. and
IntercontinentalExchange, Inc.†
Confidential treatment has been requested with respect to
certain portions of this exhibit. Omitted portions have been
filed separately with the Securities and Exchange Commission.
Additions charged to costs and expenses for the allowance for
doubtful accounts are based on our historical collection
experiences and management’s assessment of the
collectibility of specific accounts. This column also includes
the foreign currency translation adjustments.
(2)
Deductions represent the write-off of uncollectible receivables,
net of recoveries.
Item 17.
Undertakings
The undersigned hereby undertakes:
(a) to provide to the underwriters at the closing specified
in the underwriting agreement, certificates in such
denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
(b) insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the provisions referenced in Item 14 of this registration
statement, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective; and
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 4 to the
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Atlanta, Georgia on
the 14th day of October, 2005.
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 4 to the Registration Statement has been
signed by the following persons in the capacities indicated on
the 14th day of October, 2005.
Signature
Title(s)
*
Jeffrey
C. Sprecher
Chairman of the Board and Chief Executive Officer (principal
executive officer)
