UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported)
October 22, 2003
CHICAGO MERCANTILE EXCHANGE HOLDINGS INC.
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(Exact Name of Registrant as Specified in Charter)
Delaware 001-31553 36-4459170
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(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
30 South Wacker Drive, Chicago, Illinois 60606
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(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (312) 930-1000
N/A
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(Former Name or Former Address, if Changed Since Last Report)
ITEM 12. Results Of Operations And Financial Condition.
The information set forth under "Item 12. Results Of Operations And
Financial Condition," including the Exhibit attached hereto, shall not be
deemed "filed" for purposes of Section 18 of the Securities Act of 1934, nor
shall it be deemed incorporated by reference in any filing under the
Securities Act of 1933, except as shall be expressly set forth by specific
reference in such filing.
Attached and incorporated herein by reference as Exhibit 99.1 is a
copy of a press release of Chicago Mercantile Exchange Holdings Inc., dated
October 22, 2003, reporting Chicago Mercantile Exchange Holdings Inc.'s
financial results for the third quarter of 2003.
EXHIBIT INDEX
Exhibit
Number Description
- ------- --------------
99.1 Press Release, dated October 22, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
CHICAGO MERCANTILE EXCHANGE HOLDINGS INC.
Registrant
Date: October 22, 2003 By: /s/ Kathleen M. Cronin
------------------------------------
Kathleen M. Cronin
Managing Director, General Counsel and
Corporate Secretary
EXHIBIT 99.1
CHICAGO MERCANTILE
EXCHANGE HOLDINGS INC. NEWS RELEASE
Media Contacts
Ellen G. Resnick, 312/930-3435
Maryellen T. Thielen, 312/930-3467
news@cme.com
FOR IMMEDIATE RELEASE
Investor Contact
John Peschier, 312/930-8491
Chicago Mercantile Exchange Holdings Inc. Reports Strong Revenues, Earnings
for the Third Quarter of 2003, Fueled by Overall Volume Growth and Record
Electronic Trading Volume
CHICAGO, Oct. 22, 2003-- Chicago Mercantile Exchange Holdings Inc.
(NYSE: CME) today reported strong revenues and earnings for the third quarter
of 2003, fueled by overall volume growth and record electronic trading levels.
Net revenues increased 8 percent to $135.0 million for the third
quarter of 2003, compared with $125.2 million for the same quarter of 2002.
Net income climbed 37 percent to $31.4 million, versus $22.9 million a year
ago. Diluted earnings per share improved 20 percent to 93 cents from 77 cents
per diluted share for the third quarter last year. This growth occurred on a
base of shares that increased by nearly 3.7 million with the company's initial
public offering in December 2002.
CME's third quarter revenues reflected significant growth in its
stock index, foreign exchange and commodity product groups, as well as
continued high volume in interest rate contracts. Average daily volume
increased 8 percent to 2.6 million contracts for the third quarter of 2003
versus the same period of 2002. Comparing the third quarters of 2003 and 2002,
average daily volume in electronic trading on CME's GLOBEX(R) platform climbed
29 percent to a record of nearly 1.2 million contracts per day. Electronic
trading was 45 percent of CME's total volume in the third quarter of this
year.
"As we continue to broaden electronic distribution and make it easier
for customers to connect to our GLOBEX platform, volumes have risen in many of
our most significant electronically traded products," said Chairman Terry
Duffy. "For example, our E-mini(TM) stock index contracts grew 35 percent in
September 2003 versus 2002, to a record 1.1 million contracts a day, despite
lower volatility in the underlying equity markets. Also this September,
electronic trading of our foreign exchange products reached a record 73,000
contracts a day, up from 35,000 contracts per day a year ago. We continue to
reach out to new customers -- most recently, through agreements with
Bloomberg, E*TRADE and CyberTrader, a division of Charles Schwab. These
companies have established customers, networks and proprietary software which
can now provide easy access to our GLOBEX-traded products."
"In the third quarter, we made excellent progress toward implementing
the first phase of the CME/CBOT Common Clearing Link on Nov. 24, 2003 and
bringing all CBOT products into the Link as scheduled on Jan. 2, 2004," said
President and Chief Executive Officer Jim McNulty. "In the meantime, clearing
firms have been quantifying the benefits. Based on their existing portfolios
as of Oct. 3, we estimate that market participants would realize an aggregate
$1.4 billion reduction in performance bond requirements due to offsetting CME
and CBOT positions, and another $200 million in reduced capital requirements
due to a combined CME-CBOT financial safeguards package. In addition, we
expect many firms to realize operational efficiencies, such as a standardized
online interface and simplified business practices, because firms will not
have to maintain separate back-office clearing operations for the two
exchanges."
"We believe that CME's proven ability to innovate and execute has
allowed us to build important new business partnerships, including our Common
Clearing Link agreement with CBOT, and most recently with NASDAQ," said Craig
Donohue, who will become the company's CEO on Jan. 1, 2004. "About two weeks
ago, we announced an agreement with NASDAQ to extend the exclusive license on
our benchmark NASDAQ-100(R) contracts from 2006 to 2011. We also announced
plans to launch a new futures contract based on the NASDAQ Composite Index(R),
which will occur next Monday, less than three weeks after signing our
agreement. The contract will be traded exclusively at CME, subject to
attaining specified performance criteria. These two NASDAQ indexes are among
the most widely recognized measures for tracking U.S. market performance, and
we are pleased to add the NASDAQ Composite to CME's suite of equity
contracts."
For the third quarter of 2003, revenue from clearing and transaction
fees rose 9 percent to $107.8 million from $99.3 million for the same period
of 2002. Clearing and transaction revenue includes trading volumes multiplied
by an average rate per contract. The average rate per contract is affected by
the product mix, venue mix and member/non-member percentage. Excluding
TRAKRSSM, the overall rate per contract was 67.4 cents, compared to 65.0 cents
in the same quarter last year and a decrease from 68.4 cents, excluding an
audit assessment, in the second quarter of 2003. Quotation data fees improved
12 percent to $13.6 million for the 2003 quarter, versus $12.1 million for the
same period a year ago, primarily due to a pricing change that took effect in
April 2003.
Total operating expenses for the third quarter of 2003 were $82.1
million, including $1.2 million of CME/CBOT Common Clearing Link-related
expenses, compared with $87.0 million for the same period a year ago. The
third quarter of 2002 included a $13.7 million one-time charge related to the
Wagner patent litigation settlement.
Income before income taxes was $52.9 million for the third quarter of
2003 versus $38.1 million for the year-earlier period. Excluding the patent
litigation settlement, income before income taxes would have been $51.8
million for the third quarter of 2002. The company's operating margin, defined
as income before income taxes expressed as a percentage of net revenues, was
39.2 percent for the third quarter of 2003, compared with 30.5 percent for the
same period a year ago including the settlement and 41.4 percent excluding the
settlement. Net income was $31.4 million for the third quarter of 2003 versus
$31.1 million for the third quarter of 2002, excluding the settlement.
Excluding the settlement from the stated operating results for the third
quarter of 2002 provides better insight into the company's operating results,
as the patent litigation settlement was a one-time expense.
CME's working capital was $414.3 million at Sept. 30, 2003, compared
with $325.6 million at Dec. 31, 2002, primarily due to improved operating
results.
In January 2003, the FASB issued Interpretation (FIN) No. 46 -
"Consolidation of Variable Interest Entities - An Interpretation of Accounting
Research Bulletin (ARB) No. 51." As a result, the first interest earning
facilities that CME initiated in 1997, which are utilized by clearing firms to
satisfy performance bond requirements, have been determined to be variable
interest entities and have been included in the consolidated financial
statements beginning with the third quarter of 2003. While this consolidation
has no incremental effect on net income, investment income in the third
quarter of 2003 includes $0.6 million arising from these interest earning
facilities, with offsetting increases in expenses of $0.6 million to reflect
fees paid for managing the interest earning facilities and the distribution of
the earnings to the participants. In addition, the company's current assets
and current liabilities at Sept. 30, 2003 reflect an increase of $339.6
million for the balances in these interest earning facilities which are due to
the participants.
Capital expenditures and capitalized software development costs were
$13.1 million for the third quarter. The company paid a quarterly dividend of
14 cents per common share in September 2003, which totaled $4.6 million. Also
in September, the company modified its dividend payout policy -- raising its
annual dividend target from 20 percent to 30 percent of the prior year's cash
earnings. The amount and payment of any dividend is at the discretion of the
Board.
CME recently filed a Form 8-K regarding CEO Jim McNulty's stock
option. CME's policy is to expense stock-based compensation on an accelerated
basis. From 2000 through the third quarter of 2003, the company has expensed
98 percent of the fair value of the grant as determined under SFAS No. 123.
Since McNulty's contract with the company is expiring at year-end with 20
percent of the option unvested, the company will reduce compensation and
benefits expense in the fourth quarter of 2003 by $2.6 million. This reduction
reflects the expense previously recorded for the portion of the option that
will not vest.
Nine-Month Results
For the first nine months of this year, higher trading volume led to
a 21 percent increase in net revenues, to $403.4 million from $333.8 million
for the same period of 2002. Clearing and transaction fees climbed 25 percent
to $326.1 million from $261.4 million a year ago. Total operating expenses
were $247.4 million for the first nine months of 2003, versus $230.0 million
for the comparable period of 2002. Income before income taxes rose 50 percent
to $156.0 million for the 2003 period versus $103.8 million for the 2002
period. The operating margin was 38.7 percent for the first nine months of
2003, compared with 31.1 percent for the first three quarters of 2002.
The company reported net income of $92.5 million, or $2.73 per
diluted share, for the first nine months of 2003, compared with $62.5 million,
or $2.11 per diluted share, for the same period of 2002.
Capital expenditures and capitalized software development costs were
$38.1 million for the first nine months of 2003 compared to $43.1 million
during the same period of 2002.
Chicago Mercantile Exchange Holdings Inc. became the first publicly
traded U.S. financial exchange on Dec. 6, 2002. The company was added to the
Russell 1000(R) Index on July 1, 2003. It is the parent company of Chicago
Mercantile Exchange Inc. (www.cme.com), the largest futures exchange in the
United States. As an international marketplace, CME brings together buyers and
sellers on its trading floors and its GLOBEX electronic trading platform. CME
offers futures contracts and options on futures contracts primarily in four
areas: interest rates, stock indexes, foreign exchange and commodities. The
exchange moved about $1.5 billion per day in settlement payments in the first
nine months of 2003 and managed $29.6 billion in collateral deposits at Sept.
30, 2003.
CME will hold a conference call to discuss third quarter results at
8:30 a.m. Eastern time today. A live audio Webcast of the conference call will
be available on the Investor Relations section of CME's Web site; those
wishing to listen to the live conference via telephone should dial (800)
474-8920 if calling from within the United States or (719) 457-2727 if calling
from outside the United States at least 10 minutes before the call begins.
Following the conference call, an archived recording will be available at the
same site.
Statements in this news release that are not historical facts are
forward-looking statements. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or implied in any forward-looking
statements. Among the factors that might affect our performance are:
increasing competition by foreign and domestic competitors, including new
entrants into our markets; our ability to keep pace with rapid technological
developments; our ability to continue introducing competitive new products and
services on a timely, cost-effective basis, including through our electronic
trading capabilities; our ability to maintain the competitiveness of our
existing products and services; our ability to efficiently and simultaneously
operate both open outcry trading and electronic trade execution facilities;
our ability to adjust our fixed costs and expenses if our revenues decline;
changes in domestic and foreign regulations; changes in government policy,
including interest rate policy; the costs associated with protecting our
intellectual property rights and our ability to operate our business without
violating the intellectual property rights of others; the ability of our joint
venture, OneChicago, to obtain market acceptance of its products and achieve
sufficient trading volume to operate profitably; and the continued
availability of financial resources in the amounts and on the terms required
to support our future business. In addition, our performance could be affected
by our ability to realize the benefits or efficiencies we expect from our
for-profit initiatives, such as fee increases, volume and member discounts and
new access rules to our markets; our ability to recover market data fees that
may be reduced or eliminated by the growth of electronic trading; changes in
the level of trading activity, price levels and volatility in the derivatives
markets and in underlying fixed income, equity, foreign exchange and
commodities markets; economic, political and market conditions; our ability to
accommodate increases in trading volume without failure or degradation of
performance of our trading systems; our ability to manage the risks associated
with our acquisition, investment and alliance strategy; industry and customer
consolidation; decreases in member trading and clearing activity and
seasonality of the futures business. More detailed information about factors
that may affect our performance may be found in our filings with the
Securities and Exchange Commission, including our most recent Annual Report on
Form 10-K, which is available in the Investor Information section of the CME
Web site. We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or
otherwise.
Chicago Mercantile Exchange, CME and GLOBEX are registered trademarks
of Chicago Mercantile Exchange Inc. E-mini is a trademark of CME. NASDAQ-100,
NASDAQ Composite Index, Russell 1000, TRAKRS and other trade names, service
marks, trademarks and registered trademarks that are not proprietary to
Chicago Mercantile Exchange Inc. are the property of their respective owners,
and are used herein under license. Further information about Chicago
Mercantile Exchange Holdings Inc. and Chicago Mercantile Exchange Inc. is
available on the CME Web site at www.cme.com.
Chicago Mercantile Exchange Holdings Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands)
Sept. 30, 2003 Dec. 31, 2002
ASSETS
Current Assets:
Cash and cash equivalents $ 391,534 $ 339,260
Proceeds from securities lending activities 800,000 985,500
Short-term investments of interest earning facilities 339,647 ---
Marketable securities 29,633 ---
Accounts receivable 58,195 50,865
Other current assets 7,898 11,515
Cash performance bonds and security deposits 2,027,710 1,827,991
---------- ----------
Total Current Assets 3,654,617 3,215,131
Property, net of accumulated depreciation and amortization 106,909 109,563
Other assets 34,081 30,322
---------- ----------
TOTAL ASSETS $3,795,607 $3,355,016
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 17,821 $ 27,607
Payable under securities lending agreements 800,000 985,500
Payable to participants in interest earning facilities 339,647 ---
Other current liabilities 55,124 48,396
Cash performance bonds and security deposits 2,027,710 1,827,991
---------- ----------
Total Current Liabilities 3,240,302 2,889,494
Long-term debt 165 2,328
Other liabilities 18,074 17,055
---------- ----------
Total Liabilities 3,258,541 2,908,877
Shareholders' Equity 537,066 446,139
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,795,607 $3,355,016
========== =========
Balance Sheet Items Excluding Cash Performance Bonds and Security Deposits,
Securities Lending and Interest Earning Facilities(1)
Sept. 30, 2003 Dec. 31, 2002
Current assets $487,260 $401,640
Total assets 628,258 541,525
Current liabilities 72,945 76,003
Total liabilities 91,184 95,386
1 Securities lending, cash performance bonds and securities deposits, and
interest earning facilities are excluded from this presentation, as there
are current assets for these balances that have equal and offsetting
current liabilities. This presentation results in a more meaningful
indication to investors of the assets owned and related obligations of the
company. Clearing firms are subject to performance bond requirements
pursuant to the rules of the exchange. The clearing firm can elect to
satisfy these requirements in cash, which is reflected in the consolidated
balance sheets, or by depositing securities, which are not reflected in
the consolidated balance sheets. The balance of cash performance bonds and
security deposits that are deposited by clearing firms may change daily as
a result of changes in the clearing firms' open positions and how clearing
firms elect to satisfy their performance bond requirements. Securities
lending transactions utilize a portion of the securities that clearing
firms have deposited to satisfy their proprietary performance bond
requirements. Effective July 1, 2003, the first interest earning
facilities are included in the consolidated financial statements of CME
Holdings. Deposits received from clearing firms in these interest earning
facilities are invested on a short-term basis, are payable to the clearing
firm participants on demand and will fluctuate daily.
Chicago Mercantile Exchange Holdings Inc. and Subsidiaries
Consolidated Statements of Income
(dollars in thousands, except share and per share amounts)
Quarter Ended Nine Months Ended
Sept. 30, Sept. 30,
2003 2002 2003 2002
---- ---- ---- ----
REVENUES
Clearing & transaction fees $107,846 $99,255 $326,053 $261,414
Quotation data fees 13,611 12,117 38,980 36,507
GLOBEX access fees 3,961 3,362 11,566 9,770
Communication fees 2,415 2,453 7,243 7,364
Investment income 2,351 3,177 5,661 6,098
Securities lending interest income 2,441 4,913 7,327 14,702
Other operating revenue 4,636 4,372 13,326 10,943
------- ------- ------- --------
TOTAL REVENUES 137,261 129,649 410,156 346,798
Securities lending interest expense (2,251) (4,484) (6,739) (13,009)
------- ------- ------- --------
NET REVENUES 135,010 125,165 403,417 333,789
------- ------- ------- --------
EXPENSES
Compensation & benefits 36,664 28,325 107,878 88,433
Occupancy 6,421 5,881 18,996 16,970
Professional fees, outside services & licenses 7,850 9,109 22,789 24,747
Communications & computer & software 10,687 12,183 33,986 33,816
maintenance
Depreciation & amortization 13,331 12,353 39,863 35,504
Patent litigation settlement --- 13,695 --- 13,695
Marketing, advertising & public relations 1,827 1,481 8,963 4,398
Other operating expense 5,349 4,005 14,937 12,441
------- ------- ------- --------
TOTAL EXPENSES 82,129 87,032 247,412 230,004
------- ------- ------- --------
Income before income taxes 52,881 38,133 156,005 103,785
Income tax provision (21,484) (15,235) (63,474) (41,237)
-------- -------- -------- --------
NET INCOME $ 31,397 $ 22,898 $ 92,531 $ 62,548
======== ======== ======== ========
EARNINGS PER SHARE
Basic $ 0.96 $ 0.79 $ 2.84 $ 2.17
====== ====== ====== ======
Diluted $ 0.93 $ 0.77 $ 2.73 $ 2.11
====== ====== ====== ======
Weighted average number of common shares:
Basic(2) 32,738,674 28,819,779 32,632,391 28,798,301
Diluted(2) 33,942,315 29,777,649 33,890,969 29,730,097
2 In December 2002, CME Holdings issued approximately 3.7 million shares in its initial public offering.
Average Daily Volume (Round Turns, in Thousands)
3Q 4Q 1Q 2Q 3Q
2002 2002 2003 2003 2003
Interest rates 1,290 1,030 1,121 1,389 1,257
Equity E-mini 812 848 958 936 950
Equity standard-size 161 138 142 134 118
Foreign exchange 93 93 127 137 136
Commodities 28 29 35 34 38
----- ----- ----- ----- -----
Subtotal 2,384 2,138 2,383 2,630 2,499
TRAKRS 31 122 18 46 114
----- ----- ----- ----- -----
Total 2,415 2,260 2,401 2,676 2,613
===== ===== ===== ===== =====
Open outcry 1,471 1,192 1,299 1,548 1,398
Electronic (including TRAKRS) 915 1,036 1,063 1,087 1,175
Privately negotiated 29 32 39 41 40
----- ----- ----- ----- -----
Total 2,415 2,260 2,401 2,676 2,613
===== ===== ===== ===== =====
Transaction Fees (in Thousands)
3Q 4Q 1Q 2Q(3) 3Q
2002 2002 2003 2003 2003
Interest rates $38,314 $33,506 $ 33,763 $ 47,174 $ 39,403
Equity E-mini 37,018 37,639 41,607 39,692 40,533
Equity standard-size 11,948 10,691 10,594 10,641 9,329
Foreign exchange 10,320 11,322 14,502 16,235 16,300
Commodities 1,650 1,766 1,920 2,034 2,255
------ ------- ------- ------- -------
Subtotal 99,250 94,924 102,386 115,776 107,820
TRAKRS 5 58 13 32 26
------- ------- -------- -------- --------
Total $99,255 $94,982 $102,399 $115,808 $107,846
======= ======= ======== ======== ========
Open outcry $49,032 $43,568 $ 43,986 $ 56,308 $ 47,831
Electronic (including TRAKRS) 43,489 43,322 48,936 49,245 49,971
Privately negotiated 6,734 8,092 9,477 10,255 10,044
------- ------- -------- -------- --------
Total $99,255 $94,982 $102,399 $115,808 $107,846
======= ======= ======== ======== ========
Average Rate Per Contract
3Q 4Q 1Q 2Q(3) 3Q
2002 2002 2003 2003 2003
Interest rates $ 0.46 $ 0.51 $ 0.49 $ 0.54 $ 0.49
Equity E-mini 0.71 0.69 0.71 0.67 0.67
Equity standard-size 1.16 1.21 1.22 1.26 1.23
Foreign exchange 1.73 1.90 1.88 1.89 1.88
Commodities 0.92 0.95 0.91 0.95 0.92
------- ------- -------- -------- --------
Average excluding TRAKRS 0.65 0.69 0.70 0.70 0.67
TRAKRS 0.003 0.007 0.012 0.011 0.004
------- ------- -------- -------- --------
Overall rate per contract $ 0.64 $ 0.66 $ 0.70 $ 0.69 $ 0.65
Open outcry $ 0.52 $ 0.57 $ 0.56 $ 0.58 $ 0.54
Electronic (including TRAKRS) 0.74 0.65 0.75 0.72 0.66
Electronic (excluding TRAKRS) 0.77 0.74 0.77 0.75 0.74
Privately negotiated 3.64 3.90 3.96 4.00 3.95
------- ------- -------- -------- --------
Overall rate per contract $ 0.64 $ 0.66 $ 0.70 $ 0.69 $ 0.65
3 Second quarter 2003 transaction fees include a $2.5 million assessment to a
clearing firm which primarily affected the rate per contract for interest
rate contracts. Without this assessment, the interest rate contract rate per
contract would have been 51.2 cents; the assessment increased it 2.7 cents
to 53.9 cents. The overall rate per contract, excluding TRAKRS, would have
been 68.4 cents, and was increased by 1.5 cents to 69.9 cents. Transaction
fee assessments occur in the regular course of business.
03-154 # # #