Cboe Global Markets
Annual Report 2002

Plain-text annual report

state of the exchange chicago board options exchange annual report 2002 cv2 cv2 fy 2002: a year of challenges and strategic initiatives Letter from the Office of the Chairman during the past year, the u.s. equity market struggled to find a bottom amidst the ongoing threat of terrorism and war. the highly publicized reports of corporate misconduct and accounting abuses further undermined investor confidence. the chicago board options exchange® (cboe®), the world leader among options exchanges, was buffeted by the effects of the market’s tumult as well as by increasing competitive pressures. Competitive Environment Against the backdrop of a difficult macroeconomic environment, CBOE and its members faced intense competition from other exchanges. Increased elec- tronic competition had a profound effect on CBOE’s business as well as on the business of other floor-based exchanges. CBOE members’ profitability suffered and many smaller Designated Primary Market Makers (DPMs) merged or consolidated with larger firms. The Exchange continued to lead the market in options volume in FY 2002, with overall market share of 37% of all options contracts traded. Exchange volume in FY 2002, however, was off 14% from the record-breaking levels set in the previous fiscal year. CBOE continued to lead the industry in equity options trading, although market share in equity options was down 5.5 percentage points from FY 2001 to 33% in FY 2002. Volume in index options was a bright spot as market share climbed from 54% in FY 2001 to 56% in FY 2002 when investors sought the broad protection provided by index options as market volatility increased. Throughout the year, CBOE’s member- ship, Board of Directors and staff worked to address losses in market share and member profitability, and to productively chart the future course for the Exchange. In light of the changing competitive landscape, our first priority was the development of a hybrid trading model, which will merge the best features of both screen- and floor-based trading. The development of this unique, “best of both worlds” trading model is well under way. 1 total options market share fiscal year 2002 index options market share fiscal year 2002 equity options market share fiscal year 2002 phlx 11.7% pcx 11.8% ise 15.0% amex 24.5% cboe 37.0% phlx 6.2% pcx 6.4% ise 6.7% amex 24.7% cboe 56.0% phlx 12.9% pcx 13.0% ise 16.9% amex 24.5% cboe 32.7% New Trading Model CBOE’s trading floor has the greatest concentration of market-making expertise and the deepest pool of liquidity of any options exchange. The CBOE hybrid trading model will preserve these floor- based advantages while enhancing CBOE’s ability to capture screen-based business. The hybrid model will offer customers the best elements of both trading environments—the speed and functionality of screen-based systems combined with the market depth, ability to execute complex strategies, and opportunity for price improvement found on the trading floor. More than two dozen enhancements were built and effectively integrated into the evolving hybrid model during FY 2002. Two of the most important elements of the hybrid were rolled out over the past six months. In May 2002, CBOE introduced “Dynamic Quotes with Size.” This new technology allows investors to see, in real time, the number of contracts that are available to be traded at a given price. The “dynamic size” feature is continually updated throughout the trading day, providing investors with an understanding of the liquidity available in every options series. In July 2002, CBOE unveiled a second major component of the hybrid model— the Large Order Utility (LOU). LOU offers “point and click” convenience, instanta- neous reports on any order up to the size displayed, and exposure to the trading floor’s centralized pool of liquidity for price improvement. This combination of instantaneous reporting with continued exposure to the market for possible price improvement is not available through any other options marketplace. CBOE’s goal in developing the hybrid trading model is to offer customers convenience, liquidity and price improve- ment opportunity that is unparalleled in the options industry. CBOEdirect The cornerstone of the CBOE hybrid trading model is CBOEdirect,® CBOE’s screen-based trading system, launched on October 26, 2001. A milestone tech- nological achievement for the Exchange, CBOEdirect replicates CBOE’s trading floor on a screen. CBOEdirect currently supports the trading of some of CBOE’s most popular index products during extended trading hours (7 a.m.– 8:15 a.m.). CBOEdirect was developed as a hedge against screen-based competition. Although designed to be a stand-alone system, key components of CBOEdirect have been used as the foundation of the hybrid. 2 competitive environment increased electronic competition had a profound effect on cboe’s business as well as on the business of other floor-based exchanges. 3 new trading model cboe’s goal in developing the hybrid trading model is to offer customers convenience, liquidity and price improvement opportunity that is unparalleled in the options industry. 4 total volume in millions, by fiscal year average daily volume in millions, by fiscal year open interest in millions, by fiscal year 350 300 250 200 150 100 50 0 1998 1999 2000 2001 2002 1.4 1.2 1.0 .8 .6 .4 .2 0 1998 1999 2000 2001 2002 84 72 60 48 36 24 12 0 1998 1999 2000 2001 2002 CBOE has a long legacy of technological innovation. With the introduction of CBOEdirect, the Exchange has once again redefined the state of the art in trading technology. In January 2002, CBOEdirect was chosen as the trade engine for OneChicago, an all-electronic exchange trading single stock futures and futures on narrow-based indexes. Additionally, in September 2002, the Chicago Board of Trade (CBOT®) purchased a license to use CBOEdirect software to support and enhance its trading floor. New Products To meet the needs of a growing and diverse customer base, CBOE added a wide range of products in FY 2002. Most notably, options on DIAMONDS® (DIA) began trading at CBOE on May 20, 2002 and quickly became one of CBOE’s top five most actively traded index prod- ucts. Volume in options on DIAMONDS continues to post impressive gains, averaging more than 33,000 contracts traded per day. DIAMONDS are shares in an exchange-traded fund designed to track the performance of the Dow Jones Industrial AverageSM (DJIA®). • Additional new products listed include: S&P 100® Index Options with European- style exercise (XEO®) launched on July 23, 2001. CBOE developed this product in response to customer requests for an S&P 100 Index option that does not carry the possibility of early assignment. • • • Shares of the Nasdaq-100 Index Tracking StockSM (QQQ). This exchange-traded fund began trading at CBOE on August 1, 2001, following the successful introduc- tion of QQQ options on February 27, 2001. The QQQ shares are among the most actively traded contracts in the world. Three new Morgan Stanley sector index options launched on October 22, 2001— Morgan Stanley Biotech Index (MVB), Morgan Stanley Oil Services Index (MGO), and Morgan Stanley Retail Index (MVR). Standard & Poor’s® Depository Receipts (SPDRs®) became available at CBOE on November 23, 2001. This exchange-traded fund (CBOE ticker symbol SPY) repre- sents units of beneficial interest in a unit investment trust that holds the component stocks of the S&P 500® Index. A critical development in new products was realized on May 14, 2001 with the formation of OneChicago. CBOE, the Chicago Mercantile Exchange Inc. and the Chicago Board of Trade formed this joint venture to trade single stock futures and futures on narrow-based indexes. CBOE members are members of OneChicago, which is expected to begin trading in the fourth quarter, 2002. 5 onechicago at a glance cboe new listings in fy 2002 cboe total product listings 85 single stock futures to be listed 15 narrow-based index futures to be listed 20+ Lead Market Makers 7,000+ members 500+ member firms 399 equity options 1,487 equity options 4 index options 32 index options 2 exchange-traded funds 18 exchange-traded funds 78 LEAPS® 424 LEAPS® Index Options The uncertainty and volatility that charac- terized much of the stock market in FY 2002 contributed to a sharp increase in index options trading at CBOE. Index options, which allow investors to make investment decisions based on market segments or on the market as a whole, offer an efficient means of portfolio protection. CBOE pioneered the listing of index options in 1983. Exchange-traded funds (ETFs) are index-linked baskets of stocks that trade on an exchange at a market price close to the underlying value of the securities in its portfolio. ETFs can be traded like stocks, yet mimic many of the characteristics of indexes. As such, they are also used to manage risk. For calendar year 2002, total ETF volume through September was up 32% when compared to September 2001, due in part to strong volume in the QQQs and SPDRs. In FY 2002, total index options volume increased in ten of the twelve months when compared to the previous year. For calendar year 2002, total index volume at CBOE was up 23% through September when compared to September 2001, including: options on the Dow Jones Industrial AverageSM (DJX), up 37%; S&P 100® Index options (OEX®), up 25%; S&P 500® Index options (SPXSM), up 19%; and options on the Nasdaq-100 Index Tracking StockSM (QQQ), up 17%. In July 2002, new records were established for monthly volume in DJX (1,485,582 contracts traded), SPX (3,859,734 contracts traded) and QQQ options (2,450,147 contracts traded). CBOE renewed its licensing agreement with Dow Jones & Company, Inc. to trade Options on the DowSM (DJX) and other Dow Jones Indexes. Exclusively traded at CBOE since 1997, DJX options are one of the Exchange’s most actively traded index products. CBOE now lists seven Dow Jones products. CBOE initiated a number of efforts in FY 2002 to promote its index products, including marketing programs aimed at institutional investors, new micro-websites at www.cboe.com dedicated to index products, new Index WorkbenchSM soft- ware posted on the same website, and distribution of CD-ROM versions of the Index Workbench to more than 35,000 institutional investors. Another significant achievement was the Exchange’s development of the CBOE BuyWrite Monthly IndexSM (BXM). The BXM is a benchmark measure of the popular buy-write strategy. CBOE believes that the introduction of the BXM will lead to more long-term customer interest in, and use of, CBOE index options. 6 a critical development in new products was realized on may 14, 2001 with the formation of onechicago. cboe, the chicago mercantile exchange inc. and the chicago board of trade formed this joint venture to trade single stock futures and futures on narrow-based indexes. new products 7 indexes in fy 2002, total index options volume increased in ten of the twelve months when compared to the previous year. 8 total index options volume in millions, by fiscal year dow jones industrial average (djx) volume in millions, by fiscal year s&p 500 (spx) volume in millions, by fiscal year 8.0 7.0 6.0 5.0 4.0 3.0 2.0 jul a u g o ct sep fy 2001 n o v dec feb ja n fy 2002 m ar apr m ay ju n 1.2 1.0 .80 .60 .40 .20 0 jul a u g o ct sep fy 2001 n o v dec feb ja n fy 2002 m ar apr m ay ju n 3.0 2.5 2.0 1.5 1.0 jul a u g sep o ct fy 2001 n o v dec feb ja n fy 2002 m ar apr m ay ju n During this past year’s turbulent markets, the widely quoted CBOE Volatility Index® (VIX®) achieved even greater recognition as the benchmark measure of U.S. mar- ket volatility. The VIX was created and launched by CBOE in 1993 as a meas- ure of the implied volatility of S&P 100® Index options. Education Throughout bull and bear markets, CBOE has remained steadfast in its commitment to educational outreach programs. The Options Institute, the educational arm of the Exchange, holds classes to educate individual investors, institutional investors, brokers, traders, trading floor and firm employees, and financial advisors. In FY 2002, The Options Institute intro- duced “Trade Like the Pros” seminars, which are available to the public and provide a special “hands-on” opportunity to learn the basics of options trading. The Options Institute also expanded its Online Learning Center at www.cboe.com with the addition of a new interactive learning section, titled “Advanced Strategies.” The Options Institute Online Learning Center offers a wide variety of options tutorials for both novice and sophisticated investors, all free of charge. CBOE’s website, www.cboe.com, is inter- nationally recognized as one of the most valuable one-stop sources of options research, data and education available. In July 2002, CBOE debuted two new micro-websites in Chinese and Spanish to accommodate the growing number of international investors who are incor- porating options into their investment portfolios. For the third straight year, CBOE’s website received a “Best of the Web” award from Forbes Magazine. In January 2002, CBOE, the Chicago Board of Trade and Chicago Mercantile Exchange Inc. hosted the 18th annual Risk Management Conference in St. Petersburg, Florida. The Risk Manage- ment Conference is the main conference event for the options and futures industries, and provides an educational forum where end users of derivatives discuss the strategies, tools and systems they use to manage risk and enhance yields. Advocacy CBOE remained the leading advocate for the options industry in Washington, D.C. during FY 2002. CBOE worked with the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission to ensure that the margin rules and tax treatment governing single stock futures were fair, so that competi- tion with other derivative products, including options, takes place on a level playing field. 9 options institute www.cboe.com 543 classes taught around the world in FY 2002 16,643 investors attended classes in FY 2002 217,133,363 page views of www.cboe.com in FY 2002 43% increase over FY 2001 54,658 registrants for “My CBOE,” the person- alized web engine of www.cboe.com 124 countries with users regularly accessing www.cboe.com Additionally, CBOE played a significant part in passage of the Investor and Capital Markets Fee Relief Act. This legislation repealed the Section 31 fees applicable to options on most broad-based indexes. Index options compete directly with futures and futures options based on stock indexes, which were not subject to comparable transaction fees. With the passage of this legislation, most index options are now exempt from these fees. In recognition of CBOE’s role in championing this legislation, CEO William Brodsky was invited to the White House for President Bush’s signing of the Investor and Capital Markets Fee Relief Act in January 2002. Governance CBOE members overwhelmingly approved a plan to alter the composition of the CBOE Board of Directors to increase the role of public directors in Exchange governance. The composition of the Board will be modified so that CBOE governance is equally balanced between 11 industry (member) directors and 11 non-industry (public) directors, plus the Chairman. As a result of this vote, CBOE was commended by the SEC for “initiatives [which] evidence the CBOE’s strong commitment to the integrity of our marketplace and the strength of the self-regulatory function.” Moving Forward As the Exchange moves forward, several significant developments will occur during FY 2003, providing valuable ben- efits to the Exchange, its membership and customers. Most significantly, we look forward to the completion of the hybrid trading model early in 2003. The hybrid will merge the best features of screen- and floor-based trading to offer an ideal trading environ- ment, unmatched in the options industry. We would like to thank our dedicated members, particularly those on the Equity Floor Procedure Committee, who have worked tirelessly to guide the development of CBOE’s hybrid trading model. Additional thanks to members of the Strategic Planning Task Force for their important work in forging CBOE’s response to changes in the competitive landscape. After current implementation plans are realized, the hybrid will continue to evolve. Its open-ended design will enable the Exchange to integrate new technologies and compete effectively in a dynamic marketplace. Both the original construction of CBOEdirect, and the modifications made to it to support OneChicago, are demon- strations of CBOE’s ability to continually advance and adapt its trading technology to address competitive challenges. 10 education throughout bull and bear markets, cboe has remained steadfast in its commitment to educational outreach programs. 11 moving forward the hybrid trading model will preserve floor- based advantages while enhancing cboe’s ability to capture screen-based business. 12 William J. Brodsky Mark F. Duffy Edward J. Joyce The implementation of market linkage represents another major technological undertaking at CBOE. We anticipate the first phase, linkage of orders eligible for automatic execution, to be in place early in 2003, and the second phase, for all other orders, to be in place shortly there- after. By providing electronic access between markets, linkage will allow CBOE to guarantee our customers the best bid or offer available, with less risk to our traders. Single stock futures are expected to be launched in the fourth quarter, 2002. CBOEdirect will be the trade engine for these new major products, which will be traded at OneChicago. Although this past year has been both difficult and demanding, the future holds tremendous promise for the options industry. The Exchange and its member- ship have never shied away from a challenge. Critical steps have been taken this year to expand our business and to increase member profitability. With the continued efforts of our dedicated members, Board of Directors, and staff, we move forward with enthusiasm and determination to remain the leading options exchange in the world. William J. Brodsky Chairman and CEO Mark F. Duffy Vice Chairman Edward J. Joyce President and COO 13 cboe financials fy 2002 financial summary The Exchange experienced disappointing results for the fiscal year ended June 30, 2002. In con- trast to the two prior years when record trading volume was achieved, CBOE volume in FY 2002 declined by 14% to 1.1 million contracts per day. In addition, market share continued to decline in the wake of increased competition. CBOE recorded a net loss of $5.6 million in FY 2002 compared to net income of $7.1 million in FY 2001. Total Exchange revenues declined by $9.0 million or 6%, mainly due to lower transaction fee revenue ($6.7 million) and less revenue from the Options Price Reporting Authority (OPRA) due to less market share and lower OPRA net income ($2.7 million). Total expenses were $6.3 million higher than the prior year, mainly due to an increase in non-cash depreciation and amortization expense ($5.1 million) and severance costs related to staff down- sizing ($4.3 million). Increased expenses were also experienced in trading floor related systems expenses ($2.2 million) and royalty fees related to increased index trading volume ($1.6 million). Contributing to the unfavorable results in FY 2002 was CBOE’s share of OneChicago, LLC (ONE) operating losses ($1.5 million). CBOE contributed $4.4 million in capital to ONE in FY 2002. The Exchange invested $21.9 million in other capital spending during FY 2002. Most of these expenditures were for systems hardware and software related to capacity increases, single stock futures and various trading floor technology enhancements. During the year, $5.3 million was paid into an escrow account, representing the third and final installment payment of a September 2000 consolidated civil class action settlement. In FY 2001 and FY 2002, a total of $16.0 million was paid by CBOE into the escrow account for our share of the settlement. Note 6 to the consolidated financial statements summarizes the status of the settlement. Retained earnings decreased to $103.7 million and total members’ equity at June 30, 2002 was $124.6 million. At year’s end, the Exchange was debt-free with working capital of $17.1 million. 14 consolidated statements of income and retained earnings Chicago Board Options Exchange, Incorporated and Subsidiaries For the Years Ended June 30, 2002 and 2001 (in thousands) Revenues: Transaction fees Other member fees Options Price Reporting Authority income Regulatory fees Interest Equity in income of CSE Other Total Revenues Expenses: Employee costs Severance expense Outside services Facilities costs Communications Data processing Travel and promotional expenses Depreciation and amortization Royalty fees Equity in loss of OneChicago Other Total Expenses (Loss) Income Before Income Taxes Provision (Benefit) for Income Taxes: Current Deferred Total Provision for Income Taxes Net (Loss) Income Retained Earnings at Beginning of Year Retained Earnings at End of Year consolidated balance sheets $ 2002 89,436 24,641 18,884 11,231 459 141 4,031 148,823 63,920 4,499 13,458 4,351 727 17,492 5,428 29,709 8,989 1,483 2,195 152,251 (3,428) (3,102) 5,294 2,192 (5,620) $ 2001 96,165 24,613 21,539 10,835 1,348 717 2,597 157,814 67,255 157 17,451 3,993 879 15,264 6,452 24,634 7,397 0 2,421 145,903 11,911 (2,943) 7,718 4,775 7,136 109,290 $ 103,670 102,154 $ 109,290 Chicago Board Options Exchange, Incorporated and Subsidiaries June 30, 2002 and 2001 (in thousands) 2002 2001 Assets Current Assets: Cash and cash equivalents Accounts receivable Income taxes receivable Prepaid medical benefits Other prepaid expenses Other current assets Total Current Assets Investments in Affiliates Land Property and Equipment: Building Furniture and equipment Less accumulated depreciation and amortization Total Property and Equipment—Net Other Assets: Goodwill (less accumulated amortization—2002, $3,888; 2001, $3,130) Software development work in progress Data processing software and other assets (less accumulated amortization— 2002, $32,113; 2001, $21,762) Total Other Assets—Net Total See notes to consolidated financial statements. $ 6,861 17,207 4,361 1,028 4,406 673 34,536 13,861 4,914 57,609 170,152 (157,621) 70,140 1,388 6,455 34,412 42,255 $ 9,740 22,212 3,313 927 4,186 554 40,932 10,849 4,914 57,609 159,012 (139,434) 77,187 2,145 26,220 14,783 43,148 $ 165,706 $ 177,030 15 consolidated balance sheets (continued) June 30, 2002 and 2001 (in thousands) Liabilities and Members’ Equity Current Liabilities: Accounts payable and accrued expenses Marketing fee payable Unearned income Membership transfer deposits Other deposits Total Current Liabilities Long-term Liabilities: Long-term settlement obligations Unearned income Deferred income taxes Total Long-term Liabilities Total Liabilities Members’ Equity: Memberships Retained earnings Total Members’ Equity Total consolidated statements of cash flows Chicago Board Options Exchange, Incorporated and Subsidiaries For the Years Ended June 30, 2002 and 2001 (in thousands) Cash Flows from Operating Activities: Net (loss) income Adjustments to reconcile net (loss) income to net cash flows from operating activities: Depreciation and amortization Long-term settlement obligations Deferred income taxes Equity in income of CSE Equity in loss of OneChicago Gain on disposition of property Changes in assets and liabilities: Accounts receivable Income taxes Prepaid medical benefits Other prepaid expenses Other current assets Accounts payable and accrued expenses Marketing fee payable Unearned income Settlement payable Membership transfer deposits Other deposits Net Cash Flows from Operating Activities Cash Flows from Investing Activities: Capital and other assets expenditures OneChicago investment Proceeds from disposition of property Investments available-for-sale: Proceeds from maturities Purchases Net Cash Flows from Investing Activities Net (Decrease) Increase in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents at End of Year Supplemental Disclosure of Cash Flow Information Cash paid for income taxes See notes to consolidated financial statements. 16 2002 2001 $ 14,436 1,079 1,250 657 0 17,422 0 250 23,430 23,680 41,102 20,934 103,670 124,604 $ 13,643 9,174 104 0 416 23,337 5,333 0 18,136 23,469 46,806 20,934 109,290 130,224 $ 165,706 $ 177,030 2002 2001 $ (5,620) $ 7,136 29,709 (5,333) 5,294 (141) 1,483 (277) 5,005 (1,048) (101) (220) (119) 793 (8,095) 1,396 0 657 (416) 22,967 (21,871) (4,388) 413 0 0 (25,846) (2,879) 9,740 6,861 0 $ $ 24,634 (5,333) 7,718 (717) 0 0 (4,761) 15 (910) 728 (39) (5,813) 9,173 0 (5,333) (1,466) 37 25,069 (37,663) 0 0 115,752 (95,619) (17,530) 7,539 2,201 9,740 3 $ $ notes to consolidated financial statements Chicago Board Options Exchange, Incorporated and Subsidiaries For the Years Ended June 30, 2002 and 2001 1. Summary of Significant Accounting Policies Nature of Business – The Chicago Board Options Exchange (“the Exchange”) is a registered securities exchange, subject to oversight by the Securities and Exchange Commission. The Exchange’s principal business is providing a marketplace for trading equity and index options. Basis of Presentation – The consolidated financial statements include the accounts and results of operations of Chicago Board Options Exchange, Incorporated, and its wholly owned subsidiaries, Chicago Options Exchange Building Corporation and, beginning in 2002, Chicago Board Options Exchange, LLC. Inter-company balances and transactions are eliminated. Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents – Cash and cash equivalents include highly liquid investments with maturities of three months or less from the date of purchase. Investments – All investments are classified as available-for-sale and are reported at cost which approximates their fair value in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Accounts Receivable – Accounts receivable consist primarily of transaction, marketing and other fees receivable from The Options Clearing Corporation (“OCC”), and the Exchange’s share of distributable revenue receivable from The Options Price Reporting Authority (“OPRA”). Investments in Affiliates – Investments in affiliates represent investments in OCC, OneChicago, LLC (“ONE”) and The Cincinnati Stock Exchange (“CSE”). The investment in OCC (20% of its outstanding stock) is carried at cost because of the Exchange’s inability to exercise significant influence. The Exchange accounts for the investment in CSE (68% of its total certificates of proprietary membership) under the equity method due to the lack of effective control over the operating and financing activities of CSE. During 2002 the Exchange made an investment in ONE (40.3% of its outstanding stock). This investment is accounted for under the equity method. Property and Equipment – Property and equipment are carried at cost. Depreciation on building, furniture and equipment is provided on the straight-line method. Estimated useful lives are 40 years for the building and five to ten years for furniture and equipment. Leasehold improvements are amortized over the lesser of their estimated useful lives or the remaining term of the applicable leases. Data Processing Software – Data processing software is carried at cost and amortized over five to seven years using the straight-line method commencing with the date the software is put in service. Goodwill – Goodwill is amortized over seven years to forty years for financial statement presentation and over fifteen years for income tax purposes. Impairment of Long-Lived Assets – Management reviews long-lived assets and the related intangible assets for impairment of value whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. If the Exchange determines it is unable to recover the carrying value of the assets, the assets will be written down using an appropriate method. Management does not believe current events or circumstances provide evidence that suggests asset values have been impaired. Income Taxes – Income taxes are determined using the liability method, under which deferred tax assets and liabilities are recorded based on differences between the financial accounting and tax bases of assets and liabilities. Other Deposits – Other deposits include amounts received from members for telephones in the Exchange facility and amounts for Exchange sponsored conferences. Unearned Income – Unearned income represents amounts received by the Exchange for which the contracted services have not been provided. Fair Value of Financial Instruments – SFAS No. 107, “Disclosures About Fair Value of Financial Instruments,” requires disclosure of the fair value of certain financial instruments. The carrying values of financial instruments included in assets and liabilities are reasonable estimates of their fair value. Reclassifications – Certain prior year amounts have been reclassified to conform with the current year presentation. Adoption of New Accounting Policies – In June 1998, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which requires recognition of all derivative instruments in the balance sheet as either assets or liabilities and the measurement of those instruments at fair value. SFAS No. 133 also requires changes in the fair value of the derivative instruments to be recorded each period in current year earnings or comprehensive income depending on the intended use of the derivatives. In June, 2000, the FASB issued SFAS No. 138, which amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and certain hedging activities. SFAS No. 133 and SFAS No. 138 were adopted by the Exchange effective July 1, 2001. No transition adjustment was required. Recent Accounting Pronouncement – In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets” which is effective for the Exchange July 1, 2002. Under SFAS No. 142, goodwill and separately identified intangible assets with indefinite lives will no longer be amortized but reviewed annually (or more frequently if impairment indicators arise) for impairment. Separately identified intangible assets not deemed to have indefinite lives will continue to be amortized over their useful lives. The Exchange has deemed the impact of adopting SFAS No. 142 to be immaterial. In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of,” and the accounting provisions of Accounting Principles Board (“APB”) Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal 17 notes to consolidated financial statements (continued) of a segment of a business. The Statement also amends Accounting Research Bulletin (“ARB”) No. 51, “Consolidated Financial Statements,” to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. SFAS No. 144, which is effective for the Exchange July 1, 2002, requires that long-lived assets held for sale be recorded at the lower of carrying value or fair value less cost to sell. An impairment loss is recognized only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and fair value of the asset. Long-lived assets to be disposed of other than by sale are considered held and used until disposed of. The Exchange has determined the impact of adopting SFAS 144 to be immaterial. 2. Investment in the Cincinnati Stock Exchange The investment in CSE is accounted for using the equity method. Condensed financial statements of the CSE as of and for the years ended June 30, 2002 and 2001 are as follows (in thousands): Balance Sheets Cash and cash equivalents Securities available-for-sale Other current assets Long-term securities available-for-sale Other long-term assets Total assets Current liabilities Deferred income taxes Members’ equity Total liabilities and members’ equity The Exchange’s share of members’ equity Statement of Operations Transaction revenue Other revenue Total revenues Employee costs Other expenses Total expenses Net income The Exchange’s equity in net income 2002 4,955 2,090 9,007 8,540 5,661 30,253 14,543 1,252 14,458 30,253 10,308 2002 2,971 5,011 7,982 2,622 5,152 7,774 208 141 $ $ $ $ 2001 434 2,569 2,624 10,223 3,167 19,017 4,276 558 14,183 19,017 10,200 2001 4,078 4,925 9,003 2,955 4,991 7,946 1,057 717 $ $ $ $ 3. Related Parties The Exchange’s equity in the net assets of OCC exceeded its cost by approximately $8.6 million and $10.0 million at June 30, 2002 and 2001, respectively. The Exchange collected transaction and other fees of $123.4 million and $202.4 million for the years ended June 30, 2002 and 2001, respectively, by drawing on accounts of the Exchange’s members held at OCC. For the years ended June 30, 2002 and 2001, respectively, the amount collected includes $19.3 million and $80.1 million of marketing fees (see note 8). The Exchange had a receivable due from OCC of $11.1 million and $15.8 million at June 30, 2002 and 2001, respectively. The Exchange incurred rebillable expenses on behalf of CSE, for expenses such as employee costs, computer equipment and office space of $2.6 million and $2.3 million for the years ended June 30, 2002 and 2001, respectively. The Exchange had a receivable from CSE of $485 thousand and $462 thousand at June 30, 2002 and 2001, respectively. OPRA is a committee administered jointly by the five options exchanges and is authorized by the Securities and Exchange Commission to provide consolidated options information. This information is provided by the exchanges and is sold to outside news services and customers. OPRA’s operating income is distributed among the exchanges based on their relative volume of total transactions. Operating income distributed to the Exchange was $18.9 million and $21.5 million for the years ended June 30, 2002 and 2001, respectively. The Exchange had a receivable from OPRA of $4.5 million and $5.6 million at June 30, 2002 and 2001, respectively. The Exchange, the Chicago Mercantile Exchange and the Chicago Board of Trade are partners in ONE, a joint venture created to trade single stock futures. Certain ONE employees also have minority interests in the joint venture. ONE is a for-profit entity with its own management and board of directors, and is separately organized as a regulated exchange. As of June 30, 2002, the Exchange has contributed $4.4 million in capital to ONE. The Exchange had a receivable due from ONE of $391 thousand at June 30, 2002. 4. Leases The Exchange leases office space with lease terms of six months and five years. Rent expenses related to leases during FY 2002 and FY 2001 were $1.8 million and $2.0 million, respectively. Future minimum lease payments under these noncancelable operating leases are as follows at June 30, 2002 (in thousands): 2003 2004 2005 2006 Total 18 $ $ 661 652 669 627 2,609 notes to consolidated financial statements (continued) 5. Employee Benefits Eligible employees participate in the Chicago Board Options Exchange SMART Plan (the “SMART Plan”). The SMART Plan is a defined contribution plan, which is qualified under Internal Revenue Code Section 401(k). The Exchange contributed $3.4 million and $3.2 million to the SMART Plan for the years ended June 30, 2002 and 2001, respectively. Eligible employees participate in the Supplemental Employee Retirement Plan (the “SERP Plan”). The SERP Plan is a defined contribution plan that is nonqualified by Internal Revenue Code regulations. The Exchange contributed $579 thousand and $1.1 million to the SERP Plan for the years ended June 30, 2002 and 2001, respectively. The Exchange also has a Voluntary Employees’ Beneficiary Association (“VEBA”). The VEBA is a trust, qualifying under Internal Revenue Code Section 501(c)(9), created to provide certain medical, dental, severance, and short-term disability benefits to employees of the Exchange. Contributions to the trust are based on reserve levels established by Section 419(a) of the Internal Revenue Code. During fiscal 2002 and 2001, the Exchange contributed $1.8 million and $1.7 million, respectively, to the trust. 6. Commitments The Exchange reached a settlement in September 2000 with the Securities and Exchange Commission and the Antitrust Division of the Department of Justice concerning their investigations into the past listing of certain options and other SEC regulatory issues. The Exchange was not fined, but as part of these settlements, agreed to expend an amount on options-related surveillance, regulation and enforcement that equals or exceeds $17.0 million in each of calendar years 2000 and 2001. The Exchange has satisfied this obligation. In September 2000, the Exchange reached an agreement in principle to settle a consolidated civil class action lawsuit filed against the Exchange and the other U.S. options exchanges and certain market maker firms. The Exchange agreed to pay $16.0 million in three equal installments on or before October 16, 2000, July 1, 2001, and July 1, 2002. All payments have been made, and are being held in escrow pending approval of the settlement agreement by the U.S. District Court for the Southern District of New York. Approval of the settlement agreement is currently pending appellate review of the district court’s February 2001 order granting summary judgment in favor of the defendants. 7. Income Taxes A reconciliation of the statutory federal income tax rate to the effective income tax rate, for the years ended June 30, 2002 and 2001, is as follows: Statutory federal income tax rate State income tax rate, net of federal income tax effect Equity in income of CSE Meals and entertainment Political contributions Lobby expenses Other, net Effective income tax rate At June 30, 2002 and 2001, the net deferred income tax liability approximated (in thousands): Deferred tax assets Deferred tax liabilities Net deferred income tax liability 2002 34.0% 4.7 (98.0) (4.4) (1.4) (5.4) 6.6 (63.9%) 2001 35.0% 4.7 (2.2) 1.4 0.4 1.7 (1.0) 40.0% 2002 9,261 32,691 23,430 $ $ 2001 8,887 27,023 18,136 $ $ Deferred income taxes arise principally from temporary differences relating to the use of accelerated depreciation methods for income tax purposes, capitalization of software, licensing fees, funding of the VEBA trust, and beginning in 2002, undistributed earnings from the Exchange’s investment in CSE. Through 2001, consistent with the requirements of FASB Statement No. 109, CBOE has measured the difference between the book and tax basis of its investment in CSE using a deferred tax liability rate of zero. This rate was reflective of the expected tax-free means of recovering the investment in CSE through the ultimate purchase of the shares necessary to effectuate a statutory merger. Due to continued interest by several outside parties in the potential purchase of the Exchange’s investment in CSE and CBOE’s refined strategy of possibly selling the CSE investment, management now believes that CBOE’s expected realization of its investment in CSE will most likely be through the sale of its investment in CSE, which will trigger a capital gain at CBOE’s normal tax rate. Therefore, beginning in 2002, CBOE has modified the deferred tax liability rate to match the changed disposition strategy. 8. Marketing Fee On July 1, 2000 the Exchange imposed a $.40 per contract marketing fee on market makers and DPMs when executing transactions with non-Exchange market makers. This fee was suspended effective August 1, 2001, however the Exchange still facilitates the collection of payment for order flow funds from DPMs and distributes order flow funds to order provider firms, as directed by the DPMs each month. As of June 30, 2002 and 2001 amounts held by CBOE on behalf of others included accounts receivable balances of $1.1 million and $5.6 million, respectively and a cash balance of $3.5 million as of June 30, 2001. 19 notes to consolidated financial statements (continued) 9. Litigation In May 2001, in an action entitled Cathedral Trading, L.L.C. et al v. CBOE et al., the Exchange was sued by six individuals and two corporations, who described themselves as retail customers, claiming that the Exchange made false representations about the operation of various Exchange systems and engaged in fraudulent practices in connection with plaintiffs’ options transactions. The complaint also alleged that they were harmed by a regulatory inquiry that the Exchange initiated. Plaintiffs alleged that the Exchange thereby violated certain sections of the Securities Exchange Act of 1934, the Securities Act of 1933, the antitrust laws and various Illinois statutes concerning fraudulent practices and that the Exchange defrauded them, breached contractual obligations, defamed plaintiffs and inter- fered with their contractual relations. The complaint sought damages in the amount of $100.0 million, plus treble damages for the alleged antitrust violations, attorneys’ fees, costs, and interest. On April 30, 2002, the court granted defendants’ motion to dismiss the complaint and entered judgment in favor of the Exchange. Plaintiffs did not appeal from that decision. On September 27, 2001, in an action entitled Kundrat et al. v. CBOE et al., the Exchange was sued by four individuals, who described themselves as retail customers, claiming that the Exchange refused to execute plaintiffs’ options transactions at the disseminated quote, improperly faded quotes, failed to send timely trade and cancellation confirmations and improperly busted trades. Plaintiffs’ amended complaint claims that the Exchange’s alleged actions violated the Securities Exchange Act of 1934, the antitrust laws, and breached con- tracts that the Exchange supposedly had with plaintiffs. Plaintiffs also allege that they were harmed by an Exchange regulatory inquiry and that the inquiry interfered with other purported contractual relations. The amended complaint seeks damages in excess of $75 thousand, plus treble damages in connection with the antitrust claims, interest, attorneys’ fees and costs. The Exchange’s motion to dismiss has been fully briefed and is pending before the Court. The Exchange believes that it has meritorious defenses and intends to vigorously defend itself in the Kundrat action. However, the Exchange cannot presently estimate the amount of loss, if any, that may result. The ultimate outcome of this litigation cannot presently be determined and no allowance for loss has been made in these financial statements. 10. Subsequent Events Effective July 1, 2002 the Exchange entered into an unsecured revolving credit agreement providing for borrowings up to $10.0 million. Borrowings under the agreement bear interest based on LIBOR or prime interest rates. The agreement, which will expire on June 30, 2003, is intended to meet short-term working capital requirements if the need were to occur. The agreement requires the Exchange to maintain certain net worth and financial ratios. independent auditors’ report To the Board of Directors and Members of the Chicago Board Options Exchange, Incorporated: We have audited the accompanying consolidated balance sheets of the Chicago Board Options Exchange, Incorporated and subsidiaries (the “Exchange”) as of June 30, 2002 and 2001, and the related consolidated statements of income and retained earnings and of cash flows for the years then ended. These consolidated financial statements are the responsibility of the Exchange’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of The Cincinnati Stock Exchange (“CSE”) for the years ended June 30, 2002 and 2001, the Exchange’s investment in which is accounted for by use of the equity method. The Exchange’s equity of $10.3 million and $10.2 million in the CSE’s net assets at June 30, 2002 and 2001, respectively and of $141 thousand and $717 thousand in that Exchange’s net income for the respective years then ended are included in the accompanying financial statements. The financial statements of CSE were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for CSE, is based solely on the report of such other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of the Exchange and its subsidiaries at June 30, 2002 and 2001, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. August 21, 2002 20 board of directors William J. Brodsky Chairman of the Board and Chief Executive Officer Mark F. Duffy Vice Chairman and Chairman of the Executive Committee Robert J. Birnbaum Former President New York Stock Exchange American Stock Exchange Public Director Thomas A. Bond Independent Market Maker David Johnson Managing Director Morgan Stanley Silas Keehn President (Retired) Federal Reserve Bank of Chicago Public Director Leon T. Kendall Professor of Finance and Real Estate The Kellogg School of Management Northwestern University Public Director Daniel P. Koutris Vice President Knight Financial Products Duane R. Kullberg Former Chief Executive Officer 1980-1989 Andersen Worldwide Public Director Richard F. Lynch Senior Vice President Equity Trading Prudential Securities Roderick Palmore Senior Vice President Sara Lee Corporation Public Director James P. MacGilvray Executive Vice President UBS PaineWebber Thomas H. Patrick, Jr. Managing Director Equity Linked Trading for the Americas Merrill Lynch & Co., Inc. Michael J. Post President Seats Exchange, Inc. Robert A. Rosholt Chief Financial and Investment Officer Nationwide Mutual Insurance Company Public Director R. Eden Martin Partner Sidley Austin Brown & Wood Public Director Thomas A. Petrone Managing Director Global Equity Derivatives Salomon Smith Barney John E. Smollen Managing Director SLK/Hull Derivatives, LLC Anthony D. McCormick Vice President Equity Options Schwab Capital Markets Craig C. Messinger Executive Vice President Fidelity Capital Markets Susan M. Phillips Former Governor Federal Reserve Board Dean School of Business and Public Management The George Washington University Public Director John M. Streibich Designated Primary Market Maker Susquehanna Investment Group Alvin G. Wilkinson Market Maker Wilkinson Management, LLC standing committees of the board Audit Committee Duane R. Kullberg, Chairman Daniel P. Koutris Roderick Palmore Compensation Committee Mark F. Duffy, Chairman William J. Brodsky committees of the membership Allocation/Special Product Assignment Committee Licia J. Leslie, Chairman David C. Adent Terrence J. Andrews Michael R. Benson James D. Coughlan Joseph A. Frehr Stuart J. Kipnes Gerald T. McNulty John B. Niemann William J. O’Keefe Benjamin E. Parker Steven N. Tumen Appeals Committee Patrick J. McDermott, Chairman Orlando Alfonso Matthew Arndt Brett T. Benson Timothy Benton Frank Brodlo Andrew H. Carolan Michael T. Considine Greg DeFalco Bruce D. DiDominicis David A. Filippini James P. Fitzgibbons Jonathan G. Flatow Michael D. Friedman James Gazis Timothy P. Gill Thomas A. Hamilton, Jr. Mark A. Harmon Michael P. Held Andrew Hodgman Paul J. Jiganti B. Michael Kelly Richard Kevin John A. Lalowski Kelly Luthringshausen Daniel R. McCarthy Patrick J. Naughton Daniel P. Koutris Duane R. Kullberg James P. MacGilvray R. Eden Martin Executive Committee Mark F. Duffy, Chairman William J. Brodsky Robert J. Birnbaum Daniel P. Koutris James P. MacGilvray John M. Streibich John T. Nemeth John B. Niemann Renee P. O’Bryan Daniel M. O’Donnell Terrence M. O’Donnell Daniel O’Grady Daniel J. O’Shea Peter Osborne Douglas W. Prskalo Gregg A. Prskalo Sondra C. Rabin W. Scott Schwanke Neal Shamis James David Short Antanas Siurna Svebor Smolic James D. Sullivan William Ulivieri Wayne A. Weiss Dennis M. Wetzel Francis Wondrasek Arbitration Committee Daniel A. Baldwin, Chairman Thomas R. Beehler Robert I. Chukerman Richard M. Coplan Michael D. Coyle Christopher P. Cribari David Dobreff Stephen P. Donahue Douglas H. Edelman Brian H. Egert David A. Eglit Jennifer Abrams Fisher James P. Fitzgibbons Jonathan G. Flatow Theodoric Flemister Mark R. Fluger Ann Grady Peter C. Guth Thomas A. Hamilton Michael P. Held William G. Hohenadel Paul J. Jiganti Mark E. Kalas Joseph G. Kinahan John A. Koltes John A. Lalowski Michael Lyons Patrick J. McDermott Brock R. McNerney Nina V. Milovac Joseph D. Mueller Scott O’Connell Charles W. Palm Donald F. Pratl Steven M. Quirk Sondra C. Rabin Peter V. Rogus Scott E. Schram William Shimanek Fred Teichert John H. Waterfield Patrick W. Wehr Dennis M. Wetzel James U. Wieties Corey D. Zimmerman 21 committees of the membership (continued) Business Conduct Committee John F. Burnside, Chairman David T. DeArmey, Vice Chairman Patrick J. Caffrey Raymond P. Dempsey Robert C. Errico Richard I. Fremgen Maureen C. Guilfoile Peter C. Guth Allen B. Holeman Gary P. Lahey Steven A. O’Malley Joseph F. Sacchetti Margaret E. Wiermanski J. Slade Winchester CBOE/CBOT Joint Advisory Committee John E. Callahan, Chairman David Johnson William J. Terman Ex-Officio Thomas Corbett Norman Friedman Ross G. Kaminsky Brian A. Novak Paul L. Richards Gregg Rzepczynski Robert C. Sheehan James Slykas Jesse L. Stamer Clearing Procedure Committee Michael J. Ryan, Chairman John E. O’Donnell, Vice Chairman Mark A. Baumgardner Gordon Baytala John R. Beres Mitchell R. Bialek Patrick K. Blackburn Louis G. Buttny William F. Carik Arthur Goldberg John Hiatt, Sr. John J. Kaminsky Matthew Liszka Anthony Monaco Ralph Mueller Maureen Pacocha Frank Pirih Susan Shimmin Thomas C. Smith Michael E. Trees Election Committee Joanne Moffic-Silver, Chairman Nancy Nielsen Raedelle Pancake 22 Equity Floor Procedure Committee Edward T. Tilly, Chairman Terrance G. Boyle Anthony J. Carone Daniel P. Carver James D. Coughlan Stephen M. Dillinger Mark A. Esposito Patrick S. Hamilton Kevin J. Hincks Paul J. Jiganti Ross G. Kaminsky Stuart J. Kipnes Benjamin M. Klein Licia J. Leslie David F. Miller, Jr. Kenneth D. Mueller Ex-Officio John E. Smollen, Jr. Equity Market Development and Market Performance Committee John M. Streibich, Chairman Terrence J. Andrews Susan C. Bannon Michael R. Benson Richard H. Bode Edward G. Boyle Terrence E. Cullen Michael A. Dalesandro Richard W. Fuller, Jr. James Gazis Monte J. Henige B. Michael Kelly Jack Kennedy Donald H. Klein, Jr. John B. Niemann John P. O’Grady Joel A. Tenner John H. Waterfield, III Thomas G. Weston Exemption Committee Peter M. Najarian, Chairman Jeffrey A. Cesarone, Vice Chairman Patrick J. Caffrey John W. Fickle Corey L. Fisher Daniel P. McCollar Michael N. Suarez Joseph M. O’Donnell Donald F. Pratl David H. Scott Lawrence E. Spieldenner James U. Wieties Adam J. Zechman Corey D. Zimmerman Financial Planning Committee Daniel P. Koutris, Chairman Alan J. Dean Stephen P. Donahue Douglas H. Edelman William J. Ellington Corey L. Fisher Fred O. Goldman Jeffrey T. Kaufmann Kevin J. Keller Timothy G. Keller John P. Robinson Frank A. Roszkiewicz Robert Silverstein Timothy M. Sommerfield Financial Regulatory Committee Richard E. Schell, Chairman Margaret E. Wiermanski, Vice Chairman Matthew Abraham William F. Carik Frank Catris David T. DeArmey Mark Gannon Fred O. Goldman John Hiatt, Sr. Judith M. Kula Steven O’Malley Janice Rohr Ex-Officio Linda Haven Andrew Naughton Jacqueline Sloan Floor Directors Committee William J. Brodsky, Chairman Thomas A. Bond Mark F. Duffy David Johnson Daniel P. Koutris Michael J. Post John E. Smollen John M. Streibich Alvin G. Wilkinson Facilities Committee Christopher M. Wheaton, Chairman William J. Ellington, Vice Chairman Patrick M. Athern David A. Dobeff Robert R. Fabijanowicz Patricia A. Kevin-Schuler Floor Officials Committee Raymond P. Dempsey, Chairman Daniel C. Zandi, Vice Chairman Daniel A. Baldwin Darryl A. Behm Patrick J. Caffrey James K. Corsey Brian M. Dowd Damon M. Fawcett Craig R. Johnson Daniel P. McCollar Thomas W. McEntegart David F. Miller Jr. Sean P. Moran Joseph T. Nowicki Ronald M. Pittelkau Henry M. Robinson-Duff Paul T. Savoie John P. Stowick Index Floor Procedure Committee Richard E. Tobin, Chairman Jonathan G. Flatow, Vice Chairman Terrence J. Brown Jeff Burianek Terrence E. Burke Richard Cichy Michael F. Gallagher Sean W. Haggerty Kevin J. Kearns Emmanuel L. Liontakis John P. Mariner Michael P. McGuire Michael Mercucci Robert C. O’Mullan Michael R. Quaid Keith G. Siemiawski Paul C. Stefanos James D. Sullivan Scott F. Tinervia Index Market Development and Market Performance Committee Jonathan G. Flatow, Chairman Jeffrey S. Latham, Vice Chairman Dennis A. Carta David A. Filippini Matthew J. Filpovich Francis P. Gleason Jonathan M. Grodnick I. Patrick Kernan Jeffrey L. Klein Todd A. Koster Joseph A. Mareno Christopher Nevins Joshua G. Ortego Daniel J. O’Shea Douglas W. Prskalo Steven M. Quirk Joseph F. Sacchetti Peter H. Schulte Lessor Advisory Committee Mark F. Duffy, Chairman Bill Power, Vice Chairman Lawrence J. Blum Peter C. Guth Paul J. Jiganti Ruth I. Kahn Paul Liang Raymond G. Meyer Michael M. Mondrus Robert Murtagh Martin P. O’Connell Michael J. Post William S. Persky Irwin Segal Robert Silverstein Member Firm Operations Committee Gerald T. McNulty, Chairman Thomas Berk, III J. Peter Brown Jeffrey J. Bughman Daniel P. Carver Steven M. Chilow David Creagan Raymond P. Dempsey Robert E. Duddy William J. Ellington Joseph A. Frehr Francis P. Gleason Jeffrey S. Kantor Jeffrey T. Kaufmann Stuart Kipnes Donald Klein Jeffrey S. Latham James C. Lavery Nicholas L. Marovich Bruce A. Martin Patrick J. McDermott David F. Miller Mark T. Morse John E. O’Donnell Mark Oakley Donald F. Pratl Michael Stowick Michael Trees J. Todd Weingart Membership Committee Robert B. Gianone, Chairman Richard W. Fuller, Vice Chairman Anthony P. Arciero Keir S. Collins Matthew J. Filpovich Ian R. Galleher David C. Ho Charles F. Imburgia William M. Kennedy Jeffrey H. Melgard Lloyd William Montgomery Andrew B. Newmark Philip G. Oakley Steven Padley Gregg A. Prskalo committees of the membership (continued) James P. Rouzan Mary Rita Ryder Gregg Rzepczynski Stuart D. Saltzberg Thomas C. Smith, III Robert J. Wasserman Modified Trading System (MTS) Appointments Committee William J. O’Keefe, Chairman Anthony P. Arciero Daniel P. Carver, Sr. Randy N. Chandra Mark F. Duffy Michael B. Frazin Joseph A. Frehr Kevin J. Keller Gerald T. McNulty James Meade John M. Streibich New Product Development Committee Boris Furman, Chairman Martin O’Connell, Vice Chairman James Anstrand Richard Clarke Michael Gallagher Jason Knupp Brian Novak Dominic Salvino Matthew Shapiro Robert Sheehan Nominating Committee William C. McGowan, Chairman Bruce I. Andrews James J. Boyle Steven M. Chilow Jonathan G. Flatow Paul J. Jiganti Jeffrey Kirsch Newton N. Minow John R. Power Richard L. Thomas Screen-Based Trading Committee Paul J. Jiganti, Chairman John Favia, Vice Chairman Christine Bookmyer James J. Boyle Terrance G. Boyle Anthony J. Carone John L. Cowden J. David Fikejs James Gray Joseph G. Kinahan John Knuth Thomas M. O’Donnell Joseph Sellitto Antanas Siurna Phillip E Teuscher SPX Floor Procedure Committee Richard T. Marneris, Chairman Jeffrey J. Kupets, Vice Chairman Salvatore J. Aiello Colin J. Barth Eoin T. Callery S. Mark Cavanagh Michael P. Cozzie Timothy P. Feeney Michael J. Hayes Thomas H. Jarck I. Patrick Kernan John J. Massarelli Michael M. Mayor Mark T. Morse Christopher Nevins Daniel J. Quinn David A. Scatena Timothy G. Weinand Stock Selection Committee Benjamin Parker, Chairman David Adent, Vice Chairman Lanny Brooks John Colletti Mark G. Eddy Steven Hessing Michael Looper Brock R. McNerney Jeff Melgard Dora Morano-Koop James Relihan John Superson Timothy J. Werner J. Slade Winchester Corey Zimmerman special committees Public Directors Governance Committee Robert J. Birnbaum, Chairman Duane R. Kullberg R. Eden Martin Susan M. Phillips Regulatory Oversight Committee Robert J. Birnbaum, Chairman Duane R. Kullberg R. Eden Martin Susan M. Phillips task forces Governance Task Force Duane R. Kullberg, Chairman Robert J. Birnbaum Thomas A. Bond Michael J. Post Alvin G. Wilkinson advisory committees Compliance Advisory Panel Kevin Ahearn David A. DeMuro Robert C. Errico Allen Holeman James Kehoe Anthony J. Leitner Mark Manning Michael Moran Michelle Morgan Lou Moschetta Robert Palleschi Luigi Ricciardi Gary Stegeland Mark Straubel Brian Underwood Institutional Traders Group Alan Augarten John Brett Arnaud Desombre Jerry Donini Ralph Edwards Joseph Gahtan Kenneth MacKenzie Arthur Mbanefo Val Mihan Larry Motola Mark Neuberger Van Nguyen Brett Overacker Ralph Reynolds Regional Firm Advisory Committee Vince Bonato Louis DePaul Dino Galeazzi Dalton Givens Mary Hanan Sharon Jensen James Knight Jon Matthai Stephen Mitchell Denny Moorman Ann Mueller Henry Nothnagel Nancy Penwell Wendy Rea John Sagness William Sanford James Schmitz Terri Strickland-Smith Carol Zenk Strategy Implementation Task Force Edward J. Joyce, Chairman Thomas A. Bond Terrance G. Boyle William J. Brodsky Retail Advisory Committee Angelo Benedetto Peter Biebel Pat Blackburn Matthew Gelber Rich Gueren Laura Holder Edward Lynn Craig Mihoulides Gregory Miller Philip Polera William Ryan Michael Schwartz Thomas Stotts Timothy Strazzini Stewart Winner Systems Committee John E. Smollen, Chairman Brian T. Batt Daniel Condon Thomas J. Corbett, Jr. Greg J. DeFalco Stephen M. Dillinger Samuel L. Eadie, Jr. George P. Hanley John T. Hayden John J. Kaminsky Mark J. Karrasch Jeffrey S. Latham David F. Miller, Jr. Kenneth D. Mueller Thomas J. Neil John E. O’Donnell William L. Patterson Steven J. Pettinato Johnson T. Thomas Ex-Officio Daniel P. Koutris Edward T. Tilly Mark F. Duffy Mark A. Esposito Stuart J. Kipnes Anthony D. McCormick Thomas A. Petrone John E. Smollen Edward T. Tilly Managing Directors Advisory Committee John Andersen Joseph Bile Joseph Dattolo Lawrence Hanson David Johnson Ronald Kessler James MacGilvray, Jr. Douglas Matthews Anthony McCormick Kurt Muller Kevin Murphy Mike Perry Chris Sandel Simon Terner Joseph Valenza 23 executive officers and staff officials Executive William J. Brodsky Chairman and Chief Executive Officer Mark F. Duffy Vice Chairman and Chairman of the Executive Committee Edward J. Joyce President and Chief Operating Officer Business Development Edward L. Provost Executive Vice President Thomas A. Brady Vice President Member Trading Services Daniel R. Hustad Vice President Market Quality and Assurance Matthew T. Moran Vice President Institutional Marketing Debra L. Peters Vice President The Options Institute William J. White, Jr. Vice President Member Trading Services Civic and Governmental Affairs Amy Zisook Vice President Corporate Communications Carol E. Kennedy Vice President Corporate Planning and Research Richard G. DuFour Executive Vice President Joseph Levin Vice President Research and Product Development Finance and Administration Alan J. Dean Senior Vice President and Chief Financial Officer clearing member firms A A Sage Corporation A.G. Edwards & Sons, Inc. ABN AMRO, Inc. ABN AMRO Sage Corporation Advest, Inc. Banc One Capital Markets, Inc. Bank of America Securities, LLC Credit Suisse First Boston Corporation Deutsche Bank Alex Brown, Inc. Donaldson Lufkin & Jenrette Securities Corporation/ Pershing Division E.D. & F. Man Bear Stearns Securities E.D. & F. Man Corp. BNP Securities (U.S.A.), Inc. BNY Clearing Services, LLC BNY ESI & Co. Inc. Botta Capital Management, LLC Carr Futures, Inc. Charles Schwab & Co., Inc. CIBC Oppenheimer Corp. International, Inc./ Retail Customer Ernst & Co. (Corporation) Fahnestock & Co., Inc. FIMAT, USA, Inc. First Options of Chicago, Inc. Goldman, Sachs & Co. Herzog, Heine, Geduld, Inc. ING TT&S (U.S.) Securities, Inc. 24 Richard Lewandowski Vice President Regulatory Services Curt Schumacher Vice President Systems Operations Margaret Williams Vice President Market Regulation Trading Operations Philip M. Slocum Senior Vice President Donald R. Patton Controller and Vice President Accounting James P. Roche Vice President Market Data Services Deborah Woods Vice President Human Resources Legal Joanne Moffic-Silver General Counsel and Corporate Secretary Systems Gerald T. O’Connell Executive Vice President and Chief Information Officer James J. Neceda Vice President Systems Development Arthur B. Reinstein Deputy General Counsel Mark S. Novak Vice President Systems Development J. Patrick Sexton Assistant General Counsel Larry L. Pfaffenbach Vice President Systems Planning Regulatory Services Douglas Beck Vice President Market Monitoring Lawrence J. Bresnahan Vice President Financial and Sales Practice Compliance Roberta J. Piwnicki Vice President Systems Development Gautam Roy Vice President Software Gail Flagler Vice President Reporting Services John T. Johnston Vice President Execution and Reporting Services Thomas P. Knorring Vice President Trade Processing Anthony Montesano Vice President Trading Operations Michael Todorofsky Vice President Market Operations Timothy T. Watkins Vice President Trading Systems Development Merrill Lynch RBC Dominion Professional Clearing Securities Corporation ING Barings Corp. Instinet Clearing Services Inc. Interactive Brokers, LLC J.J.B. Hilliard, W.L. Lyons, Inc. Inc. K.A., Division of First Knight Execution Partners, LLC K.V. Execution Services, Morgan Keegan & Company, Inc. Morgan Stanley & Company, Inc. National Financial Services, LLC Nomura Securities International, Inc. O’Connor & Company, J.P. Morgan Securities, Morgan Stanley Dean Witter Inc. Inc. LLC LLC La Branche Financial Services, Inc. Ladenburg, Thalman & PaineWebber, Inc. PAX Clearing Corporation Co., Inc. Lakeshore Securities, L.P. Lehman Brothers, Inc. LIT, Division of First Options of Chicago, Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. PAX Clearing Corp.–AB Preferred Capital Markets, Inc. Prudential Securities, Inc. Raymond James & Associates, Inc. RBC Dain Rauscher, Inc. Refco Securities, LLC Robert W. Baird & Co., Inc. Salomon Brothers, Inc. Salomon Smith Barney, SG Cowen Securities Corporation SLK-Hull Division of First Options Inc. Spear, Leeds & Kellogg Stephens, Inc. Stifel, Nicolaus & Company, Inc. Timber Hill, LLC TradeLink, LLC UBS Warburg, LLC U.S. Clearing Corp. Weiss, Peck & Greer, LLC Ziv Investment Company International, Inc. 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Nasdaq-100,® Nasdaq- 100 Index,® Nasdaq,® The Nasdaq Stock Market,® Nasdaq-100 Shares,SM Nasdaq-100 Index Tracking Stock,SM and Nasdaq-100 TrustSM are trademarks of The Nasdaq Stock Market, Inc. The Nasdaq-100 Index® is determined, composed, and calcu- lated by Nasdaq without regard to CBOE, The Nasdaq-100 Trust,SM or the beneficial owners of Nasdaq-100 Shares.SM The corporations make no warranty, express or implied, and bear no liability with respect to The Nasdaq-100 Index,® its use, or any data included therein. The Russell 2000® Index is a registered trademark of The Frank Russell Company. SPDRs,® Standard & Poor’s,® S&P,® S&P 100® and S&P 500® are registered trademarks of The McGraw-Hill Companies, Inc. and are licensed for use by the Chicago Board Options Exchange, Inc. ©2002 Chicago Board Options Exchange, Inc. All rights reserved. Printed in the USA. 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