Cboe Global Markets
Annual Report 2004

Plain-text annual report

CBOE: Creating new options Chicago Board Options Exchange 2004 Annual Report Option: CBOE Option: Hybrid 1.0 Hybrid 2.0 Option: CBOE Futures Exchange Options on: 1,450 equities 44 indexes 55 exchange- traded funds 4 interest rates e-DPMs, DPMs and on-floor market makers “streaming” quotes Electronic trading via CBOEdirect® Home of options on the S&P,® Dow Jones,® Russell, Nasdaq® indexes, and DIAMONDS® Deeper, transpar- ent markets, “quotes with size” and increased liquidity Futures on CBOE Volatility Index® (VIX®), Variance and CBOE China Index By offering investors a diverse mix of innovative options, CBOE was the leading U.S. options exchange in overall volume in FY 2004. Index Options Volume In M i lli o ns, By F iscal Year Equity Options Volume In Mil lions, By Fi scal Year 25 20 15 10 5 0 J U L AU G S E P O C T N OV D EC JA N F E B M A R A P R M AY J U N J U L AU G S E P O C T N OV D EC JA N F E B M A R A P R M AY J U N F Y 2 0 0 3 F Y 2 0 0 4 F Y 2 0 0 3 F Y 2 0 0 4 S&P 500 (SPX) Options Volume I n M i l l i o n s , By F i s c a l Ye a r Russell 2000 (RUT) Options Volume I n T h o u s a n d s , By F i s c a l Ye a r 120 100 80 60 40 20 0 15 12 9 6 3 0 5.0 4.5 4.0 3.5 3.0 2.5 2.0 J U L AU G S E P O C T N OV D EC JA N F E B M A R A P R M AY J U N J U L AU G S E P O C T N OV D EC JA N F E B M A R A P R M AY J U N F Y 2 0 0 3 F Y 2 0 0 4 F Y 2 0 0 3 F Y 2 0 0 4 NASDAQ -100 Index Tracking Stock (QQQ) Options Volume I n M i l l i o n s , By F i s c a l Ye a r DIAMONDS Trust, Series 1 (DIA) Options Volume I n M i l l i o n s , By F i s c a l Ye a r 4.0 3.5 3.0 2.5 2.0 1.5 1.2 1.0 0.8 0.6 0.4 0.2 J U L AU G S E P O C T N OV D EC JA N F E B M A R A P R M AY J U N J U L AU G S E P O C T N OV D EC JA N F E B M A R A P R M AY J U N F Y 2 0 0 3 F Y 2 0 0 4 F Y 2 0 0 3 F Y 2 0 0 4 Letter from the Office of the Chairman The Chicago Board Options Exchange® (CBOE®) maintained its industry leadership position in Fiscal Year 2004 due to the implementation of major strategic initiatives to service customers and stimulate order flow in the face of intense competition in the options markets. Moreover, CBOE ended the fiscal year in a sound financial position, with increased working capital. CBOE remained the leading U.S. options exchange in overall volume in FY 2004. A record- breaking total of 330 million contracts traded with an average daily volume in excess of 1.3 million contracts per day. This represents an increase of 22% in total volume over FY 2003, when 270 million contracts traded, and is the largest number of contracts traded in a fiscal year since FY 2001 when 319 million contracts traded. CBOE completed the fiscal year with a pre-tax profit of $3 million, even as member fees were reduced in excess of $9 million. CBOE had approximately $37 million in working capital at the end of the fiscal year, up from $30 million at the beginning of FY 2004. It is also notable that CBOE seat prices rose 79% during FY 2004. CBOE’s market share began to stabilize at the close of FY 2004, indicating that CBOE’s new market model, implemented during FY 2004, is having a positive effect on business. Through rolling out a revolutionary trading system and launching innovative products, including those offered through a new CBOE-owned futures exchange, CBOE created a wide range of valuable products and services for investors. CBOE is dedicated to developing new and unique trading solutions that illustrate CBOE’s commitment to remaining the marketplace of choice for as many customers as possible. CBOE Tota l Volume I n M i l l i o n s , By F i s c a l Ye a r CBOE Open Inte rest I n M i l l i o n s , By F i s c a l Ye a r 312.2 319.1 329.9 275.4 270.0 350 300 250 200 150 100 50 0 134.9 103.8 79.8 81.6 44.9 150 120 90 60 30 0 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 3 • CBOE 2004 The Hybrid Trading System Merging the Advantages of Electronic and Open Outcry Trading On June 12, 2003, CBOE launched its new Hybrid Trading System. The technology encompassed in CBOE’s Hybrid Trading System combined the best features of screen-based and floor-based trading into a “best of both worlds” marketplace. The system enables market makers to “stream” live quotes, to post “quotes with size” and expedite order execution, allowing CBOE market makers to better showcase the quality of markets found at CBOE. The backing of Hybrid technology by CBOE’s large pool of market makers permits CBOE to offer customers greater transparency, liquidity and opportunities for price improvement. The roll-out of hybrid trading in individual stock classes was conducted in phases to ensure a smooth conversion process. As the fiscal year ended on June 30, 2004, over 800 equity classes were being traded on Hybrid, representing over 90% of the nationally-traded equity contracts. As of the end of September 2004, 1,000 stock options classes were listed for trading on Hybrid, and additional classes continue to be added. By the end of 2004, all equity classes traded at CBOE will have been converted to trading on the Hybrid System. To date, the initial results of Hybrid have been encouraging as disseminated bid/ask spreads for classes on Hybrid have tightened and CBOE has more consistently established the National Best Bid or Offer. In addition, through the Hybrid’s point-and-click technology, customers now have speedier access to CBOE’s deep, liquid markets. 5 • CBOE 2004 Hybrid 2.0 The Evolution of a Revolution in Trading Systems Significant effort was expended in Fiscal Year 2004 preparing for the next generation of the CBOE Hybrid Trading System initiative—Hybrid 2.0, which was launched on July 21, 2004. Hybrid 2.0 creates new classes of membership and enables a wider range of market participants to access the Hybrid System. Specifically, nationally-based specialists now have the opportunity to quote and trade electronically from remote locations. A new class of members, electronic-Designated Primary Market Makers (e-DPMs), serve as electronic specialists who are able to “stream” quotes electronically from any location, offering a new option for participating in trading at CBOE. On May 4, 2004, the Exchange announced the firms it selected as CBOE e-DPMs. In the next phase of Hybrid 2.0, CBOE is seeking regulatory approval from the Securities and Exchange Commission (SEC) to also enable our members and member firms to become Remote Market Makers (RMMs), a designation proposed for those individuals and organizations who would prefer to operate as solely off-floor market makers. In its filing to the SEC, CBOE proposes consolidating e-DPM and RMM quotes with those of CBOE’s on-floor market participants, including broker/dealers, market makers and member firms, to create a more robust marketplace with deep liquidity. The Hybrid format will continue to accommodate orders directed for open outcry execution, thus providing CBOE’s floor members and customers with opportunities for price improvement on the traditional platform. CBOE is seeking to obtain regulatory approval of the RMM program by the end of this calendar year. The implementation of Hybrid 2.0 adds an important new dimension to our Hybrid model and is intended to strengthen CBOE’s competitive position. Our goal in developing the Hybrid System has always been to have an easily-accessible system in place that is flexible by design and efficient for trading. And because CBOE built the system entirely in-house and is the sole proprietor of the technology, we can make timely and cost-effective adaptations to the demands of the marketplace as they evolve. 6 • CBOE 2004 CBOE Futures Exchange Unprecedented New Opportunities to Trade Volatility CBOE began a new chapter in product innovation in FY 2004 with the launch of the CBOE Futures Exchange, LLC (CFE). CFE is a wholly-owned subsidiary of CBOE that operates as an all-electronic exchange, using CBOEdirect® as its trading platform, with trades cleared through the Triple A-rated Options Clearing Corporation. CFE debuted on March 26, 2004 by offering futures on the CBOE Volatility Index® (VIX®). VIX, which was created and first introduced by CBOE in 1993, is known throughout the world as the benchmark index of market sentiment and is commonly referred to as “the fear gauge” by investors and media analysts. Derived from real-time S&P 500® Index option prices, VIX is designed to reflect investors’ consensus view of expected stock market volatility over the next 30 days. The ability to trade futures on VIX for the first time ever provided a whole new option for investors and a landmark opportunity to hedge and trade volatility. On May 18, 2004, CFE launched trading in CBOE S&P 500 Three-Month Variance Futures (VT). VT is an exchange-traded futures contract based on the realized variance of the Standard & Poor’s 500 Stock Index over a three-month period. VT is the first in what is anticipated to be an innovative series of variance products planned for CFE. Variance and volatility products provide a practical, direct means to trade the volatility of the broad market and to hedge the volatility risk of broad-based portfolios. On October 18, 2004, CFE listed its third product and began trading futures on the newly- created CBOE China Index (CX). CBOE China Index futures are exchange-traded contracts based on the equal-dollar weighted index composed of sixteen American Depository Receipts, New York Registered Shares or NYSE Global Shares,® which are traded on the New York Stock Exchange, Nasdaq or the American Stock Exchange. We are encouraged by the initial success of CFE. Volume, liquidity, open interest and the number of market participants have grown steadily each month. We are optimistic that this trend will continue as investors become increasingly familiar with the products, and additional volatility and variance products are developed and listed on CFE. CBOE is also a founding partner, along with Chicago Mercantile Exchange® and the Chicago Board of Trade,® of OneChicago, LLC, a joint venture exchange, which has a total of 134 products: 119 single stock futures, including futures on the DIAMONDS® Trust, and 15 futures on the Dow Jones MicroSector IndexesSM. 8 • CBOE 2004 Governance A Commitment to Transparency, Disclosure and Integrity In today’s business environment of heightened scrutiny of corporate governance and self-regulation practices, CBOE has stood at the forefront of establishing and enforcing safeguards to ensure that its governance structure and reputation remain beyond reproach. Well before much-publicized governance and regulatory issues surfaced in the financial and corporate arenas, CBOE instituted policies and reforms to ensure that its governance structure met the highest standards of ethical conduct and integrity. Significant steps were taken to institutionalize checks and balances, and to eliminate the potential for conflicts of interest. The Securities and Exchange Commission views these changes as very positive steps. As early as 2002, CBOE established representative parity on its Board of Directors. The composition of the CBOE Board of Directors is now equally balanced between 11 public (independent) directors and 11 industry directors, plus the chairman of the Exchange. Last year, CBOE appointed a public director to serve in the newly-created position of Lead Director. The Lead Director plays a vital role by identifying issues raised by other directors for further Board discussion at meetings where Exchange management is not present, and also acts as a liaison between the Board and Exchange management. CBOE has also created a Regulatory Oversight Committee composed solely of public directors, and a Governance Committee that is chaired by a public director. Public representation on the Business Conduct Committee was increased from one to three members, and an additional internal audit position was created to perform regular audits of CBOE’s regulatory activities. Public directors also chair CBOE’s Audit Committee and Compensation Committee, and these committees maintain a balance of at least 50 percent public directors. The SEC continues to request more information about how exchanges operate, and, in that regard, CBOE will make and issue an annual financial disclosure document, in accordance with SEC requirements. The disclosure will be issued by the end of the year, and will include CBOE compensation data for the top executives at CBOE. These actions evidence CBOE’s resolve to ensure ethical, fair and transparent governance. They also allow us to more fully utilize the expertise of both public and industry directors to chart CBOE’s course within a highly competitive marketplace. 9 • CBOE 2004 CBOE and Public Policy Continuing to Advocate for Fairness in the Options Industry CBOE continues to monitor congressional hearings on the need to reform the “national market system” for the U.S. securities market. During FY 2004, hearings have focused on a broad range of issues including governance and regulatory roles, reforms to promote competition, the role of the specialist system, changes in trade-through rules, and a variety of other market structure issues, all of which will have implications for the options industry and CBOE members. On February 3, 2004, the SEC issued a concept release, titled “Competitive Developments in the Options Markets.” The release sought comments on business practices that have emerged since the expansion of multiple listing, including payment for order flow, internal- ization, specialist guarantees, penny increments, the “self-regulatory organization” status of exchanges and regulatory arbitrage. CBOE submitted responses on all of these issues. On April 21, 2004, the SEC held hearings in New York to discuss the proposed Regulation NMS (“National Market System”) and its four areas of focus: trade-through, market access, market data and sub-pennies. Forty-five industry executives appeared before the SEC panel to discuss the potential impact of Regulation NMS on the U.S. financial markets’ structure. Among the participants were CBOE Chairman William Brodsky and CBOE Vice Chairman Ed Tilly, who were asked to jointly testify on the strengths of CBOE’s Hybrid Trading System. The SEC cited CBOE’s Hybrid as an exemplary trading model that effectively incorporates floor and screen-based trading. We expect that FY 2005 will be a very active year on the regulatory and legislative fronts, and CBOE will continue to aggressively advocate for a fair, open and efficient options marketplace for all participants. 11 • CBOE 2004 Moving Ahead Continuing a Proud Tradition of Meeting Customers’ Needs Through Product and Technological Innovation The past few years have been characterized by fierce competitive assaults on CBOE. Our membership and staff responded to these challenges by virtually reinventing the way options are traded at CBOE, creating the Hybrid Trading System, one of the most innovative trading platforms in the industry. We are beginning to see the positive results of key strategic initiatives, and have laid the groundwork for a future that holds great promise. We are optimistic that, with the continued dedication and commitment of the membership and staff, CBOE will meet all future challenges with the same indomitable spirit that has distinguished the Exchange since its founding in 1973. Sincerely, William J. Brodsky Chairman and CEO Edward T. Tilly Vice Chairman Edward J. Joyce President and COO 12 • CBOE 2004 Fiscal Year 2004 (FY04) Financial Summary Although CBOE experienced record trading volume in FY04, competitive pressures on fees and higher operating expense levels limited net income to $1.7 million versus $7.4 million in the prior year. Total options daily volume averaged 1,308,000 contracts, an increase of 22% from the prior year’s average of 1,071,000 contracts per day. The previous record for options average daily volume was 1,271,000 contracts set in fiscal year 2001. The significant growth in trading volume was the main reason current year revenues were $9.9 million higher than the prior year. Fee reductions and fee caps for our customers and members amounted to $9.2 million versus $5.2 million in the prior year. Expenses were $20.7 million higher than the prior year, mainly due to employee costs ($5.2 million), royalty fees ($4.8 million), outside services ($3.4 million), travel and promotional expenses ($1.6 million) and non-cash impairment expense ($2.5 million). Employee costs were higher mainly due to increased expenses in the Systems area to meet information technology needs and year-end compensation awards. Royalty fees were higher due to new license agreements and increased expenses related to higher volume. Outside services were higher than the prior year mainly due to increased legal services. Promotional expenses were higher mainly due to increased index options marketing efforts. Impairment expense related to recognition of lower book values for our investment in the National Stock Exchange and good- will related to the NYSE options program, purchased approximately seven years ago. Capital spending in FY04 amounted to approximately $23.3 million. Investments were primarily in the Systems Division related to the Hybrid Trading System and other trading floor enhancements. In addition, the Exchange contributed $5.1 million in capital to OneChicago, LLC in FY04. Retained earnings increased to $112.7 million and total members’ equity at June 30, 2004 was $133.6 million. At year’s end, the Exchange was debt-free with working capital of $36.8 million. C O N S O L I D AT E D S TAT E M E N T S O F I N C O M E A N D R E TA I N E D E A R N I N G S Chicago Board Options Exchange, Incorporated and Subsidiaries For the Years Ended June 30, 2004 and 2003 (in thousands) 2004 2003 Revenues: Transaction fees Other member fees Options Price Reporting Authority income Regulatory fees Other Total Revenues Expenses: Employee costs Depreciation and amortization Data processing Outside services Royalty fees Travel and promotional expenses Facilities costs Equity in loss of OneChicago Impairment of investment in affiliates Impairment of goodwill Other Total Expenses Income Before Income Taxes Provision (Benefit) for Income Taxes: Current Deferred Total Provision for Income Taxes Net Income Retained Earnings at Beginning of Year Retained Earnings at End of Year C O N S O L I D AT E D B A L A N C E S H E E T S $ 116,344 25,465 14,543 11,289 6,073 173,714 69,304 29,685 18,022 15,242 15,847 6,406 4,389 4,359 1,763 690 5,352 171,059 2,655 1,333 (329) 1,004 1,651 $ 104,827 26,642 15,614 10,800 5,909 163,792 64,094 29,252 17,771 11,794 11,028 4,853 4,240 4,165 0 0 3,204 150,401 13,391 5,201 798 5,999 7,392 111,062 $ 112,713 103,670 $ 111,062 Chicago Board Options Exchange, Incorporated and Subsidiaries June 30, 2004 and 2003 (in thousands) 2004 2003 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 Software development work in progress Data processing software and other assets (less accumulated amortization— 2004, $43,938; 2003, $31,854) Total Other Assets—Net Total See notes to consolidated financial statements. 14 • CBOE 2004 $ 30,254 17,937 1,266 1,780 3,015 724 54,976 15,194 4,914 57,609 123,144 (122,186) 58,567 698 5,588 36,297 42,583 $ 20,558 18,473 1,519 1,777 4,464 912 47,703 14,976 4,914 57,609 110,006 (104,577) 63,038 1,388 5,440 38,325 45,153 $ 176,234 $ 175,784 C O N S O L I D AT E D B A L A N C E S H E E T S ( C O N T I N U E D ) June 30, 2004 and 2003 (in thousands) Liabilities and Members’ Equity Current Liabilities: Accounts payable and accrued expenses Marketing fee payable Unearned income Membership transfer and other deposits Total Current Liabilities Long-term Liabilities: Unearned income Deferred income taxes Total Long-term Liabilities Total Liabilities Members’ Equity: Memberships Retained earnings Total Members’ Equity Total C O N S O L I D AT E D S TAT E M E N T S O F C A S H F L O W S Chicago Board Options Exchange, Incorporated and Subsidiaries For the Years Ended June 30, 2004 and 2003 (in thousands) Cash Flows from Operating Activities: Net Income Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization Deferred income taxes Equity in income of NSX Equity in loss of OneChicago Impairment of investment in affiliates Impairment of goodwill 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 Membership transfer and other deposits Net Cash Flows from Operating Activities Cash Flows from Investing Activities: Capital and other assets expenditures OneChicago investment Net Cash Flows from Investing Activities Net Increase in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents at End of Year 2004 2003 $ 16,610 66 1,500 12 18,188 500 23,899 24,399 42,587 20,934 112,713 133,647 $ 15,173 687 1,500 200 17,560 2,000 24,228 26,228 43,788 20,934 111,062 131,996 $ 176,234 $ 175,784 2004 2003 $ 1,651 $ 7,392 29,685 (329) (1,235) 4,359 1,763 690 536 253 (3) 1,449 188 1,437 (621) (1,500) (188) 38,135 (23,334) (5,105) (28,439) 9,696 20,558 29,252 798 (1,867) 4,165 0 0 (1,266) 2,842 (749) (58) (239) 737 (392) 2,000 (457) 42,158 (25,047) (3,414) (28,461) 13,697 6,861 $ 30,254 $ 20,558 Supplemental Disclosure of Cash Flow Information Cash paid for income taxes $ 3,847 $ 3,875 See notes to consolidated financial statements. 15 • CBOE 2004 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Chicago Board Options Exchange, Incorporated and Subsidiaries For the Years Ended June 30, 2004 and 2003 1 . S U M M A RY O F S I G N I F I C A N T ACCO U N T I N G P O L I C I E S 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, CBOE, LLC and CBOE Futures 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, disclosures of contingent assets and liabilities, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition – Transaction Fees revenue is considered earned upon the execution of the trade and is recognized on a trade date basis. Other Member Fees revenue is recognized during the period the service is provided. The Options Price Reporting Authority (“OPRA”) income is allocated based upon the market share of the OPRA members and is received quarterly. Estimates of OPRA’s quarterly revenue are made and accrued each month. Regulatory Fees are predominately received in the month of January and are amortized monthly to coincide with the services rendered during the fiscal year. Cash and Cash Equivalents - Cash and cash equivalents include highly liquid investments with maturities of three months or less from the date of purchase. 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 OPRA. Investments in Affiliates - Investments in affiliates represent investments in OCC, OneChicago, LLC (“ONE”) and The National Stock Exchange (“NSX”), formerly known as the Cincinnati Stock Exchange. 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 investments in NSX (68% of its total certificates of proprietary membership) and ONE (approximately 40% of its outstanding stock) under the equity method due to the lack of effective control over the operating and financing activities of each affiliate. Investments in affiliates are reviewed to determine whether any events or changes in circumstances indicate that the investments may be other than temporarily impaired. In the event of an impairment, the Exchange would recognize a loss for the difference between the carrying amount and the estimated fair value of the equity method investment. Property and Equipment - Property and equipment are carried at cost, net of accumulated depreciation. 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 and Software Development Work in Progress - Data processing software and software development work in progress are capitalized in accordance with Statement of Position 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” and are carried at cost. Software development work in progress is reclassified to data processing soft- ware when the software is ready for its intended use. Data processing software is amortized over five to seven years using the straight-line method commencing with the date the software is put in service. Goodwill – SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill and separately identified intangible assets with indefinite lives 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. 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. 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. 16 • CBOE 2004 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N T I N U E D ) 2 . I N V E ST M E N T I N T H E N AT I O N A L STO C K E XC H A N G E The investment in NSX is accounted for using the equity method. Condensed financial statements of NSX as of and for the years ended June 30, 2004 and 2003 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 $ 2004 25,268 21,060 20,466 8,560 3,878 79,232 59,619 751 18,862 79,232 $ 2003 15,734 525 12,449 11,508 4,862 45,078 26,888 982 17,208 45,708 $ 11,647 $ 12,175 $ 2004 4,226 17,680 21,906 4,406 15,678 20,084 1,822 $ 2003 4,160 14,885 19,045 2,342 13,948 16,290 2,755 The Exchange’s equity in net income $ 1,235 $ 1,867 3 . R E L AT E D PA RT I E S The Exchange collected transaction and other fees of $146.7 million and $129.0 million for the years ended June 30, 2004 and 2003, respectively, by drawing on accounts of the Exchange’s members held at OCC. For the years ended June 30, 2004 and 2003, respectively, the amount collected includes $14.1 million and $8.2 million of marketing fees (see note 9). The Exchange had a receivable due from OCC of $11.5 million and $11.9 million at June 30, 2004 and 2003, respectively. The Exchange incurred rebillable expenses on behalf of NSX, for expenses such as employee costs, computer equipment and office space of $3.9 million and $3.7 million for the years ended June 30, 2004 and 2003, respectively. The Exchange had a receivable from NSX of $1.0 million and $890 thousand at June 30, 2004 and 2003, 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 $14.5 million and $15.6 million for the years ended June 30, 2004 and 2003, respectively. The Exchange had a receivable from OPRA of $4.1 million and $4.1 million at June 30, 2004 and 2003, respectively. The Exchange, the Chicago Mercantile Exchange Holdings, Inc. and the Board of Trade of the City of Chicago, Inc. 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. The Exchange contributed $5.1 million and $3.4 million in capital to ONE during the years ended June 30, 2004 and 2003, respectively. The Exchange had a receivable due from ONE of $920 thousand and $1.0 million at June 30, 2004 and June 30, 2003, respectively. At June 30, 2004 and 2003, respectively, the Exchange’s equity in ONE was $2.9 million and $2.1 million. 17 • CBOE 2004 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N T I N U E D ) 4 . L E AS E S The Exchange leases office space with lease terms ranging from six months to five years. Rent expenses related to leases for the years ended June 30, 2004 and 2003 were $766 thousand and $735 thousand, respectively. Future minimum lease payments under these noncancellable operating leases are as follows at June 30, 2004 (in thousands): 2005 2006 2007 2008 Total $ 776 736 112 66 $ 1,690 5 . E M P LOY E E B E N E F I TS 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 $3.7 million and $3.5 million to the SMART Plan for the years ended June 30, 2004 and 2003, 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 $971 thousand and $788 thousand to the SERP Plan for the years ended June 30, 2004 and 2003, 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 2004 and 2003, the Exchange contributed $2.6 million and $2.7 million, respectively, to the trust. 6 . CO M M I T M E N TS A N D CO N T I N G E N C I E S In September 2000, the Exchange reached an agreement in principle to settle a consolidated civil class action lawsuit filed against the Exchange and 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. The Exchange is currently a party to various legal proceedings. Litigation is subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance. After discussions with counsel, it is the opinion of management that the outcome of such matters will not have a material adverse impact on the consolidated financial position, results of operations or cash flows in the Exchange. In June 2004, the Exchange was notified of an investigation by the U.S. Department of Justice’s (“DOJ”) Antitrust Division “to determine whether there is, has been, or may be a violation of Section 1 of the Sherman Act, 15 U.S.C. § 1, by conduct, activities or proposed action of the following nature: product allocation agreement between the American Stock Exchange, LLC (AMEX) and the CBOE.” The Exchange is complying with the DOJ’s investigation. The Exchange is unable to predict the outcome of the DOJ’s investigation or whether such outcome will have a material financial statement impact. 7. I N CO M E TA X E S A reconciliation of the statutory federal income tax rate to the effective income tax rate, for the years ended June 30, 2004 and 2003, is as follows: Statutory federal income tax rate State income tax rate, net of federal income tax effect Other permanent differences, net Effective income tax rate 2004 34.0% 4.8 (1.0) 37.8% 2003 35.0% 4.7 5.1 44.8% At June 30, 2004 and 2003, the net deferred income tax liability approximated (in thousands): Deferred tax assets Deferred tax liabilities Net deferred income tax liability $ 2004 10,940 34,839 $ 2003 11,369 35,597 $ 23,899 $ 24,228 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 undistributed earnings from the Exchange’s investment in NSX. 18 • CBOE 2004 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N T I N U E D ) 8 . I M PA I R M E N T O F AS S E TS Impairment Charge for NSX – As is necessary under APB 18, which requires an adjustment to the carrying value of an asset when there is a decline (other than temporary) in the value of an asset that causes its current fair market value to be less than the carrying amount, the Exchange determined in the year ended June 30, 2004 that the value of its equity investment in NSX was impaired by $1.8 million and consequently lowered the value of its investment to reflect the estimated fair market value of its ownership interest in NSX. The fair market value of the investment was based on the sale price for 153 (94% of its current investment) of the NSX certificates of proprietary membership it currently owns (see note 10). Management believes this sale price is a basis for approximating the fair value of its investment in NSX. Impairment Charge for New York Stock Exchange (NYSE) Options Program Goodwill – The Exchange purchased the NYSE options program in 1997. SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill and separately identified intangible assets with indefinite lives no longer be amortized but reviewed annually (or more frequently if impairment indicators arise) for impairment. As a result of its review of goodwill, the Exchange recorded $690 thousand of impairment of other assets due to an increase in competition and the April 2004 expiration of the options trading permit program. The impairment review included an estimate of fair value of the intangible asset based on the expected present value of future cash flows ($698 thousand). No other changes in the carrying balance of goodwill occurred during years ended June 30, 2004 and 2003. 9. M A R K E T I N G F E E Effective June 2, 2003, the Exchange re-instituted a new marketing fee program. As of June 30, 2004 and 2003 amounts held by the Exchange on behalf of others included accounts receivable balances of $1.0 million and $687 thousand, respectively. 1 0. S U B S EQ U E N T E V E N TS On April 19, 2004, the membership voted in favor of a proposal to initiate a purchase offer for a significant number of Chicago Board of Trade (“CBOT”) exercise rights. The Exchange has entered into a secured four-year term loan agreement providing for borrowings up to $50.0 million for the purchase of CBOT exercise rights. Borrowings under the agreement bear interest based on LIBOR or prime interest rates. The loan agreement includes covenants requiring the Exchange to maintain certain net worth and financial ratios. To date, no funds have been drawn on this line of credit. On August 10, 2004, the Board of Directors of NSX approved the purchase of 153 (94%) of the NSX certificates of proprietary membership currently owned by the Exchange. The Exchange’s Board of Directors approved the sale on September 14, 2004. Certificates of proprietary membership will be surrendered and NSX will pay the Exchange a total of $11 million over a period of four years on the anniversary of the closing date. The present value of the sale price is $10.7 million. The Exchange will ultimately retain nine certificates of proprietary membership (10% of the total certificates of proprietary membership). After the fourth anniversary of the closing date, the Exchange will account for its remaining investment in NSX on the cost basis. I N D E P E N D E N T A U D I T O R S ’ R E P O R T 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, 2004 and 2003, and the related consolidated statements of income and retained earnings and of cash flows for the years then ended. These financial statements are the responsibility of the Exchange’s management. Our responsi- bility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of The National Stock Exchange (“NSX”), formerly the Cincinnati Stock Exchange, for the years ended June 30, 2004 and 2003, the Exchange’s investment in which is accounted for by use of the equity method. The Exchange’s equity of $11.6 million and $12.2 million in the NSX’s net assets at June 30, 2004 and 2003, respectively, and of $1.2 million and $1.9 million in that Exchange’s net income for the respective years then ended are included in the accompanying financial statements. The financial statements of NSX were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for NSX, 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, 2004 and 2003, 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. October 12, 2004 19 • CBOE 2004 O F F I C E O F T H E C H A I R M A N From left: Edward J. Joyce William J. Brodsky Edward T. Tilly B O A R D O F D I R E C T O R S William J. Brodsky Chairman of the Board and Chief Executive Officer Stuart J. Kipnes President Associated Options, Inc. At-Large Director Daniel P. Koutris Director Knight Financial Products At-Large Director Duane R. Kullberg Former Chief Executive Officer, 1980–1989 Arthur Andersen & Co., S.C. Public Director Richard F. Lynch Retired Senior Vice President Equity Trading Prudential Securities Off-Floor Director James P. MacGilvray President Capital Markets Fidelity Investments Off-Floor Director Edward T. Tilly Vice Chairman Robert J. Birnbaum Former President New York Stock Exchange American Stock Exchange Public Director James R. Boris Retired Chairman and Chief Executive Officer EVEREN Capital Corporation and EVEREN Securities, Inc. Public Director Mark F. Duffy General Partner Cornerstone Partners General Partner Fugue General Partner Isomorphism Floor Director 20 • CBOE 2004 Scott P. Marks, Jr. Former Vice Chairman and Board Member First Chicago NBD Corporation Public Director R. Eden Martin Partner Sidley Austin Brown & Wood President The Commercial Club of Chicago Public Director Lead Director Roderick Palmore Executive Vice President, General Counsel and Secretary Sara Lee Corporation Public Director Thomas H. Patrick, Jr. Managing Director Equity Linked Trading for the Americas Merrill Lynch & Co., Inc. Off-Floor Director Thomas A. Petrone Managing Director Global Equity Derivatives Citigroup Global Markets, Inc. Off-Floor Director Susan M. Phillips Former Governor Federal Reserve Board Dean School of Business and Public Management The George Washington University Public Director William R. Power Member New York Stock Exchange Chicago Board Options Exchange Lessor Director Robert A. Rosholt Executive Vice President and Chief Financial and Investment Officer Nationwide Mutual Insurance Company Public Director Samuel K. Skinner Retired Chairman and Chief Executive Officer USF Corporation Former Chief of Staff and Former U.S. Secretary of Transportation under President George H.W. Bush Public Director John E. Smollen Managing Director SLK/Hull Derivatives, LLC Floor Director Howard L. Stone Senior Managing Director American Express Tax and Business Services Public Director Eugene S. Sunshine Senior Vice President Business and Finance Northwestern University Public Director Alvin G. Wilkinson Market Maker Wilkinson Management, LLC Floor Director From left: Thomas A. Petrone, Stuart J. Kipnes, Robert J. Birnbaum, Robert A. Rosholt, R. Eden Martin, Samuel K. Skinner From left: John E. Smollen, Eugene S. Sunshine, Roderick Palmore, Richard F. Lynch, Susan M. Phillips, William R. Power, Mark F. Duffy From left: Thomas H. Patrick, Jr., Duane R. Kullberg, Alvin G. Wilkinson, Howard L. Stone, James R. Boris, Scott P. Marks, Jr., Daniel P. Koutris, Not Pictured: James P. MacGilvray S TA N D I N G C O M M I T T E E S O F T H E B O A R D AUDIT COMMITTEE Duane R. Kullberg, Chairman Daniel P. Koutris Roderick Palmore Thomas H. Patrick, Jr. Howard L. Stone Eugene S. Sunshine Alvin G. Wilkinson COMPENSATION COMMITTEE James R. Boris, Chairman Daniel P. Koutris Richard F. Lynch Scott P. Marks, Jr. William R. Power Robert A. Rosholt Eugene S. Sunshine Edward T. Tilly EXECUTIVE COMMITTEE William J. Brodsky, Chairman Robert J. Birnbaum Daniel P. Koutris R. Eden Martin Roderick Palmore Thomas A. Petrone John E. Smollen Eugene S. Sunshine Edward T. Tilly GOVERNANCE COMMITTEE Robert J. Birnbaum, Chairman William R. Power, Vice Chairman Mark F. Duffy Stuart J. Kipnes Duane R. Kullberg James P. MacGilvray Scott P. Marks, Jr. Thomas A. Petrone Samuel K. Skinner REGULATORY OVERSIGHT COMMITTEE Susan M. Phillips, Chairwoman Robert J. Birnbaum James R. Boris Duane R. Kullberg SPECIAL APPOINTMENTS COMMITTEE James R. Boris Edward J. Joyce Scott P. Marks, Jr. William R. Power Edward T. Tilly C O M M I T T E E S O F T H E M E M B E R S H I P ALLOCATION ARBITRATION COMMITTEE Peter C. Guth, Chairman Courtney T. Andrews Daniel Baldwin Thomas R. Beehler Michael D. Coyle Christopher P. Cribari Terrence E. Cullen David Dobreff Stephen P. Donahue Brian M. Dowd David J. Drummond Douglas H. Edelman Brian H. Egert David A. Eglit Jonathan G. Flatow Mark R. Fluger Matthew T. Garrity Ann Grady Allen D. Greenberg Thomas A. Hamilton Michael P. Held Paul J. Jiganti Mark E. Kalas Joseph G. Kinahan John A. Koltes Kevin Lawless Craig R. Luce Kathleen McCullough Patrick J. McDermott Edward P. McFadden, III Brock R. McNerney Joseph D. Mueller Charles W. Palm Donald F. Pratl Steve Quirk Sondra C. Rabin Scott A. Resnick Duncan W. Robinson Carlos Saez Bill Shimanek Antanas Siurna Thomas E. Stern Kevin S. Sullivan Fred Teichert John Waterfield J. Todd Weingart BUSINESS CONDUCT COMMITTEE Bruce I. Andrews, Chairman Patrick J. Caffrey Raymond P. Dempsey COMMITTEE David F. Miller, Chairman Gerald T. McNulty, Vice Chairman David C. Adent John F. Burnside David Creagan Richard W. Fuller, Jr. Bradley G. Griffith Donald H. Klein, Jr. Benjamin R. Londergan Craig R. Luce Daniel C. Mandernach Mark D. Oakley Joseph P. Perona J. Slade Winchester APPEALS COMMITTEE Patrick J. McDermott, Chairman B. Michael Kelly, Vice Chairman Courtney T. Andrews Thomas R. Beehler Henry Choi Terrence E. Cullen Brian M. Dowd David J. Drummond Douglas H. Edelman Jonathan G. Flatow Mark D. Freund Ann Grady James Gray Allen D. Greenberg Peter C. Guth Thomas A. Hamilton Mark A. Harmon Andrew Hodgman Paul J. Jiganti Richard Kevin Craig R. Luce Michael Lyons Carolyn Matuga Edward McFadden John B. Niemann Daniel J. O’Shea Charles W. Palm Donald F. Pratl Gregg A. Prskalo J. David Short Antanas Siurna J. Todd Weingart 22 • CBOE 2004 Richard I. Fremgen Peter C. Guth Philip N. Hablutzel Mary E. Keefe Gary P. Lahey Scott K. Shaw Kenneth L. Wagner Margaret E. Wiermanski J. Slade Winchester CBOE/CBOT JOINT ADVISORY COMMITTEE Mark F. Duffy, Chairman Mark A. Esposito Jeffrey S. Kirsch Paul L. Richards Christopher M. Wheaton CLEARING PROCEDURE COMMITTEE John E. O’Donnell, Chairman Mark A. Baumgardner Mitchell R. Bialek Louis G. Buttny Jorene Clark David J. Drummond James E. Halm John Hunt John J. Kaminsky Patty Kevin-Schuler Matthew J. Liszka Anthony J. Monaco Daniel O’Donnell Maureen L. Pacocha Frank Pirih Susan Shimmin Daniel J. Thorns ELECTION COMMITTEE Joanne Moffic-Silver, Chairwoman Jaime Galvan Stanley E. Leimer EQUITY MARKET PERFORMANCE COMMITTEE John E. Smollen, Jr., Chairman Mark D. Oakley, Vice Chairman Michael R. Benson Thomas J. Berk, III Jeffrey A. Cesarone Terrence E. Cullen Brian M. Dowd James A. Gray Bradley G. Griffith Michael T. Juneman Donald H. Klein, Jr. Benjamin R. Londergan Sean P. Moran Kenneth D. Mueller John B. Niemann Robert M. O’Leary Jay A. Rosenbloom Frank P. Tenerelli EQUITY OPTIONS PROCEDURE COMMITTEE Anthony J. Carone, Chairman Barton D. Bergman Timothy C. Brennan Daniel P. Carver Steven M. Chilow John J. Colletti David M. Creagan Stephen M. Dillinger Mark A. Esposito James Gazis Kevin J. Hincks Frank A. Hirsch Mark J. Karrasch Stuart J. Kipnes Craig R. Luce David F. Miller, Jr. Andrew B. Newmark Scott P. Nicholson Benjamin E. Parker Joseph P. Perona Ethan H. Schwartz John M. Streibich EXEMPTION COMMITTEE Corey L. Fisher, Chairman Jeffrey A. Cesarone, Vice Chairman Patrick J. Caffrey David A. Goldsmith S. Casey Platt Brian E. Salomon Matthew D. Schoen Michael Suarez FACILITIES COMMITTEE Richard W. Fuller, Chairman Joseph Cullen Robert Fabijanowicz Jeffery Fried Gary Garlich Eric Hartin Raymond Hurley Andrew Keene John Lourigan John F. McDermott John Niemann Joseph M. O’Donnell Alec D. Pashkow Donald F. Pratl Marc Rothman FINANCIAL PLANNING COMMITTEE Daniel P. Koutris, Chairman Dennis A. Carta Steven M. Chilow Alan J. Dean Stephen P. Donahue Douglas H. Edelman William J. Ellington Fred O. Goldman Michael T. Juneman J.T. Lundy Edward Lynn Michael T. Merucci James W. Schiavitti Robert Silverstein Timothy M. Sommerfield Margaret E. Wiermanski FINANCIAL REGULATORY COMMITTEE Richard E. Schell, Chairman Matthew D. Abraham David J. Barclay William F. Carik Frank L. Catris Peter Dorenbos Mark E. Gannon Richard Lewandowski Steven A. O’Malley Patricia A. Pokuta Janice T. Rohr Dianne R. Staples Margaret E. Wiermanski Ex-Officio Linda C. Haven Andrew J. Naughton Jacqueline L. Sloan FLOOR DIRECTORS COMMITTEE Edward T. Tilly, Chairman Mark F. Duffy Stuart J. Kipnes Daniel P. Koutris William R. Power John E. Smollen Alvin G. Wilkinson FLOOR OFFICIALS COMMITTEE Damon M. Fawcett, Chairman Raymond P. Dempsey, Vice Chairman Alexander Ackerhalt Patricia M. Bachman Patrick J. Caffrey James K. Corsey Brian G. Cotter Brian M. Dowd Corey L. Fisher Michael J. Hayes Craig R. Johnson John T. Kark Thomas W. McEntegart Sean P. Moran Joseph J. Nowicki Ronald M. Pittelkau Duncan Robinson Elizabeth A. Ruda Beverly Shaw Timothy E. Starsia Daniel C. Zandi INDEX FLOOR PROCEDURE COMMITTEE Richard J. Tobin, Chairman Emmanuel L. Liontakis, Vice Chairman Jon B. Adler Larry S. Beebe Terrence J. Brown Richard Cichy Stephen J. Climo Brian M. Connelly James D. Coughlan Matthew J. Filpovich Jonathan G. Flatow David S. Fleming Martin Galivan Wayne A. Jazwierski James W. Lynch Michael P. McGuire Stephen P. Meadows Steven J. Pettinato Michael R. Quaid Nicholas C. Reilly David A. Saviski James D. Sullivan Scott F. Tinervia 23 • CBOE 2004 INDEX MARKET PERFORMANCE COMMITTEE Jonathan G. Flatow, Chairman Dennis A. Carta, Vice Chairman Joshua D. Aling William E. Billings Donald C. Cullen David A. Filippini Paul Kepes I. Patrick Kernan Jeffrey L. Klein Todd A. Koster Joseph A. Mareno Charles A. Maylee Michael T. Merucci Christopher Nevins Joshua G. Ortego Daniel J. O’Shea Michael P. Perillo Douglas W. Prskalo Joseph F. Sacchetti Peter H. Schulte Thomas J. Siurek Gerard G. Sullivan LESSORS COMMITTEE William R. Power, Chairman Robert Silverstein, Vice Chairman Anthony P. Arciero Lawrence J. Blum Mohamed H. El-Ruby Steve Fanady Norman S. Friedland Peter C. Guth Paul J. Jiganti Ruth I. Kahn Robert Kalmin Jeffrey Kirsch Victor Meskin Michael M. Mondrus Robert Murtagh Michael Post Duane L. Wasmuth MARKETING COMMITTEE Jack Kennedy, Chairman Matthew Andrews Terrence J. Andrews Kenneth J. Bellavia Edward G. Boyle James J. Boyle Peter Brown Jonathan G. Flatow Lou Friedmann Richard W. Fuller, Jr. Robert B. Gianone Andrew McLeod Paul A. Oldani Joseph Sellitto Mark Severin Timothy M. Sommerfield Richard E. Tobin MARKETING FEE OVERSIGHT COMMITTEE Anthony P. Arciero, Chairman Brian R. Cappelletto John J. Colletti John A. Kinahan Craig R. Luce Gregory R. Tilly MEMBER FIRM PROCEDURES COMMITTEE Stuart J. Kipnes, Chairman Edward Barry, Jr. Thomas Berk, III Peter Bottini Peter J. Brown Jeffrey Bughman Daniel P. Carver Steven M. Chilow David Creagan Raymond P. Dempsey Charles Feuillan Joseph A. Frehr Richard Graziadei Eric Henschel David Johnson Jeffrey S. Kantor Jeffrey T. Kaufmann Donald Klein Daniel Mandernach Nicholas L. Marovich Timothy A. Martin Patrick J. McDermott Andrew McLeod Gerald T. McNulty David Miller Milan Radjenovich David Schmueck Timothy Watts Alan Zahtz MEMBERSHIP COMMITTEE Mark F. Duffy, Chairman Robert B. Gianone, Vice Chairman Mary Rita Ryder, Vice Chairwoman Ann L. Bartosz Robert R. Fabijanowicz Matthew J. Filpovich Ian R. Galleher Michael J. Guzy, Jr. Charles F. Imburgia Keith J. Lee Jeffrey H. Melgard Lloyd William Montgomery Steven Padley Gregg M. Rzepczynski Stuart D. Saltzberg Thomas E. Stern Robert J. Wasserman MODIFIED TRADING SYSTEMS (MTS) APPOINTMENTS COMMITTEE Daniel P. Carver, Chairman Kevin J. Keller, Vice Chairman Anthony P. Arciero John F. Burnside Douglas H. Edelman Joseph A. Frehr Richard W. Fuller, Jr. Gerald T. McNulty John E. Smollen, Jr. Elizabeth C. Steigmann Edward T. Tilly NOMINATING COMMITTEE Gerald T. McNulty, Chairman Lawrence J. Blum Donald P. Jacobs Paul J. Jiganti Newton N. Minow Kenneth D. Mueller Kurt Muller John R. Power Douglas W. Prskalo Christopher M. Wheaton PRODUCT DEVELOPMENT COMMITTEE New Product Subcommittee: Boris Furman, Chairman Barton Bergman Michael Gallagher Ian Galleher Steven Hessing Todd W. Jones Gary P. Lahey Gavin Lowrey Sheldon Natenberg Martin P. O’Connell John O’Grady Robert O’Leary William S. Persky Dominic Salvino Matthew Shapiro Robert C. Sheehan Sean Truett Stock Selection Subcommittee: Boris Furman, Chairman Benjamin E. Parker, Vice Chairman David Adent Henry Choi Ronald Dawczak Geoffrey D. Fahy J. David Fikejs Michael Hoover Brock R. McNerney Steven Mennecke Timothy O’Donnell Scott C. Pospisil Scott A. Resnick Kevin S. Sullivan J. Slade Winchester William Yerby David Zalesky Edmund J. Zarek SPECIAL PRODUCT ASSIGNMENT COMMITTEE Stuart J. Kipnes, Chairman Jonathan G. Flatow Richard W. Fuller, Jr. Gerald T. McNulty David F. Miller, Jr. John E. Smollen, Jr. Edward T. Tilly SPX FLOOR PROCEDURE COMMITTEE Richard T. Marneris, Chairman Timothy P. Feeney, Vice Chairman Salvatore J. Aiello Peter Brown Eoin T. Callery S. Mark Cavanagh Ronald Grutzmacher Michael J. Hayes I. Patrick Kernan Kraig D. Koester Jeffrey J. Kupets John J. Massarelli Timothy S. McGugan Sean McKoeugh Brian Meister Christopher Nevins Tom Pradd Daniel J. Quinn David A. Scatena Joseph F. Sullivan Wayne A. Weiss STRATEGY IMPLEMENTATION COMMITTEE Edward T. Tilly, Chairman Terrance G. Boyle Anthony J. Carone Mark F. Duffy Mark A. Esposito Timothy P. Feeney Jonathan G. Flatow Jack Kennedy Stuart J. Kipnes Daniel P. Koutris William R. Power John E. Smollen John M. Streibich Richard J. Tobin Alvin G. Wilkinson SYSTEMS COMMITTEE Terrance G. Boyle, Chairman Mark A. Esposito, Vice Chairman Steven J. Balz James D. Coughlan Jack Cowden Dan Cusick David S. Kalt John J. Massarelli David F. Miller Jennifer L. Mistretta Thomas J. Neil John E. O’Donnell Steven J. Pettinato David B. Schmueck Kenneth N. Wilson C B O E F U T U R E S E X C H A N G E C O M M I T T E E FUTURES TRADING PROCEDURE Alvin G. Wilkinson, Chairman James Carney Kevin Donahue Stephen P. Donahue Gary P. Lahey Jack McDermott Sheldon Natenberg Patricia Pokuta William R. Power Joseph Sellitto Devesh Shah John M. Streibich John Waterfield J. Slade Winchester A D V I S O R Y C O M M I T T E E S COMPLIANCE INSTITUTIONAL REGIONAL FIRM ADVISORY PANEL Robert Ackermann Kevin Ahearn Michelle Morgan Bundock David A. DeMuro Thomas Fishel Allen Holeman James Huff Pat Levy Mark Manning Robert Mooney Michael Moran Benjamin Morof Lou Moschetta Robert Palleschi Mark Straubel Brian Underwood TRADERS GROUP Alan Augarten Jonathan Beebe John Cassol Arnaud Desombre Gerald Donini Bret Engelkemier Joseph Ghartey Chris Leone Lawrence Motola Jack Skiba Stephen Thurer Ben Wilkinson Simon Yates ADVISORY COMMITTEE Vincent Bonato Joseph Fenton Gary Franklin Mary Hanan Sharon Jensen Brian Killefer James Knight Thomas Looser Dennis Moorman Robert Paset Nancy Penwell Kenneth Rathgeber John Sagness Greg Schebece James Schmitz E X E C U T I V E O F F I C E R S A N D S TA F F O F F I C I A L S William J. White, Jr. Vice President Member Trading Services James P. Roche Vice President Market Data Services CBOE FUTURES EXCHANGE Patrick Fay Managing Director 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 Donald R. Patton Controller and Vice President Accounting Deborah Woods Vice President Human Resources L EG A L Joanne Moffic-Silver General Counsel and Corporate Secretary Arthur B. Reinstein Deputy General Counsel J. Patrick Sexton Assistant General Counsel REGULATORY SERVICES Timothy H. Thompson Senior Vice President and Chief Regulatory Officer Douglas Beck Vice President Market Regulation Lawrence J. Bresnahan Vice President Financial and Sales Practice Compliance Richard Lewandowski Vice President Regulatory Services EXECUTIVE William J. Brodsky Chairman and Chief Executive Officer Edward T. Tilly Vice Chairman 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 Assurance and DPM Administration Matthew T. Moran Vice President Institutional Marketing Debra L. Peters Vice President The Options Institute 24 • CBOE 2004 Anthony McCormick Andrew McLeod Kurt Muller Kevin Murphy Christopher Nagy Henry Nothnagel Frank O’Connor Michael Perry Christopher Sandel Joseph Sellitto Thomas Stotts TRADING OPERATIONS Philip M. Slocum Senior Vice President 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 Systems Development Michael Todorofsky Vice President Market Operations Timothy T. Watkins Vice President Trading Systems Development Terri Strickland-Smith Ray Tucker Carol Zenk MANAGING DIRECTORS COMMITTEE Joseph Bile Jeffrey Capretta Joseph Dattolo Matthew Gelber Richard Gueren Lawrence Hanson David Johnson David Kalt Ronald Kessler Edward Lynn James P. MacGilvray Margaret Williams Vice President Regulatory Development SYSTEMS Gerald T. O’Connell Executive Vice President and Chief Information Officer James J. Neceda Vice President Systems Development Mark S. Novak Vice President and Chief Technology Officer Systems Development Larry L. Pfaffenbach Vice President Systems Planning Roberta J. Piwnicki Vice President Systems Development Gautam Roy Vice President Software Curt Schumacher Vice President and Chief Technology Officer Systems Operations C L E A R I N G M E M B E R F I R M S ABN AMRO Incorporated ABN AMRO Sage Corporation A.G. Edwards & Sons, Inc. Banc of America Credit Suisse First Boston LLC Deutsche Bank Securities Inc. Electronic Brokerage Futures, Incorporated Systems, LLC Banc of America Securities, LLC Banc One Capital Markets, Inc. Bear, Stearns Securities Corp. BNP Paribas Brokerage Services, Inc. BNY Brokerage Inc. Calyon Financial Inc. Charles Schwab & Co., Inc. CIBC World Markets Corp. Citigroup Global Markets Inc. Equitec Proprietary Markets LLC Fimat USA Inc. First Clearing, LLC FOC Division of Spear, Leeds and Kellogg LP Fleet Securities, Inc. Goldman Sachs & Co. Instinet Clearing Services, Inc. Interactive Brokers LLC J.J.B. Hilliard, W.L. Lyons, Inc. J.P. Morgan Securities, Inc. Knight Execution Partners, LLC KV Execution Services LLC Lakeshore Securities, L.P. Legent Clearing Corp. Lehman Brothers, Inc. Lek Securities Corporation Man Securities Inc. Merrill Lynch, Pierce, Fenner & Smith/Broadcort Execution Services Merrill Lynch, Pierce, Fenner & Smith Incorporated Merrill Lynch Professional Clearing Corp. Morgan, Keegan & Company, Inc. Morgan Stanley & Co., Inc. Morgan Stanley DW Inc. National Financial Services LLC National Investor Refco Securities, LLC Robeco USA, L.L.C. Robert W. Baird & Co. Incorporated SG Americas Securities, Services Corporation LLC Spear, Leeds & Kellogg Stephens Inc. Stifel, Nicolaus & Company, Incorporated Timber Hill LLC Tradelink L.L.C. UBS Financial Services Inc. UBS Securities LLC Wachovia Securities, LLC Ziv Investment Co. Nomura Securities International, Inc. O’Connor & Co. L.L.C. Oppenheimer & Co. Inc. Pax Clearing Corporation Penson Financial Services, Inc. Pershing LLC PreferredTrade, Inc. Raymond James & Associates, Inc. RBC Dain Rauscher Inc. RBC Dominion Securities Corporation CBOE,® Chicago Board Options Exchange,® CBOEdirect,® CBOE Volatility Index,® and VIX®are registered trademarks, and SPXSM is a trademark of Chicago Board Options Exchange, Incorporated. Dow Jones,® DIAMONDS,® and DJIA® are regis- tered trademarks, and Dow Jones Industrial AverageSM and Options on the DowSM are service marks of Dow Jones & Company, Inc., and have been licensed for certain purposes by Chicago Board Options Exchange, Incorporated. Options based on Dow Jones Indexes are not sponsored, endorsed, sold or promoted by Dow Jones, and Dow Jones makes no repre- sentation regarding the advisability of investing in such products. Nasdaq-100,® Nasdaq- 100 Index,® Nasdaq,® The Nasdaq Stock Market,® Nasdaq-100 Shares,SM Nasdaq-100 Index Tracking Stock,® 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. Russell 2000® is a registered trademark of The Frank Russell Company. 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 Chicago Board Options Exchange, Incorporated. ©2004 Chicago Board Options Exchange, Incorporated. All rights reserved. Printed in the USA. Design: Liska + Associates Photography: Chris DeFord and Mark Battrell (p. 20,21). Printing: Active Graphics LaSalle at VanBuren Chicago, Illinois 60605 312.786.5600 61 Broadway, Suite 1301 New York, New York 10006 212.344.4110 www.cboe.com 

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