N OT E S TO C O N S O L I DAT E D F I N A N C I A L STAT E M E N T S ( C O N T I N U E D )
Recent Accounting Pronouncement – In November 2002, the FASB issued FASB Interpretation Number 45 (FIN), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” effective June 30, 2003. FIN45 is an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Exchange has determined the impact of adopting FIN45 to be immaterial.
In January 2003, the FASB issued FIN46, “Consolidation of Variable Interest Entities,” effective July 1, 2003. This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities that meet one or all of certain preset characteristics. The Exchange has determined the impact of adopting FIN46 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, 2003 and 2002 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
525 12,449 11,508
4,955 2,090 9,007 8,540 5,661
Current liabilities Deferred income taxes Members’ equity
26,888 982 17,208
14,543 1,252 14,458
Total liabilities and members’ equity The Exchange’s share of members’ equity
Statement of Operations Transaction revenue Other revenue
Employee costs Other expenses
Total expenses Net income The Exchange’s equity in net income
16,290 2,755 1,867
7,774 208 141
3. RELATED PARTIES The Exchange’s equity in the net assets of OCC exceeded its cost by approximately $8.3 million and $8.6 million at June 30, 2003 and 2002, respectively. The Exchange collected transaction and other fees of $129.0 million and $123.4 million for the years ended June 30, 2003 and 2002, respectively, by drawing on accounts of the Exchange’s members held at OCC. For the years ended June 30, 2003 and 2002, respectively, the amount collected includes $8.2 million and $19.3 million of marketing fees (see note 8). The Exchange had a receivable due from OCC of $11.9 million and $11.1 million at June 30, 2003 and 2002, respectively.
The Exchange incurred rebillable expenses on behalf of CSE, for expenses such as employee costs, computer equipment and office space of $3.7 million and $2.6 million for the years ended June 30, 2003 and 2002, respectively. The Exchange had a receivable from CSE of $890 thousand and $485 thousand at June 30, 2003 and 2002, 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 $15.6 million and $18.9 million for the years ended June 30, 2003 and 2002, respectively. The Exchange had a receivable from OPRA of $4.1 million and $4.5 million at June 30, 2003 and 2002, respectively.