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Chiicago Board Optiions Exchange Annuall Report 2003 - page 21 / 28

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21 / 28

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 )

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. The Exchange contributed $3.4 million and $4.4 million in capital to ONE during the years ended June 30, 2003 and 2002, respectively. The Exchange had a receivable due from ONE of $1.0 million and $391 thousand at June 30, 2003 and June 30, 2002, respectively.

4. LEASES The Exchange leases office space with lease terms of six months and five years. Rent expenses related to leases during FY03 and FY02 were $735 thousand and $1.8 million, respectively. Future minimum lease payments under these noncancelable operating leases are as follows at June 30, 2003 (in thousands):

$

758 776 736 112 66

$

2,448

2004 2005 2006 2007 2008

Total

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 $3.5 million and $3.4 million

to the SMART Plan for the years ended June 30, 2003 and 2002, 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 $788 thousand and $579 thousand to the SERP Plan for the years ended June 30, 2003 and 2002, 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 2003 and 2002, the Exchange contributed $2.7 million and $1.8 million, respectively, to the trust.

6. COMMITMENTS 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.

7. INCOME TAXES A reconciliation of the statutory federal income tax rate to the effective income tax rate, for the years ended June 30, 2003 and 2002, is as follows:

2003

2002

35.0%

34.0%

4.7

4.7

0.0

(98.0)

5.1

(4.6)

44.8%

(63.9%)

Statutory federal income tax rate State income tax rate, net of federal income tax effect Equity in income of CSE Other permanent differences, net

Effective income tax rate

Deferred tax assets Deferred tax liabilities

$

Net deferred income tax liability

$

At June 30, 2003 and 2002, the net deferred income tax liability approximated (in thousands):

2002

$

9,261 32,691

$

23,430

2003

11,369 35,597

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 beginning in 2002, undistributed earnings from the Exchange’s investment in CSE.

19

  • CBOE 2003

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