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 )
Due to 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 Even though the original Exchange-sponsored marketing fee was suspended effective August 1, 2001, the Exchange continued to facilitate the collection of payment for order flow funds from DPMs and distributed funds to order provider firms, as directed by the DPMs each month. Effective June 2, 2003, the Exchange re-instituted a new marketing fee program. As of June 30, 2003 and 2002 amounts held by CBOE on behalf of others included accounts receivable balances of $687 thousand and $1.1 million, respectively.
9. LITIGATION A former member of the Exchange has requested compensation for losses it alleges to have incurred because the Exchange terminated that member’s appointment as a designated primary market maker. The former member states that it has suffered substantial lost profits and that it lost the opportunity to sell its business at a multiple of those profits. The Exchange has informed the former mem- ber that specific Exchange rules preclude claims of this type from being made against the Exchange. The former member has initiated no lawsuit or other formal legal proceeding.
I N D E P E N D E N T AU D I TO R S ’ R E P O RT
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, 2003 and 2002, 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 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, 2003 and 2002, the Exchange’s investment in which is accounted for by use of the equity method. The Exchange’s equity of $12.2 million and $10.3 million in the CSE’s net assets at June 30, 2003 and 2002, respectively, and of $1.9 million and $141 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, 2003 and 2002, 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 15, 2003