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As filed with the Securities and Exchange Commission on February 22, 2000
File No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-20
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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THE OPTIONS CLEARING CORPORATION
(Exact name of registrant as specified in its charter)
440 SOUTH LASALLE STREET
SUITE 2400
CHICAGO, ILLINOIS 60605
312-322-6200
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
WAYNE P. LUTHRINGSHAUSEN, CHAIRMAN
THE OPTIONS CLEARING CORPORATION
440 SOUTH LASALLE STREET
SUITE 2400
CHICAGO, ILLINOIS 60605
312-322-6200
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Approximate date of commencement of proposed sale of the securities to the
public:
As soon as practicable after the effective date of this Registration Statement.
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES TO BE AMOUNT TO BE FEE OR CHARGE AGGREGATE FEE OR AMOUNT OF
REGISTERED REGISTERED PER UNIT CHARGE REGISTRATION FEE
<S> <C> <C> <C> <C>
Put and Call Options........ 2,000,000,000 $0.09* $180,000,000.00 $47,520.00
Contracts
</TABLE>
* Estimated solely for the purpose of calculating the registration fee on the
basis of the maximum clearing fee charged by the registrant in connection with
the issuance of Option contracts.
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
PROSPECTUS
[LOGO]
THE OPTIONS CLEARING CORPORATION
PUT AND CALL OPTIONS
This prospectus pertains to put and call options ("Options") issued by The
Options Clearing Corporation ("OCC").
CERTAIN TYPES OF TRANSACTIONS IN OPTIONS INVOLVE A HIGH DEGREE OF RISK AND
ARE NOT SUITABLE FOR MANY INVESTORS. INVESTORS SHOULD UNDERSTAND THE NATURE AND
EXTENT OF THEIR RIGHTS AND OBLIGATIONS AND BE AWARE OF THE RISKS INVOLVED. AN
OPTIONS DISCLOSURE DOCUMENT CONTAINING A DESCRIPTION OF THE RISKS OF OPTIONS
TRANSACTIONS IS REQUIRED, UNDER U.S. LAWS, TO BE FURNISHED TO OPTIONS INVESTORS.
THAT DOCUMENT IS ENTITLED CHARACTERISTICS AND RISKS OF STANDARDIZED OPTIONS.
INVESTORS MAY OBTAIN IT FROM THEIR BROKERS. THAT DOCUMENT IS NOT A PART OF THIS
PROSPECTUS, AND IT IS NOT INCORPORATED HEREIN BY REFERENCE OR OTHERWISE.
Financial statements of OCC and certain additional information required to
be contained in Part II of the registration statement of which this prospectus
forms a part, other than exhibits, may be obtained without charge upon request
from OCC. The exhibits required to be contained in Part II may be inspected at
the offices of OCC or obtained from OCC or from the Securities and Exchange
Commission ("SEC") upon payment of the applicable fee.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this prospectus is March , 2000.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS ON BEHALF OF OCC OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY OCC. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OPTIONS IN ANY JURISDICTION IN WHICH, OR TO ANY
PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER. THE DELIVERY OF THIS
PROSPECTUS DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
Certain Options issued by OCC and traded on U.S. exchanges may also be
traded on non-U.S. exchanges. Options issued by OCC that are traded on non-U.S.
exchanges would be identical to Options having the same terms that are traded on
U.S. exchanges. A United States investor desiring to effect transactions in
OCC-issued Options on a non-U.S. exchange generally could do so through a United
States broker who is a member of the non-U.S. exchange or who maintains an
affiliation or correspondent relationship with a member of that exchange.
Investors should bear in mind that non-U.S. exchanges, transactions in Options
executed on such exchanges, and non-U.S. members of such exchanges are not
subject to regulation by the SEC, are not generally subject to the requirements
of the securities or other laws of the United States, and may not be subject to
the jurisdiction of courts in the United States.
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THE OPTIONS CLEARING CORPORATION
OCC was organized as a corporation in 1972 under the laws of the state of
Delaware. OCC is owned equally by the U.S. exchanges that provide markets in
Options. As of the date of this prospectus, those exchanges are the American
Stock Exchange LLC, the Chicago Board Options Exchange, Incorporated, the
Pacific Exchange Incorporated, and the Philadelphia Stock Exchange, Inc. The
International Securities Exchange LLC, which has applied for registration as a
national securities exchange, has announced that it intends to provide a market
in Options and to become a stockholder of OCC.
OCC's principal business consists of issuing Options, providing facilities
for the clearance and settlement of transactions in Options, and providing
incidental services to its Clearing Members and to the markets on which Options
are traded. (Clearing Members are organizations--generally securities
firms--that assume responsibility to OCC for the settlement of transactions in
Options and the performance of the obligations undertaken by writers of
Options.)
OCC is managed by a board of directors consisting of nine directors who
represent Clearing Members, one director representing each of its stockholder
exchanges, one public director, and the chief executive officer of OCC.
The principal executive offices of OCC are located at 440 South LaSalle
Street, Chicago, Illinois 60605, telephone (312) 322-6200.
DESCRIPTION OF OPTIONS
GENERAL
The Options covered by this prospectus are put and call options issued by
OCC. As of the date of this prospectus, Options are traded or approved for
trading on common stocks and certain other equity securities, including
preferred stocks, publicly traded limited partnership interests, American
Depositary Receipts, American Depositary Shares, and interests in unit
investment trusts, investment companies and similar entities holding portfolios
or baskets of common stocks, all of which are included in the term "stock" as
used in this prospectus. Options are also currently traded or approved for
trading on United States Treasury bonds, notes, and bills (sometimes referred to
below as "debt instruments"), on foreign currencies, on stock and mutual fund
indexes, and on the yields of certain Treasury securities. Stock, debt
instruments, currencies, and indexes on which Options are traded are referred to
as "underlying interests." Packaged spread Options, calling for payment, upon
exercise, of the net exercise settlement values of specified types of spread
positions, have also been approved for trading. Options may be traded on other
underlying interests in the future.
There are three "styles" of Options--American, European, and capped. Subject
to certain limitations prescribed in the by-laws and rules of OCC, an
American-style Option may be exercised at any time prior to expiration. A
European-style Option or a capped Option may be exercised only at expiration. In
addition, a capped Option will be automatically exercised if the value of the
underlying interest on any trading day (determined at a specified time of day)
equals or exceeds (in the case of a call Option), or equals or is less than (in
the case of a put Option), the pre-established "cap price" for the Option.
Certain American-style and European-style Options will be automatically
exercised at expiration if they are in the money or in the money by a minimum
amount. An Option holder may determine from his broker whether and under what
circumstances the Option will be automatically exercised, and, if the Option
will not be automatically exercised, what steps the holder must take in order to
exercise.
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Some Options call for the delivery of the underlying interest against
payment of the exercise price. When an Option of that type is exercised, subject
to limitations that may be imposed by OCC pursuant to its by-laws and rules, the
exercising holder sells (in the case of a put) or buys (in the case of a call)
the number of shares or other units of the underlying interest covered by the
Option at a fixed or determinable exercise price. Other Options are
"cash-settled." When a cash-settled Option is exercised, the holder is entitled
to receive a cash "exercise settlement amount." The exercise settlement amount
for a cash-settled Option is equal to the product of (i) the difference between
the exercise price of the Option and the settlement value of the underlying
interest as of a specified date and time (or, in the case of a capped Option
that is automatically exercised, the cap price) and (ii) the number of units of
the underlying interest covered by the Option, or, in the case of Options on
indexes or yields, a fixed "multiplier." Certain Options may provide for
payments or deliveries prior to exercise, such as dividend equivalent payments.
As of the date of this prospectus, several exchanges have proposed to trade
"differential Options." A differential Option is a cash-settled European-style
Option based on an index reflecting the differential (positive in the case of a
call or negative in the case of a put) between the percentage price performance
of a designated interest and that of a benchmark interest over the life of the
Option. Trading of differential Options is subject to SEC approval.
OBLIGATIONS OF OCC
The obligations of OCC to holders and writers of Options are prescribed in
its by-laws and rules, copies of which may be obtained as described under
"Additional Information" below. The following is a brief summary of some, but
not all, of those obligations, and is qualified in its entirety by the
provisions of the by-laws and rules themselves.
1. ACCEPTANCE AND REJECTION OF TRANSACTIONS
If a market reports an Option transaction to OCC on a timely basis, OCC
ordinarily becomes obligated to "accept" the transaction--that is, to issue the
Option if the buyer was engaging in an opening purchase transaction or to cancel
a pre-existing writer's position if the buyer was engaging in a closing purchase
transaction--on the following business day. When OCC issues Options, it assumes
the obligations described below under "Exercise and Settlement." OCC has no
obligation with respect to any transaction in Options unless and until the
transaction is reported to OCC by the responsible market. In the case of certain
Options, OCC reserves the right to reject even properly reported transactions if
the Clearing Member representing the buyer fails to meet its obligations to OCC
before the time when the Option would otherwise be issued. If a transaction is
rejected for that reason, the writer may have remedies under the rules of the
market where the transaction took place.
2. EXERCISE AND SETTLEMENT
When OCC issues an Option, it becomes obligated to purchase (in the case of
a put) or sell (in the case of a call) the underlying interest for the stated
exercise price (or, in the case of a cash-settled Option, to pay the exercise
settlement amount) if the Option is exercised. The procedures whereby OCC
discharges these obligations are prescribed in the by-laws and rules of OCC, and
are summarized below.
After an Option is exercised, OCC assigns the exercise to a Clearing Member
whose account with OCC reflects the writing of an Option of the same series as
the exercised Option. The assigned Clearing Member then becomes obligated to
perform OCC's obligations on its behalf--that is, to purchase the underlying
interest (in the case of an exercised put) or to sell the underlying interest
(in the case of an
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exercised call) for the specified exercise price, or to pay the exercise
settlement amount in the case of a cash-settled Option.
While an American-style Option normally can be exercised at any time prior
to its expiration, and a European-style or capped-style Option ordinarily can be
exercised at expiration, both OCC and the Options markets have the authority to
restrict the exercise of Options at certain times in specified circumstances. It
also is possible that a court, the SEC or another regulatory agency having
jurisdiction would take action which would have the effect of restricting the
exercise of an Option or settlement of such exercise. If a restriction on
exercise is imposed at a time when trading in the Option has also been halted,
holders of that Option may be locked into their positions until either the
restriction or the trading halt has been lifted. Further, certain restrictions
could prevent exercise throughout the exercise period, in which event an Option
would expire worthless.
A. STOCKS. Settlement obligations among Clearing Members resulting from
the exercise of Options calling for the delivery of stocks are ordinarily
discharged through a stock clearing corporation. Like OCC, a stock clearing
corporation is registered with the SEC as a clearing agency, and its rules are
subject to SEC review. After an exercise of an Option calling for the delivery
of stock has been assigned as described above, OCC will report the exercise to
the stock clearing corporation. Each Clearing Member (or its agent) then looks
to the stock clearing corporation for settlement, and receives delivery of the
underlying stock or payment of the exercise price, as the case may be, in
accordance with the rules of the clearing corporation. The clearing corporation
in turn looks to the other Clearing Member for an offsetting delivery or
payment. When an exercise is submitted to a stock clearing corporation for
settlement and not rejected by it, the responsibility for completing the
settlement passes from OCC to the stock clearing corporation. This occurs on or
prior to the exercise settlement date, at a time determined by agreement between
OCC and the stock clearing corporation. After that time, OCC has no further
responsibility to its Clearing Members for the exercise. Instead, rights and
responsibilities run between the exercising and assigned Clearing Members and
the stock clearing corporation. In unusual circumstances, OCC may require that
particular exercises (or exercises of stock Options generally) be settled
directly between the exercising and the assigned Clearing Members or their
agents. In those cases, OCC's obligations are discharged when the aggregate
exercise price in the case of a put, or the underlying stock in the case of a
call, is delivered to the exercising Clearing Member.
B. DEBT INSTRUMENTS. Exercises of Options requiring delivery of debt
instruments are settled directly between the exercising and the assigned
Clearing Members or their agents. OCC's obligations are discharged when the
aggregate exercise price in the case of a put, or the deliverable underlying
debt instrument in the case of a call, is delivered to the exercising Clearing
Member.
C. FOREIGN CURRENCIES. Exercises of Options requiring delivery of foreign
currencies are settled through OCC. Currencies are delivered to OCC, and
redelivered by OCC to the receiving Clearing Members, through banking channels
that make the underlying currency available to the recipient in the country of
origin (as designated by OCC, in the case of the euro). Exercise prices are paid
to OCC, and credited by OCC to the accounts of the delivering Clearing Members,
either through OCC's regular cash settlement system or through the banking
channels used for delivery of the underlying currencies. Certain foreign
currency Options have exercise prices that are denominated in currencies other
than U.S. dollars (E.G., Options to purchase German marks for Japanese yen).
Payment of exercise prices denominated in foreign currencies and delivery of the
underlying currencies are effected through banking arrangements established for
that purpose by OCC in the country of origin of the currency being paid or
delivered.
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Clearing Members may arrange in some cases for delivery of underlying
foreign currency and payment of exercise prices to be made directly between a
customer's bank account and an OCC correspondent bank. In some cases, OCC may
act as an agent for The Intermarket Clearing Corporation ("ICC"), a futures
clearing subsidiary of OCC, in making foreign currency settlements with Clearing
Members, and settlements between OCC and ICC may be netted. ICC's settlement
procedures are the same as OCC's. OCC's obligations to the exercising Clearing
Member are discharged when the aggregate exercise price in the case of a put, or
the underlying currency in the case of a call, is delivered to the Clearing
Member.
D. CASH SETTLEMENTS. Exercises of cash-settled Options are settled through
OCC. The exercise settlement amount is credited to the exercising Clearing
Member's settlement account with OCC and charged to the account of the assigned
Clearing Member. OCC's obligations are discharged when the exercise settlement
amount is credited to the account of the exercising Clearing Member. In the
future, exchanges may introduce cash-settled Options with exercise settlement
amounts payable in currencies other than U.S. dollars. OCC and Clearing Members
would pay and receive such amounts through banking channels that make the
relevant currency available to the recipient in the country of origin.
Exercise settlement amounts for cash-settled Options are calculated based
upon values or prices for the underlying interests determined in accordance with
procedures specified in the by-laws and rules of OCC or in the rules of the
exchanges on which the Options are traded. Special discretionary procedures for
determining exercise settlement amounts may apply when values or prices of the
underlying interests are unreported or otherwise unavailable or have been
affected by trading halts or other unusual conditions.
E. NET SETTLEMENT. If a Clearing Member is obligated both to purchase and
to sell a particular underlying interest for the same exercise price on the same
exercise settlement date, OCC may offset the Clearing Member's purchase and sale
obligations against each other, so that only the net purchase obligation or the
net sale obligation will have to be settled as described above. Where an
exercise is settled by offset, OCC has no further responsibility in respect of
that exercise. OCC may net a Clearing Member's purchase and sale obligations
with respect to foreign currencies even where the purchase and sale are at
different exercise prices. In that event, the difference in exercise prices is
settled in cash between OCC and the Clearing Member.
F. SETTLEMENT WITH CUSTOMERS. The foregoing describes the system for
exercise settlements among OCC and its Clearing Members. Clearing Members settle
independently with their customers (or with brokers representing customers). OCC
has no responsibility for settlements between a Clearing Member or broker and
its customer or for the funds or securities of a customer that are held by a
Clearing Member or broker.
G. SHORTAGES OF UNDERLYING INTERESTS. In certain circumstances involving
shortages of underlying securities or currencies or in other unusual situations,
OCC has the power to impose special exercise settlement procedures. These
special procedures may involve delaying settlements or fixing cash settlement
prices in lieu of delivery of the underlying security or currency. Although OCC
currently has the authority in such circumstances to prohibit the exercise of
puts by holders who would be unable to deliver the underlying security or
currency on the exercise settlement date, OCC has filed a proposed rule change
with the SEC that would eliminate that authority and, in lieu thereof, authorize
OCC to delay settlements or fix cash settlement prices rather than require
delivery. The proposed rule change will apply only to series of Options
introduced after its effective date. In the event of a shortage of an
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underlying debt instrument, OCC may permit the delivery of other, generally
comparable securities, and may adjust the exercise prices of affected Options to
compensate for such substitute deliveries.
3. REMEDIES
A. GENERAL RULE. If an exercising or an assigned Clearing Member is
suspended by OCC, with the result that a pending exercise will not be settled in
the ordinary course, or if a Clearing Member fails to make settlement for an
exercise that was to have been settled directly with another Clearing Member or
an exercise of foreign currency Options, OCC may require that the underlying
interest be bought in or sold out by the non-defaulting party to the exercise.
Losses on such transactions constitute senior claims against certain assets of
the defaulting Clearing Member in the possession of OCC, and are compensable out
of OCC's Clearing Funds (see "The Back-Up System") to the extent that those
assets are insufficient. In addition, losses sustained by an exercising Clearing
Member would constitute claims against the general assets of OCC.
B. CASH-SETTLED PRODUCTS. If a Clearing Member that is a party to an
exercise of a cash-settled Option is suspended or fails to pay the exercise
settlement amount to OCC, OCC is obligated to settle with all Clearing Members
that have filed exercise notices that were assigned to the suspended or
defaulting Clearing Member.
C. SETTLEMENTS THROUGH STOCK CLEARING CORPORATIONS. After responsibility
for completing a settlement passes to a stock clearing corporation as described
above, the exercising and assigned Clearing Members have no further rights
against OCC or any assets in its possession.
D. TENDER OFFERS, ETC. If an exercising or an assigned Clearing Member
fails to make timely delivery of an underlying security on the exercise
settlement date, and as a result another party is unable to deliver the security
in sufficient time to participate in a tender offer, exchange offer, or other
transaction, the Clearing Member that failed to make timely delivery may be held
liable for any loss sustained by the other party. Similarly, a Clearing Member
may seek to hold its customer liable for losses sustained due to the customer's
failure to make timely delivery.
4. THE BACK-UP SYSTEM
OCC's settlement procedures are designed so that for every outstanding
Option there will be a writer--and a Clearing Member that is or that represents
the writer--of an Option of the same series who has undertaken to perform OCC's
obligations in the event that an exercise is assigned to such writer. As a
result, no matter how many Options of a given series may be outstanding at any
time, there will always be a group of writers of Options of the same series who,
in the aggregate, have undertaken to perform OCC's obligations with respect to
such Options.
A customer that writes an Option is contractually bound to its broker to
perform in accordance with the terms of the Option. These contractual
obligations are secured by the securities or other margin that the customer is
required to deposit with its broker.
Clearing Members are contractually bound to perform their obligations to OCC
regardless of whether their customers perform. Standing behind a Clearing
Member's obligations are the Clearing Member's net capital, the Clearing
Member's margin deposits with OCC, OCC's lien and setoff rights with respect to
certain of the Clearing Member's assets, and the Clearing Funds.
A. THE CLEARING MEMBER'S NET CAPITAL. Every U.S. Clearing Member must have
an initial net capital (as defined in SEC rules) of $1 million or more,
depending on the nature and magnitude of its
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assets and obligations. A Clearing Member's net capital may fall to less than
that amount as a result of transactions in the regular course of business, but a
Clearing Member may not engage in or clear any opening transaction if its net
capital falls below $750,000 or a greater amount determined in accordance with
the rules of OCC. Certain non-U.S. Clearing Members may elect to comply with
alternative financial requirements. These alternative requirements may be more
or less stringent than those applicable to U.S. Clearing Members. A Clearing
Member's assets are, of course, subject to claims by creditors other than OCC.
OCC obtains certain financial reports from each Clearing Member on a monthly
basis, and may require more frequent reports. In appropriate cases, OCC may
impose restrictions on a Clearing Member's operations, such as a prohibition on
opening transactions or a requirement that the Clearing Member reduce or
eliminate certain writing positions.
When Options issued by OCC are traded on non-U.S. exchanges, clearinghouses
associated with those exchanges ("Associate Clearinghouses") may maintain
Options accounts with OCC. The financial and reporting requirements applicable
to Associate Clearinghouses, as well as OCC's ability to impose restrictions on
positions carried by Associate Clearinghouses, would be subject to agreements
between OCC and the Associate Clearinghouses.
B. THE CLEARING MEMBER'S MARGIN DEPOSITS. Subject to certain exceptions
described below, each Clearing Member is required to deposit and maintain margin
with OCC with respect to each Option for which it represents the writer. Several
different forms of margin are permitted, including cash, marketable securities
and letters of credit, and certain margin assets may be denominated in foreign
currencies. OCC may in the future accept margin deposits in still other forms.
The amount of margin is specified by OCC in accordance with its rules, and
may be reduced to the extent a Clearing Member is permitted or required to
pledge to OCC certain Options positions carried in its accounts with OCC. OCC
may require any Clearing Member to deposit higher margins at any time in the
event it deems such action necessary and appropriate in the circumstances to
protect the interests of other Clearing Members, OCC or the public. OCC may
waive a margin deposit that would otherwise be required to be made if it
determines that the waiver is advisable in the public interest and for the
protection of investors and is consistent with maintaining OCC's financial
integrity.
OCC has implemented "cross-margining" arrangements with various commodity
clearing organizations. Under these arrangements, OCC Clearing Members that are
also members of one or more of the participating commodity clearing
organizations, or that have affiliates that are members of such clearing
organizations, can pledge positions in certain Options to secure their
obligations (or obligations of their designated affiliates) in respect of
positions in related futures and futures options and vice versa. The obligations
of one or more participating commodity clearing organizations are substituted in
whole or in part for the Clearing Member's obligations to deposit margin in
respect of cross-margined Option writing positions. Margin deposited in
satisfaction of any remaining margin requirement in respect of cross-margined
Options, futures and futures options positions is held jointly for the benefit
of OCC and the participating commodity clearing organizations.
OCC also functions as an intermediary in stock lending and borrowing
transactions among participating Clearing Members. Positions representing the
rights and obligations of the borrowing or lending Clearing Member to OCC are
carried in the Clearing Member's accounts at OCC. A Clearing Member's margin
requirements reflect the increase or decrease in risk to OCC associated with the
inclusion of those positions in the Clearing Member's accounts, except that a
Clearing Member may elect to exclude
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borrow and loan positions from its margin requirements. In that event, OCC
relies on its internal risk monitoring systems and the Clearing Member's
Clearing Fund deposit and the other elements of the OCC back-up system to
mitigate the intra-day risk to OCC created by those positions.
Margin deposited by a Clearing Member may be applied only to the obligations
of that Clearing Member and its designated affiliates and may not be applied to
the obligations of other Clearing Members or the obligations of OCC itself.
In lieu of depositing margin with respect to writing positions in certain
call Options, a Clearing Member may deposit the underlying interest, or, in the
case of index Options, a combination of cash and marketable securities with an
aggregate initial value determined in accordance with the rules of OCC. In lieu
of depositing margin with respect to writing positions in certain put Options, a
Clearing Member may deposit cash and/or short-term government securities with an
aggregate initial value not less than the aggregate exercise price. Cash and
securities deposited in lieu of margin must be placed with a depository
satisfactory to OCC under agreements requiring their delivery or liquidation and
payment of the proceeds in the event that the writer is required to perform its
exercise settlement obligations with respect to the position covered by the
deposit.
OCC has no reason to believe that any depository holding margin deposits or
deposits made in lieu of margin will not deliver them in accordance with the
terms of its agreement with OCC, or that any bank will not honor letters of
credit issued to OCC for margin purposes. However, there can be no assurance
that a bank or other depository will not delay or default in performing these or
other obligations to OCC, or be restrained by court order or regulatory action
from performing these obligations, and such delays or defaults could adversely
affect OCC's ability to perform its obligations as the issuer of Options.
C. OCC'S LIEN AND SETOFF RIGHTS. OCC has a lien on, and setoff right
against, certain securities, margin deposits, funds and other assets maintained
in Clearing Members' accounts with OCC. If a Clearing Member does not perform
its obligations to OCC, these assets may be sold or converted to cash and the
proceeds applied to the performance of the Clearing Member's obligations to OCC
(such application being limited, in certain cases, to obligations arising from
the same account in which the assets were held).
D. THE CLEARING FUNDS. OCC's rules provide for Clearing Funds composed of
mandatory deposits by Clearing Members. OCC currently maintains separate
Clearing Funds (which, however, back each other up) for Options on stocks and
other types of Options. OCC has filed a proposed rule change with the SEC that
would merge the two Clearing Funds. The Clearing Funds are for the protection of
OCC and are not general indemnity funds available to other persons, such as
customers of Clearing Members. The amounts of the Funds vary over time, based on
formulas designed to reflect OCC's risk exposure. The proportionate contribution
of each Clearing Member takes into account the size of the Clearing Member's
positions relative to the positions of all Clearing Members. All Clearing Fund
deposits must be made in cash or by the deposit of U.S. or Canadian government
securities or other government securities acceptable to OCC, except that OCC may
agree with an Associate Clearinghouse that its Clearing Fund deposit may be made
in different or additional forms.
If a Clearing Member fails to discharge any obligation to OCC in connection
with Options or stock loan/borrow transactions, its Clearing Fund deposits may
be applied to the discharge of that obligation. If a Clearing Member's
obligation to OCC exceeds its Clearing Fund deposits, the amount of the
deficiency may be charged by OCC on a predetermined basis against all other
Clearing Members' deposits to the Clearing Funds. OCC also may charge to the
Clearing Funds, on the same basis, certain
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other losses resulting from its business as a clearing agency and issuer of
securities. Whenever amounts are paid out of a Clearing Fund as a result of such
a charge, Clearing Members are required promptly to make good any deficiency in
their deposits resulting from such payment, except that a Clearing Member is not
required to pay more than an additional 100% of the amount of its prescribed
deposits to a Clearing Fund if it ceases to clear transactions in Options of the
types for which the applicable Clearing Fund was established and promptly closes
out or transfers all of its positions in such Options.
Under certain limited circumstances, OCC may borrow against the Clearing
Funds on a short term basis to meet obligations arising out of the suspension of
a Clearing Member and related actions taken by OCC or to cover losses resulting
from bank or clearing organization failures.
OCC will also have available its own assets in the event that the Clearing
Funds are insufficient However, these assets are small relative to the magnitude
of OCC's potential obligations.
CERTIFICATELESS TRADING
No certificates are issued to evidence Options. Investors look to the
confirmations and statements that they receive from their brokers to confirm
their positions as holders or writers of Options.
ADDITIONAL INFORMATION
Certain additional information, which is neither part of this prospectus nor
incorporated herein in any way, can be obtained as described below:
1. The document entitled CHARACTERISTICS AND RISKS OF STANDARDIZED OPTIONS
referred to on the cover page of this prospectus may be obtained by
U.S. customers from their brokers.
2. The by-laws and rules of OCC, as the same may be amended from time to time,
are filed with the SEC under the Securities Exchange Act of 1934. These
filings may be obtained from the SEC upon payment of the fees prescribed by
the SEC.
3. The constitutional provisions, rules, regulations and other requirements of
the U.S. exchanges that are authorized to provide markets in Options, and of
the stock clearing corporation through which exercises of stock Options are
settled, are required to be filed with the SEC. These filings may be
obtained from the SEC upon payment of the fees prescribed by the SEC. Copies
of corresponding documents relating to non-U.S. exchanges that provide
markets in Options may be obtained in accordance with the rules applicable
to those exchanges. OCC is not responsible for the content, interpretation,
sufficiency or enforcement of such provisions, rules, regulations, other
requirements or documents.
4. The financial statements of OCC and certain other information may be
obtained as described on the cover page of this prospectus.
10
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 4. DIRECTORS AND EXECUTIVE OFFICERS.
OCC's by-laws provide for a board of directors consisting of nine Member
Directors elected by Clearing Members, one Exchange Director designated by each
of the self-regulatory organizations authorized to provide a market in Options,
one Public Director who is not affiliated with any national securities exchange
or national securities association or any broker or dealer in securities, and
one Management Director who is the chief executive officer of OCC. The nine
Member Directors, who are selected by a Nominating Committee (or by vote of the
Clearing Members where nominees have been proposed by petition), are divided
into three classes whose terms are staggered so that three directors are elected
each year. The Public Director (who is nominated by the Chairman of the Board
with the approval of the Board of Directors) is elected for a term of three
years. The Exchange Directors and the Management Director are elected for a term
of one year. The Nominating Committee is composed of six representatives of
Clearing Members who are elected in the same manner as Member Directors. Terms
expire in April of each year.
As of the date of this Registration Statement, the directors and executive
officers of OCC are as follows:
DIRECTORS
WAYNE P. LUTHRINGSHAUSEN, age 55, has been the Management Director of OCC
since 1973. He has served as Chairman of the Board and Chief Executive Officer
of OCC for over five years. His present term as a director of OCC expires in
April, 2000.
PHILIP D. DEFEO, age 53, has been an Exchange Director of OCC, representing
the Pacific Exchange, Incorporated, since November, 1999. Mr. DeFeo has been
Chairman and Chief Executive Officer of that exchange since June, 1999. From
1996 to February, 1999, Mr. DeFeo was President and Chief Executive Officer of
Van Eck Associates Corp., a diversified global mutual fund and brokerage
company. From 1994 to 1996, Mr. DeFeo was Executive Vice President and Director
of Marketing and Customer Service at Cedel, International, PLC, a provider of
Eurobond clearance and custody service. His present term as a director of OCC
expires in April, 2000.
FREDDY ENRIQUEZ, age 59, has been a Member Director of OCC since April,
1995. Mr. Enriquez has been the First Vice President and Director of Global
Operations Service for Merrill Lynch Pierce Fenner & Smith, Inc., a securities
firm and a Clearing Member of OCC, since 1992. His present term as a director of
OCC expires in April, 2001.
WAYNE W. FIELDSA, age 51, has been a Member Director of OCC since April,
1999. Mr. Fieldsa has been Executive Vice President of Brokerage Operations for
Charles Schwab & Co., Inc., a securities firm and a Clearing Member of OCC,
since 1994. His present term as a director of OCC expires in April, 2000.
WILLIAM C. FLOERSCH, age 55, has been a Member Director of OCC since April,
1998. Mr. Floersch has been President and Chief Executive Officer of O'Connor &
Company, a securities firm and a Clearing Member of OCC, since 1997. From 1991
to 1997, Mr. Floersch served as the Vice Chairman of the Chicago Board Options
Exchange, Incorporated, and was an active market maker on that exchange. His
present term as a director of OCC expires in April, 2001.
11
<PAGE>
MEYER S. FRUCHER, age 53, has been an Exchange Director of OCC, representing
the Philadelphia Stock Exchange, Inc., since September, 1998. Mr. Frucher has
been Chairman and Chief Executive Officer of that exchange since June, 1998.
From 1996 to 1998, Mr. Frucher was a Real Estate and Management Consultant with
Robert Plan Corporation, a subsidiary of the American International Group, in
the insurance industry. From 1988 to 1996, he was the Executive Vice
President-Development for Olympia & York Companies (USA), a real estate firm.
His present term as a director of OCC expires in April, 2000.
WILLIAM GANGI, age 59, has been a Member Director of OCC since April, 1999.
Mr. Gangi has been the Senior Managing Director of the Professional Clearing
Services Division for Bear Stearns & Co., Inc., a securities firm and a Clearing
Member of OCC, since 1980. His present term as a director of OCC expires in
April, 2002.
DORCAS R. HARDY, age 53, has been a Public Director of OCC since April,
1999. Ms. Hardy has been the Principal of Dorcas R. Hardy & Associates, a
government relations and public policy consulting firm, since 1989. From 1996 to
1998, she was the Chairman and Chief Executive Officer of Work Recovery, Inc., a
rehabilitation technology firm. Ms. Hardy also served as the United States
Commissioner of Social Security from 1986 to 1989. Her present term as a
director of OCC expires in April, 2002.
JOHN C. HARRIS, age 51, has been a Member Director of OCC since April, 1999.
Mr. Harris has been the Executive Vice President and Manager of the Dealer
Services Division for ABN AMRO Incorporated, a securities firm and a Clearing
Member of OCC, since 1997. From 1982 to 1997, Mr. Harris was the Executive Vice
President of The Chicago Corporation, a securities firm, a Clearing Member of
OCC and the predecessor firm of ABN AMRO Incorporated. From 1995 to 1997,
Mr. Harris served as a member of OCC's Nominating Committee and was its chairman
in 1997. His present term as a director expires in April, 2002.
EDWARD J. JOYCE, age 47, has been an Exchange Director of OCC, representing
the Chicago Board Options Exchange, Incorporated, since 1991. He has been
Executive Vice President-Trading Operations of that exchange since 1987. His
present term as a director of OCC expires in April, 2000.
TIMOTHY R. MULLEN, age 43, has been a Member Director of OCC since April,
1999. Mr. Mullen has been President and Chief Executive Officer of First Options
of Chicago, Inc., a securities firm and a Clearing Member of OCC, since 1997.
From 1993 to 1997, Mr. Mullen was the Chairman and Chief Executive Officer of
LIT Clearing Services, Inc., a securities firm and a Clearing Member of OCC.
Mr. Mullen has also been a Managing Director of Spear, Leeds & Kellogg, a
securities firm and a Clearing Member of OCC, since 1991 and a member of the
Executive Committee of Spear Leeds & Kellogg since 1997; a Governor of the Board
of Trade Clearing Corporation and a member of the Business Committee and the
Chairman of the Audit Committee for the Board of Trade Clearing Corporation
since 1998, and served as its Second Vice Chairman and Chairman of the Audit
Committee from 1998 to February, 1999 and is currently serving as its First Vice
Chairman and as the Chairman of its Risk Committee. From 1995 to 1997
Mr. Mullen served as the Chairman of the Clearing Procedures/Regulatory
Subcommittee for the Chicago Board Options Exchange, Incorporated. His present
term as a director expires in April, 2002.
MARTIN PFINSGRAFF, age 45, has been a Member Director of OCC since April,
1998. Mr. Pfinsgraff has been President of the Capital Markets Group and has
served on the Operating Committee and the Board of Directors of Prudential
Securities Incorporated, a securities firm and a Clearing Member of OCC, since
July, 1997. From 1995 to 1997, Mr. Pfinsgraff was an Executive Vice President
and Chief Financial Officer
12
<PAGE>
of Prudential Securities Incorporated, and he served as a Vice President and
Treasurer of Prudential Insurance Company from 1991 to 1995. His present term as
a director of OCC expires in April, 2000.
WILLIAM A. ROGERS, age 60, has been a Member Director of OCC since April,
1994. Mr. Rogers has been the Chief Executive Officer of Wayne Hummer
Investments, LLC, a securities firm and a Clearing Member of OCC, for over five
years. Mr. Rogers served as a director of the National Association of Securities
Dealers, Inc. from 1994 to 1997. His present term as a director of OCC expires
in April, 2000. Mr. Rogers will be retiring from the board of directors at the
annual meeting of OCC in April, 2000.
JOSEPH B. STEFANELLI, age 61, has been an Exchange Director of OCC,
representing the American Stock Exchange, LLC since December, 1995.
Mr. Stefanelli has been Executive Vice President of that exchange since 1993.
His present term as a director of OCC expires in April, 2000.
MELVIN B. TAUB, age 56, has been the Vice Chairman of the Board of OCC since
April, 1999 and a Member Director of OCC since April, 1996. Mr. Taub has been a
Senior Executive Vice President at Salomon Smith Barney Inc., a securities firm
and a Clearing Member of OCC, since 1991. Mr. Taub served as a Director of the
National Securities Clearing Corporation from 1994 to 1998 and was its Chairman
from 1996 to 1998. He presently serves as a Director of The Depository Trust
Company and the Securities Industry Automation Corporation. His present term as
a director of OCC expires in April, 2001.
NOMINEE FOR DIRECTOR
DENNIS W. ZANK, age 45, has been nominated by the Nominating Committee of
OCC for election as a Member Director of OCC at its April 25, 2000 annual
meeting. If elected, his term as a director of OCC would expire in April, 2003.
Mr. Zank has been Executive Vice President, Operations and Administration of
Raymond James & Associates, Inc., a securities firm and a Clearing Member of
OCC, since 1992. Mr. Zank also serves as a board member and director of Raymond
James & Associates and a director of its parent company, Raymond James
Financial, Inc.; a director and treasurer of that firm's insurance subsidiary,
Planning Corporation of America, and its affiliated broker-dealer, Raymond James
Financial Securities, Inc.; as well as director and vice president of Raymond
James Credit Corporation. Mr. Zank also served as a Director of the National
Securities Clearing Corporation from 1994 to 1997.
NON-DIRECTOR EXECUTIVE OFFICERS
GEORGE S. HENDER, age 57, has been Management Vice Chairman of OCC since
1997 and Chief Operating Officer since March 1999. He was Senior Executive Vice
President of OCC from 1990 to 1997.
PAUL G. STEVENS, JR., age 55, has been President of OCC since 1989. From
1989 to March 1999 he was Chief Operating Officer of OCC and from 1994 to March
1999 was Treasurer and Chief Financial Officer of OCC.
WILLIAM H. NAVIN, age 54, has been Executive Vice President and General
Counsel of OCC since July, 1999. From 1975 to June, 1999 he was a partner of
Schiff Hardin & Waite, a Chicago law firm and OCC's principal outside counsel
during that period.
RALPH E. PFAFF, age 61, has been Executive Vice President and Corporate
Information Officer of OCC since 1984 and Treasurer and Chief Financial Officer
of OCC since March, 1999.
13
<PAGE>
ITEM 5. LEGAL PROCEEDINGS.
None.
ITEM 6. LEGAL OPINIONS AND EXPERTS.
The legality of the securities being registered has been passed upon for OCC
by Sidley & Austin.
The Consolidated Financial Statements of OCC as of December 31, 1999 and
1998, and for the years ended December 31, 1999, 1998, and 1997 included in this
Registration Statement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
ITEM 7. FINANCIAL STATEMENTS.
Set forth below are the audited statements of consolidated financial
condition of OCC and subsidiaries as of December 31, 1999 and 1998 and the
related statements of consolidated income and retained earnings and consolidated
cash flows for each of the three years in the period ended December 31, 1999.
14
<PAGE>
STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION
The Options Clearing Corporation and Subsidiaries
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 36,026,090 $ 28,333,427
Accounts receivable 11,185,686 8,489,178
Exchange billing receivable NOTE 9 13,104,102 8,395,820
Due from participant
exchanges NOTE 9 1,664,872 985,451
Other current assets 7,552,204 6,212,940
Deferred income taxes NOTE 10 1,377,453 835,925
---------------------------------------------------------------------------------------------------------
Total Current Assets 70,910,407 53,252,741
---------------------------------------------------------------------------------------------------------
Property and Equipment:
Data processing equipment,
furniture, etc. 6,977,285 7,527,688
Leasehold improvements 5,423,094 4,510,924
---------------------------------------------------------------------------------------------------------
Total property and equipment 12,400,379 12,038,612
Accumulated depreciation
and amortization (10,730,780) (9,994,840)
---------------------------------------------------------------------------------------------------------
Property and equipment - net 1,669,599 2,043,772
Clearing fund deposits NOTE 4 1,603,986,000 1,294,185,000
Other assets 510,047 600,026
Deferred income taxes NOTE 10 976,367 1,176,930
---------------------------------------------------------------------------------------------------------
Total Assets $ 1,678,052,420 $ 1,351,258,469
---------------------------------------------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,365,945 $ 2,692,319
SEC fees payable 21,504,226 14,958,349
Income taxes payable 1,940,457 1,308,766
Refundable clearing fees NOTE 7 3,796,082 2,876,580
Exchange billing payable NOTE 9 13,104,102 8,395,820
Other accrued expenses 3,291,604 3,939,541
---------------------------------------------------------------------------------------------------------
Total Current Liabilities 47,002,416 34,171,375
---------------------------------------------------------------------------------------------------------
Clearing fund deposits NOTE 4 1,603,986,000 1,294,185,000
Commitments and contingent
liabilities NOTES 2, 3, 4, 8, 13
Shareholders' Equity: NOTE 5
Common stock 600,000 600,000
Paid-in capital 1,393,332 1,393,332
Retained earnings 25,737,338 21,575,428
---------------------------------------------------------------------------------------------------------
Total 27,730,670 23,568,760
Treasury stock (666,666) (666,666)
---------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 27,064,004 22,902,094
---------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $ 1,678,052,420 $ 1,351,258,469
---------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
15
<PAGE>
STATEMENTS OF CONSOLIDATED INCOME & RETAINED EARNINGS
The Options Clearing Corporation and Subsidiaries
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1999 1998 1997
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Clearing fees NOTE 7 $ 65,491,771 $ 56,840,415 $ 47,737,753
Interest 7,747,953 5,601,015 4,862,071
Disclosure documents 860,336 742,642 771,529
Data processing fees and
services 3,497,594 6,222,837 5,372,716
Other 4,757,132 5,398,360 2,885,940
---------------------------------------------------------------------------------------------------------
Total Revenues 82,354,786 74,805,269 61,630,009
---------------------------------------------------------------------------------------------------------
EXPENSES
Employee costs 39,182,463 33,501,740 32,590,104
Data processing costs 15,903,975 12,630,284 13,027,316
Professional fees 7,490,290 6,020,196 4,165,662
General and administrative NOTE 9 8,625,739 9,881,029 7,220,794
Disclosure documents 698,906 543,654 539,045
Rental, other than data
processing equipment 2,571,297 4,127,319 3,518,610
Depreciation and
amortization 735,940 705,968 422,612
---------------------------------------------------------------------------------------------------------
Total Expenses 75,208,610 67,410,190 61,484,143
---------------------------------------------------------------------------------------------------------
Income Before Income Taxes 7,146,176 7,395,079 145,866
Provision (benefit) for
Income taxes: NOTE 10
Federal - current 2,663,493 2,562,858 (342,807)
State and local - current 661,738 400,466 (15,064)
Federal - deferred (273,111) 132,586 428,481
State - deferred (67,854) 19,698 63,660
---------------------------------------------------------------------------------------------------------
Total Provision for
Income Taxes 2,984,266 3,115,608 134,270
---------------------------------------------------------------------------------------------------------
Net Income
[Basic earnings per Class B
common share - 1999, $208.09;
1998, $213.97;
1997, $0.53] NOTES 1 and 5 4,161,910 4,279,471 11,596
Retained Earnings,
Beginning of Year 21,575,428 17,295,957 17,284,361
---------------------------------------------------------------------------------------------------------
Retained Earnings,
End of Year $ 25,737,338 $ 21,575,428 $ 17,295,957
---------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16
<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS
The Options Clearing Corporation and Subsidiaries
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 1999 1998 1997
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income $ 4,161,910 $ 4,279,471 $ 11,596
Adjustments to reconcile
net income to net
cash flows from
operating activities:
Depreciation and
amortization 735,940 705,968 422,612
Deferred income taxes (340,965) 152,284 347,328
Loss on disposal of assets -- 84,864 --
Changes in assets
and liabilities:
Accounts receivable
and other receivables (8,084,211) (2,256,763) (511,723)
Other current assets (1,339,264) (2,834,795) (1,626,698)
Accounts payable,
accrued expenses
and other payables 11,279,848 1,631,924 7,555,944
Refundable clearing fees 919,502 (1,716,220) 2,210,406
Income taxes payable 631,691 1,233,164 (75,655)
---------------------------------------------------------------------------------------------------------
Net cash flows from
operating activities 7,964,451 1,279,897 8,333,810
---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM
INVESTING ACTIVITIES
Capital expenditures (361,767) (680,998) (605,630)
Other - net 89,979 702,543 (967,426)
---------------------------------------------------------------------------------------------------------
Net cash flows from
investing activities (271,788) 21,545 (1,573,056)
---------------------------------------------------------------------------------------------------------
Net increase in cash
and cash equivalents 7,692,663 1,301,442 6,760,754
Cash and cash equivalents,
beginning of year 28,333,427 27,031,985 20,271,231
---------------------------------------------------------------------------------------------------------
Cash and cash equivalents,
end of year $ 36,026,090 $ 28,333,427 $ 27,031,985
---------------------------------------------------------------------------------------------------------
Supplemental disclosure of
cash flow information:
Cash paid for income taxes $ 2,323,954 $ 2,414,013 $ 867,408
---------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
17
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Options Clearing Corporation and Subsidiaries
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 1.
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BASIS OF PRESENTATION The consolidated financial statements include the
accounts of The Options Clearing Corporation ("OCC") and its wholly owned
subsidiaries, The Intermarket Clearing Corporation ("ICC") and International
Clearing Systems, Inc. ("ICSI"). All intercompany balances and transactions have
been eliminated in consolidation. References to the "Clearing Corporation" will
include both OCC and its subsidiaries, as applicable.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the 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 are comprised primarily
of United States Government securities held under agreements issued by major
banking institutions, which mature on the next business day. During the term of
the agreements, the underlying securities are transferred through the Federal
Reserve System to a custodial account maintained by the issuing bank for the
benefit of the Clearing Corporation. The Clearing Corporation considers all
highly liquid debt instruments with a maturity of three months or less from the
date of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT Property and equipment are stated at historical cost,
net of accumulated depreciation. Depreciation is computed using straight-line
and accelerated methods based on estimated useful lives of five to twenty years.
Leasehold improvements are amortized over the terms of the related leases.
Effective January 1, 1999, OCC adopted Statement of Position ("SOP") 98-1,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE. SOP 98-1 requires capitalization of certain costs incurred in the
development of internal use computer software. The effect on the December 31,
1999 financial statements was not material.
IMPAIRMENT OF LONG-LIVED ASSETS The Clearing Corporation reviews long-lived
assets for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If such
review indicates that the carrying amount of a long-lived asset is not
recoverable, the carrying amount is reduced to the estimated recoverable value.
INCOME TAXES The Clearing Corporation uses the asset and liability method,
under which deferred tax assets and liabilities are recorded based on
differences between the financial accounting and tax basis of assets and
liabilities. Deferred tax assets and liabilities are measured based on the
currently enacted tax rate expected to apply to taxable income in the year in
which the deferred tax asset or liability is expected to be settled or realized.
EARNINGS PER SHARE Earnings per share are calculated based on the weighted
average number of Class B common shares outstanding during the year; 20,000
shares in 1999, 20,000 shares in 1998, and 21,666 shares in 1997. The Clearing
Corporation has no dilutive common shares outstanding.
RECLASSIFICATIONS Certain prior years' amounts have been reclassified to
conform with the current year presentations.
RECENT ACCOUNTING PRONOUNCEMENTS In 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, as
amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Additionally, SFAS No. 133 requires
changes in the fair market value of derivatives to be recorded each period in
current earnings or shareholders' equity, depending on the intended use of the
derivatives. The impact of SFAS No. 133, effective for OCC beginning January
2001, is not expected to be significant.
NOTE 2.
OFF-BALANCE-SHEET RISK, CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL
INSTRUMENTS
OCC is the registered clearing agency for U.S. listed securities options. OCC
issues (and in that sense guarantees) and clears option contracts traded on its
Participant Exchanges. OCC clears options on several types of underlying
interests, including common and preferred stocks, foreign currency, stock
indexes, American depository receipts and interest rate composites. OCC also is
the clearing agency for exercises of foreign currency options and stock index
options. OCC maintains lines of credit with major domestic and foreign banks in
the amount of approximately $1.1 billion as of December 31, 1999. Of these lines
of credit, $930 million is available to ensure the performance of the foreign
currency settlement process in the event that a Clearing Member should fail to
deliver foreign currencies on a timely basis; $150 million is available to
enable OCC to meet any suspension obligations or to reimburse itself for
bankruptcy losses; and $20 million is available to
18
<PAGE>
NOTE 2.
OFF-BALANCE-SHEET RISK, CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL
INSTRUMENTS (CONTINUED)
meet working capital requirements incurred in the ordinary course of
business. Commitment fees are paid to the issuing banks for these lines of
credit.
ICC clears, settles and guarantees futures contracts and options on futures
contracts executed on its Participant Exchanges. ICC maintains lines of credit
with major domestic and foreign banks in the amount of approximately $50 million
as of December 31, 1999. These lines of credit are utilized to ensure
performance of the foreign currency settlement process in the event that a
Clearing Member should fail to deliver foreign currencies on a timely basis.
Commitment fees are paid to the issuing banks for these lines of credit.
OCC and ICC perform a guarantee function which ensures the financial
integrity of the markets they clear. Consequently, OCC and ICC bear counterparty
credit risk in the event that future market movements create conditions which
could lead to Clearing Members failing to meet their obligations to OCC or ICC.
OCC and ICC are, thus, exposed to off-balance-sheet risk, with respect to the
securities broker dealers and futures commission merchants that are their
respective Clearing Members.
OCC and ICC reduce their exposure through a risk management program that
strives to achieve a prudent balance between market integrity and liquidity.
This program of safeguards, which provides substance to OCC's guarantee,
consists of: rigorous initial and ongoing financial responsibility standards
for membership; margin deposits (see Note 3); and clearing fund deposits (see
Note 4).
The carrying value of the Clearing Corporation's cash and cash equivalents
approximates fair value because of the short maturities of those investments.
Margin deposits (see Note 3) and clearing fund deposits (see Note 4) are
presented at market value at December 31, 1999, in accordance with the rules of
the Clearing Corporation.
Neither OCC nor ICC assumes any guarantor role unless it has a precisely
equal, and offsetting, claim against another Clearing Member. Therefore, the
fair value of the open interest of options, futures and options on futures
contracts cleared and settled by OCC and ICC is not included in the statements
of consolidated financial condition. It should be noted that ICC had no open
interest at December 31, 1999.
NOTE 3.
MARGIN DEPOSITS
The rules and practices established by OCC provide that each Clearing
Member representing the writer of an option must either deposit the
underlying interest or maintain specified margin deposits in the form of
cash, bank letters of credit, Government securities (as defined in the
By-laws) or other acceptable margin securities ("valued securities"). The
margin deposits of each Clearing Member are available to meet only the
financial obligations of that Clearing Member to OCC. All margin deposits,
except letters of credit, are held at securities depositories or banks. All
obligations and noncash margin deposits are marked to market on a daily
basis. OCC also haircuts, on a daily basis, the value of equity securities
and Government securities with more than one year to maturity in order to
provide a cushion against price fluctuations. Valued securities are given
margin credit at 70% of the daily exchange closing price. The margin credit
granted for the securities of any one issuer cannot exceed 10% of a Clearing
Member's daily margin requirement.
The rules of ICC provide that each Clearing Member, with respect to each
option on futures contract for which it represents the writer, and with
respect to each futures contract, is required to deposit and maintain
specified margin in the form of cash, Government securities, or bank letters
of credit.
Under the rules of OCC and ICC, bank letters of credit are required to be
irrevocable. Cash margin deposits which are held may be invested, and any
interest or gain received or loss incurred on invested funds accrues to OCC
and ICC. OCC's and ICC's margin deposits are not included in the statements
of consolidated financial condition.
The values of underlying securities, and margin deposits at December 31,
1999 for the Clearing Corporation were approximately as follows (foreign
government securities are converted to U.S. dollars using the year-end
exchange rate):
<TABLE>
- ------------------------------------------------------------------------------
<S> <C>
Underlying securities at market value $ 11,421,038,000
Valued securities at market value 36,442,617,000
Cash and temporary investments 410,889,000
Bank letters of credit 10,869,417,000
Government securities deposited as
margin (at market value at date
of deposit, which approximates
market value at December 31, 1999) 9,069,781,000
- ------------------------------------------------------------------------------
Total $ 68,213,742,000
==============================================================================
</TABLE>
Further, as of December 31, 1999, OCC had on deposit Index Option Escrow
Receipts which represent acceptable collateral on deposit with approved banks
which OCC has accepted in lieu of margin for approximately 97,000 short index
contracts. At December 31, 1999, the market value of the index option contracts
collateralized under the escrow receipts program approximated $13.6 billion.
OCC also maintains cross-margining arrangements with certain U.S. commodities
clearing organizations, including ICC. Under the terms of these arrangements, an
OCC Clearing Member that is also a Clearing Member of one or more commodities
clearing organi-
19
<PAGE>
zations participating in the cross-margining arrangement, or that has an
affiliate that is a Clearing Member of one or more such commodities clearing
organizations may maintain cross-margin accounts in which the Clearing
Member's positions in OCC-cleared options are combined, for purposes of
calculating margin requirements, with positions of the Clearing Member (or
its affiliate) in futures contracts and/or options on futures contracts.
Margin deposits on the combined positions are held jointly by OCC and the
participating commodities clearing organization(s) and are available
(together with any proceeds of the options and futures positions themselves)
to meet financial obligations of the Clearing Member(s) to OCC and the
commodities clearing organization(s). In the event that either OCC or one or
more participating commodities clearing organization(s) suffers a loss in
liquidating positions in a cross-margin account, the loss is to be shared
among OCC and the participating commodities clearing organization(s) in
accordance with their agreement. Margin deposits in respect of cross-margin
accounts may be in the form of cash, valued securities, Government securities
or bank letters of credit.
NOTE 4.
CLEARING FUND DEPOSITS
OCC and ICC maintain separate clearing funds to cover possible losses
should a Clearing Member, bank, or a securities or commodities clearing
organization default. The OCC clearing fund is available only to OCC, and the
ICC clearing fund is available only to ICC. A Clearing Member's clearing fund
deposit is based on its pro-rata share of options, futures or options on
futures activity which is recomputed monthly. Therefore, the OCC and ICC
clearing funds expand and contract in size in relation to activity in their
respective markets. The OCC and ICC clearing funds mutualize the risk of
default among all Clearing Members. The entire clearing fund is available to
cover potential losses in the event that the margin deposit and the clearing
fund deposit of a defaulting Member are inadequate or not immediately
available to fulfill that Member's outstanding financial obligations. In the
event of a default, OCC and ICC are required, in the case of an exercise of a
call option, to sell, and in the case of an exercise of a put option, to buy,
the underlying interest covered by the option at the stated exercise price.
In addition, in the event a futures contract or an option on futures contract
remains open after the close of business on the last day of trading, ICC is
required to purchase the commodity underlying the contract from the seller of
the contract and to sell the commodity underlying the contract to the
purchaser. The OCC and ICC clearing funds are available to cover the cost of
liquidating a defaulting Clearing Member's open positions or performing OCC's
or ICC's obligations in respect of positions not yet liquidated.
Clearing fund deposits must be in the form of cash or Government
securities (as defined in the By-laws), as the clearing funds are intended to
provide OCC or ICC with an immediately available pool of liquid assets.
Clearing Members may make clearing fund deposits in cash to OCC or ICC or in
an approved segregated funds account, or in Government securities to various
securities depositories or banks. Cash deposits in nonsegregated accounts may
be invested and any interest or gain received or loss incurred on invested
funds accrues to OCC or ICC. Cash in a segregated account is a demand deposit
which is held in the name of OCC or ICC, which names an individual Clearing
Member whose clearing fund obligation the deposit represents and which can
only be withdrawn by OCC or ICC. These segregated funds cannot be invested by
OCC or ICC. Clearing fund cash and securities deposits are included in the
statements of consolidated financial condition. The total amount of the
clearing funds (all foreign government securities are converted to U.S.
dollars using the year-end exchange rate) at December 31, 1999 was as follows:
<TABLE>
- ------------------------------------------------------------------------------
<S> <C>
Cash and temporary investments $ 12,474,000
Segregated funds accounts 134,825,000
Government securities, at market value 1,456,687,000
- ------------------------------------------------------------------------------
Total $ 1,603,986,000
==============================================================================
</TABLE>
The clearing funds maintained by OCC and ICC were $1,603,648,000 and
$338,000, respectively.
NOTE 5.
COMMON STOCK, STOCKHOLDERS AGREEMENT AND AGREEMENTS WITH PARTICIPANT EXCHANGES
OCC has Class A and Class B common stock, each with $10 par value, 60,000
shares authorized, 30,000 shares issued and 20,000 shares outstanding at
December 31, 1999 and 1998. Treasury stock comprises 10,000 shares of Class A
common stock and 10,000 shares of Class B common stock at a cost of $666,666.
The Class B common stock is issuable in twelve series of 5,000 shares each.
The Class B common stock is entitled to receive dividends whereas the Class A
common stock is not. Upon liquidation of OCC, holders of Class A common stock
and Class B common stock would first be paid the par value of their shares.
Next, each holder of Class B common stock would receive a distribution of
$1,000,000. Next, an amount equal to OCC's shareholders' equity at December
31, 1998, minus the distributions described above, would be distributed to
those holders who acquired their Class B common stock before December 31,
1998. Finally, any remaining shareholders' equity would be distributed
equally to all holders of Class B common stock.
The By-laws of OCC provide that any national securities exchange or
national securities association
20
<PAGE>
which meets specific requirements may become a participant by acquiring 5,000
shares of Class A common stock and 5,000 shares of Class B common stock.
The purchase price for such shares will be the aggregate book value of a
comparable number of shares at the end of the preceding calendar month, but
not more than $1,000,000.
OCC is a party to a Stockholders Agreement and a Restated Participant
Exchange Agreement with its shareholders.
The Stockholders Agreement provides that each stockholder appoints the
members of the Nominating Committee of OCC as its proxy for purposes of
voting its shares for the election of member directors, the Chairman of OCC
as the management director and members of the following year's Nominating
Committee. It also provides for the purchase by OCC of all of its stock owned
by any stockholder under specified circumstances, but the obligation to pay
the purchase price will be subordinated to OCC's obligations to creditors and
the purchase price cannot be paid if the payment would reduce capital and
surplus below $1,000,000. If OCC is required to purchase its stock from any
stockholder, the purchase price for the two years following the date the
stockholder acquired its stock is the stockholder's purchase price paid
reduced by $300,000 and, thereafter, the purchase price at the date of
purchase is the lesser of the aggregate book value of the shares or the
original purchase price paid less $240,000, $180,000, $120,000, $60,000 or
zero after the second, third, fourth, fifth or sixth year, respectively, from
the date of sale of such stock.
The Restated Participant Exchange Agreement deals with the business
relationship between and among OCC and each participant securities exchange
and securities association. Likewise, ICC is a party to a Participant
Exchange Agreement with its participant futures exchanges ("participant" or
"participants"), which deals with the business relationship between and among
ICC and each participant and among such participants.
NOTE 6.
SALE AND BUY BACK AGREEMENTS
Sale and Buy Back agreements outstanding, including amounts in margin and
clearing fund deposits, averaged $162 million and $116 million during 1999
and 1998, respectively, and the maximum amount outstanding during 1999 and
1998 was $399 million and $291 million, respectively. The amounts outstanding
approximate the market value of the underlying securities.
NOTE 7.
CLEARING FEES
The Boards of Directors set clearing fees and determine the amounts of
refunds, if any, based upon the current needs of OCC and ICC. The Boards of
Directors have determined in the years ended December 31, 1999, 1998 and 1997
that refunds and discounts of clearing fees be made to Clearing Members. Such
refunds and discounts, which have been netted against clearing fees in the
statements of consolidated income and retained earnings, amounted to
$21,566,000, $13,786,000 and $21,549,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
NOTE 8.
COMMITMENTS
Future minimum rental payments under noncancelable operating leases
(principally for office space and data processing equipment) in the aggregate
in effect as of December 31, 1999 are as follows:
<TABLE>
- ------------------------------------------------------------------------------
<S> <C>
2000 $ 4,565,000
2001 3,790,000
2002 1,042,000
2003 157,000
2004 151,000
- ------------------------------------------------------------------------------
Total $ 9,705,000
==============================================================================
</TABLE>
Rental expense for the years ended December 31, 1999, 1998 and 1997
amounted to $11,344,000, $11,558,000, and $11,433,000, respectively. Included
in rental expense for 1998 is a $680,000 charge for vacating certain office
space.
Rental income received under subleases for the years ended December 31,
1999, 1998 and 1997 amounted to $446,000, $347,000, and $251,000,
respectively.
The Clearing Corporation has employment agreements with certain of its
senior officers. The aggregate commitment for future salaries at December 31,
1999, excluding bonuses, was approximately $2.24 million.
NOTE 9.
RELATED PARTY TRANSACTIONS
Certain exchanges and their affiliates provide some operational and other
services on behalf of OCC for which expenses of approximately $109,000,
$115,000, and $110,000 were incurred for the years ended December 31, 1999,
1998 and 1997, respectively.
OCC also bills and collects transaction fees for the Chicago Board Options
Exchange, Incorporated.
21
<PAGE>
Fees billed and uncollected at December 31, 1999 and 1998 were $13,104,000
and $8,396,000, respectively, and are included in the statements of
consolidated financial condition as Exchange billing receivable and payable.
In 1992, OCC entered into a joint marketing effort with its Participant
Exchanges to form The Options Industry Council ("OIC"). The total amounts
expended by OCC on behalf of OIC for the years ended December 31, 1999, 1998
and 1997 were $4,280,000, $3,299,000, and $2,070,000, respectively. The
Participant Exchanges' share of OIC expenditures for the years ended December
31, 1999, 1998 and 1997 was $2,179,000, $1,678,000, and $992,000,
respectively. At December 31, 1999 and 1998, the amounts due from Participant
Exchanges were $1,664,872 and $985,000, respectively.
Transactions between OCC and shareholder exchanges and their affiliates
are settled by cash payments.
NOTE 10. INCOME TAXES
The provision for income taxes is reconciled to amounts determined by
applying the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income
tax at the
statutory rates $2,501,162 $2,588,278 $ 51,053
Permanent tax
differences 97,080 107,166 78,774
State income
tax effect 386,024 400,466 48,596
Tax credits -- -- (40,000)
Other -- 19,698 (4,153)
- ------------------------------------------------------------------------------
Provision for
income taxes $2,984,266 $3,115,608 $ 134,270
==============================================================================
</TABLE>
The deferred tax asset consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Compensation and
employee benefits $1,268,793 $ 639,415
Other items 108,660 196,510
- ------------------------------------------------------------------------------
Current asset 1,377,453 835,925
- ------------------------------------------------------------------------------
Accelerated depreciation 976,367 791,319
Other items -- 385,611
- ------------------------------------------------------------------------------
Long-term asset 976,367 1,176,930
- ------------------------------------------------------------------------------
Total $2,353,820 $2,012,855
==============================================================================
</TABLE>
NOTE 11.
RETIREMENT PLANS
The Clearing Corporation has a trusteed, non-contributory, qualified
retirement plan covering employees who meet specified age and service
requirements. Retirement benefits are primarily a function of both years of
service and the level of compensation during the highest consecutive five
years out of the last ten years before retirement.
The Clearing Corporation also has a funded supplemental executive
retirement plan ("SERP"). Retirement benefits are primarily a function of
both years of service and the level of compensation during the highest
nonconsecutive three years out of the last ten years before retirement.
Effective January 1, 1998, the SERP was amended to include a benefit
replacement plan ("BRP") feature for certain employees whose qualified
retirement plan benefits are limited by maximum pay and maximum benefit
limitations.
The Clearing Corporation's funding policies, subject to the minimum
funding requirements of U.S. employee benefit and tax laws, are to contribute
such amounts as are determined on an actuarial basis to provide the plans
with assets sufficient to meet the benefit obligation of the plans. During
1998, the Clearing Corporation adopted SFAS 132, Employers' Disclosures about
Pensions and Other PostretirementBenefits. The provisions of SFAS No. 132
revise employers' disclosures about pensions and other postretirement benefit
plans.
Net periodic benefit cost consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 1,225,000 $ 983,000 $ 793,000
Interest cost 1,939,000 1,603,000 1,381,000
Expected return
on assets (2,227,000) (2,002,000) (1,385,000)
Amortization:
Transition obligation 17,000 17,000 17,000
Prior service cost 38,000 217,000 133,000
Actuarial (gain)/loss 542,000 (2,000) 127,000
- ------------------------------------------------------------------------------
Net periodic
benefit cost $ 1,534,000 $ 816,000 $ 1,066,000
==============================================================================
</TABLE>
Assets and liabilities for the Retirement Plan and the SERP/BRP were
measured as of September 30, 1999. The funded status as of December 31, 1999
is the same as the funded status as of September 30, 1999.
22
<PAGE>
NOTE 11.
RETIREMENT PLANS (CONTINUED)
The plans' benefit obligation, plan assets and funded status are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Change in Benefit Obligation:
Net benefit obligation
at beginning of year $26,614,000 $20,381,000
Service cost 1,225,000 983,000
Interest cost 1,939,000 1,603,000
Plan amendments 584,000 (503,000)
Actuarial (gain)/loss (759,000) 4,397,000
Gross benefits paid (457,000) (247,000)
- ------------------------------------------------------------------------------
Net benefit obligation
at end of year $29,146,000 $26,614,000
==============================================================================
Change in Plan Assets:
Fair value of plan assets
at beginning of year $22,030,000 $19,837,000
Actual return on plan assets $ 3,654,000 121,000
Employer contributions 4,348,000 2,319,000
Gross benefits paid (457,000) (247,000)
- ------------------------------------------------------------------------------
Fair value of plan assets
at end of year $29,575,000 $22,030,000
==============================================================================
Funded Status:
Funded status at end of year $ 429,000 $(4,584,000)
Unrecognized
net actuarial loss 4,149,000 6,877,000
Unrecognized prior service cost 796,000 250,000
Unrecognized net
transition obligation 32,000 49,000
Fourth quarter contributions 1,000,000 1,863,000
- ------------------------------------------------------------------------------
Net amount recognized -
prepaid $ 6,406,000 $ 4,455,000
==============================================================================
Amounts recognized in the
statements of consolidated
financial condition
consist of:
Prepaid benefit cost $ 6,406,000 $ 4,855,000
Accrued benefit liability -- (826,000)
Intangible asset -- 426,000
- ------------------------------------------------------------------------------
Net amount recognized
prepaid $ 6,406,000 $ 4,455,000
==============================================================================
</TABLE>
The accumulated benefit obligation and fair value of plan assets for the
pension plan with accumulated benefit obligations in excess of plan assets
(SERP/ BRP) was $9,517,000 and $9,582,000; respectively, as of December 31,
1999.
The major assumptions used to determine the obligations are a 7.75%
discount rate and 4.75% future salary increases as of September 30, 1999 and
6.75% discount rate and 4.75% future salary increases as of September 30,
1998. The expected long-term return on assets was 9.5% for both 1999 and 1998.
The Clearing Corporation also maintains a defined contribution plan
qualified under Internal Revenue Code Section 401(k) for eligible employees
who elect to participate in the plan. Eligible employees may elect to have
their salaries reduced by a percentage. This amount is then paid into the
plan by the Clearing Corporation on behalf of the employee.
The Clearing Corporation will make matching contributions to the
participant's account subject to certain limitations. The Clearing
Corporation's expenses for the matching contributions to the plan for the
years ended December 31, 1999, 1998 and 1997 were $593,000, $469,000, and
$451,000, respectively.
NOTE 12.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Clearing Corporation has a Postretirement Welfare Plan covering
employees who meet specified age and service requirements. Retiree
contributions to medical payments vary by age and service at retirement. The
plan is a defined dollar benefit plan in which the Clearing Corporation's
obligation is limited to a maximum amount per participant set by the Clearing
Corporation at the time a participant retires. Effective January 1, 1998, the
plan established a 401(h) account to fund retiree welfare benefits. Benefits
for all participants, excluding key employees, will be funded through the
401(h) account, to the extent allowed under the regulations.
Net periodic benefit cost consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 170,000 $ 46,000 $ 39,000
Interest cost 187,000 68,000 63,000
Expected return
on assets (13,000) -- --
Amortization:
Transition obligation 28,000 28,000 28,000
Prior service cost 144,000 -- --
- ------------------------------------------------------------------------------
Total net periodic
benefit cost $ 516,000 $ 142,000 $ 130,000
==============================================================================
</TABLE>
Assets and liabilities for the postretirement benefit plan were measured
as of September 30, 1999. The funded status as of December 31, 1999 is the
same as the funded status as of September 30, 1999.
The plans' benefit obligation, plan assets and funded status are as follows:
23
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Change in Benefit Obligation:
Net benefit obligation
at beginning of year $ 2,220,000 $ 881,000
Service cost 170,000 46,000
Interest cost 187,000 68,000
Plan amendments 407,000 1,125,000
Actuarial (gain)/loss (367,000) 143,000
Gross benefits paid (68,000) (43,000)
- ------------------------------------------------------------------------------
Net benefit obligation
at end of year $ 2,549,000 $ 2,220,000
- ------------------------------------------------------------------------------
Change in Plan Assets:
Fair value of plan assets
at beginning of year -- --
Actual return on plan assets 17,000 --
Employer contributions 278,000 43,000
Gross benefits paid (68,000) (43,000)
- ------------------------------------------------------------------------------
Fair value of plan assets
at end of year $ 227,000 --
==============================================================================
Funded Status:
Funded status at end of year $(2,322,000)$(2,220,000)
Unrecognized net
actuarial (gain)/loss (298,000) 76,000
Unrecognized prior service cost 1,388,000 1,125,000
Unrecognized net
transition obligation 365,000 393,000
Fourth quarter contributions 236,000 223,000
- ------------------------------------------------------------------------------
Net amount recognized -
accrued $ (631,000)$ (403,000)
Amount recognized in
the statements of consolidated
financial condition consist of:
Accrued benefit liability $ (631,000)$ (403,000)
==============================================================================
</TABLE>
The assumed discount rate used in determining the accumulated postretirement
benefit obligation was 7.75% in 1999 and 6.75% in 1998.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit was 5% in 1999 decreasing by one percentage point per
year until 2001.
A one percentage point increase in the assumed health care cost trend rate
for each year would not have a material effect on the accumulated postretirement
benefit obligation or net postretirement health care cost.
NOTE 13.
CONTINGENCIES
In the normal course of business, the Clearing Corporation may be
subjected to various lawsuits and claims. At December 31, 1999, no litigation
exists which management of the Clearing Corporation believes would have a
material adverse effect on the consolidated financial statements of the
Clearing Corporation.
INDEPENDENT AUDITORS' REPORT
The Options Clearing Corporation and Subsidiaries
We have audited the accompanying statements of consolidated financial
condition of The Options Clearing Corporation and Subsidiaries (the
"Corporation") as of December 31, 1999 and 1998 and the related statements of
consolidated income and retained earnings and of consolidated cash flows for
each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Corporation
at December 31, 1999 and 1998 and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999
in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Chicago, lllinois
January 28, 2000
24
<PAGE>
ITEM 8. UNDERTAKINGS.
1. The undersigned registrant hereby undertakes to file a post-effective
amendment, not later than 120 days after the end of each fiscal year
subsequent to that covered by the financial statements presented herein,
containing financial statements meeting the requirements of Regulation S-X
and the supplementary financial information specified by Item 302 of
Regulation S-K.
2. The undersigned registrant hereby undertakes not to issue, clear, guarantee
or accept any securities registered herein until there is a definitive
options disclosure document meeting the requirements of Rule 9b-1 of the
Securities Exchange Act of 1934 with respect to the class of options.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-20 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago, State of Illinois on February 22, 2000.
<TABLE>
<S> <C> <C>
THE OPTIONS CLEARING CORPORATION
By: /s/ WAYNE P. LUTHRINGSHAUSEN
-------------------------------------------
Wayne P. Luthringshausen
CHAIRMAN AND PRINCIPAL EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities set forth below on February 22, 2000.
<TABLE>
<S> <C>
/s/ WAYNE P. LUTHRINGSHAUSEN /s/ DORCAS R. HARDY
- ------------------------------------------- -------------------------------------------
Wayne P. Luthringshausen, Dorcas R. Hardy, DIRECTOR
CHAIRMAN AND PRINCIPAL EXECUTIVE OFFICER
/s/ RALPH E. PFAFF /s/ JOHN C. HARRIS
- ------------------------------------------- -------------------------------------------
Ralph E. Pfaff, PRINCIPAL FINANCIAL AND John C. Harris, DIRECTOR
ACCOUNTING OFFICER
/s/ PHILIP D. DEFEO /s/ EDWARD J. JOYCE
- ------------------------------------------- -------------------------------------------
Philip D. DeFeo, DIRECTOR Edward J. Joyce, DIRECTOR
/s/ FREDDY ENRIQUEZ /s/ TIMOTHY R. MULLEN
- ------------------------------------------- -------------------------------------------
Freddy Enriquez, DIRECTOR Timothy R. Mullen, DIRECTOR
/s/ WAYNE W. FIELDSA /s/ MARTIN PFINSGRAFF
- ------------------------------------------- -------------------------------------------
Wayne W. Fieldsa, DIRECTOR Martin Pfinsgraff, DIRECTOR
/s/ WILLIAM C. FLOERSCH /s/ WILLIAM A. ROGERS
- ------------------------------------------- -------------------------------------------
William C. Floersch, DIRECTOR William A. Rogers, DIRECTOR
/s/ MEYER S. FRUCHER /s/ JOSEPH B. STEFANELLI
- ------------------------------------------- -------------------------------------------
Meyer S. Frucher, DIRECTOR Joseph B. Stefanelli, DIRECTOR
/s/ WILLIAM GANGI /s/ MELVIN B. TAUB
- ------------------------------------------- -------------------------------------------
William Gangi, DIRECTOR Melvin B. Taub, DIRECTOR
</TABLE>
26
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears above authorizes Wayne P.
Luthringshausen, or George S. Hender, William H. Navin or James C. Yong,
severally, to execute in the name of each such person, and file, any amendments
to this Registration Statement necessary or advisable to enable the registrant
to comply with the Securities Act of 1933, as amended, and any rules,
regulations and requirements of the Securities and Exchange Commission in
respect thereof, in connection with the registration of the securities which are
the subject hereof, which amendment may make such changes herein as any of
the above-named attorneys deems appropriate.
27
<PAGE>
EXHIBIT INDEX
The following documents are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------
<S> <C>
5 Opinion of Sidley & Austin
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Sidley & Austin (included in Exhibit 5)
23.3 Consent of Dennis W. Zank
24 Power of Attorney (included on the signature page to this
Registration Statement)
</TABLE>
28
<PAGE>
Exhibit 5
SIDLEY & AUSTIN
BANK ONE PLAZA
10 S. DEARBORN
CHICAGO, ILLINOIS 60603
February 22, 2000
The Options Clearing Corporation
440 South LaSalle Street
Chicago, Illinois 60605
Re: Registration Statement on Form S-20
-----------------------------------
Ladies and Gentlemen:
We are acting as counsel to The Options Clearing
Corporation, a Delaware corporation (the "Company"), in connection with its
filing of a Registration Statement on Form S-20 with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the
"Securities Act"), relating to the registration of 2,000,000,000 put and call
options to be issued in transactions on certain participating exchanges. In
that connection, we have examined such corporate records, certificates and
other documents and have made such other factual and legal investigations as
we have deemed necessary or appropriate to enable us to render the opinion
contained herein.
Based on the foregoing, it is our opinion that the put and
call options covered by the Registration Statement have been duly authorized
by the Company, and, when issued in accordance with the by-laws and rules of
the Company, will be binding obligations of the Company in accordance with
and subject to such by-laws and rules, except to the extent enforceability
may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer or other similar laws affecting the
enforcement of creditors' rights generally and by the effects of general
principles of equity, regardless of whether enforceability is considered a
proceeding in equity or at law.
This opinion letter is limited to the General Corporation
Law of the State of Delaware and the Securities Act.
We hereby consent to the filing of this opinion letter as
Exhibit 5 to the Registration Statement and to the reference to our Firm
under the caption "Legal Opinions and Experts" in the Registration Statement.
Very truly yours,
SIDLEY & AUSTIN
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement on Form S-20 of
The Options Clearing Corporation of our report dated January 28, 2000,
appearing in Part II hereof, and to the reference to us under the heading "Legal
Opinions and Experts" in Part II hereof.
Deloitte & Touche LLP
Chicago, Illinois
February 22, 2000
<PAGE>
Exhibit 23.3
Consent of Dennis W. Zank
The undersigned hereby consents to being named, in the
Registration Statement on Form S-20 of The Options Clearing Corporation, as
about to become a director of The Options Clearing Corporation.
Dated: February 22, 2000
/s/ Dennis W. Zank
------------------------------
Dennis W. Zank
