Filed by CBOE Holdings, Inc.

pursuant to Rule 425 under the Securities Act of 1933, as amended

 

Subject Company: CBOE Holdings, Inc.

Subject Company’s Commission File No.: 333-140574

 

On January 30, 2008, the Chicago Board Options Exchange, Incorporated issued the following information circular.

 

 

 

IC08-15

 

 

 

 

 

January 30, 2008

 

 

To:

CBOE Members

 

 

 

From:

Bradley G. Griffith

 

Chairman, Financial Planning Committee

 

 

 

 

Alan J. Dean

 

Chief Financial Officer

 

 

 

Re:

Unaudited Fourth-Quarter and Full-Year 2007 Financial Statements

 

Overview of Fourth-Quarter 2007 Financial Results

 

CBOE capped off the year with another strong quarter, reporting a 43 percent increase in total revenues to $93.0 million and a 53 percent increase in pretax earnings to $36.3 million for the fourth-quarter 2007 compared with fourth-quarter 2006.  The fourth-quarter results mark CBOE’s eighth consecutive quarter of year-over-year, double-digit gains in revenues and earnings.

 

(in thousands)

 

4Q2007

 

4Q2006

 

chg

 

% chg

 

Revenues

 

$

93,048

 

$

64,901

 

$

28,147

 

43

%

Expenses

 

$

56,717

 

$

41,188

 

$

15,529

 

38

%

Income Before Taxes

 

$

36,331

 

$

23,713

 

$

12,618

 

53

%

Operating Margin

 

39.0

%

36.5

%

 

 

 

 

Net Income

 

$

24,260

 

$

13,785

 

$

10,475

 

76

%

Contracts Traded Per Day

 

4,039

 

2,795

 

1,244

 

45

%

 

The growth in total revenues was primarily driven by higher transaction fees.  For the fourth quarter of 2007, transaction fees rose 54 percent to $72.0 million from $46.7 million in last year’s fourth quarter, fueled by robust trading volume during the quarter.  Total contracts traded for the quarter were up 47 percent to 258.5 million from 176.1 million in last year’s fourth quarter.  CBOE’s average daily volume of options contracts traded was 4.0 million contracts for the final quarter of 2007, a 45 percent increase compared with last year’s comparable average of 2.8 million contracts.  Additionally, the transaction fee per contract increased to $0.279 for the quarter from $0.265 in last year’s fourth quarter, contributing to the growth in transaction fees.  This increase reflects targeted fee changes implemented in 2007 combined with a shift in the volume mix favoring higher-margin product categories.

 



 

The other line items included in total revenues only accounted for $2.8 million of the $28.1 million increase.

 

Scalability of Operating Model Underscored by Higher Margins

 

Total expenses were $56.7 million for the fourth quarter of 2007.  This represents a $15.5 million increase from the same period in 2006, primarily driven by employee costs, outside services, royalty fees and other expenses.  Employee costs were up $3.3 million for the quarter primarily due to accrued expense for year-end incentive awards which are aligned with the company’s financial performance.  The increase in royalty fees of $1.5 million is directly related to higher volumes in licensed products.  Costs for outside services increased by $1.6 million, due to a lower percentage of consulting fees relating to software development costs being capitalized compared with last year’s fourth quarter.  The negative variance in other expenses mainly relates to the net effect of last year’s fourth quarter benefiting from a $7.1 million refund associated with prior litigation and increased reimbursement of costs for DPM linkage accounts of $1.7 million.  Excluding royalty fees, which are variable expenses correlated with volume growth, and the impact of the 2006 litigation refund, total expenses for the fourth quarter of 2007 were $49.6 million compared with $42.7 million for the same period last, representing an increase of $6.9 million, or 16 percent.

 

During the fourth quarter, CBOE continued to focus on maintaining strong expense controls, evidenced by our operating margin expansion.  CBOE’s operating margin, representing income before taxes divided by total revenues, increased to 39.0 percent for the quarter compared with 36.5 percent for the same period last year.  Our ability to expand our margins validates the scalability and operating leverage inherent in CBOE’s operating model.

 

Full-Year 2007 Financial Overview

 

In our second year of operation with a for-profit approach, CBOE made significant strides, achieving records in trading volume, total revenues and earnings.  Strong revenue growth combined with disciplined expense management resulted in a 94 percent increase in pretax earnings for the full-year 2007 compared with 2006.

 

(in thousands)

 

YTD 2007

 

YTD 2006

 

chg

 

% chg

 

Revenues

 

$

352,300

 

$

257,986

 

$

94,314

 

37

%

Expenses

 

$

212,295

 

$

185,959

 

$

26,336

 

14

%

Income Before Taxes

 

$

140,005

 

$

72,027

 

$

67,978

 

94

%

Operating Margin

 

39.7

%

27.9

%

 

 

 

 

Net Income

 

$

83,226

 

$

42,108

 

$

41,118

 

98

%

Contracts Traded Per Day

 

3,763

 

2,688

 

1,075

 

40

%

 

Total revenues were $352.3 million for the year 2007, an increase of $94.3 million, or 37 percent, from the prior year.  Mirroring the fourth-quarter results, higher transaction fees driven by record trading volume accounted for 2007’s revenue growth.  Transaction fees for the year were up $84.7 million, or 45 percent, compared with full-year 2006.  The record trading volume reached in 2007 exceeded 2006’s volume by 40 percent.  The average daily volume of contracts

 

2



 

traded for the year also increased 40 percent to 3.8 million contracts compared with 2.7 million in 2006.  Additionally, the transaction fee per contract increased to $0.287 for the year, up from $0.276 in 2006.

 

For the full-year 2007, CBOE’s operating margin increased to 39.7 percent, nearly 12 percentage points higher than the comparable prior year period, demonstrating the flexibility of our operating model and our ability to gain economies of scale.

 

Net income nearly doubled for the year, climbing to $83.2 million, an increase of $41.1 million, or 98 percent, compared with the full-year 2006.

 

Consolidated Balance Sheets

 

Working capital (current assets minus current liabilities) increased by $23.9 million to $174.0 million during the fourth quarter of 2007.  At year-end 2007, cash and investments were $185.7 million, up $29.4 million from September 30, 2007.  The growth in revenues net of cash expenses and capital expenditures drove these increases.

 

For the fourth quarter of 2007, capital expenditures were $6.0 million, the majority of which was related to systems hardware and capitalized software.  Capital expenditures for the full-year 2007 were $32.1 million, reflecting CBOE’s ongoing investment in systems upgrades.  Moving forward in 2008, CBOE expects to continue to make strategic investments in the growth of its business and functionality of its systems, spending at levels comparable with 2007.  Free cash flow, another measure of liquidity, defined as net cash provided by operating activities less capital expenditures, was $26.0 million in the fourth quarter of 2007.

 

Questions may be directed to Don Patton at 312-786-7026 or patton@cboe.com or Alan Dean at 312-786-7023 or dean@cboe.com.

 

This communication shall not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any state or jurisdiction in which an offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.

 

In connection with the proposed restructuring transaction, CBOE Holdings, Inc. (“CBOE Holdings”) has filed certain relevant materials with the United States Securities and Exchange Commission (SEC), including a registration statement on Form S-4. Members are encouraged to read the registration statement, including the proxy statement/prospectus that are a part of the registration statement, because it contains important information about the proposed transaction. Members are able to obtain a free copy of the proxy statement/prospectus, as well as the other filings containing information about CBOE Holdings and the Chicago Board Options Exchange, Incorporated (“CBOE”), without charge, at the SEC’s Web site, http://www.sec.gov, and the companies’ website, www.CBOE.com. In addition, CBOE members may obtain free copies of the proxy statement/prospectus and other documents filed by CBOE Holdings or the CBOE from CBOE Holdings by directing a request to the Office of the Secretary, CBOE Holdings, Inc., 400 South LaSalle Street, Chicago, Illinois 60605.

 

CBOE Holdings, the CBOE and their respective directors, executive officers and other employees may be deemed to be participants in the solicitation of proxies in connection with the proposed transaction. Information about the directors and executive officers of CBOE Holdings and of the CBOE is available in the prospectus/proxy statement.

 

3



 

CHICAGO BOARD OPTIONS EXCHANGE, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Quarter Ended

 

YTD

 

(In thousands)

 

12/31/2007

 

12/31/2006

 

12/31/2007

 

12/31/2006

 

REVENUES:

 

 

 

 

 

 

 

 

 

Transaction fees

 

$

72,039

 

$

46,663

 

$

270,935

 

$

186,285

 

Other member fees

 

7,189

 

5,432

 

26,468

 

22,270

 

Options Price Reporting Authority income

 

4,203

 

5,134

 

18,892

 

19,965

 

Regulatory fees

 

3,792

 

3,436

 

14,346

 

13,817

 

Investments income

 

2,310

 

1,382

 

8,031

 

4,743

 

Other

 

3,515

 

2,854

 

13,628

 

10,906

 

Total Revenues

 

93,048

 

64,901

 

352,300

 

257,986

 

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

 

Employee costs

 

23,217

 

19,941

 

83,501

 

79,782

 

Depreciation and amortization

 

6,229

 

7,129

 

25,338

 

28,189

 

Data processing

 

5,067

 

5,088

 

19,612

 

19,078

 

Outside services

 

6,414

 

4,796

 

23,374

 

20,455

 

Royalty fees

 

7,069

 

5,567

 

28,956

 

23,552

 

Travel and promotional expenses

 

2,742

 

2,087

 

9,625

 

7,209

 

Facilities costs

 

989

 

1,019

 

4,306

 

4,281

 

Net loss from investment in affiliates

 

10

 

144

 

4,546

 

878

 

Other

 

4,980

 

(4,583

)

13,038

 

2,535

 

Total Expenses

 

56,717

 

41,188

 

212,295

 

185,959

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE TAXES

 

36,331

 

23,713

 

140,005

 

72,027

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

12,071

 

9,928

 

56,779

 

29,919

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

24,260

 

$

13,785

 

$

83,226

 

$

42,108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Statistics

 

 

 

 

 

 

 

 

 

Trading Days

 

64

 

63

 

251

 

251

 

Contracts Traded

 

258,493,200

 

176,080,500

 

944,471,900

 

674,735,300

 

Contracts Per Day

 

4,039,000

 

2,795,000

 

3,763,000

 

2,688,000

 

Transaction Fees Per Contract

 

$

0.279

 

$

0.265

 

$

0.287

 

$

0.276

 

 

4



 

CHICAGO BOARD OPTIONS EXCHANGE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

Unaudited

 

Unaudited

 

 

 

Unaudited

 

(In thousands)

 

12/31/2007

 

9/30/2007

 

12/31/2006

 

9/30/2006

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and investments

 

$

181,425

 

$

155,225

 

$

102,098

 

$

92,799

 

Cash and investments – restricted

 

4,249

 

1,089

 

0

 

0

 

Other Current Assets

 

42,928

 

44,019

 

42,851

 

42,404

 

Total Current Assets

 

$

228,602

 

$

200,333

 

$

144,949

 

$

135,203

 

 

 

 

 

 

 

 

 

 

 

Investments in Affiliates/Subsidiary

 

8,104

 

8,307

 

12,830

 

10,981

 

Land

 

4,914

 

4,914

 

4,914

 

4,914

 

Property and Equipment – Net

 

64,347

 

65,971

 

59,971

 

58,931

 

Other Assets – Net

 

35,746

 

34,383

 

33,162

 

30,668

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

341,713

 

$

313,908

 

$

255,826

 

$

240,697

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES & MEMBERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Current Liabilities

 

$

54,577

 

$

50,233

 

$

50,868

 

$

49,768

 

Total Long-Term Liabilities

 

20,647

 

21,445

 

21,569

 

20,600

 

Total Members’ Equity

 

266,489

 

242,230

 

183,389

 

170,329

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Members’ Equity

 

$

341,713

 

$

313,908

 

$

255,826

 

$

240,697

 

 

5



 

CHICAGO BOARD OPTIONS EXCHANGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Quarter Ended

 

YTD

 

(In thousands)

 

12/31/2007

 

12/31/2006

 

12/31/2007

 

12/31/2006

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

 

Net Income

 

$

24,260

 

$

13,785

 

$

83,226

 

$

42,108

 

 

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash flows from operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

6,228

 

7,129

 

25,337

 

28,189

 

Impairment of investment in affiliates and other assets

 

(3,800

)

(212

)

0

 

121

 

Loss on sale of HedgeStreet, Inc. investment

 

3,607

 

0

 

3,607

 

0

 

Equity in income of NSX

 

0

 

212

 

0

 

(75

)

Equity in loss of OneChicago, LLC

 

203

 

144

 

733

 

832

 

Equity in loss of CBSX

 

0

 

0

 

206

 

0

 

Amortization of discount on investments available for sale

 

0

 

(67

)

(422

)

(67

)

Gain (net) on disposition of property

 

0

 

0

 

(203

)

0

 

Restricted funds - temp access fees (offset by def rev - net $0)

 

(3,160

)

0

 

(4,249

)

0

 

Deferred income taxes

 

(799

)

269

 

(922

)

(4,576

)

 

 

 

 

 

 

 

 

 

 

Change in assets and liabilities:

 

5,436

 

626

 

3,634

 

2,822

 

 

 

 

 

 

 

 

 

 

 

Net Cash Flows from Operating Activities

 

31,975

 

21,886

 

110,947

 

69,354

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

 

Capital and other assets expenditures

 

(5,968

)

(10,661

)

(32,095

)

(28,700

)

Purchase of investments available for sale

 

0

 

(19,511

)

0

 

(19,511

)

Sale of investments available for sale

 

0

 

0

 

20,000

 

0

 

Sale of NSX certificates of proprietary membership

 

0

 

0

 

0

 

3,000

 

Membership purchase

 

0

 

0

 

0

 

(1,360

)

HedgeStreet, Inc. investment recovery

 

193

 

0

 

193

 

0

 

HedgeStreet, Inc. investment

 

0

 

(1,800

)

0

 

(3,800

)

OneChicago, LLC investment

 

0

 

0

 

0

 

(1,215

)

CBOE Stock Exchange investment

 

0

 

(193

)

(13

)

(193

)

Net Cash Flows from Investing Activities

 

(5,775

)

(32,165

)

(11,915

)

(51,779

)

 

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

 

CBOT exercise right purchase

 

0

 

0

 

(127

)

(135

)

 

 

 

 

 

 

 

 

 

 

Net Increase in Cash and Cash Equivalents

 

26,200

 

(10,279

)

98,905

 

17,440

 

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents at Beginning of Period

 

155,225

 

92,799

 

82,520

 

65,080

 

Cash and Cash Equivalents at End of Period

 

$

181,425

 

$

82,520

 

$

181,425

 

$

82,520

 

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

11,306

 

$

8,881

 

$

56,343

 

$

35,981

 

Non-cash investing activities:

 

 

 

 

 

 

 

 

 

Sale of membership shares by OneChicago, LLC

 

0

 

0

 

0

 

4,320

 

Impact of adoption of FASB 158

 

0

 

1,270

 

0

 

1,270

 

 

6