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LEASE LOSS ACCRUAL – It is the Company’s
policy to identify excess real estate capacity and where applicable,
accrue against such future costs. In determining the accrual, a nominal
cash flow analysis is performed, and costs related to the excess capacity
are accrued. During 2002, we incurred $8.9 million of lease loss expense
that is included on the Consolidated Statements of Operations in the
Writedown of assets and lease loss accrual line item.The majority
of this amount is related to our lease at 545 Washington Boulevard
in Jersey City, New Jersey, of approximately 266,000 square feet,
all of which is currently unoccupied. The Company engaged a real estate
broker in order to sub-lease approximately 100,000 square feet based
on an assessment of our real estate needs. In accordance with SFAS
No. 13, Accounting for Leases, the Company recorded a lease
loss accrual of $8.1 million in 2002 related to this sub-lease.The
accrual at December 31, 2002 was derived from assumptions and estimates
based on lease terms of the anticipated sub-lease agreement, which
assumed a sub-lease would have commenced in the second quarter of
2003, anticipated market prices along the Jersey City waterfront and
estimated up-front costs, including broker fees and build out allowances.
We continually monitor the market and space to assess the reasonableness
of our applicable assumptions.
For further discussion, see the section entitled “Subsequent
Events” included below in this section.
IMPAIRMENT
OF GOODWILL AND INTANGIBLE ASSETS – The useful lives
of goodwill and intangible assets are determined upon acquisition.
Intangible assets are amortized over their respective lives. Goodwill
and the useful lives of intangible assets are tested, at a minimum,
on an annual basis.
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Our goodwill of $17.5 million is related to the purchase of
our listed equities market maker, KCM, and our order routing
business of KEP. During our annual tests for impairment done
in 2002, it was determined that these assets were not impaired.
As part of our test for impairment, we considered the profitability
of the applicable reporting unit, an assessment of fair value
of the reporting unit based on various valuation methodologies,
as well as the overall market value of the Company, compared
to the Company’s book value. It was determined that no
impairment charge was necessary.
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Our intangible assets balance of $34.9 million is attributable
to our equity markets business segment and includes trading
rights and trading posts on the Chicago Board Options Exchange,
American Stock Exchange, Pacific Exchange and the Philadelphia
Stock Exchange. These assets are being amortized over their
useful lives, which have been determined to be 15 years. During
our annual tests for impairment done in 2002, it was determined
that the carrying value and the useful lives of these assets
were not impaired. |
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STRATEGIC INVESTMENTS – Investments
include ownership interests of less than 20% in financial services-related
businesses, which are accounted for under the equity method or at
fair value.The equity method of accounting is used for investments
in limited partnerships.The fair value of other investments, for which
a quoted market or dealer price is not available, is based on management’s
estimate. Among the factors considered by management in determining
the fair value of investments are the cost of the investment, terms
and liquidity, developments since the acquisition of the investment,
the sales price of recently issued securities, the financial condition
and operating results of the issuer, earnings trends and consistency
of operating cash flows, the long-term business potential of the issuer,
the quoted market price of securities with similar quality and yield
that are publicly traded, and other factors generally pertinent to
the valuation of investments. The fair value of these investments
is subject to a high degree of volatility and may be susceptible to
significant fluctuations in the near term. Strategic investments,
which include our investment in Nasdaq, are reviewed on an ongoing
basis to ensure that the valuations have not been impaired. For further
discussion, see the section entitled “Subsequent Events”
included below in this section.
MARKET-MAKING
ACTIVITIES – Securities owned and securities sold, not
yet purchased, which primarily consist of listed and OTC stocks and
listed options contracts, are carried at market value and are recorded
on a trade date basis. Market value is estimated daily using market
quotations available from major securities exchanges and dealers.
WRITEDOWN OF FIXED ASSETS – Writedowns
of fixed assets are recognized when it is determined that the carrying
amount of the fixed asset is not recoverable or has been impaired.
The amount of the writedown is determined by the difference between
the carrying amount and the fair value of the fixed asset. In determining
recoverability and impairment, an estimated fair value is obtained
through research and inquiry of the market. |
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