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In December 2002, the FASB issued SFAS No. 148, Accounting
for Stock-Based Compensation – Transition and Disclosure –
an amendment of FASB Statement No. 123. This Statement amends
FASB Statement No. 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results.We adopted the disclosure provisions of SFAS No. 148 effective
December 31, 2002, and continue to follow APB 25.The adoption of this
statement did not have a material impact on our financial statements. In November 2002, the EITF reached a consensus on EITF Issue No. 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities. EITF Issue No. 02-3 precludes mark-to-market accounting for energy-trading contracts that are not derivatives pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. We adopted the provisions of this statement effective November 1, 2002.The adoption of this statement had no effect on our financial statements. In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities. FIN No. 46 requires a company to consolidate a variable interest entity (“VIE”) if the company has variable interests that give it a majority of the expected losses or a majority of the expected residual returns of the entity. Prior to FIN No. 46, VIEs were commonly referred to as SPEs. As the Company does not have any VIEs, the adoption of this statement will not have an effect on our financial statements. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our market-making and trading activities expose our capital to significant risks. These risks include, but are not limited to, absolute and relative price movements, price volatility and changes in liquidity, over which we have virtually no control. We employ automated proprietary trading and position management systems that provide real-time, online position management and inventory control. We monitor our risks by reviewing trading positions and their appropriate risk measures. We have established a system whereby transactions are monitored by senior management on a real-time basis as are individual and aggregate dollar and inventory position totals and real-time profits and losses. The management of trading positions is enhanced by review of mark-to-market valuations and position summaries on a daily basis. In the normal course of our equities market-making business, we maintain inventories of exchange-listed and OTC equity securities. The fair value of these securities at December 31, 2002 and 2001 was $130.8 million and $152.8 million, respectively, in long positions and $84.8 million and $153.6 million, respectively, in short positions. Additionally, at December 31, 2001, we had $137.5 million in long positions and $70.5 million in short positions in accounts managed by Deephaven. The potential change in fair value, using a hypothetical 10.0% decline in prices, is estimated to be a $4.6 million loss and a $6.6 million loss as of December 31, 2002 and 2001, respectively, due to the offset of losses in long positions with gains in short positions. The following table illustrates, for the period indicated, our average, highest and lowest month-end inventory at market value (based on both the aggregate and the net of the long and short positions of trading securities from our cash equities business). |
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