<PAGE>
As filed with the Securities and Exchange Commission on January 28, 2000
Registration No. 333-_____
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
___________
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
___________
CHICAGO MERCANTILE EXCHANGE INC.
(Exact name of registrant as specified in its charter)
___________
<TABLE>
<S> <C> <C>
Delaware 6231 36-4340266
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
30 South Wacker Drive
Chicago, Illinois 60606
(312) 930-1000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Craig S. Donohue, Esq.
Senior Vice President and General Counsel
30 South Wacker Drive
Chicago, Illinois 60606
(312) 930-1000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
copies to:
Richard W. Astle, Esq.
Sidley & Austin
Bank One Plaza -- 10 South Dearborn Street
Chicago, Illinois 60603
(312) 853-7270
___________
Approximate date of commencement of proposed sale to the public: As
promptly as practicable after this Registration Statement becomes effective and
the satisfaction or waiver of certain other conditions under the Agreement and
Plan of Merger described herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
<PAGE>
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
___________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Proposed Proposed
Title of Each Class Maximum Maximum Amount of
of Securities Amount to be Offering Aggregate Registration
to be Registered Registered Price Per Offering Fee(3)
Share Price(3)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A common stock, $.01 par value 25,876,600 shares (1)
- ---------------------------------------------------------------------------------------------------------------------------
Class B common stock, Series B-1, $.01 625 shares
par value
- ---------------------------------------------------------------------------------------------------------------------------
Class B common stock, Series B-2, $.01 813 shares
par value
- ---------------------------------------------------------------------------------------------------------------------------
Class B common stock, Series B-3, $.01 1,287 shares
par value
- ---------------------------------------------------------------------------------------------------------------------------
Class B common stock, Series B-4, $.01 467 shares (2)
par value
- ---------------------------------------------------------------------------------------------------------------------------
Class B common stock, Series B-5, $.01 2,140 shares
par value
- ---------------------------------------------------------------------------------------------------------------------------
Total.................................... $877,944,250 $231,777.28
===========================================================================================================================
</TABLE>
(1) Includes up to 21,400 shares of Class A common stock which may be issued
upon the conversion of the Class B common stock, Series B-5.
(2) Includes up to 214 shares of Class B common stock, Series B-4 which may be
issued upon the conversion of the Class B common stock, Series B-5.
(3) Estimated solely for purposes of calculating the registration fee under
Rule 457(f)(1). The securities to be registered are to be offered in
connection with a series of proposed mergers in which such securities would
be issued in exchange for existing membership interests in Chicago
Mercantile Exchange, an Illinois not-for-profit corporation. Such
membership interests have an aggregate market value equal to $877,944,250,
determined as provided by Rule 457(c) based upon the average of the bid and
asked price as of January 24, 2000. The registration fee in respect of
shares of Class A common stock and Class B common stock, Series B-4 to be
issued upon the conversion of shares of the Class B common stock, Series B-
5 was calculated pursuant to Rule 457(i). No additional consideration is
receivable upon such conversion.
___________
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.
================================================================================
<PAGE>
[Graphic: CME logo appears here.]
CHICAGO MERCANTILE EXCHANGE
CHICAGO MERCANTILE EXCHANGE
30 SOUTH WACKER DRIVE
CHICAGO, ILLINOIS 60606
February ___, 2000
Dear Member:
I would like to invite you to attend a special members meeting on
___________, March ___, 2000, at ____ p.m., Central Standard Time, at 30 South
Wacker Drive, Chicago, Illinois 60606 at which we will consider a fundamental
change in the structure of our organization. Specifically, we are seeking to
"demutualize" our organization by changing from a not-for-profit membership
corporation to a for-profit stock corporation. This demutualization would be
accomplished through a two-step merger with corporations we have formed for this
purpose. We are seeking your approval of this proposed demutualization. Only
members who own seats at the close of business on __________, 2000 will be
entitled to vote on the demutualization at the special meeting.
Your Board of Directors has unanimously approved the proposed
demutualization and unanimously recommends that you vote for its approval. The
Board believes that the proposed demutualization will better position us to
compete in the rapidly changing and consolidating financial services industry.
We will have greater organizational flexibility and will be able to raise
additional equity capital, if needed. We will be better positioned to grow and
to continue to provide high quality products and services to all of our
customers.
Please review the attached document which provides important information
regarding the proposed demutualization. You should consider the matters
discussed under "Risk Factors" commencing on page 10 of the attached document.
Sincerely,
Scott Gordon
Chairman of the Board
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY.
<PAGE>
[Graphic: CME logo appears here.]
CHICAGO MERCANTILE EXCHANGE
CHICAGO MERCANTILE EXCHANGE
30 SOUTH WACKER DRIVE
CHICAGO, ILLINOIS 60606
NOTICE OF SPECIAL MEMBERS MEETING TO BE HELD ON MARCH ____, 2000
To the Members of the Chicago Mercantile Exchange:
We will hold a special meeting of the members of the Chicago Mercantile
Exchange on ____________, March _____, 2000 at _____ p.m., Central Standard
Time, at 30 South Wacker Drive, Chicago, Illinois 60606, to consider and vote on
an agreement and plan of merger whereby we would become a Delaware stock
corporation by merging into a Delaware nonstock corporation and then merging
into a Delaware stock corporation. We will not transact any other business at
the special meeting.
Only members owning memberships at the close of business on ______________,
2000, the record date for the special meeting, are entitled to notice of, and to
vote at, the special meeting and any adjournments or postponements of it. The
merger agreement requires approval by the affirmative vote of two-thirds of the
votes present and voted, either in person or by proxy, at the special meeting.
For more information about the demutualization, please review the attached
document. The merger agreement is attached as Exhibit B.
Whether or not you plan to attend the special meeting, please complete,
sign and date the enclosed proxy and return it promptly in the enclosed postage-
paid envelope. The giving of such proxy does not affect your right to vote in
person in the event that you attend the special meeting. In the absence of
specific direction, proxies will be voted "FOR" approval of the merger
agreement. Proxies that are marked both "FOR" and "AGAINST" will not count and
will not be treated as votes cast. Unsigned proxies will not be counted. Proxies
must be received at the Chicago Mercantile Exchange, Membership Department, 30
South Wacker Drive, Chicago, Illinois 60606 by 5:00 p.m. on ________, 2000 in
order to be voted at the special meeting.
Your Board of Directors has carefully considered the proposed
demutualization and unanimously recommends that you vote "FOR" its approval.
By Order of the Board of Directors,
Craig S. Donohue
Senior Vice President and General Counsel
February ___, 2000
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting an offer to buy +
+these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION,
DATED JANUARY 28, 2000
Proxy Statement
for
Chicago Mercantile Exchange
Prospectus
for
Chicago Mercantile Exchange Inc.
This proxy statement is considered to be a prospectus with respect to the
shares of Chicago Mercantile Exchange Inc. that will be issued if the proposed
demutualization is approved and completed.
If the demutualization proposal is approved and completed, up to 25,876,600
shares of Class A common stock and up to 5,332 shares of Class B common stock of
Chicago Mercantile Exchange Inc. will be issued to the members of the Chicago
Mercantile Exchange in exchange for their membership interests. Shares of Class
B common stock will be issued in series corresponding to the present membership
interests in the Exchange. Each series will contain the traditional features of
common stock and will confer the trading privileges associated with the
membership interests that are converted into that series of shares. Shares of
Class A common stock will be issued to CME, IMM and IOM members only and will
contain only the traditional features of common stock. Additional information
regarding the capital stock of Chicago Mercantile Exchange Inc. is provided in
this document under "Description of Capital Stock of New CME."
This document describes our business and what it means to be a stockholder
in a Delaware stock corporation. IT ALSO DESCRIBES, UNDER "RISK FACTORS" ON PAGE
10, THE RISKS ASSOCIATED WITH THE PROPOSED DEMUTUALIZATION AND OUR BUSINESS.
PLEASE READ THIS INFORMATION.
The Securities and Exchange Commission and state securities
regulators have not approved or disapproved these securities, or determined if
this Proxy Statement/Prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
This Proxy Statement/Prospectus and the form of proxy were first mailed to
members on or about February ____, 2000.
The date of this Proxy Statement/Prospectus is February ___, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INTRODUCTION......................................................................................... 1
WHERE YOU CAN FIND MORE INFORMATION.................................................................. 2
QUESTIONS AND ANSWERS REGARDING THE DEMUTUALIZATION PROPOSAL......................................... 3
SUMMARY OF DEMUTUALIZATION PROPOSAL.................................................................. 5
RISK FACTORS......................................................................................... 10
Risks Related to Demutualization.................................................................. 10
Risks Related to Our Business..................................................................... 13
Risks Related to Regulation and Litigation........................................................ 16
DEMUTUALIZATION PROPOSAL............................................................................. 17
Reasons for Demutualization....................................................................... 18
Description of Demutualization Transaction........................................................ 19
Rights of Class B Common Stock.................................................................... 21
Differences in Ownership Rights................................................................... 24
Required Regulatory Approvals..................................................................... 25
Amendment or Termination.......................................................................... 25
Conditions to Effectiveness of the Demutualization Transactions................................... 26
Effectiveness of the Demutualization Transactions................................................. 26
Federal Income Tax Consequences................................................................... 26
Required Vote; Record Date; Available Votes....................................................... 27
Recommendation to Members......................................................................... 27
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS...................................... 28
CAPITALIZATION....................................................................................... 32
DESCRIPTION OF CAPITAL STOCK OF NEW CME.............................................................. 32
Description of Class A Common Stock............................................................... 32
Description of Class B Common Stock............................................................... 33
Preferred Stock................................................................................... 34
Transfer Restrictions............................................................................. 34
Other Charter Provisions.......................................................................... 35
Transfer Agent.................................................................................... 36
MANAGEMENT........................................................................................... 36
Board of Directors................................................................................ 36
Director Compensation............................................................................. 41
Committees of the Board of Directors.............................................................. 42
Executive Officers................................................................................ 42
Executive Compensation............................................................................ 43
Employee Benefit Plans............................................................................ 44
Employment-Related Agreements..................................................................... 46
Beneficial Ownership of Management................................................................ 48
BUSINESS............................................................................................. 49
Products.......................................................................................... 51
Execution Facilities.............................................................................. 55
Clearing.......................................................................................... 58
Market Data....................................................................................... 60
International Alliances........................................................................... 61
Marketing Programs and Advertising................................................................ 61
Competition....................................................................................... 61
Our Members....................................................................................... 62
Other Business Relationships And Subsidiaries..................................................... 64
Intellectual Property............................................................................. 64
Employees......................................................................................... 64
Facilities........................................................................................ 64
Legal Proceedings................................................................................. 64
Regulation........................................................................................ 65
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.................................................................................... 66
Historical Overview............................................................................... 66
Results of Operations............................................................................. 69
Liquidity and Capital Resources................................................................... 72
Accounting Standards.............................................................................. 72
EXPERTS.............................................................................................. 72
VALIDITY OF SECURITIES............................................................................... 73
Exhibits
</TABLE>
<PAGE>
[Graphic: CME logo appears here.]
CHICAGO MERCANTILE EXCHANGE
CHICAGO MERCANTILE EXCHANGE
30 SOUTH WACKER DRIVE
CHICAGO, ILLINOIS 60606
INTRODUCTION
We are providing this document to you as part of a solicitation by our
Board of Directors of proxies to be used at a special membership meeting. The
meeting will be held on _________, March ___, 2000 at ___ p.m., Central Standard
Time, at 30 South Wacker Drive, Chicago, Illinois 60606. The purpose of the
meeting is to consider and vote upon an agreement and plan of merger whereby our
company, Chicago Mercantile Exchange ("Exchange"), would change its corporate
structure from that of a member-owned Illinois not-for-profit corporation to a
stockholder-owned Delaware for-profit corporation ("New CME"). We have referred
to that change as a "demutualization" in this document.
You will find a description of the proposed demutualization in the
following pages. In the forepart, we have provided some answers to some of the
questions we believe you may have regarding the proposal as well as a summary of
the proposal. Additional information is provided in the body of this document,
and we encourage you to read it before casting your vote.
Eligibility to Vote; Available Votes; Quorum Required for Meeting
You are eligible to vote on the demutualization proposal only if you owned
a membership at the close of business on _________________, 2000, the record
date for the special meeting. On that date, we had 3,192 memberships, consisting
of 625 CME memberships, 813 IMM memberships, 1,287 IOM memberships, and 467 GEM
memberships (including currently outstanding GEM fractional membership interests
that have not been combined into full GEM memberships). Under our rules, CME
members will have six votes for each CME membership owned, IMM members will have
two votes for each IMM membership owned, IOM members will have one vote for each
IOM membership owned, GEM members will have one-sixth vote for each full GEM
membership owned, and owners of GEM fractional membership interests will have
one-sixtieth vote for each GEM fractional membership interest owned. The
presence in person or by proxy of members holding a majority of the votes
entitled to be cast on the demutualization proposal shall constitute a quorum
for the consideration of the proposal at the meeting.
Manner of Voting; Required Vote
You may vote on the proposal by attending, in person or by proxy, the
special meeting and registering your vote. You may also complete the enclosed
proxy to register your vote on the proposal. You may revoke your proxy at any
time before it is voted at the meeting. You may revoke it in any of three ways:
<PAGE>
. By sending written notice to Ms. Nancy Wendt, Senior Director, CME
Membership Department, 30 South Wacker Drive, Chicago Illinois 60606;
. By signing a later dated proxy; or
. By attending the meeting and voting in person.
Attendance at the meeting will not automatically revoke your proxy. All
membership interests represented by properly executed and unrevoked proxies
received in the accompanying form in time for the meeting will be voted at the
meeting or at any adjournment thereof.
You may mark your proxy to vote for the demutualization proposal, to vote
against the proposal or to abstain from voting on the matter. In the absence of
specific direction, the membership interests represented by an executed proxy
will be voted at the meeting FOR approval of the demutualization proposal.
Proxies marked to abstain from voting on the proposal will have the legal effect
of voting against approval of the proposal.
The proposal will require the affirmative vote of at least two-thirds of
the votes present and voted either in person or by proxy.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE
FOR THE DEMUTUALIZATION PROPOSAL.
Methods of Solicitation of Proxies; Costs
The cost of soliciting proxies will be borne by the Exchange. In addition
to solicitation by mail, our directors, officers and employees may solicit
proxies in person or by telephone.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4 with respect to the common stock offered in this document.
This document, which constitutes a part of the registration statement, does not
contain all the information in the registration statement or the exhibits and
schedules that are part of the registration statement. For further information
with respect to New CME and its common stock, please see the registration
statement and the exhibits and schedules that are part of the registration
statement. You may read and copy this document and any subsequent documents we
file at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about
the Public Reference Room. Our SEC filings are also available to the public
from the SEC's Web site at http://www.sec.gov.
Because of the offering, we will become subject to the information
requirements of the Securities Exchange Act. We will fulfill our obligations
with respect to such requirements by filing periodic reports, proxy statements
and other information with the SEC. Such reports, proxy statements and
information may be inspected and copied at the Public Reference Room referred to
above. We intend to furnish holders of our common stock with annual reports that
include annual consolidated financial statements audited by an independent
certified public accounting firm and quarterly reports for the first three
quarters of each fiscal year containing unaudited interim financial information.
2
<PAGE>
QUESTIONS AND ANSWERS REGARDING THE DEMUTUALIZATION PROPOSAL
What is the demutualization proposal?
It is a proposal to convert the Exchange from an Illinois not-for-profit
membership corporation to a Delaware for-profit stockholder corporation.
How will the demutualization be accomplished?
By merging the existing not-for-profit corporation into an intermediate Delaware
nonstock corporation, and then merging that corporation into the final Delaware
stock corporation. The two steps are required because Illinois law does not
allow the direct merger of a not-for-profit corporation into a stock
corporation. These steps are shown in a diagram on page 5.
What happens to my membership interest in the Exchange?
It will be converted into stock of the Delaware corporation. All members will
receive shares of Class B common stock, which will be divided into series
corresponding to the existing membership categories and embodying the trading
privileges of those categories. For example, an IMM member would receive one
share of Class B Common Stock, Series B-2, which would embody the IMM membership
trading privileges. CME, IMM and IOM members will also receive shares of Class
A common stock, which will contain the traditional features of common stock.
These conversions are shown in a diagram on pages 5 to 6.
Will the shares I receive be listed on any exchange?
No. However, the Board of New CME may choose to do so in the future.
Will there be any restrictions on the transfer of the shares that I receive?
Yes. Class B shares will be subject to the same transfer process as applies to
your current membership interest. Class A shares will be subject to transfer
restrictions, which will fall away over time. For the first six months, the
shares may only be transferred with the associated Class B shares. Each three
months thereafter, a portion of the shares (in 25% increments) will become
transferable. After fifteen months, the shares would not be subject to the
transfer restrictions.
Is there any market for shares of the Delaware corporation?
None presently exists. We expect a market for the Class B shares will exist
that is similar to the existing market for membership interests. We expect
that, over time, a market for Class A shares will develop. It is expected that
the existing markets for CME, IMM, IOM and GEM membership interests, and for GEM
fractional membership interests, will facilitate the development of new markets
for each series of Class B shares. We will undertake educational and
promotional efforts to communicate the value of Class A shares to holders of
such shares and to potential investors.
Will there be any change in the existing ownership of the Exchange as a result
of the demutualization?
No. Immediately following the mergers, only the members of the Exchange will own
shares of the Delaware corporation.
What other changes can I expect?
As part of the demutualization, the Board's size and role is being changed. It
will be reduced from 39 to 19 members over a transition period ending in
December 2001. It is also expected that the Board will be less actively
involved in the day-to-day operations of the Exchange, and that management will
assume greater responsibility for such operations.
There are also differences that will result from the fact that we will become a
stockholder-owned corporation as opposed to a membership-owned not-for-profit
corporation. These differences are described below in this document.
Why are we doing this?
Your Board believes that the change in our structure resulting from
demutualization will accomplish the following objectives:
. Improve our governance and managerial structure to facilitate more
accelerated decision-making
. Change our financial decision-making model to emphasize stockholder value
. Create a catalyst for pursuing new business strategies
3
<PAGE>
. Unlock members' equity values by allowing them to sell a portion of their
interest in the Exchange, should they so desire
. Provide a signal and currency for working with strategic partners
What am I being asked to vote on?
The first step of the demutualization transaction-the agreement and plan of
merger whereby the Exchange will be merged into an intermediate nonstock
corporation. The second step, whereby the nonstock corporation will be merged
into the final for-profit stock corporation and complete the demutualization,
will follow as a result of the approval of the first step.
What vote is required to approve the demutualization?
The affirmative vote of at least two-thirds of the votes present and voted,
either in person or by proxy, is required to approve the demutualization
transaction. Under our rules, members will have weighted voting on the
proposal: CME members will have six votes for each membership owned, IMM
members will have two votes for each membership owned, IOM members will have one
vote for each membership owned, and GEM members will have one-sixth vote for
each full membership owned and one-sixtieth vote for each GEM fractional
membership interest owned.
If approved, what conditions are there to the completion of the
demutualization?
. Receipt of a favorable ruling from the Internal Revenue Service confirming
the federal income tax consequences of the demutualization to our members
. Purchase of the assets and business of P-M-T Limited Partnership by the
Exchange for cash
. Approval of certain changes to our rules by the Commodity Futures Trading
Commission.
If approved, when would the demutualization be completed?
Sometime during mid-2000, after the conditions have been satisfied.
Who can answer any further questions I may have?
, who can be
- ---------------------------------------------------------------
reached at (312) 930- .
----
4
<PAGE>
SUMMARY OF DEMUTUALIZATION PROPOSAL
You should read this summary together with this entire document, including the
more detailed information in our financial statements and accompanying notes
appearing elsewhere in this document.
Proposed Mergers
We are proposing to convert the Chicago Mercantile Exchange from an Illinois
not-for-profit membership corporation into a Delaware for-profit stockholder
corporation. As a result, you would become a stockholder of New CME.
The demutualization would be effected in a two-step process. First, our
existing corporation would be merged into an intermediate Delaware nonstock
membership corporation, which we have formed called "CME Transitory Co."
Second, CME Transitory Co. would be merged into a Delaware stock corporation.
These steps are depicted in the following chart.
[Graphic: Three rectangular boxes aligned from left to right, with an arrow
silhouette pointing from the first to the second box and pointing from the
second to the third box. Inscribed in the first box is "Chicago Mercantile
Exchange (Illinois not-for-profit corporation)", inscribed in the second is "CME
Transitory Co. (Delaware nonstock corporation)", and inscribed in the third is
"Chicago Mercantile Exchange Inc. (Delaware stock corporation)" The phrase
"Membership Interests for Membership Interests" appears below the first arrow
and the phrase "Membership Interests for series of Class B shares and, in the
case of CME, IMM and IOM members, Class A shares" appears below the second
arrow.]
Immediately after the demutualization is completed, Exchange members will be
the only stockholders of New CME.
Conversion of Membership Interests into Shares of Stock
As a result of the demutualization, membership interests in the Exchange will
be converted into shares of Class B common stock in the Delaware stock
corporation and, in the cases of the CME, IMM and IOM membership interests,
shares of Class A common stock. Class B shares will be issued in several
series. Each series will contain the traditional features of common stock and
also will confer the trading privileges associated with the membership interest
that was converted into that series. Class A shares will represent traditional
common stock. These conversions are illustrated below:
[Graphic: Box appears here containing words "CME Membership Interest". To
the immediate right of the box, two arrow silhouettes point from left to right
each toward a rectangle whose length is approximately ten times its width.
Inscribed in the top rectangle is "16,200 shares of Class A common stock" and in
the bottom rectangle is "One share of Class B common stock, series B-1". The
same flow chart is repeated immediately two more times. In the second chart,
inscribed in the left box is "IMM Membership Interest", inscribed in the top
right rectangle is "10,800 shares of Class A common stock" and inscribed in the
bottom rectangle is "One share of Class B common stock, series B-2". In the
third chart, inscribed in the left box is "IOM Membership Interest", inscribed
in the top right rectangle is "5,400 shares of Class A common stock" and
inscribed in the bottom rectangle is "One share of Class B common stock, series
B-3". Immediately below the above-described flow charts, the chart is modified
and repeated twice. Only one arrow silhouette points from the box on the left
to a single rectangle whose length is ten times its width. In the first
modified chart, inscribed in the box is "GEM Membership Interest" and inscribed
in the rectangle is "One share of Class B common stock, series B-4". In the
second modified chart, inscribed in the box is "GEM Fractional Membership
Interest" and inscribed in the rectangle is "One share of Class B common stock,
series B-5".]
Description of Shares of Class B Common Stock to be Received
Shares of Class B common stock will be issued in four series corresponding to
the existing membership divisions of the Exchange, with a fifth series for the
GEM fractional membership interests that are outstanding. Shares of series B-1,
B-2, B-3, B-4 and B-5 will confer the trading rights of the associated
membership divisions
5
<PAGE>
and voting rights with respect to proposed changes in those rights.
Specifically, holders of such shares will have the right to approve, pursuant to
a 6-2-1-1/6th-1/60th weighted vote, proposed changes to the following "core"
rights before such changes may become effective:
. current divisional product allocation rules applicable to each series of
Class B shares;
. current floor access rights and privileges, including commitments to
maintain open outcry markets under specified circumstances;
. the number of authorized and issued shares of any series of Class B
shares; and
. eligibility requirements for an individual or entity to hold any shares
of any series of Class B shares or to exercise the trading rights or
privileges inherent in any series of Class B shares
Following a transition period, holders of series B-1, B-2 and B-3 shares
also will have the right, as separate series, to elect a total of six members to
New CME's Board of Directors. Such holders and holders of series B-4 and B-5
shares will have the right to vote with the holders of the Class A shares in the
election of the remaining thirteen members of New CME's Board of Directors.
The fifth series (series B-5), relating to the GEM fractional membership
interests, has a short life corresponding to the current requirement that such
fractional membership interests must be combined into full membership interests
on or before November 3, 2000. Such shares are convertible at the option of
their holders into series B-4 shares, representing a full GEM membership
interest, at the ratio of ten series B-5 shares for one series B-4 share. Any
series B-5 shares not converted by their holders on or before November 3, 2000
would be mandatorily converted into Class A shares at the close of business on
November 3, 2000.
Differences in Ownership Rights
If the demutualization is completed, you will become a stockholder in a
Delaware corporation as opposed to a member in an Illinois not-for-profit
corporation. There are certain differences in your ownership rights that will
result from this change in structure that you should consider.
Some of these differences arise from differences between the corporate law
applicable to Illinois not-for-profit corporations versus Delaware stock
corporations. These differences include:
. Stockholder vote required to approve charter amendments or major
corporate transactions, such as a merger, a sale of all of the corporate
assets, or a dissolution
. Illinois: two-thirds of the votes present and voted
. Delaware: a majority of the outstanding voting shares
. Right of holders of a class or series of stock to approve changes to the
charter that adversely affect their rights even though the charter does
not expressly grant an approval right
. Illinois: no such right
. Delaware: right conferred by statute
. Right of stockholders to dissent from a proposed merger or sale of all
of the corporate assets and to seek a cash payment for the appraised
value for their shares
. Illinois: no such right
. Delaware: procedure established by statute
. Ability of stockholders to receive dividends from present or accumulated
earnings if, and when, declared by the Board
. Illinois: not allowed
. Delaware: allowed
. Ability, by charter provision, to limit the personal liability of
directors for breaches of fiduciary duties to the corporation
. Illinois: not allowed
. Delaware: allowed
6
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Some of these differences arise from choices that we have made in drafting
the charter and by-laws for New CME. These differences include:
. We have reduced the size of the Board from 39 to 19 members (following a
transition period ending in December 2001).
. We have eliminated the referendum process whereby members could overturn
Board approved rule changes. Instead, New CME's charter grants Class B
stockholders the right to approve changes to "core" rights before such
changes can become effective.
. We have inserted into the charter several provisions which may have the
effect of encouraging persons considering unsolicited tender offers or
other unilateral takeover proposals to negotiate with the Board. These
provisions include:
. A prohibition against stockholder action by nonunanimous written
consent
. A restriction on who may call special meetings of stockholders
. An advance notice requirement for persons other than the Board who
intend to present proposals for approval at stockholder meetings
. A restriction that directors may only be removed for cause by the
holders of two-thirds of the voting power of the outstanding shares
. Provisions that empower the Board to create certain rights to
purchase securities, or to take certain actions, designed to
encourage potential acquirers of the company to negotiate with the
Board
. We have changed the relative amounts payable to members in the event
that New CME is liquidated and dissolved. We have chosen to distribute
such amounts to stockholders on a Class A share equivalent basis. Under
the existing provisions, such amounts would be distributed on the basis
of the relative capital contributions made by the members.
Risk Factors
There are certain risks associated with the proposed demutualization that
you should consider. These and other risks are discussed under "RISK FACTORS"
below. These risks include our ability to implement in a timely and successful
manner changes to our organizational and managerial structure that are required
in order to operate in a manner that will enhance stockholder value. Although
the Exchange has a long history of operating a successful member-owned
institution, changes will be required in the manner in which activities are
evaluated and undertaken.
Conditions to Demutualization
The completion of the demutualization is subject to:
. Receipt of a favorable ruling from the Internal Revenue Service
regarding the federal income tax consequences to our members and the
Exchange of the contemplated transactions. The ruling request was filed
December 30, 1999.
. Completion of the cash purchase by the Exchange of the assets and
business of P-M-T Limited Partnership, which requires the approval of
the holders of two-thirds of the Class A partnership units of such
partnership (excluding units held by the Exchange)
. Approval by the Commodity Futures Trading Commission of certain changes
to our rules to reflect the demutualization. These approvals will be
sought after the special meeting of members.
Federal Income Tax Consequences
We are seeking a ruling from the Internal Revenue Service to the effect
that, for federal income tax purposes, you will not recognize any gain or loss
strictly as a result of receiving Class A common stock and Class B common stock
(or Class B common stock only for holders of GEM memberships or GEM fractional
membership interests) in exchange for your membership interest. Assuming such
nonrecognition treatment, the tax basis in your
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<PAGE>
membership interest would carryover to the stock received in exchange. If you
received both Class A common stock and Class B common stock, your membership
basis would be allocated between the two classes in proportion to the relative
fair market values of those shares at the time of the demutualization.
Vote Required; Available Votes
The affirmative vote of at least two-thirds of the votes present and voted
at the special meeting, either in person or by proxy, is required to approve the
demutualization. Under our rules, members will have weighted voting on the
proposal: CME members will have six votes for each membership owned, IMM members
will have two votes for each membership owned, IOM members will have one vote
for each membership owned, and GEM members will have one-sixth vote for each
full membership owned and one-sixtieth vote for each GEM fractional membership
interest owned. Directors and officers of the Exchange hold memberships
entitling them to cast an aggregate of 143.63 votes on the proposal,
representing 2.13 percent of the total membership votes that may be cast.
Board Recommendation
Your Board unanimously recommends that you vote FOR the demutualization.
The Exchange
Founded in 1898, the Exchange is one of the world's leading exchanges for
the trading of futures and options on futures contracts. We operate traditional
open outcry auction markets and an electronic trading system -- now known as
GLOBEX //2//. We also match, clear, settle and guarantee all transactions
executed on the Exchange through the CME Clearing House, and we engage in
extensive regulatory, compliance, market surveillance and financial supervision
activities designed to ensure market integrity and provide financial safeguards
for users of our markets. Our offices are located at 30 South Wacker Drive,
Chicago, Illinois 60606, and our telephone number is (312) 930-1000.
Selected Consolidated Financial Information
Selected consolidated financial data is set forth below. The data for the
nine months ended September 30, 1999 and 1998 are derived from the unaudited
consolidated financial statements of the Exchange which, in the opinion of
management, have been prepared on the same basis as the audited financial
statements and include all normal and recurring adjustments necessary for a fair
presentation of the information set forth therein. The data for the five years
ended December 31, 1998 are derived from the audited consolidated financial
statements of the Exchange. The results for the nine months ended September 30,
1999 are not necessarily indicative of future results. This data should be read
in conjunction with the audited consolidated financial statements of the
Exchange and notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included toward the end of this
document.
8
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Selected Consolidated Financial Data
(Amounts in thousands)
<TABLE>
<CAPTION>
As of or for the
Nine Months
As of or for the Ended
Year Ended December 31, September 30,
---------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Total revenues $160,695 $164,459 $164,212 $177,226 $194,709 $158,529 $158,490
Operating expenses 142,351 149,689 151,803 158,168 180,516 129,150 147,633
Other income (1) 24,216 - 15,717 - - - -
Limited partners' interest in earnings
of P-M-T - - - - 2,849 1,957 1,201
Net income 24,160 8,631 15,068 8,667 7,029 16,453 5,794
Balance Sheet Data :
Total Assets 193,625 199,733 193,625 424,971 280,136 386,166
Current assets 114,523 113,492 160,286 346,320 192,273 268,508
Current liabilities 64,220 56,877 82,729 256,449 97,245 193,586
Long-term obligations and limited
partners' interest in P-M-T 6,276 7,845 9,539 8,968 15,994 20,575
Members' equity 124,832 134,108 150,631 159,554 166,897 172,005
Other Data:
Total trading volume (round turn trades) 205,330 181,806 177,042 200,742 226,619 170,470 156,132
GLOBEX volume 1,044 1,326 2,018 4,388 9,744 6,948 11,348
Open interest at period-end 5,370 5,254 5,361 6,479 7,282 8,770 6,769
</TABLE>
(1) Consists of a one-time gain in 1994 from the liquidation of a real estate
limited partnership and the 1996 return of contributions and interest from the
CME Trust.
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RISK FACTORS
If the demutualization proposal is approved and the related transactions
are effected, your existing membership interest will be converted into shares of
New CME. Although New CME will succeed to our existing business, demutualization
will change our business model from a membership-owned non-stock organization to
an investor-owned stock corporation. We expect that this change in form will
have a significant impact on us and on the risks of owning us. Whether or not we
demutualize, our industry is rapidly evolving; competitive and regulatory
factors may influence our ability to maintain or expand our current business.
You should carefully consider the following risk factors, together with the
other information in this document, before casting your vote or executing your
proxy.
Risks Related to Demutualization
. We have always operated as a not-for-profit enterprise and have no operating
history as a for-profit enterprise.
If the demutualization proposal is approved and the related transactions
are completed, we will convert from our present not-for-profit membership
structure to a for-profit corporation. We have no operating history as a for-
profit corporation upon which to evaluate our ability to operate as a for-
profit entity. For this reason, we will be subject to risks, expenses and
difficulties associated with changing and implementing our business model that
are not typically encountered by established for-profit companies.
. Our Board's role and size will be changing significantly over the next two
years, diminishing the number of directors elected by the Class B stockholders
and potentially delaying the implementation of necessary changes.
Our Board has been actively involved in the day-to-day functioning of our
business. If the demutualization proposal is effectuated, our Board will
become less involved in such day-to-day operations and the management of New
CME will assume greater responsibility. Our Board will also be reduced from
thirty-nine members to nineteen members in approximately two years. Following
the two-stage reduction, only six out of nineteen directors will be elected
solely by the Class B stockholders. The changing roles and the long
transition period could produce delays in implementing changes in procedures
and authority needed to operate a for-profit enterprise in an efficient and
responsive manner.
. Our governance and management structures will be reorganized and we will
depend on new managers and staff, many of whom have not been tested running a
for-profit exchange.
Our future success depends, in significant part, on our new chief executive
officer and on his ability to utilize new and existing management and staff in
the context of a for-profit corporation. Our success also depends on their
ability to successfully operate an exchange and, in particular, an exchange
that is transitioning to a for-profit structure. We can provide no assurance
that our CEO, other members of management, and our employees, will be
successful. The new CEO may desire or need to recruit additional management
or staff. We can provide no assurance that we can successfully recruit these
persons.
. Changes in our operating structure may impact the influence of members.
We are currently served by a large number of member-dominated committees.
Our professional staff provides support to these committees but members
generally retain decision-making authority. This structure will change
because of demutualization. Many of these committees will be eliminated or
converted into advisory bodies. The membership of some committees may also
change. Our professional staff will be given greater decision-making
responsibilities. Management will generally make decisions designed to
enhance stockholder value, which may lead to decisions or outcomes that differ
from the decisions and outcomes that were made by our current Board and
committees. These changes may make us less attractive to our current members
and clearing members and encourage them to conduct their business at, or seek
membership in, another exchange. A loss or material diminishment of member
trading activity could negatively impact liquidity and trading volumes in our
products. A loss or material reduction in the number of our clearing
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<PAGE>
member firms and the capital they provide to guarantee their trades and the
trades of their customers could diminish the strength and attractiveness of
our Clearing House and our markets.
. There has not been any prior public market for our shares.
Prior to the effectiveness of the demutualization, there will be no holders
of capital stock of New CME other than us. There is no current market for
such capital stock. Further, because we are not offering any shares to
outside investors, we have not undertaken the traditional marketing activities
associated with bringing a company to the public markets. We do not expect to
list our shares on an exchange in the near future. We do not know whether
third parties will find our shares to be attractive or whether firms will be
interested in making a market in our stock. Consequently, we cannot assure
you that a trading market will develop or, if it develops, how strong it may
be.
. We can give no assurance that an orderly market in our common stock will
develop.
We have adopted transfer restrictions for the Class A shares, which will
gradually expire over a fifteen-month period following the demutualization,
designed to foster the development of an orderly market in our common stock.
We cannot guarantee that these restrictions will achieve their intended
purpose.
If our stockholders sell a large number of Class A shares upon the
expiration of some or all of the transfer restrictions, the market prices for
our common stock could decline significantly. Additionally, the transfer
restrictions that we have adopted will not restrict a sale to a single
purchaser of Class A shares in conjunction with a simultaneous sale of the
related Class B share, in part, to allow a clearing member firm to liquidate
the full value of a member's interest in New CME if such member is in a
deficit position. Any forced sales of Class A or Class B shares during the
time in which an orderly market is being developed could negatively impact the
market price for such shares.
. The market prices for our shares may fluctuate widely and trade at prices
below the recent price of the membership that the shares replace.
The market price of Class A and Class B shares received by you in the
demutualization transaction may fluctuate widely. Factors causing these
fluctuations will include our perceived prospects, and the prospects of the
financial industry and exchanges in general, differences between our actual
financial and operating results and those expected by investors and analysts,
and changes in analysts' recommendations or projections. In addition, changes
in general economic or market conditions and broad market fluctuations may
influence the market prices for our stock. As a result, Class A and Class B
shares may trade at prices significantly below the price of the membership for
which they were exchanged. The value of Class B shares is likely to be driven
primarily by the perceived value, and the demand for, the related trading
privileges.
. The issuance of additional shares may dilute the market value of the shares we
issue to you.
New CME will have authorized but unissued Class A shares that may be issued
at the discretion of New CME's Board. If we issue a large number of Class A
shares in connection with future acquisitions or otherwise, which fail to
increase our overall value, your equity could be diluted and the market price
of your shares could decline significantly. The Board of New CME will
consider the potential dilutive effects of any subsequent issuance of Class A
shares in relation to the value generated or expected to be generated in
connection with their issuance.
. Decisions made by management or the Board of New CME, or changes in the
business or operations of New CME, may negatively impact Class B stockholders
or affect Class A stockholders and Class B stockholders differently.
The conversion to a stockholder owned for-profit corporation will require
management to make decisions and take actions designed to maximize profits and
stockholder value. Such decisions or actions may negatively impact Class B
stockholders or affect Class A stockholders and Class B stockholders
differently. While holders of Class B shares will have certain protections
with respect to "core" rights that may limit the decision-making authority of
management and the Board, the management of New CME will acquire substantial
decision-
11
<PAGE>
making responsibility. It is possible that decisions or changes which benefit
the value of Class A shares will negatively impact the value of Class B shares
or, conversely, that decisions or changes which benefit the value of Class B
shares will negatively impact the value of Class A shares.
. Class B stockholders will have a right to approve changes to certain core
rights and will be entitled to elect certain directors. The market price of
the Class A shares may be adversely affected by the exercise of these rights.
Class B stockholders will benefit from the preservation of certain "core"
rights. Class B stockholders will have the ability to preserve their trading
rights by means of special approval rights. Following a transition period,
Class B stockholders owning series B-1, B-2 and B-3 shares will be entitled to
elect six of nineteen directors, even though such Class B stockholders
represent only approximately ten percent of the overall equity interest. Such
directors will also participate in the nomination of additional directors and
the election of a chairman. These protections could be used to block changes
that management might want to make to enhance stockholder value, including the
value of Class A shares.
. Delaware law may protect decisions of the Board of New CME that have a
different effect on Class A and Class B stockholders.
Delaware law generally provides that a board of directors owes an equal
duty to all stockholders, regardless of class or series and does not have
separate or additional duties to either group of stockholders, subject to
applicable provisions set forth in a company's charter. The governing
documents of New CME will include provisions that establish and protect these
core rights of Class B stockholders. With respect to decisions not involving
such core rights, however, you may not be able to challenge decisions that
have an adverse effect on the value of the Class A or B shares if our Board
acts in a disinterested, informed manner with respect to these decisions, in
good faith and in the belief that it is acting in the best interests of our
stockholders.
. Effects of anti-takeover provisions could enable the Board of Directors to
prevent or delay a change of control of New CME.
Some of the provisions of our certificate of incorporation, our by-laws and
Delaware law could, together or separately:
. discourage potential acquisition proposals;
. delay or prevent a change in control; and
. limit the price that investors might be willing to pay in the future for
shares of our common stock.
Under these anti-takeover provisions, New CME's Board may issue up to
10,000,000 shares of preferred stock with rights and privileges that might be
senior to issued common stock, without the consent of the holders of the
common stock. New CME's certificate of incorporation and by-laws will
provide, among other things, that our Board will be divided into two classes
which will serve staggered two-year terms, that stockholders may not take
actions by written consent and that special meetings of stockholders may only
be called by our Chairman or a majority of our Board. As a result, these
provisions could limit the price some investors might be willing to pay in the
future for Class A and Class B shares.
Our Board believes that these provisions will protect stockholders and
ensure that stockholders receive fair compensation for their shares in the
event of a hostile takeover attempt. Our Board believes that these provisions
are widely adopted by other public companies.
. We do not anticipate paying dividends in the foreseeable future.
The payment and amount of dividends, if any, may affect the market value of
our shares. We do not anticipate paying dividends on our shares in the
foreseeable future.
12
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Risks Related to Our Business
. Our business may be adversely affected if maintaining pit-based and electronic
trading systems results in higher costs or otherwise impairs efficiency.
It may be expensive to continue operating two trading systems for the same
product. Substantial expenses and delays may be caused by efforts to create
trading links between the separate trading platforms. Any loss of efficiency
or increase in time to market of new or improved products could be detrimental
to our business plans in a highly competitive market.
. Our business may be adversely affected if our trading volumes decline or if
our customers do not utilize our products, markets or services.
We have experienced fluctuations in our trading volumes. Such fluctuations
may occur in the future and may impact our future operating results. Periods
of low volatility could result in low trading volume and negatively impact our
business, financial condition and operating results.
The success of our business depends, in part, on our ability to maintain
and expand our product offering and our customer base. Our success also
depends on our ability to offer competitive prices and services in an
increasingly price sensitive business. We cannot assure you that we will be
able to continue to expand our product lines, or that we will be able to
retain our current customers. We also cannot assure you that we will not lose
customers to low-cost competitors with comparable or potentially superior
products. If we fail to expand our product line or lose current customers,
our ability to realize our financial objectives will be adversely affected.
. Our existing and future revenues are highly dependent upon maintaining current
volume levels in our Eurodollar and S&P 500(R) futures and options contracts,
and in our foreign currency Exchange-for-Physicals ("EFP") market.
Clearing fees account for approximately 70% of our total revenues.
Approximately 37% of clearing fees are attributable to transactions in
Eurodollar futures and options contracts, approximately 24% are attributable
to transactions in S&P 500 futures and options contracts, and approximately
27% are attributable to foreign currency EFP transactions. Any significant
decline in our trading volumes in these products or markets could negatively
impact our business, financial condition and operating results.
. Our revenues may be adversely impacted if the value of our market data
declines or if we become subject to legislation or regulation limiting the
prices that we can charge for our market data.
We derive a significant percentage of our revenues from sales of market
data. The increase in electronic trading and the availability of our market
data over terminals that access our GLOBEX(R)//2// system may diminish the
value of our market data and the prices that we can charge for our market
data. We could also become subject to legislation or regulation limiting the
prices that we can charge for our market data.
. Our prospects are subject to risks, expenses and uncertainties encountered by
companies in the new and rapidly evolving market with and for electronic
transaction services.
These risks include our failure or inability to:
. provide reliable and cost-effective services to our customers;
. attract independent software vendors to write front-end software that
effectively accesses our electronic trading and automated order-routing
systems;
. match prices or offer trade execution alternatives provided by
competitors operating under more favorable regulations;
. increase the number of devices (trading and order routing terminals)
capable of sending orders to our floor and to our electronic trading
system;
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. increase awareness of our brand or market positioning; and
. respond to technological developments or service offerings by
competitors.
If we are not successful, our business or future financial condition or
operating results could suffer.
. Marketing and strategic alliances may not generate increased trading in our
electronic marketplaces.
We have entered into strategic alliances with exchanges and clearinghouses
in order to increase client access to and use of our electronic platforms.
The success of these relationships will depend, in part, on the amount of
increased trading in our products generated by the members and customers of
these partners. These arrangements may not generate the expected increased
trading volume we are seeking. In addition, these alliances may constrain our
resources and limit our ability to pursue other strategic and business
initiatives.
. Intense competition could adversely affect our market share and financial
performance.
The financial services industry is highly competitive. Many of our
competitors and potential competitors are more established and have greater
financial resources than we do. We expect that competition will intensify in
the future. Many of our competitors also have greater marketing capabilities
and technological and personnel resources. As a result, as compared to us,
our competitors may:
. develop similar products that are preferred by our customers;
. develop non-traditional alternative risk transfer products that compete
with our products;
. price their products and services more competitively;
. develop and expand their network infrastructures and service offerings
more efficiently;
. adapt more swiftly to new or emerging technologies and changes in client
requirements;
. take greater advantage of acquisitions and other opportunities;
. more effectively market, promote and sell their products and services;
. better leverage existing relationships with clients and strategic
partners or exploit more recognized brand names to market and sell their
services; and
. exploit regulatory disparities between traditional regulated exchanges
and alternative markets that benefit from a reduced regulatory burden
and a lower-cost business model.
Our current and prospective competitors are numerous and include securities
exchanges, futures exchanges, market data and information vendors, electronic
communications networks, crossing systems and similar entities, consortia of
large customers and some of our clearing member firms, and interdealer
brokerage firms. We may also face competition from computer software
companies, and media and technology companies. The number of businesses
providing Internet-related financial services is rapidly growing, and other
companies have entered into or are forming joint ventures or consortia to
provide services similar to those provided by us.
. Adverse economic and political conditions may cause declines in the global
financial markets and adversely affect our operating results.
The global financial services business is, by its nature, risky and
volatile and is directly affected by many national and international factors
that are beyond our control. Any one of these factors may cause a substantial
decline in the U.S. and global financial services markets, resulting in
reduced trading volume. These events could materially adversely affect our
business. These factors include:
. economic and political conditions in the United States and elsewhere in
the world;
. concerns over inflation and wavering institutional/consumer confidence
levels;
. the availability of cash for investment by mutual funds and other
wholesale and retail investors; and
. legislative and regulatory changes.
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<PAGE>
. Computer and communications systems failures and capacity constraints could
harm our reputation and our business.
Our failure to monitor or maintain our computer systems and network
services or, if necessary, to find a replacement for our technology in a
timely and cost-effective manner, could have a material adverse effect on our
reputation, business, financial condition and operating results.
We rely and expect to continue to rely on third parties for various
computer and communications systems, such as telephone companies, on-line
service providers, data processors, clearance organizations and software and
hardware vendors. Our systems or those of our third party providers may fail
or operate slowly, causing one or more of the following:
. unanticipated disruptions in service to customers;
. slower response times;
. delays in trade execution;
. decreased customer satisfaction;
. incomplete or inaccurate accounting, recording or processing of trades;
. financial losses;
. security breaches;
. litigation or other customer claims; and
. regulatory sanctions.
We cannot assure you that we will not experience system failures, outages
or interruptions that negatively impact our business. Any failure that causes
an interruption in service or decreases our responsiveness, including failures
caused by customer error or misuse of our systems, could impair our
reputation, damage our brand name and have a material adverse effect on our
business, financial condition and operating results.
. We may not effectively manage our growth.
We expect to grow our business. This growth may place a significant strain
on our management, personnel, systems and resources. We must continue to
improve our operational and financial systems and managerial controls and
procedures, and we will need to continue to expand, train and manage our
technology workforce. We must also maintain close coordination among our
technology, compliance, accounting, finance, marketing and sales
organizations. We cannot assure you that we will manage our growth
effectively, and failure to do so could have a material adverse effect on our
business, financial condition and operating results.
. We may not be able to keep up with rapid technological changes.
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality, accessibility and features of our proprietary
software, network distribution systems and other technologies. The financial
services and e-commerce industries are characterized by rapid technological
change, changes in use and customer requirements and preferences, frequent
product and service introductions embodying new technologies and the emergence
of new industry standards and practices that could render our existing
proprietary technology and systems obsolete. Our success will depend, in
part, on our ability to:
. develop or license leading technologies useful in our business;
. enhance our existing services;
. develop new services and technology that address the increasingly
sophisticated and varied needs of our existing and prospective clients;
and
. respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
We cannot assure you that we will successfully implement new technologies
or adapt our proprietary technology and transaction-processing systems to
customer requirements or emerging industry standards. We cannot assure you
that we will be able to respond in a timely manner to changing market
conditions or customer
15
<PAGE>
requirements, and a failure to respond could have a material adverse effect on
our business, financial condition and operating results.
. We cannot predict our future capital needs or our ability to secure additional
financing.
We anticipate, based on management's experience and current industry
trends, that our existing cash resources will be sufficient to meet our
anticipated working capital and capital expenditure requirements for at least
the next twelve months. However, we may need to raise additional funds to:
. support more rapid growth;
. develop new or enhanced services and products;
. respond to competitive pressures;
. acquire or develop complementary technologies; and
. respond to unanticipated requirements.
We cannot assure you that we will be able to obtain additional financing on
acceptable terms.
. We could be adversely impacted by a clearing member default.
We insure contract performance for all transactions in our products. Upon
acceptance of a contract, we are substituted as the counter-party to each
trade and we provide a financial guarantee of performance. Each of our
clearing member firms, in turn, provides a financial guarantee to our Clearing
House for all transactions executed by persons trading through that clearing
member. Although we maintain significant financial resources and safeguards,
we cannot assure you that we will not be adversely affected by a clearing
member default. A clearing member default could severely and negatively
impact our reputation, business, financial condition and operating results.
Risks Related to Regulation and Litigation
. Regulatory changes may cause our members and customers to use other markets or
competing products.
The Commodity Futures Trading Commission ("CFTC") has substantially
exempted from regulation certain types of derivative products used by certain
market participants. In many instances, these products compete with our
products and are used by the same market participants. Additional legislative
and regulatory initiatives are being considered that could create new
disparities in the regulatory treatment of our products and products offered
by our competitors. Such changes, if adopted, may cause our members and
customers to use other markets or competing products.
. We may not be able to maintain our self regulatory responsibilities.
Some financial services regulators have publicly stated their concerns
about the ability of a financial exchange, organized as a for-profit
corporation, to adequately discharge its self-regulatory responsibilities.
Our regulatory programs and capabilities contribute significantly to our brand
name and reputation. Although we believe that we will retain these
responsibilities, we cannot assure you that we will not be required to modify
or restructure our regulatory functions in order to address these concerns.
. We face regulatory burdens and obstacles in securing permission from foreign
regulatory and governmental authorities to allow foreign entities and
individuals to access and trade on our GLOBEX//2// system from foreign
locations.
The placement of GLOBEX//2// terminals, and the provision of access to our
GLOBEX//2// system from foreign locations, typically requires permission or
authorization from foreign regulatory and governmental authorities. These
permissions and authorizations can be difficult and/or time-consuming to
acquire. We cannot assure you that we will be successful in expanding global
access to our GLOBEX//2// markets. We have received permission to place
GLOBEX//2// terminals in the U.K., Japan and various other major world
financial centers.
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. We are subject to the risks of litigation.
Many aspects of our business involve substantial risks of liability.
Dissatisfied customers frequently make claims regarding quality of trade
execution, improperly settled trades, mismanagement or even fraud against
their service providers. We may become subject to these claims as the result
of failures or malfunctions of systems and services provided by us. We could
incur significant legal expenses defending claims, even those without merit.
Although the Commodity Exchange Act ("CEA") and our CFTC-approved disclaimer
and limitation of liability rules offer us some protections, an adverse
resolution of any lawsuits or claims against us could have a material adverse
effect on our reputation, business, financial condition and operating results.
In addition, we may also become subject to legal proceedings and claims as
a result of the demutualization transactions.
. Any infringement by us on patent rights of others could result in litigation.
Our competitors as well as other companies and individuals may obtain, and
may be expected to obtain in the future, patents that concern products or
services related to the types of products and services we offer or plan to
offer. We cannot assure you that we are or will be aware of all patents
containing claims that may pose a risk of infringement by our products and
services. In general, if one or more of our products or services were to
infringe patents held by others, we may be required to stop developing or
marketing the products or services, to obtain licenses to develop and market
the services from the holders of the patents or to redesign the products or
services in such a way as to avoid infringing on the patent claims. If we
were unable to obtain such licenses, we may not be able to redesign our
products or services to avoid infringement, which could materially adversely
affect our business, financial condition and operating results.
. Employee or member misconduct could harm us and is difficult to detect.
There have been a number of highly publicized cases involving fraud or
other misconduct by employees in the financial services industry in recent
years, and we run the risk that employee misconduct could occur. Misconduct
by employees could include concealing from us unauthorized or unsuccessful
activities. In either case, this type of conduct could result in unknown and
unmanaged risks or losses. Similarly, we run the risk that members and other
persons who use our markets will engage in fraud or other misconduct, which
could result in regulatory sanctions and serious reputational harm. It is not
always possible to deter misconduct, and the precautions we take to prevent
and detect this activity may not be effective in all cases.
DEMUTUALIZATION PROPOSAL
Your Board of Directors unanimously believes that it is in the best interests
of the Exchange and its members to change its corporate structure from a member-
owned not-for-profit corporation to a stockholder-owned for-profit corporation.
This belief is founded on the results of a year-long process in which
demutualization was examined. Last year, the Board adopted a five-point plan to
improve the operation of the Exchange-including an element regarding
demutualization. Since that time, the Strategic Planning Committee of the Board
has studied the structure of possible transactions to effect the conversion to a
for-profit corporation and considered a number of the issues posed by such a
transaction. Based upon those studies and considerations, the Strategic
Planning Committee developed and recommended to the Board a plan to effect the
demutualization. This plan was then unanimously approved by the Board.
It is intended that the demutualization transaction will not have any adverse
federal income tax consequences to our members. We have applied for a ruling
from the Internal Revenue Service to confirm such intentions, and the completion
of the demutualization transaction is conditioned, among other conditions, upon
the receipt of such ruling. No gain or loss will be recognized by the Exchange
as a result of the demutualization.
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<PAGE>
Reasons for Demutualization
The financial and risk management markets in which we operate are
experiencing significant and rapid changes. These changes are largely due to
advances in technology, a relaxation of regulatory barriers and resultant cost
efficiencies. Computer and telecommunications systems today can efficiently and
economically bring buyers and sellers together in ways that present new
challenges to the traditional exchange model of centralized physical auction
markets. The Internet and proprietary networks are changing investor behavior
and revolutionizing how investors interface with financial markets. Other
technological innovations are reducing the costs and barriers to entry for
alternative exchange-type systems.
The traditional exchange model is undergoing a significant transformation
with the emergence of electronic trading technologies. Technological innovations
and reduced regulatory burdens in the global financial markets have lowered
barriers to entry, have created new competitors, and are encouraging traditional
exchanges to modernize their operations. In order to achieve the necessary
economies of scale and remain competitive in a low-price/high-volume
environment, consolidation among exchanges and financial intermediaries is
likely to continue. With respect to exchanges, large market users are expected
to continue to seek more efficient trading, processing and clearing facilities.
Although such institutions currently justify membership in multiple exchanges
and clearing organizations, they are likely to concentrate their business
activity in those exchanges and clearing organizations that offer standardized
systems, a full spectrum of financial products that can be traded and cleared
through a single entity, and low operating costs and capital efficiencies for
member intermediaries.
Notwithstanding these changes and increased competitive activity, the Board
believes that the Exchange is well-positioned in today's marketplace to preserve
and enhance our position. The Board also believes, however, that we will be
better able to respond to such competition if we are reorganized as a
commercially-operated enterprise with a true oversight board and a team of
professional business managers. These managers will leverage the substantial
existing assets and strengths of the Exchange into new business strategies
designed to maximize stockholder returns.
Objectives of Demutualization. We have identified five major objectives to
be achieved by demutualization:
. Improved Governance and Managerial Structure
The traditional distinctions between our activities and the activities of
our members and clearing members are becoming increasingly blurred. On the one
hand, members and clearing members decide our affairs; while on the other
hand, certain of them compete directly with us by developing off-exchange
products and business and by joining alternative market initiatives. Our Board
believes that demutualization will enable management to reduce the impact of
such conflicts and to increase our enterprise value for the benefit of our
equity owners.
Increasingly, our competitors are for-profit companies operating with a
singular purpose to maximize stockholder value. Our Board believes that
demutualization will create a governance and management structure that is more
agile and swift in its ability to respond to such competition. Management of
the demutualized entity will be free to make decisions regarding listing
contracts electronically if they will be more successful in that forum,
changing clearing and transaction fees when appropriate, or expanding our
existing product and service offerings.
. Improved Financial Decision-Making Model
Our Board believes that changing to a for-profit model will result in
improved financial decision-making to enhance stockholder value. For example,
management of the demutualized entity will judge investments and expenditures
on, among other reasons, the basis of stockholder return. Commercial decision-
making will diminish political member influences. Commercial pricing of
services and a profit-making objective will ensure that resources are
allocated to those business initiatives and ventures that enhance, or have the
potential to enhance, stockholder value. Our ability to obtain financing at
favorable rates will depend on whether lenders believe we are investing
prudently.
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<PAGE>
. Create a Catalyst for Pursuing New Business Strategies
Continuing financial innovation and demand for new risk management and
derivative products are fueling global growth in exchange-traded and over-the-
counter ("OTC") products. To capitalize on this potential, we may need to
attract outside investment, further expand our current technology platforms,
and broaden our product and service offerings.
. Unlock Members' Equity Values
Our owners are a heterogeneous group with different economic interests.
During the last several years, and prior to the recent increases in seat
prices and lease rates, many of our retired owners experienced substantial
declines in their seat values and, hence, income from leasing. These owners
are generally less interested in member opportunity on the floor and more
interested in maintaining their asset values and deriving income from their
assets. In this sense, many of these owners already have begun to look more
like traditional stockholders than exchange members. Demutualization will
unlock the equity value in a membership and allow our management to provide
stockholder returns to these members.
Many of our members are interested in selling only a portion of their
interest in the Exchange. Under the existing structure, these members have
been unable to do so because they cannot sell less than an entire membership
or seat. Demutualization will allow members to sell only a portion of their
interest in the Exchange (i.e., all of their Class B shares or all or a
portion of their Class A shares).
. Provide a Signal and a Currency for Working with Strategic Partners
Our Board believes that technology firms, as well as firms interested in
acquiring an equity stake in us, will have a strong preference for working
with a demutualized corporation, rather than a member-owned mutual
organization. The Board believes that we will benefit from entering into
strategic alliances with partners or investors who can provide technology and
capital resources. Demutualization and conversion of memberships into shares
will create a valuable currency for working with such partners, facilitating
our ability to enter into such transactions in the future.
Description of Demutualization Transaction
The proposed demutualization transaction will be effected through a two-
step merger which is illustrated below:
[Graphic: Three rectangular boxes aligned from left to right, with an arrow
silhouette pointing from the first to the second box and pointing from the
second to the third box. Inscribed in the first box is "Chicago Mercantile
Exchange (Illinois not-for-profit corporation)", inscribed in the second is "CME
Transitory Co. (Delaware nonstock corporation)", and inscribed in the third is
"Chicago Mercantile Exchange Inc. (Delaware stock corporation)" The phrase
"Membership Interests for Membership Interests" appears below the first arrow
and the phrase "Membership Interests for series of Class B shares and, in the
case of CME, IMM and IOM members, Class A shares" appears below the second
arrow.]
First Step: Illinois to Delaware. In the first step, the Exchange will
merge with and into a recently formed, membership Delaware nonstock corporation
for the purpose of reincorporating us in Delaware. No substantive change will
occur in the members' current rights as a result of the merger, except for
changes that result from being incorporated as a membership corporation in
Delaware as opposed to Illinois. Under Illinois law, an Illinois not-for-profit
corporation cannot merge directly into a for-profit corporation (but a merger
with a Delaware not-for-profit corporation is permissible).
This merger will be effected under an agreement and plan of merger between
the Exchange and the nonstock corporation, which is named "CME Transitory Co."
Under this merger agreement, each membership interest in the Exchange will be
converted into an equivalent membership interest in CME Transitory Co. The
completion of the merger is subject to several conditions, which are described
below under "Conditions to Effectiveness."
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<PAGE>
CME Transitory Co. was formed by the Exchange for the sole purpose of
effecting the demutualization transaction. It has no present assets or any
business operations, other than activities associated with preparing for the
demutualization transaction. The Exchange is its sole present member, and that
membership interest will be cancelled upon the effectiveness of the merger. Your
Board of Directors has approved this first step merger. CME Transitory Co.'s
Board of Directors and the Exchange, as its sole member, have also approved this
merger.
Second Step: Delaware Nonstock to Delaware Stock Corporation. In the
second step, CME Transitory Co. will merge with and into a recently formed, for-
profit Delaware stock corporation referred to in this document as "New CME."
There will be changes in the rights of members as a result of this merger, which
are described below under "Differences in Ownership Rights."
This merger will be effected under an agreement and plan of merger between
CME Transitory Co. and New CME. Under this merger agreement, the membership
interests in CME Transitory Co. will be converted into shares of the capital
stock of New CME as described in the following section. This merger is
conditioned upon the completion of the first step merger of our existing
corporation into CME Transitory Co.
New CME was formed by the Exchange solely for the purpose of effecting the
demutualization transaction. It has no present assets or any business
operations, other than activities associated with preparing for the
demutualization transaction. CME Transitory Co. is its sole present stockholder,
and that stock interest will be cancelled upon the effectiveness of the merger.
CME Transitory Co.'s Board of Directors and the Exchange, as its sole member,
have approved this second step merger. New CME's Board of Directors and CME
Transitory Co., as its sole stockholder, have also approved this merger.
Conversion of Membership Interests into Shares. As a result of the
consummation of the mergers described above, membership interests in the
Exchange will be converted into shares of the capital stock of New CME.
Specifically, membership interests in the Exchange will be converted into shares
of Class B common stock and, in the cases of the CME, IMM and IOM members,
shares of Class A common stock.
Number of Shares to Be Received
Membership Division Class A Shares Class B Shares
- ------------------- -------------- --------------
CME 16,200 One share, series B-1
IMM 10,800 One share, series B-2
IOM 5,400 One share, series B-3
GEM One share, series B-4
GEM Fractions One share, series B-5
The Class B shares will include traditional equity rights as well as the trading
privileges associated with the membership interest that was exchanged for the
shares, whereas the Class A shares will represent solely equity rights.
A description of the rights of the various series of Class B common stock
is set forth below under "Rights of Class B Common Stock" and under "Description
of Capital Stock of New CME." Holders of each series of Class B common stock
will have special voting rights in the election of New CME's Board of Directors
and certain "core rights" (as described below). For purposes of certain other
voting, dividend and dissolution rights, shares of each series of Class B common
stock are treated as representing a specified equivalent number of shares of
Class A common stock. The following tables illustrate the relative equity (other
than in respect of voting rights for the Board of Directors and certain "core
rights") that would be received by an Exchange member in respect of each
membership division as of the effectiveness of the mergers:
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<PAGE>
Distribution to Individual Members
<TABLE>
<CAPTION>
Total Equity
per Membership (expressed
Equivalent Class A Shares in equivalent
Membership Division Class A Shares Class B Series Represented by Class B Shares Class A shares)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CME 16,200 B-1 1,800 18,000
IMM 10,800 B-2 1,200 12,000
IOM 5,400 B-3 600 6,000
GEM B-4 100 100
GEM Fractions B-5 10 10
</TABLE>
Distribution of Relative Equity by Membership Division
<TABLE>
<CAPTION>
Equivalent Total Equity Percentage
Class A Shares (expressed in of Equity
Number of Class A Class B Represented by Class equivalent Class Distributed to
Membership Division Memberships Shares Series B Shares A shares) Members
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CME 625 10,125,000 B-1 1,125,000 11,250,000 39.1%
IMM 813 8,780,400 B-2 975,600 9,756,000 33.9%
IOM 1,287 6,949,800 B-3 772,200 7,722,000 26.8%
GEM* 253 B-4 25,300 25,300 0.2%
GEM Fractions* 2,140 B-5 21,400 21,400
------------- --------------- ------------------- ---------------- ---------------
Total 5,118 25,855,200 2,919,500 28,774,700 100%
============ =============== ================== =============== ==============
</TABLE>
* Based on full and fractional GEM memberships as of December 31, 1999.
Rights of Class B Common Stock
Voting. Shares of each series of Class B common stock carry traditional
equity rights and also confer the trading rights of the associated membership
division. Holders of shares of each series of Class B common stock will have
certain special voting rights, consisting of the right (of B-1, B-2 and B-3
stockholders) to elect certain members of the Board of Directors of New CME and
the right to approve certain actions proposed by the Board of Directors that
would affect "core rights." Holders of such shares will also have the right to
vote with holders of Class A shares on the election of the remaining members of
the Board of Directors of New CME, as well as on other matters for which a vote
of stockholders is required. In such voting, Class B shares are deemed the
equivalent of a specified number of Class A shares, and the Class B stockholders
are entitled to cast a number of votes equal to such equivalent number. These
concepts are illustrated in the following table and explained below and under
"Description of Capital Stock of New CME:"
<TABLE>
<CAPTION>
Maximum Number of Votes Equivalent Class A
Number of Trading Number of Directors Per Share on "Core Shares Represented by
Series Shares Privileges Each Series Can Elect Rights" Class B Shares
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
B-1 625 CME 3 6 1,800
B-2 813 IMM 2 2 1,200
B-3 1,287 IOM 1 1 600
B-4 467 GEM 0 1/6 100
B-5 2,140 GEM Fractions 0 1/60 10
</TABLE>
Election of Directors. Initially, New CME's Board will consist of the
members of our Board at the time of the completion of the demutualization. The
Board will then be reduced from its present size of thirty-nine members to
nineteen over a transition period as these members" terms expire. At the
December 2000 annual meeting, the terms of eighteen of the directors will
expire. At that time, nine individuals would be elected in the manner described
below to the Board of New CME for a term of two years. At the December 2001
annual meeting, the
21
<PAGE>
terms of the remaining twenty-one directors will expire. At that time, ten
individuals would be elected in the manner described below to the Board of New
CME.
Following the phased reduction of the size of New CME's Board, holders of
Class A and Class B shares, voting together on a Class A share equivalent basis,
will have the right to elect thirteen directors. In addition, holders of Class B
shares will have the right to elect six directors, as follows: the series B-1
stockholders will have the right to elect three directors, the series B-2
stockholders will have the right to elect two directors and the series B-3
stockholders will have the right to elect one director. All Board members will
serve for two-year terms, which will be staggered so that approximately one-half
of the Board members are elected each year.
A nominating committee, composed of members of New CME's Board, will
nominate the slate of candidates for the thirteen directors to be elected by the
holders of the Class A and Class B shares, voting together. This committee will
be responsible for assessing the qualifications of candidates as well as
ensuring that regulatory requirements with respect to the composition of New
CME's Board are met. Candidates nominated by this committee could include New
CME's President and CEO, other executive staff members, representatives from the
futures commission merchants community, and public directors from outside the
industry as required by regulations of the CFTC.
Consistent with our past practices, each of the series B-1, B-2 and B-3
holders will have the right to elect members of a nominating committee for their
respective series, which would be responsible for nominating candidates for
election by such series. Each committee for a particular series will be
responsible for assessing the qualifications of candidates to serve as directors
to be elected by that series. In accordance with our current practice, New CME's
charter requires that director-candidates for election by a series of Class B
shares own, or be recognized under its rules as a permitted transferee (other
than temporary lease-type transfers) of, at least one share of that series. For
purposes of the elections to be held in December 2000, the members of the series
B-1, B-2 and B-3 nominating committees will be the members of the present
corresponding CME, IMM and IOM nominating committees.
The size of the Board will be reduced at the December 2000 and 2001 annual
meetings. The manner and number of directors to be elected at these meetings is
illustrated in the following table:
<TABLE>
<CAPTION>
Number of Directors to be Elected
December 2000 December 2001
Directors Nominated By Directors Elected By Annual Meeting Annual Meeting
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Board Nominating Committee Holders of Class A and Class B 6 7
shares, voting together
series B-1 nominating committee Holders of series B-1 shares 1 2
series B-2 nominating committee Holders of series B-2 shares 1 1
series B-3 nominating committee Holders of series B-3 shares 1
Total 9 10
</TABLE>
Trading Privileges. A Class B stockholder will also have the trading
privileges currently encompassed in the Exchange membership interest associated
with the share as long as the holder owns the share. New CME's governing
documents will provide as follows:
. Floor Access. A holder of a series of Class B shares who meets New CME's
membership and eligibility criteria will be entitled to appear upon the
floor of New CME and to act as a floor broker and/or trader for the
contracts assigned to that series. The current product allocation rules
applicable to a particular membership division will be associated with
the corresponding series of Class B shares (as shown in the table at the
beginning of the prior section).
. Electronic Trading Rights. A holder of a series of Class B shares who
meets New CME"s membership and eligibility criteria will have the right
to trade electronically through the GLOBEX\\2\\ system. Such right is
restricted, when accessing GLOBEX\\2\\ terminals from the trading
floors, to trading only contracts assigned to that series. Otherwise,
the holder may trade any product listed on the GLOBEX2 system.
22
<PAGE>
. Use and Leasing of Trading Privileges. The trading privileges associated
with a Class B share may be used by the owner of the Class B share or
may be leased out to another person who satisfies the membership and
eligibility requirements imposed by New CME. Such requirements are
expected to be substantially the same as the requirements set forth in
our current rules.
. Clearing fees. New CME will continue to differentiate fees on cleared
trades based on the trader for whom the trades are being cleared. In
recognition of the importance of the liquidity provided by holders of
Class B shares, New CME will continue to charge a lower clearing fee on
Exchange products for trades made for their own accounts by a holder of
a Class B share or by a lessee of the trading privileges of a Class B
share. New CME will not charge a higher clearing fee for any trade
executed in the open outcry environment than the execution of the same
trade in another trading environment. New CME's management may lower
clearing fees or provide other incentives with respect to trades of
other persons, including persons considered to be especially important
as providers of market liquidity.
. Clearing Memberships. The right to be a clearing member will require an
ownership interest in New CME equivalent to the requirements under our
current rules.
. Commitment to Maintain Floor Trading. As long as an open outcry market
is "liquid," New CME will be obligated to maintain a facility for
conducting business, for the dissemination of price information, and for
clearing and delivery, and to provide reasonable financial support
(consistent with 1999 budget levels) for technology, marketing and
research for open outcry markets. An open outcry market will be deemed
liquid for these purposes if it meets any of the following tests on a
quarterly basis:
. if a comparable exchange-traded product exists, the New CME open
outcry market has maintained at least 30 percent of the average daily
volume of such comparable product (including for calculation
purposes, volume from Exchange-For-Physicals transactions in such
open outcry market); or
. if a comparable exchange-traded product exists and New CME"s product
trades exclusively by open outcry, New CME's open outcry market has
maintained at least 30 percent of the open interest of such
comparable product; or
. if no comparable exchange-traded product exists, New CME's open
outcry market has maintained at least 40 percent of the average
quarterly volume in that market in 1999 (including, for calculation
purposes, volume from Exchange-For-Physicals transactions in such
open outcry market); or
. if no comparable exchange-traded product exists and New CME's product
trades exclusively by open outcry, New CME's open outcry market has
maintained at least 40 percent of the average open interest in that
market in 1999.
If a market is deemed illiquid, management of New CME will make
commercial decisions consistent with the best interests of the
stockholders.
Special Voting Rights. Holders of Class B shares will also have the right to
approve changes to certain "core rights." These rights consist of:
. Current divisional product allocation rules applicable to each series of
Class B shares;
. Current floor access rights and privileges, including the commitments to
maintain floor trading as long as an open outcry market is deemed
"liquid" as described above;
. Changes in the number of authorized and issued shares of any series of
Class B shares (other than the issuance of series B-4 shares upon the
conversion of series B-5 shares); and
. Eligibility requirements for an individual or entity to hold any shares
of any series of Class B shares or to exercise the trading rights or
privileges inherent in any series of Class B shares.
23
<PAGE>
A vote on any proposal to alter such core rights would be weighted by
series, with series B-1 (CME) holders having six votes per share, series B-2
(IMM) holders having two votes per share, series B-3 (IOM) holders having one
vote per share, series B-4 (GEM) holders having one-sixth vote per share, and,
on or before November 3, 2000, series B-5 (GEM fractions) holders having one-
sixtieth vote per share.
Differences in Ownership Rights
The demutualization will cause certain changes in your ownership rights.
Some of these differences arise from differences that exist between the
corporate law governing Illinois not-for-profit corporations and Delaware stock
corporations. The remainder of the differences result from changes that we have
made in drafting the charter and by-laws for New CME.
Changes arising from differences in the corporate law governing Illinois
not-for-profit corporations versus Delaware stock corporations include the
following:
. Stockholder Approval Requirements for Charter Amendments and Major
Corporate Transactions
Illinois law requires the approval of two-thirds of the votes present
and voting to authorize charter amendments or major corporate
transactions, such as a merger; a sale of all of the corporate assets;
or a dissolution. Delaware law generally requires the approval of a
majority of the outstanding voting shares for such matters. The lower
vote requirements means that it may be easier to undertake certain
activities in New CME. In both cases, the required vote may be altered
by charter provision. The Exchange's current charter does not alter the
required vote, nor does the charter of New CME.
. Class or Series Voting Right for Charter Amendments that Adversely
Affect that Class' or Series' Rights
Delaware law grants holders of classes or series of stock a statutory
right to vote as a separate class or series on a proposed charter
amendment if the amendment would adversely affect their rights. Such
right exists regardless of whether the charter grants those holders the
right to approve such changes. Illinois law does not provide a statutory
right.
. Right to Dissent from Major Corporate Transactions and Seek Appraised
Value of Shares
Delaware law grants stockholders the right in transactions involving
mergers and the sale of all of the corporate assets, the right to
dissent from the transaction and to receive a cash payment equal to the
appraised value for their shares. Delaware law does recognize exceptions
from this right where a public market exists for the shares. Illinois
law does not grant members the right to dissent in mergers or sales of
all of the corporate assets.
. Ability to Receive Dividends If, and When, Declared by the Board of
Directors
Stockholders in Delaware corporations may receive dividend distributions
based on current or accumulated earnings. Members in an Illinois not-
for-profit corporation may not receive dividends based on earnings.
Notwithstanding the foregoing, New CME has no present intention of
paying dividends.
. Ability to Limit the Personal Liability of Directors for Breaches of
Fiduciary Duty
Delaware law, unlike Illinois law, permits corporations to include a
provision in their certificates of incorporation limiting or eliminating
the personal liability of directors under certain circumstances. New CME
has included such a provision.
Other changes arise from choices we have made in drafting the charter and
by-laws for New CME. These changes include:
24
<PAGE>
. Reduction in the Size of the Board
The size of the Board will be reduced from 39 members to 19 by December
2001.
. Elimination of Referendum Process
The referendum process, whereby members have the right to overturn a
Board action with respect to rule changes, will not be adopted by New
CME. Instead, holders of Class B shares will have the right to approve
changes to certain "core" rights before such changes become effective.
These core rights and the voting process are described above.
. Insertion of Anti-takeover Provisions
New CME's charter and by-laws will contain certain provisions which
could have the effect of encouraging persons considering unsolicited
tender offers or other unilateral takeover proposals to negotiate with
the Board of Directors. These provisions include:
. A prohibition against stockholder action by nonunanimous written
consent
. A restriction on who may call special meetings of stockholders
. An advance notice requirement for persons other than the Board who
intend to present proposals for approval at stockholder meetings
. A restriction that directors may only be removed for cause by the
holders of two-thirds of the voting power of the outstanding
shares
. Provisions which empower the Board to create certain rights to
purchase securities, or to take certain actions, designed to
encourage potential acquirers of the company to negotiate with the
Board
Additional information regarding these provisions is provided under
"Description of Capital Stock of New CME."
. Change in Liquidation Rights
Liquidation rights in New CME will be determined on a Class A share
equivalent basis. Liquidation rights in the Exchange are presently based
on what the respective membership divisions paid-in originally for their
membership interests.
Required Regulatory Approvals
Many of the terms of the demutualization transaction relating to Board
composition and elections, membership privileges and voting rights, and trading
rights and access, will either require new rules or amendments to existing
rules, or will be required to comply with certain provisions of the Commodity
Exchange Act and/or the regulations issued by the CFTC. We intend to make any
necessary submissions to the CFTC following the approval of the demutualization
proposal by the membership.
Amendment or Termination
Our Board of Directors may amend any of the terms of the first step merger
agreement at any time before or after its approval by our members, but not after
the time that the merger of the Exchange into CME Transitory Co. has been
effected. No such amendment may, in the sole judgment of the Board of Directors,
materially and adversely affect the rights of our members. The second step
merger agreement may be similarly amended.
The merger agreements may be terminated, and the demutualization
transaction abandoned, at any time before or after our members have approved the
demutualization transaction, by action of our Board of Directors if it
determines that consummation of the transactions provided for in the merger
agreements would, for any reason, be inadvisable or not in the best interests of
the Exchange or its members. However, the Board may not terminate the
25
<PAGE>
second step merger agreement between CME Transitory Co. and New CME unless the
first step merger agreement between the Exchange and CME Transitory Co. is also
terminated.
Conditions to Effectiveness of the Demutualization Transactions
Consummation of the first step merger of our existing corporation into CME
Transitory Co. is subject to the following conditions:
. Approval of the demutualization transaction by our members
The first step merger must be approved by our members by the affirmative
vote of at least two-thirds of the votes present and voted, either in
person or by proxy.
. The Class A partners in P-M-T Limited Partnership shall have approved
the sale of all of the assets and business of that partnership to New
CME
An offer by New CME to purchase all of the assets and business of P-M-T
Limited Partnership for cash shall have been approved by the holders of
two-thirds of the outstanding P-M-T Class A partnership units (excluding
units held by the Exchange). The purchase will be consummated
concurrently with the consummation of the demutualization transaction.
. Receipt of a favorable ruling from the Internal Revenue Service
We have asked the Internal Revenue Service to confirm that our proposed
demutualization transaction will not cause our members to recognize a
gain or loss upon the conversion of their membership interests into
Class A and Class B shares. We do not expect to receive that ruling
until several months after the special meeting.
. Receipt of regulatory approvals
We will need to receive the approval of the CFTC to rule changes that we
need to make to recognize the change in our structure that will occur as
a part of the demutualization.
Effectiveness of the Demutualization Transactions
After the conditions described above have been satisfied, we will cause the
necessary documents to be filed with the Secretaries of State of Illinois and
Delaware in order to effect the first step merger of the Exchange into CME
Transitory Co., whereupon it will become effective. Promptly following such
effectiveness, we will cause the necessary documents to be filed with the
Delaware Secretary of State in order to cause the merger of CME Transitory Co.
into New CME. Upon the effectiveness of that filing, the demutualization will
have been effected and members will become stockholders of New CME.
Federal Income Tax Consequences
One of the conditions to the closing of the demutualization transaction is
our receipt of a private letter ruling from the Internal Revenue Service
generally to the effect that, for federal income tax purposes, no gain or loss
will be recognized by a member on the exchange of his or her membership interest
in the Exchange for Class A common stock and Class B common stock or for Class B
common stock only. Assuming such nonrecognition treatment, the members would
have the following additional federal income tax consequences:
. The aggregate basis of the shares of New CME received by a member in
exchange for a membership interest will equal the basis of the
membership interest. In the case of a member who receives both Class A
common stock and Class B common stock, such basis will be allocated in
proportion to the fair market value of each on the date of the mergers.
26
<PAGE>
. The holding period of the Class A common stock and Class B common stock
received by a member in exchange for a membership interest will include
the period for which the membership interest has been held, provided
that such membership interest is held as a capital asset on the date of
the exchange.
No gain or loss will be recognized by the Exchange as a result of the
transfer of its assets to New CME and the assumption by New CME of the
liabilities of the Exchange.
We filed a request for the foregoing ruling with the Internal Revenue
Service on December 30, 1999. Because of the novelty of the demutualization
transactions, it is unclear at this time whether the Internal Revenue Service
will issue a favorable ruling or, if the Internal Revenue Service is willing to
issue such a ruling, when the ruling will be received. Any such ruling would
generally be binding on the Internal Revenue Service. Although an Internal
Revenue Service ruling can be revoked or modified retroactively under certain
extraordinary circumstances, we are not aware of any such circumstances that
would cause the Internal Revenue Service to revoke or modify any such ruling
with respect to the demutualization transactions.
Because of the complexity of the tax laws, and because the tax consequences
of the demutualization to you may be affected by matters not discussed herein,
you are urged to consult your own tax advisor with respect to your own
particular circumstances and with respect to the specific tax consequences of
the demutualization to you, including the applicability and effect of state,
local and foreign tax laws and any proposed changes in applicable tax laws.
Required Vote; Record Date; Available Votes
The affirmative vote of at least two-thirds majority of the votes present
and voted, either in person or by proxy, is required to approve the
demutualization proposal. Only persons who were record owners of membership
interests on ________, 2000, may vote at the special meeting. Under our rules,
members will have weighted voting on the proposal: CME members will have six
votes for each membership owned, IMM members will have two votes for each
membership owned, IOM members will have one vote for each membership owned, and
GEM members will have one-sixth vote for each full membership owned and one-
sixtieth vote for each GEM fractional membership interest owned.
How to Vote. You may vote for, against or abstain on the demutualization
proposal, although an abstention has the legal effect of voting against the
proposal. You may vote by casting your vote either in person at the meeting or
by using the enclosed proxy. To vote in person, you or your authorized proxy
must appear at the meeting. To vote using the enclosed proxy, your proxy should
indicate your vote on the demutualization proposal by checking FOR, AGAINST or
ABSTAIN. A proxy received without an indication of the manner in which it is to
be voted will be voted FOR approval of the demutualization proposal. A ballot
which has more than one box marked will not be valid and will not be regarded as
a vote cast. You must sign and date your proxy, and return it in the postage-
paid envelope enclosed with this mailing. You can also mail or deliver your
completed proxy to Ms. Nancy Wendt, Senior Director, CME Membership Department,
30 South Wacker Drive, Chicago, Illinois 60606. Your proxy must be received
prior to the start of the meeting in order to be counted.
To obtain a replacement ballot, please call Ms. Nancy Wendt, Senior
Director, CME Membership Department, at (312) 930-3488, between the hours of
7:00 a.m. and 5:00 p.m., Central Standard Time.
Recommendation to Members
THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE
FOR THE DEMUTUALIZATION PROPOSAL
27
<PAGE>
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements give effect to (i) the proposed acquisition of the limited partners'
interest in P-M-T Limited Partnership and (ii) the issuance of 25,855,200 shares
of Class A common stock and 5,118 shares of Class B common stock in connection
with the proposed demutualization and conversion of membership interests as
described elsewhere in this document as if they had occurred as of September 30,
1999, for purposes of the unaudited pro forma consolidated balance sheet, and as
of the beginning of the respective periods for purposes of the unaudited pro
forma consolidated statements of income for the nine months ended September 30,
1999 and the year ended December 31, 1998.
The unaudited pro forma information reflects the acquisition of the limited
partners interest in P-M-T Limited Partnership through a cash payment equal to
the carrying value of the limited partners' interest, which amounted to
$2,092,000 at September 30, 1999. This will be effected through the purchase of
the assets and business of P-M-T Limited Partnership at fair market value on the
date of the transaction. Because the purchase price approximates market value,
there will be no goodwill or other purchase accounting adjustments resulting
from this transaction. P-M-T Limited Partnership, for which the Exchange has
acted as general partner since its inception, will be liquidated, with proceeds
distributed to its partners, after the proposed transaction has been completed.
The unaudited pro forma information also reflects the issuance of
25,855,200 Class A shares and 5,118 Class B shares in exchange for previously
existing membership interests. No cash will be paid or received. The Class B
shares are considered the equivalent of 2,919,500 Class A shares for purposes of
calculating pro forma earnings per share.
The unaudited pro forma condensed consolidated financial statements are
based on available information and on assumptions management believes are
reasonable and that reflect the effects of the transactions described above.
Such unaudited pro forma condensed consolidated financial statements are
provided for informational purposes only and should not be construed to be
indicative of the Exchange's consolidated financial position or results of
operations had these transactions been consummated on the dates assumed and do
not in any way represent a projection or forecast of the Exchange's consolidated
financial position or results of operations for any future date or period. The
unaudited pro forma condensed consolidated financial statements should be read
in conjunction with the audited consolidated financial statements of the
Exchange, together with the related notes and report thereon, the unaudited
consolidated financial statements of the Exchange included elsewhere in this
document and with the information set forth under "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and "Business."
28
<PAGE>
CHICAGO MERCANTILE EXCHANGE
Unaudited Pro Forma Condensed Consolidated Balance Sheet
September 30, 1999
<TABLE>
<CAPTION>
Pro Forma After
--------------------------
Acquisition Issuance of
of Interest Class A and
Historical in P-M-T B Shares
---------- ----------- -----------
Assets (dollars in thousands)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 9,176 $ 7,084 $ 7,084
Investments 67,570 67,570 67,570
Accounts receivable and prepaid expenses 27,061 27,061 27,061
Cash performance bonds and security deposits 164,701 164,701 164,701
---------- ----------- -----------
Total current assets 268,508 266,416 266,416
Property, net of accumulated depreciation and amortization 89,700 89,700 89,700
Other assets 27,958 27,958 27,958
---------- ----------- -----------
Total Assets $ 386,166 $ 384,074 $ 384,074
========== =========== ===========
Liabilities Equity
Current liabilities:
Accounts payable and accrued expenses $ 28,885 $ 28,885 $ 28,885
Cash performance bonds and security deposits 164,701 164,701 164,701
---------- ----------- -----------
Total current liabilities 193,586 193,586 193,586
Limited Partners' interest in P-M-T Limited Partnership 2,092 -- --
Other liabilities 18,483 18,483 18,483
---------- ----------- -----------
Total liabilities 214,161 212,069 212,069
Members' and Stockholders' equity:
Preferred stock, $.01 par value,
10,000,000 shares authorized, none issued and outstanding --
Class A common stock, $.01 par value,
100,000,000 shares authorized,
25,855,200 shares issued and outstanding 259
Class B common stock, $.01 par value,
5,332 shares authorized, 5,118 shares issued and
outstanding 1
Additional paid-in capital 43,345
Retained earnings 128,552 128,552 128,552
Proceeds from issuance of Memberships 43,605 43,605 --
Accumulated unrealized losses on securities (152) (152) (152)
---------- -----------
Total members' equity $ 172,005 $ 172,005 --
---------- ----------- -----------
Total stockholders' equity $ 172,005
-----------
Total Liabilities and Equity $ 386,166 $ 384,074 $ 384,074
========== =========== ===========
</TABLE>
The accompanying introduction is an integral part of this
Unaudited Pro Forma Condensed Consolidated Balance Sheet.
29
<PAGE>
CHICAGO MERCANTILE EXCHANGE
Unaudited Pro Forma Condensed Statement of Operations
For the Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Pro Forma After
------------------------------
Acquisition Issuance of
Of Interest Class A and
Historical in P-M-T B Shares
---------- ----------- -----------
(amounts in thousands, except per share amount)
<S> <C> <C> <C>
Revenues:
Clearing fees $ 106,584 $ 106,584 $ 106,584
Quotation data fees 32,046 32,046 32,046
Communication fees 6,226 6,226 6,226
Investment income 6,542 6,509 6,509
Other operating revenue 7,092 7,092 7,092
---------- ----------- -----------
Total revenues 158,490 158,457 158,457
---------- ----------- -----------
Expenses:
Salaries and benefits 59,237 59,237 59,237
Occupancy 14,069 14,069 14,069
Professional fees, outside services and licenses 22,533 22,533 22,533
Communications and computer equipment 19,593 19,593 19,593
Depreciation and amortization 18,030 18,030 18,030
Public relations and promotion 4,322 4,322 4,322
Other operating expense 9,849 9,849 9,849
---------- ----------- -----------
Total expenses 147,633 147,633 147,633
---------- ----------- -----------
Income before limited partners' interest in P-M-T and
provision for income taxes 10,857 10,824 10,824
Limited partners' interest in earnings of P-M-T (1,201) -- --
Provision for income taxes (3,862) (4,330) (4,330)
---------- ----------- -----------
Net income $ 5,794 $ 6,494 $ 6,494
========== =========== ===========
Net income per share $ 0.23
===========
Shares used in the calculation of net income per share 28,775
===========
</TABLE>
The accompanying introduction is an integral part of this
Unaudited Pro Forma Condensed Consolidated Statement of Operations.
30
<PAGE>
CHICAGO MERCANTILE EXCHANGE
Unaudited Pro Forma Condensed Statement of Operations
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Pro Forma After
------------------------------
Acquisition Issuance of
Of Interest Class A and
Historical In P-M-T B Shares
---------- ----------- -----------
(amounts in thousands, except per share amount)
<S> <C> <C> <C>
Revenues:
Clearing fees $ 124,575 $ 124,575 $ 124,575
Quotation data fees 40,079 40,079 40,079
Communication fees 8,128 8,128 8,128
Investment income 9,610 9,610 9,610
Other operating revenue 12,317 12,317 12,317
---------- ----------- -----------
Total revenues 194,709 194,709 194,709
---------- ----------- -----------
Expenses:
Salaries and benefits 72,385 72,385 72,385
Occupancy 19,702 19,702 19,702
Professional fees, outside services and licenses 28,754 28,754 28,754
Communications and computer equipment 22,731 22,731 22,731
Depreciation and amortization 17,943 17,943 17,943
Public relations and promotion 9,586 9,586 9,586
Other operating expense 9,415 9,415 9,415
---------- ----------- -----------
Total expenses 180,516 180,516 180,516
---------- ----------- -----------
Income before limited partners' interest in P-M-T and
Provision for income taxes 14,193 14,193 14,193
Limited partners' interest in earnings of P-M-T (2,849) -- --
Provision for income taxes (4,315) (5,455) (5,455)
---------- ----------- -----------
Net income $ 7,029 $ 8,738 $ 8,738
========== =========== ===========
Net income per share $ 0.30
===========
Shares used in the calculation of net income per share 28,775
===========
</TABLE>
The accompanying introduction is an integral part of this
Unaudited Pro Forma Condensed Consolidated Statement of Operations.
31
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Exchange as of
September 30, 1999 (i) on an historical basis, (ii) on a pro forma basis giving
effect to the proposed acquisition of the limited partners' interest in P-M-T,
and (iii) on a pro forma basis as adjusted to give effect to the issuance by New
CME of 25,855,200 Class A shares and 5,118 Class B shares in connection with the
demutualization transactions. The table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements and notes thereto of the
Exchange included elsewhere in this document and "Unaudited Consolidated Pro
Forma Financial Data."
<TABLE>
<CAPTION>
As of September 30, 1999
-------------------------------------------
Pro Pro Forma
Actual Forma As adjusted
---------- ------------- -------------
<S> <C> <C> <C>
(in thousands)
Limited Partners' interest in P-M-T $ 2,092 $ -- $ --
Capitalized lease obligations 6,788 6,788 6,788
Other long-term debt -- -- --
--------- ----------- ----------
Total limited partners' interest and long-term debt 8,880 6,788 6,788
--------- ----------- ----------
Equity:
Preferred stock, $.01 par value,
10,000,000 shares authorized, none issued and --
outstanding
Class A common stock, $.01 par value,
100,000,000 shares authorized,
25,855,200 shares issued and outstanding 259
Class B common stock, $.01 par value,
5,332 shares authorized and 5,118 shares issued and
outstanding 1
Additional paid-in capital 43,345
Retained earnings 128,552 128,552 128,552
Proceeds from issuance of Memberships 43,605 43,605 --
Accumulated unrealized losses on securities (152) (152) (152)
--------- -----------
Total members' equity 172,005 172,005 --
----------
Total stockholders' equity 172,005
----------
Total Capitalization $ 180,885 $ 178,793 $ 178,793
=========== =========== ==========
</TABLE>
DESCRIPTION OF CAPITAL STOCK OF NEW CME
The authorized capital stock of New CME will consist of 100,000,000 shares
of Class A common stock, $.01 par value, 5,332 shares of Class B common stock,
$.01 par value and 10,000,000 shares of preferred stock, $.01 par value. The
shares of Class A common stock and Class B common stock issued in connection
with the demutualization will be fully paid and non-assessable.
Description of Class A Common Stock
Dividend Rights. Holders of Class A common stock are entitled to receive
dividends, together with the holders of Class B common stock (who participate on
a Class A share equivalent basis as described below), out of funds legally
available therefor, at such times and in such amounts as New CME's Board of
Directors may from time to time determine.
32
<PAGE>
Voting. Holders of Class A shares are entitled to one vote for each share
held. Following a two-year phase-in period in which the size of New CME's Board
of Directors will be reduced to nineteen, holders of Class A common stock will
be entitled to vote, together with the holders of Class B shares (who vote on a
Class A share equivalent basis as described below), in the election of thirteen
members of New CME's Board of Directors. Holders of such shares do not have the
right to cumulate votes in the election of directors. Holders of such shares
also have the right to vote, together with the holders of Class B shares (who
vote on a Class A share equivalent basis as described below), on all matters not
reserved to the holders of Class B shares for which a vote of the common
stockholders of New CME is required.
No Conversion, Preemptive or Subscription Rights. Holders of Class A common
stock have no conversion, preemptive or subscription rights.
Liquidation Rights. Upon liquidation of New CME and subject to the rights
of any outstanding series of preferred stock, holders of Class A shares are
entitled to participate, together with the holders of Class B shares (who
participate on a Class A share equivalent basis as described below), in the
distribution of assets available for distribution to the common stockholders.
Description of Class B Common Stock
The authorized shares of Class B common stock will be divided into five
series. Each series has certain specified trading privileges, the right to vote
(on a Class A share equivalent basis) with holders of shares of Class A shares
in the election of thirteen of the members of the Board of Directors, and
certain weighted voting rights in connection with matters described as "core
rights" as discussed above under "Demutualization Proposal--Rights of Class B
Common Stock." In addition, certain of the series have the right, as a series,
to elect members of the Board of Directors.
Dividend Rights. Holders of Class B common stock are entitled to
participate with the holders of Class A common stock on a Class A equivalent
share basis in the receipt out of funds legally available therefor of dividends
at such times and in such amounts as New CME's Board of Directors may from time
to time determine.
Voting. Following a two-year phase-in period in which the size of New CME's
Board of Directors will be reduced to nineteen, holders of Class B shares will
be entitled to vote, together with the holders of Class A shares, on a Class A
share equivalent basis, in the election of thirteen of the nineteen members of
New CME's Board of Directors. Certain series of such Class B common stock also
have the right to elect a total of six of the nineteen members of the Board of
Directors. Holders of Class B shares do not have the right to cumulate votes in
the election of directors. Holders of such shares also have the right to vote,
together with the holders of the Class A shares, on a Class A share equivalent
basis, on all matters not reserved to the holders of the Class B shares for
which a vote of the common stockholders of New CME is required.
Holders of Class B shares also have the right to approve changes to certain
"core" rights. See "Demutualization Proposal--Rights of Class B Common Stock." A
vote on any proposal to alter such core rights is weighted by series, with
series B-1 (CME) holders having six votes per share, series B-2 (IMM) holders
having two votes per share, series B-3 (IOM) holders having one vote per share,
series B-4 (GEM) holders having one-sixth vote per share, and, on or before
November 3, 2000, series B-5 (GEM fractions) holders having one-sixtieth vote
per share.
Class A Share Equivalents. For purposes of certain voting and participation
in dividend and any liquidating distributions, shares of Class B common stock
are treated as representing a specified number of shares of Class A common
stock. Specifically, one share of series B-1, B-2, B-3, B-4 and B-5 represents
1,800, 1,200, 600, 100 and 10 equivalent Class A shares, respectively. Such
equivalent share numbers are subject to upward adjustment in the event that New
CME issues a stock dividend in respect of, or splits the number of, the
outstanding Class A shares. An upward adjustment is also provided where New CME
issues shares of Class A common stock (including option and rights for, and
securities convertible into, shares of Class A common stock) at a price below
their fair market value at the time of issuance or grant. No adjustment is
provided in respect of certain issuances or grants, such as the issuance of
shares of Class A common stock upon any conversion of the series B-5 shares, any
dividend on the Class B shares payable in shares of Class A common stock, or
shares issuable to employees, officers, directors or consultants to New CME.
33
<PAGE>
No Conversion, Preemptive or Subscription Rights. Holders of Class B common
stock have no conversion, preemptive or subscription rights. Class B common
stock is not convertible into Class A common stock except to the limited extent
otherwise provided with respect to the series B-5 Class B common stock.
Liquidation Rights. Upon liquidation of New CME and subject to the rights
of any outstanding series of preferred stock, holders of Class B common stock
are entitled to participate with the holders of the Class A common stock, on a
Class A share equivalent basis, in the distribution of assets available for
distribution to the common stockholders.
Series Rights and Privileges. The Series B-1 shares will consist of 625
authorized shares and will entitle their holders to the trading privileges
currently available to a CME member. Holders of such shares will have the right,
as a series, to elect three members of New CME's Board of Directors.
The Series B-2 shares will consist of 813 authorized shares and will
entitle their holders to the trading privileges currently available to an IMM
member. Holders of such shares will have the right, as a series, to elect two
members of New CME's Board of Directors.
The Series B-3 shares will consist of 1,287 authorized shares and will
entitle their holders to the trading privileges currently available to an IOM
member. Holders of such shares will have the right, as a series, to elect one
member of New CME's Board of Directors.
The Series B-4 shares will consist of 467 authorized shares and will
entitle their holders to the trading privileges currently available to a GEM
member.
The Series B-5 shares will consist of 2,140 authorized shares and will
entitle their holders to the trading privileges currently available to a holder
of a GEM fraction. These shares are convertible at the option of their holder,
at any time on or before November 3, 2000, into whole shares of Series B-4 stock
at the ratio of ten shares of Series B-5 for one share of Series B-4 stock.
These shares are also subject to mandatory conversion into shares of Class A
common stock at the close of business on November 3, 2000, if not previously
converted into whole shares of Series B-4 stock. In any such mandatory
conversion, one Series B-5 share is converted into ten shares of Class A common
stock.
Preferred Stock
New CME will be authorized, subject to the limitations prescribed by
Delaware law, to issue preferred stock in one or more series, to establish from
time to time the number of shares to be included in each series, to fix the
rights, preferences and privileges of the shares of each wholly unissued series
and any of its qualifications, limitations or restrictions. The Board may
increase or decrease the number of shares of any series, but not below the
number of shares of that series then outstanding, without any further vote or
action by the stockholders of New CME. The Board may authorize the issuance of
preferred stock with voting or conversion rights that could adversely affect the
voting power or other rights of the holders of Class A shares and, to the extent
that they are Class A share equivalents for voting and other purposes, Class B
shares. We have no current plans to issue any shares of preferred stock.
Transfer Restrictions
Shares of the Class B and Class A common stock will be subject to certain
transfer restrictions for a period following the completion of the
demutualization transaction. Class B shares will be subject to the same transfer
process as applies to your current membership interest. Under that process, any
adult of good moral character, reputation and business integrity, with adequate
financial resources and credit to assume the responsibilities and privileges of
membership, is eligible for election to membership in the Exchange. Our
Membership Committee reviews applicants and conducts proceedings to determine
whether candidates meet our membership criteria. Consistent with our present
practice, a purchaser of Class B shares will be required to agree to be bound by
the rules and regulations adopted by the Board with respect to such shares.
34
<PAGE>
Class A shares will be subject to transfer restrictions, which will fall
away over time. For the first six months following completion of the
demutualization transaction, such shares may only be transferred with the
associated Class B shares. Each three months thereafter, a portion of such
shares (in 25% increments) will become transferable. After fifteen months, such
shares would not be subject to such transfer restrictions.
Other Charter Provisions
New CME's charter and by-laws will, upon consummation of the
demutualization transactions, include a number of provisions that may have the
effect of encouraging persons considering unsolicited tender offers or other
unilateral takeover proposals to negotiate with New CME's Board of Directors
rather than pursue non-negotiated takeover attempts. These provisions include:
Classified Board of Directors; Removal for Cause; Filling Vacancies. New
CME's charter will provide for a Board of Directors divided into two classes,
with one class to be elected each year to serve for a two-year term. The terms
of the initial classes of directors will terminate on the date of the annual
meetings of stockholders in 2000 and 2001. As a result, at least two annual
meetings of stockholders may be required for the stockholders to change a
majority of New CME's Board of Directors. Directors elected by Class A and Class
B stockholders may be removed for cause only by the affirmative vote of the
holders of not less than two-thirds of the outstanding votes entitled to vote in
the election. Vacancies resulting from that removal or any other reason shall be
filled by the Board of Directors. Directors elected by the Class B stockholders
may be removed for cause only by the affirmative vote of the holders of two-
thirds of the shares entitled to vote in the election of the director to be
removed. Vacancies resulting from that removal or any other reason shall be
filled by the Board of Directors from the candidates who ran in the previous
election for such directorship and received the next highest number of votes for
election. The classification of directors and the inability of stockholders to
remove directors without cause and to fill vacancies on the Board of Directors
will make it more difficult to change the composition of the Board of Directors,
but will promote a continuity of existing management.
Advance Notice Requirements. New CME's by-laws will establish advance
notice procedures with regard to stockholder proposals relating to the
nomination of candidates for election as directors or new business to be brought
before meetings of stockholders. These procedures provide that notice of such
stockholder proposals must be timely given in writing to the Secretary of New
CME prior to the meeting at which the action is to be taken. Generally, to be
timely, notice must be received at the principal executive offices of New CME
not less than 90 days nor more than 120 days prior to the first anniversary date
of the annual meeting for the preceding year. The notice must contain certain
information specified in the by-laws.
Special Meetings of Stockholders. The charter and by-laws deny stockholders
the right to call a special meeting of stockholders. The charter and by-laws
provide that special meetings of the stockholders may be called only by the
Chairman of the Board or by a majority of the Board of Directors.
No Written Consent of Stockholders. The charter requires all stockholder
actions to be taken by a vote of the stockholders at an annual or special
meeting, and does not permit the stockholders to act by written consent, without
a meeting.
Amendment of By-Laws and Charter. The charter generally requires the
approval of not less than two-thirds of the voting power of all outstanding
shares of capital stock entitled to vote to amend any by-laws by stockholder
action or the charter provisions described in this section. Provisions in the
by-laws regarding the trading rights and privileges available to the Class B
stockholders may only be amended with the approval of the Class B stockholders
as described under "Demutualization Proposal--Rights of Class B Common Stock."
Those provisions will make it more difficult to dilute the anti-takeover effects
of our by-laws and our charter.
Stockholder Rights Provisions. The charter authorizes the Board of
Directors to create and issue rights entitling their holders to purchase shares
of New CME's stock or other securities. Such rights might be used to affect the
ability of a third party to initiate a transaction designed to takeover New CME.
The Board is considering the adoption of a plan that would create such rights.
Such plans typically provide for dividend distributions of rights to holders of
common stock that is, or subsequently becomes, outstanding. The rights entitle
their holders to purchase a specified fraction of a newly-issued share of a
series of stock (typically preferred stock) at a specified exercise price. The
rights become exercisable, and transferable apart from the common stock, upon
the earlier to
35
<PAGE>
occur of (i) the date that a person or group (an "Acquiring Person") acquires
beneficial ownership of at least a specified percentage (possibly 15%) of New
CME's common stock or (ii) the commencement of, or announcement of an intent to
begin, a tender offer or exchange offer for a similar specified percentage of
New CME's common stock. If a person becomes an Acquiring Person and the rights
are not redeemed, each right would entitle its holder to receive, upon payment
of the exercise price, that number of shares of common stock of the issuing
entity which have a market value typically equal to twice the exercise price. If
the issuer of the rights is acquired by an Acquiring Person in a merger or other
business combination, or fifty percent or more of its assets or earning power
are transferred to a third party, each right would entitle its holder to
receive, upon payment of the exercise price, common stock of the Acquiring
Person or third party with a market value equal to twice the exercise price. The
rights are typically redeemable by the issuing company at a nominal price at any
time, but not after a certain limited period following the existence of an
Acquiring Person. The potential economic dilution inherent in the rights is
intended to cause potential acquirers to approach and negotiate with the Board
so that, assuming a satisfactory transaction is negotiated, the rights will be
redeemed. The rights would have an expiration date. The actual terms of any
rights plan adopted by the Board may vary from the foregoing description and
would be forwarded to stockholders following any plan adoption.
To the extent that the adoption of a rights plan would make more difficult
or discourage a proposed takeover of New CME, its adoption would increase the
likelihood that the then incumbent directors and management of New CME would
retain their positions. However, a rights plan, in combination with the existing
provisions of New CME's charter, should provide meaningful assurance that the
Board, if confronted by a surprise proposal from a third party, will have
sufficient time to review such proposal, as well as appropriate alternatives
thereto, and thereby will be in a more favorable position to protect the best
interest of New CME and its stockholders.
A rights plan is intended to encourage persons seeking to acquire control
of the Company to engage in arms-length negotiations with the Board and New
CME's management. However, a rights plan, if adopted, might also have the effect
of discouraging a person from making a tender offer (even at a premium over the
then prevailing market price) for shares of New CME's common stock or otherwise
attempting to obtain control, even though such an attempt could be beneficial to
New CME and its stockholders.
Transfer Agent
New CME will serve as transfer agent for Class B shares. The Transfer Agent
and Registrar for Class A shares will be _______________________.
MANAGEMENT
Board of Directors
The Exchange's Board of Directors currently consists of thirty-nine
persons. There is presently one vacancy. Our Board is divided into two classes:
one class (consisting of 25 members) is elected by you, as members, and the
other class (consisting of 12 members) is appointed by the elected directors.
Each of these directors serve for two-year terms. Leo Melamed, our Chairman
Emeritus and Senior Policy Advisor, serves as a permanent, non-voting member of
the Exchange's Board. Additionally, pursuant to Exchange rules, James J,
McNulty, our President and CEO serves as a non-voting member of our Board.
Following the effectiveness of the demutualization transactions, and assuming
there are no vacancies at that time, our Board will consist of thirty-nine
members serving staggered two-year terms. However, at the annual meeting in
2000, the size of our Board will be reduced by nine members; and at the annual
meeting in 2001, the size of our Board will be further reduced by eleven
members. Thereafter, the size of the Board will be nineteen.
Set forth below are the names and certain other information regarding our
Board of Directors following the completion of the demutualization transactions
which you are being asked to approve in this document.
36
<PAGE>
<TABLE>
<CAPTION>
Term
Name Expires Age Positions Held with Us and Background
---- ------- --- -------------------------------------
<S> <C> <C> <C>
Scott Gordon 12/01 47 Chairman of our Board and IMM Director. Elected member of the
Board for eighteen years. President and Chief Operating
Officer of Tokyo-Mitsubishi Futures (USA), Inc., a CME
clearing member firm wholly owned by the Bank of Tokyo-
Mitsubishi, Ltd. Also serves on the CFTC's Global Markets
Advisory Committee and the Advisory Committee to the Illinois
Institute of Technology Center for the Study of Law and
Financial Markets. Other directorships: National Futures
Association and the Futures Industry Institute. A member of
the Exchange for more than twenty-two years, Mr. Gordon has
one IMM membership in a trust.
Terrence A. Duffy 12/00 41 Vice Chairman of our Board and CME Director. Elected member of
the Board for five years. President of TDA Trading, Inc. and
an independent floor broker and trader. A member of the
Exchange for more than seventeen years, Mr. Duffy has one CME
membership and one GEM membership.
James E. Oliff 12/00 51 Second Vice Chairman of our Board and IMM Director. Elected
member of the Board for twelve years. Executive Director of
International Futures and Options Associates and President of
FILO Corp. He is a visiting lecturer in Financial Market
Ethics at the Lemberg School of International Finance and
Economics at Brandeis University in Waltham, Massachusetts.
Mr. Oliff serves on the Board of Directors of Matla Group
Holdings. A member of the Exchange for more than twenty-two
years, Mr. Oliff has one IMM membership.
Martin J. Gepsman 12/01 47 Secretary of our Board and IOM Director. Elected member of the
Board for six years. Independent floor broker and trader. A
member of the Exchange for more than fifteen years, Mr.
Gepsman has one IOM membership and six fractional GEM
membership interests.
Thomas A. Kloet 12/01 41 Treasurer and IMM Director. Elected member of the Board for
four years. Senior Managing Director of ABN AMRO Incorporated
and Senior Vice President ABN AMRO Bank, N.V. Director of ABN
AMRO Futures (UK), Ltd. and ABN AMRO Futures Singapore Ltd. He
is a Certified Public Accountant and a member of both the
American Institute of Certified Public Accountants and the
Illinois CPA Society. Other directorships: Board of Governors
of Elmhurst Memorial Hospital and Trustee of the Elmhurst
Memorial Health System. A member of the Exchange for more than
ten years, Mr. Kloet has one IMM membership.
Leo Melamed * 67 Chairman Emeritus, Senior Policy Advisor. Currently appointed
as a permanent non-voting member of the Board; previously
elected and appointed for twenty-six years. Founding member
and Chairman of the International Monetary Market. Special
Counsel to the Board from 1977 until 1991 and Special Counsel
and Chairman of the Exchange's Executive Committee from 1985
until 1991. Chairman and CEO of Sakura Dellsher, Inc., one of
our clearing member firms. Mr. Melamed previously served as
Chairman of the Exchange for four years. Mr. Melamed has been
a member of the Exchange for more than forty-five years.
John F. Sandner 12/00 58 Special Policy Advisor and CME Director. Elected member of the
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Term
Name Expires Age Positions Held with Us and Background
---- ------- --- -------------------------------------
<S> <C> <C> <C>
Board for twenty-three years. President and CEO of RB&H
Financial Services L.P., a futures commission merchant and one
of our clearing member firms. A member of the Exchange for
more than twenty-seven years, Mr. Sandner has three CME
memberships, two IMM memberships, four IOM memberships and
fourteen fractional GEM memberships interests. Mr. Sandner
previously served as Chairman of the Exchange for thirteen
years.
James J. McNulty --- 48 President and Chief Executive Officer of the Exchange beginning
February 2000, having previously served as Managing Director
and Co-Head of the Corporate Analysis and Structuring Team in
the Corporate Finance Division at Warburg Dillon Read (an
investment banking firm). Prior to 1992, he was a general
partner with O'Connor & Associates (a futures and options
trading organization).
H. Jack Bouroudjian 12/01 38 IOM Director. Elected member of the Board for four years.
Senior Vice President of Equity Futures with Commerz Futures.
A member of the Exchange for more than twelve years, Mr.
Bouroudjian has one IOM membership.
Timothy R. Brennan 12/01 58 CME Director. Elected member of the Board for ten years. Floor
broker and trader. Vice President of RB&H Financial Services,
L.P., one of our clearing member firms. A member of the
Exchange for more than twenty-four years, Mr. Brennan has one
CME membership, one IOM membership and two fractional GEM
membership interests.
Leslie Henner Burns 12/01 44 CME Director. Newly elected member of the Board. Floor trader.
A member of the Exchange for more than twenty-two years, Ms.
Burns has one CME membership and two fractional GEM membership
interests.
Jeffrey R. Carter 12/00 37 CME Director. Elected member of the Board for one year. Floor
trader. A member of the Exchange for more than ten years, Mr.
Carter has one CME membership and one IOM membership in a
trust.
E. Gerald Corrigan TBD 58 Appointed. Member of the Board since October 1998. Managing
Director at Goldman, Sachs & Co., an investment banking firm,
and co-chairman of its Risk Committee and Global Compliance
and Controls Committee. Prior thereto, he was President and
Chief Executive Officer of the Federal Reserve Bank of New
York and a member of the Federal Open Market Committee.
Rahm Emanuel 12/00 40 Appointed. Member of the Board since May 1998. Managing
Director of Wasserstein Perella & Co., Inc., an investment
banking firm. Prior to March 1998, he was Senior Advisor to
the President for Policy and Strategy in the Clinton
Administration and Executive Assistant to the Chief of Staff.
Other directorships: BSMG Worldwide Inc., and RxDrugstore.
Yra G. Harris 12/00 46 IMM Director. Elected member of the Board for three years.
Floor trader. A member of the Exchange for more than twenty-
two years, Mr. Harris has two IMM memberships and one IOM
membership.
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Term
Name Expires Age Positions Held with Us and Background
---- ------- --- -------------------------------------
<S> <C> <C> <C>
Robert L. Haworth 12/00 52 CME Director. Elected member of the Board for three years.
Floor trader. He is a Certified Public Accountant and a member
of both the American Institute of Certified Public Accountants
and the Illinois CPA Society. A member of the Exchange for
more than twenty years, Mr. Haworth has one CME membership and
one GEM membership. Mr. Haworth previously served as Treasurer
of the Exchange for two years.
Bruce F. Johnson 12/01 57 CME Director. Elected member of the Board for two years.
President and part owner of Packers Trading Company, a futures
commission merchant and former clearing member firm. A member
of the Exchange for more than twenty-nine years, Mr. Johnson
has one CME membership and one GEM membership.
Gary M. Katler 12/00 53 IOM Director. Elected member of the Board for seven years.
Senior Vice President of ING Barings Futures and Options Inc.
Mr. Katler has held a membership of his employer, ING Barings
Futures and Options Inc., for more than twelve years.
Paul Kimball 12/00 48 Appointed. Member of the Board since February 1999. Managing
Director and Global Co-Head of the Foreign Exchange Department
of Morgan Stanley Dean Witter, an investment banking firm, and
Chairman of the Foreign Exchange Committee, an industry
oversight group that advises the Federal Reserve Bank of New
York on issues related to Foreign Exchange markets.
John W. Lacey TBD 61 Appointed. Member of the Board since February 1998. Partner in
the Lacey Ranches, a family cow-calf operation, and the
Margarita Cattle Company in San Luis Obispo County,
California. Director of the National Cattlemen's Beef
Association and Chairman of the California Beef Council. He is
past president of the California Cattlemen's Association and
the National Cattlemen's Association. He serves on the
Advisory Council of the College of Agriculture at California
Polytechnic and is its immediate past chairman.
Merton H. Miller TBD 76 Appointed. Member of the Board since January 1990. Robert R.
McCormick Distinguished Service Professor of Finance Emeritus
at the Graduate School of Business, University of Chicago.
Professor Miller was awarded the Nobel Memorial Prize in
Economic Science in 1990 for his work in the area of corporate
finance.
William P. Miller II 12/00 44 Appointed. Member of the Board for one year. Senior Vice
President and Independent Risk Oversight Officer for the
Common Fund Group, an investment management firm for
educational institutions. Prior to September 1996, he was
Director, Trading Operations and Asset Mix Management with
General Motors Investment Management Corporation. Other
directorships: Association for Financial Professionals;
Chairman, Executive Committee, End Users of Derivatives
Council, Director, Investment Risk Institute.
Laurence E. Mollner TBD 58 Appointed. Member of the Board since February 1991. President
of Mariah Investment Company, a futures, equities and real
estate
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Term
Name Expires Age Positions Held with Us and Background
---- ------- --- -------------------------------------
<S> <C> <C> <C>
investment firm. Prior to forming his own company, he was
President of Carr Futures from August 1997 through January
1998 and was responsible for the sale and transition of the
Institutional Futures Division of Dean Witter Reynolds Inc.
(DWR) to Carr Futures. Until August 1997, he was Executive
Vice President for Dean Witter Reynolds Inc., Director of the
Futures Markets Division of DWR, and a member of the Board of
Directors of Dean Witter International Limited in London. He
joined DWR in 1979. Mr. Mollner is the former Chairman of the
Futures Industry Association. Other directorships: Futures
Industry Association and National Futures Association.
Patrick J. Mulchrone 12/01 42 IMM Director. Elected member of the Board for seven years.
Floor broker and trader. A member of the Exchange for more
than twenty years, Mr. Mulchrone has one CME membership, one
IMM membership, one IOM membership and one GEM membership.
John D. Newhouse 12/01 54 IMM Director. Elected member of the Board for twelve years.
Floor broker and trader. A member of the Exchange for more
than twenty-five years, Mr. Newhouse has three IMM
memberships, one IOM membership and four fractional GEM
membership interests.
Ward Parkinson TBD 54 Appointed. Member of the Board since February 1998. Founder of
Micron Technology, a manufacturer of computer and memory
chips, and he was its Chairman and Chief Executive Officer
from 1978 to 1986 and Vice Chairman until 1989. He is
presently consulting in the electronics field. Mr. Parkinson
is a partner in PYCO, and a board member of Parkinson-Yanke
Real Estate and Parkinson-Nelson Real Estate.
Mark G. Papadopoulos 12/01 27 GEM Director. Newly elected member of the Board. Floor trader.
A member of the Exchange for more than three years,
Mr. Papadopoulos has two GEM memberships.
Robert J. Prosi 12/01 52 CME Director. Elected member of the Board for twelve years.
Vice President, Salomon Smith Barney Inc., an investment
banking firm. He is a member of the Chicago Council on Foreign
Relations. A member of the Exchange for more than twenty-three
years, Mr. Prosi has one IOM membership.
David M. Pryde 12/00 50 Appointed. Member of the Board since February 1997. Managing
Director at J. P. Morgan & Co. Inc. with global responsibility
for its futures and options business. Prior to assuming his
current role, he was Head of Global Commodities for Morgan
Guaranty Trust Company. He is currently a member of the
Executive Committee of the Futures Industry Association and
the National Futures Association. Mr. Pryde was formerly Vice
Chairman of the Commodity Exchange Inc. in New York and was a
member of the Executive Committee of the Board of Governors.
Irwin Rosen 12/00 61 CME Director. Elected member of the Board for three years.
Floor broker and trader. A member of the Exchange for more
than twenty-nine years, Mr. Rosen has one CME membership in a
trust, one IOM membership in a trust and one fractional GEM
membership interest.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Term
Name Expires Age Positions Held with Us and Background
---- ------- --- -------------------------------------
<C> <S> <S> <S>
William G. Salatich, Jr. 12/00 48 CME Director. Elected member of the Board for three years. Floor
broker and trader. A member of the Exchange for more than
twenty-four years, Mr. Salatich has one CME membership and two
fractional GEM membership interests.
Verne O. Sedlacek 12/00 45 Appointed. Member of the Board since February 1997. President and
Chief Operating Officer of John W. Henry & Company, Inc., a
commodity trading advisor, and member of its Investment Policy
Committee; and President and Director of Westport Capital Management
Corporation and Global Capital Management Limited, both investment
management firms. Prior to July 1998, he was the Executive Vice
President and Chief Financial Officer of the Harvard Management
Company, Inc., a wholly owned subsidiary of Harvard University. He
is a member of the Global Markets Advisory Committee of the
Commodity Futures Trading Commission and a member of the Board of
Trustees of Commonfund Capital, Inc. Other directorships: Futures
Industry Association. He is a Certified Public Accountant.
Leon C. Shender 12/00 45 IOM Director. Elected member of the Board for one year. Floor
trader A member of the Exchange for more than twenty-three years,
Mr. Shender has one IOM membership.
William R. Shepard 12/00 53 IMM Director. Elected member of the Board for three years. Founder
and President of Shepard International, Inc., a futures commission
merchant. A member of the Exchange for more than twenty-six years,
Mr. Shepard has one CME membership, one IMM membership, one IOM
membership and five fractional GEM membership interests.
Howard J. Siegel 12/01 43 CME Director. Newly elected member of the Board. Floor trader. A
member of the Exchange for more than twenty-two years, Mr. Siegel
has one CME membership and one IOM membership.
Paul Simon 12/00 71 Appointed. Member of the Board since February 1997. Professor at
Southern Illinois University. Former U.S. Senator from Illinois
from 1984 through 1997, and former U.S. Congressman for ten years
prior thereto.
David I. Silverman 12/00 40 IMM Director. Elected member of the Board for more than seven
years. Independent trader. A member of the Exchange for more than
seventeen years, Mr. Silverman has one IMM membership.
Jeffrey L. Silverman 12/01 53 CME Director. Elected member of the Board for six years. Floor
trader. A member of the Exchange for more than twenty years, Mr.
Silverman has one CME membership and two fractional GEM membership
interests.
</TABLE>
* Mr. Melamed currently serves as a non-voting member of the Board.
Director Compensation
Each New CME director will receive an annual stipend of $20,000, plus a
meeting attendance fee of $1,000
41
<PAGE>
for each regular meeting of the Board that they attend, excluding special
administrative meetings. Directors also receive reimbursement of expenses for
travel to Board meetings.
In addition, the Chairman of the Board receives an annual stipend of
$350,000, plus reimbursement of other Board-related expenses. The four
additional Board Officers each receive an annual stipend of $50,000 and a
meeting attendance fee of $1,000 for each regular meeting of the Board that they
attend, plus reimbursement of other Board-related expenses. The Chairman
Emeritus and Senior Policy Advisor, and the Special Policy Advisor, each receive
an annual stipend of $200,000, subject to approval by the Board of Directors,
plus reimbursement of other Board-related expenses.
Committees of the Board of Directors
New CME's Board of Directors will have an Executive Committee, an Audit
Committee, a Compensation Committee and a Nominating Committee. It is expected
that members of these committees will be elected by New CME's Board following
the effectiveness of the demutualization transactions. Such committees will have
the following functions:
Executive Committee. This Committee has and may exercise the authority
of the Board of Directors, when the Board is not in session, except in cases
where action of the entire Board is required by the certificate of
incorporation, the bylaws or applicable law.
Audit Committee. New CME will have an Audit Committee, composed of
directors who are not employees, which will review the results and scope of the
audit and other services provided by our independent auditors as well as our
accounting and internal control procedures and policies.
Compensation Committee. New CME will have a Compensation Committee
composed of directors who are not employees. It will oversee the compensation
and benefits of the management and employees of the company.
Nominating Committee. This Committee will review the qualifications of
potential candidates and will propose nominees for the thirteen positions on the
Board of Directors that are nominated by the Board. This Committee will be
comprised of five directors selected by the Board. The Board will strive to have
a Nominating Committee that reflects the diversity of the Board. It is expected
that seven of the thirteen positions to be filled by the Nominating Committee
will be filled with candidates who satisfy the public participation regulatory
requirements to which the Exchange is subject. This Committee will consider
nominees recommended by stockholders if such recommendations are submitted in
writing, accompanied by a description of the proposed nominee's qualifications
and other relevant biographical information and evidence of the consent of the
proposed nominee. The recommendations should be addressed to the Nominating
Committee, in care of the Corporate Secretary. Under New CME's by-laws,
nominations may not be made at the annual meeting.
Executive Officers
Executive officers are appointed by and serve at the pleasure of our
Board of Directors. In addition to the executive officers identified above under
"Board of Directors" above, the following persons hold executive officers
positions with our company.
<TABLE>
<CAPTION>
Name Hire Date Age Position Held with Us and Background
---- --------- --- ------------------------------------
<S> <C> <C> <C>
Dr. Fred D. Arditti 7/97 60 Senior Executive Vice President, Planning & Development since
1998, and prior thereto was Executive Vice President, Business
Development and Research. Prior to joining the Exchange, he
was Professor of Finance at DePaul University.
Gerald D. Beyer 1/79 52 Executive Vice President and Chief Operating Officer since February
1997. Prior thereto as Chief Administrative Officer to which he was
named in July 1994 from the position of Chief Financial Officer.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Name Hire Date Age Position Held with Us and Background
---- --------- --- ------------------------------------
<S> <C> <C> <C>
Craig S. Donohue 9/89 38 Senior Vice President and General Counsel since October 1998.
Prior thereto, he was Vice President, Market Regulation, a
position held since June 1997, and Vice President and
Associate General Counsel, a position held since July 1995.
Phupinder Gill 2/88 39 President, Clearing House Division since July 1998, having
previously served as Senior Vice President thereof since May
1997 and a Vice President thereof since May 1994.
David G. Gomach 3/87 41 Senior Vice President and Chief Financial Officer since
January 1998, having previously served as Vice President,
Administration and Finance since December 1996. He is a
certified public accountant.
William W. Jenks 7/97 47 Executive Vice President, Management Information Systems since
May 1998, having previously served as Senior Vice President
and Chief Information Officer since July 1997. For more than
five years prior thereto, he was employed by Space
Systems/LORAL, where he was Vice President. Mr. Jenks joined
the Exchange in July 1997.
Donald D. Serpico 11/82 54 Executive Vice President, Operations since July 1994, having
previously served as Senior Vice President, Operations and
Senior Vice President of the Clearing House.
Carol B. Sexton 2/82 60 Executive Vice President, Corporate Relations since December
1995, having previously served in the position of Senior Vice
President, Corporate Relations in January 1994.
</TABLE>
Executive Compensation
The following table sets forth certain information relating to the
compensation paid to, accrued or earned by our chief executive officers and each
of the next four most highly compensated executive officers for services
rendered during the year ended December 31, 1999.
43
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
- -------------------------------------------------------------------------------------------------------------------
Annual Compensation
----------------------------------------------------------------
Other Annual All Other
Name and Principal Position salary Bonus Compensation Compensation
(3)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas Eric Kilcollin (1) $143,000 $0 $0 $1,063,890
President and Chief Executive Officer (CEO)
Scott Gordon (2) 0 0 350,000 0
Chairman of the Board of Directors (CEO)
Fred D. Arditti 522,500 260,000 0 140,599
Senior Executive Vice President,
Planning & Development
Gerald D. Beyer 522,500 210,000 0 132,796
Executive Vice President and
Chief Operating Officer
Phupinder S. Gill 400,000 160,000 0 80,914
President, Clearing House Division
William W. Jenks 270,000 120,000 0 65,111
Executive Vice President,
Management Information Systems
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Kilcollin served as President through March 1999. In addition to his
salary for the first three months of 1999 and the contributions made on his
behalf to the qualified benefit plans outline in the following table per
note (3) below, Mr. Kilcollin received a cash payment at the date of his
departure in the amount of $1,047,130. This table excludes amounts paid to
Mr. Kilcollin under our qualified and non-qualified benefit plans relating
to services performed in prior years.
(2) Mr. Gordon served as Chairman of the Board of Directors during 1999 and
received a stipend in the amount of $350,000 for these services. He has
served as our chief executive officer since the departure of Mr. Kilcollin.
(3) The following table shows the amount of each category of "all other
compensation" earned by each of the named individuals, in addition to the
payment described in note (1) above:
<TABLE>
<CAPTION>
401(k)
Matching Pension Supplemental SERP
Contribution Contribution Plan Contribution Total
------------ ------------ ------------ ------------ -----
<S> <C> <C> <C> <C> <C>
Mr. Kilcollin(1) $3,960 $12,800 $0 $0 $16,760
Mr. Gordon 0 0 0 0 0
Mr. Arditti 4,800 14,400 62,599 58,800 140,599
Mr. Beyer 4,800 12,800 56,623 58,573 132,796
Mr. Gill 4,800 8,000 25,705 42,409 80,914
Mr. Jenks 4,800 11,200 18,693 30,418 65,111
</TABLE>
Employee Benefit Plans
Omnibus Stock Plan. New CME has adopted an Omnibus Stock Plan under
which stock based awards may be made to employees of New CME. An aggregate of
2,600,000 Class A shares has been reserved for awards
44
<PAGE>
under the plan. Other than the award made during 2000 to Mr. McNulty, described
below under "Employment-Related Agreements," no awards have been made to date
under the plan.
The plan authorizes the making or grant of the following types of
awards singly, in combination, or in tandem: (i) stock options, which may be
either "incentive stock options" (within the meaning of Section 422 of the
Internal Revenue Code) or non-qualified stock options; (ii) stock appreciation
rights, which allow the recipient to receive a payment equal to the appreciation
in market value of a stated number of Class A shares; (iii) stock awards, which
may be restricted or unrestricted; and (iv) other stock based awards.
The plan will be administered by the Compensation Committee of New
CME's Board. The Compensation Committee has the authority to interpret the plan,
to select employees of New CME to receive awards under the plan, and to
determine the form, amount and other terms and conditions of such awards. The
Committee also has the power to modify or waive restrictions on awards, to amend
awards and to grant extensions and accelerate awards. No member of the
Compensation Committee is eligible to participate in the plan.
401(k) Plan. Our company sponsors a 401(k)-type plan known as the "Tax
Efficient Savings Plan," which is a defined contribution retirement plan
intended to qualify under Section 401 of the Internal Revenue Code. Employees
are eligible to participate in this plan from the first day of employment. They
may make pre-tax contributions to the plan between 1% to 15% of their base pay,
subject to the limitations of the plan and a statutorily prescribed annual
limit. Each employee is fully vested in his or her contributions and any
earnings on those contributions. We fully match an employee's contributions up
to a maximum of 3% of such employee's base pay. Matching contributions become
vested at the end of the second plan year following the year in which the
contributions are made. After five years of eligible service, an employee is
100% vested in all matching contributions. We make additional contributions of
up to 2% of employees' base pay based on specified increases in trading volume,
and the Plan permits additional contributions at the discretion of the Exchange.
Pension Plan. We also maintain a non-contributory defined benefit cash
balance pension plan for eligible employees. To be eligible, an employee must
have completed a continuous 12-month period of employment with us and have
reached the age of 21. Effective January 15, 1995, the pension plan was amended
to provide for an age-based contribution to a cash balance account, and to
include cash bonuses in the definition of considered earnings. Participant cash
balance accounts receive an interest credit at the one-year U.S. Treasury Bill
rate. Our policy is to fund currently required pension costs. Participants
become vested in their accounts after five years of service. The following is
the schedule of the employer contributions based on age:
Age %
------------ --
under age 30 3%
age 30 - 34 4%
age 35 - 39 5%
age 40 - 44 6%
age 45 - 49 7%
age 50 - 54 8%
over age 54 9%
The individuals named below have projected annual retirement benefits,
based on current accumulated balances, an annual interest credit rate of 6% and
future service to age 65 at current salary levels as follows: Mr. Kilcollin,
none; Mr. Gordon, none; Mr. Arditti, $10,600; Mr. Beyer, $51,500; Mr. Gill,
$92,600; and Mr. Jenks, $43,600.
Non-Qualified Plans. The Exchange maintains the following non-qualified
plans which are not subject to the Employee Retirement Income Security Act of
1974 under which participants may make assumed investment choices with respect
to amounts contributed on their behalf. Although not required to do so, the
Exchange invests such contributions in assets which mirror the assumed
investment choices. The balances in these plans are subject to the claims of
general creditors of the Exchange.
. Deferred Compensation Plan - The Exchange maintains a deferred
compensation plan under which eligible officers and board members
may contribute a percentage of their compensation and defer income
taxes thereon until the time of distribution.
45
<PAGE>
. Supplemental Plan - The Exchange maintains a non-qualified
supplemental plan to provide benefits for certain officers who
have been impacted by statutory limits under the provisions of the
qualified 401(k) and pension plans.
. Supplemental Executive Retirement Plan ("SERP") - The Exchange
maintains a non-qualified, defined contribution plan for senior
officers. Under the plan, the Exchange contributes an amount equal
to 8% of salary and bonus of eligible employees annually. Post
1996 contributions are subject to a vesting schedule under which
each annual contribution begins to vest after three years and is
fully vested after five years.
Employment-Related Agreements
Mr. McNulty
The Exchange has entered into an employment agreement with James J.
McNulty to serve as its President and Chief Executive Officer through December
31, 2003, subject to renewal by mutual agreement of the parties. Under the
agreement, Mr. McNulty will receive an annual base salary of $1 million. He is
also entitled to an annual incentive bonus based upon the achievement of certain
goals set by the Board of Directors, which bonus may not exceed the lesser of
$1.5 million or, after demutualization, 10 percent of New CME's net income. The
agreement provides for reimbursement of business expenses, certain perquisites,
and legal fees associated with the negotiation of the employment agreement. Mr.
McNulty will be eligible to participate in other benefit plans available
generally to senior officers of the CME. As partial compensation for actual
compensation, benefits and programs that Mr. McNulty was, or was reasonably
expected to become, entitled to receive from his previous employer, he received
a lump-sum payment of $2 million.
Mr. McNulty has also been granted a non-transferable non-qualified
stock option ("Option"), which is designed to reward him for increasing the
value of New CME. If the total value of the Exchange increases, exercise of the
option would entitle him to receive essentially 2.5% of the increase above the
starting valuation and 2.5% of the increase, if any, in excess of 150% of the
starting valuation. If the demutualization is completed, the Option would
entitle him to purchase from New CME two "baskets" of New CME stock. Each basket
is composed of up to 2.5% of the outstanding shares of New CME, although New CME
may elect to issue solely shares of Class A common stock upon any exercise. The
baskets have aggregate exercise prices of 2.5% and 3.75%, respectively, of the
value of the Exchange on the date of commencement of Mr. McNulty's employment.
The Option will expire in ten years. It may be exercised only if the
demutualization transaction is completed, and then only as to the portion of the
Option that has vested. The Option vests 40 percent after the first year and 20
percent in each of the succeeding three years, subject to acceleration in the
event of Mr. McNulty's termination without cause or forfeiture in the event of
his termination for cause. The Option remains exercisable in full for its
remaining term following (i) a termination by the Exchange of the employment
agreement without cause or due to Mr. McNulty's disability, (ii) a termination
of the employment agreement by Mr. McNulty where the Exchange has in effect
terminated his employment by moving the Exchange outside metropolitan Chicago,
demoting him, significantly reducing his responsibilities or failing to pay him
the agreed compensation and benefits under the agreement or (iii) upon the
expiration of the original term of the employment agreement. Any vested portion
of the Option is exercisable for a period of 180 days following a termination by
Mr. McNulty of the employment agreement. Upon exercise of the Option, New CME
may distribute, in lieu of each class of shares of New CME, cash and/or shares
of Class A stock.
The agreement provides that it may be terminated by the Exchange due to
Mr. McNulty's death or disability, or for cause on thirty days written notice or
without cause on ninety days written notice. In addition, the agreement allows
Mr. McNulty to terminate it at anytime after one year upon ninety days written
notice. He may also terminate the agreement if the Exchange's principal place of
business is relocated outside of the Chicago metropolitan area, the Exchange
fails, after notice, to pay the agreed-upon compensation or benefits or the
Exchange fails, after notice, to rectify a situation in which he is, in effect,
terminated due to a demotion or a significant reduction of his responsibilities.
The agreement provides that, in the event of a termination without cause by the
Exchange, Mr. McNulty shall be entitled to receive his base salary for the
remainder of the original term plus one-third of the maximum annual incentive
bonus. The agreement also provides that, in the event that Mr. McNulty
terminates his employment after its first year on less than ninety days written
notice (other than following one of the
46
<PAGE>
matters previously described as "good cause"), the Exchange may recover from him
a sum equal to his annual base salary, computed daily, for each day his notice
of termination is less than ninety days. If Mr. McNulty's employment is
terminated because of his death or disability, he or his beneficiary will
continue to receive the base salary for six months following such termination.
In the event of his death, his option will vest and be paid in cash. The
Exchange intends to purchase key man life insurance to assist in funding
payments that would be required in the event of Mr. McNulty's death.
In the event the demutualization is not completed by December 31, 2000,
either the Exchange or Mr. McNulty may terminate the agreement, subject to
certain conditions, within thirty days thereafter. In that case, Mr. McNulty
shall continue to receive his annual base salary plus one-third of the maximum
annual incentive bonus for the remainder of the original term of the agreement
unless he becomes employed by a competitor to the Exchange. In addition, the
option shall be forfeited.
The agreement also provides that, if within two years of a "change in
control" of the Exchange, Mr. McNulty is terminated by the Exchange or he
terminates the agreement as a result of the occurrence of one of the matters
described previously as "good cause," he shall be entitled to two times his base
salary plus one and one-third times the maximum incentive bonus for which he
would have been eligible, provided that such severance payments do not exceed $8
million. Such payment would be subject to reduction to the extent that it would
otherwise result in the payment of tax under Section 4999 of the Internal
Revenue Code. Any unvested portion of his option would immediately vest and
become exercisable for a one or three year period, depending upon whether the
option securities are registered under the Securities Exchange Act of 1934.
Messrs. Arditti, Beyer, Gill and Jenks
The Exchange has employment agreements with each of Messrs. Arditti,
Beyer, Gill and Jenks regarding their employment as executives of the Exchange.
Each agreement is for an initial period of approximately two years, with the
agreement of Mr. Jenks ending June 30, 2000, the agreement with Mr. Gill ending
August 31, 2001, the agreement with Mr. Beyer ending April 12, 2001 and the
agreement with Mr. Arditti ending June 30, 2001. Unless the agreement is renewed
by the parties, it ceases to apply following its expiration even if the covered
individual remains employed by the Exchange.
The agreements provide that annual increases to these executives' base
salaries are to be determined by the Exchange in accordance with its
compensation policies and practices. These executives are also entitled to
participate in a discretionary bonus program and in other benefit plans
available generally to Exchange employees and officers.
The agreements may be terminated by the Exchange in the event of the
executive's death or disability and may also be terminated for cause. They may
be terminated by the executive at any time and for any reason on at least sixty
days written notice. In the event of a merger, sale, reorganization or other
change in control of the Exchange, the agreements would be binding upon and
inure to the benefit of any successor of the Exchange. In the event of a
termination of an executive's employment for cause, the executive is entitled to
any accrued, but unused, vacation pay.
An executive's obligations under his employment agreement are suspended
in the event that he becomes disabled and receives benefits under the Exchange's
long-term disability insurance program, subject to reinstatement if he returns
to his original position. If the executive returns to work in a different
position or does not return to work at all upon the conclusion of his
disability, the employment agreement will be terminated. If employment is
terminated due to death or disability, an executive's legal representatives or
the executive will receive his base salary for a period of six months following
such termination.
Mr. Kilcollin
The Exchange had an employment agreement with T. Eric Kilcollin to
serve as its President and Chief Executive Officer from February 1, 1997 through
March 31, 2000; however, Mr. Kilcollin resigned effective March 19, 1999. The
agreement provided for an initial base salary of $550,000, with increases at the
Exchange's sole discretion. Under the agreement, he was eligible for a
performance bonus and to participate in the Exchange's staff bonus program. He
was also entitled to an annual enhanced pension benefit in an amount equal to
ten percent of his
47
<PAGE>
base salary for the calendar year plus a gross-up payment to negate the effect
of the additional taxes incurred because of such benefit. Under the agreement,
he was entitled to reimbursement for various perquisites, an annual lump sum
payment of $12,500 for professional services and participation in other benefit
plans available generally to Exchange employees and officers.
Under Mr. Kilcollin's separation agreement, the Exchange paid to Mr.
Kilcollin $591,982.96, representing his annual base salary and vacation benefits
through the original term of his employment agreement. He also received
$155,555, representing reimbursement of costs of perquisites and of professional
services he was expected to incur through March 31, 2000 and of amounts owed to
him as the enhanced pension benefit, plus an additional bonus of $200,000. The
Exchange also agreed to reimburse him, through March 31, 2000, for costs
incurred to obtain health, dental, vision, life and accidental death and
dismemberment insurance.
Mr. Kilcollin's interests under the retirement and deferred
compensation plans in which he participated became fully vested as of his
resignation date. In all other respects, his rights and the Exchange's
obligations pursuant to such plans are determined by the terms of those plans.
However, Mr. Kilcollin was paid approximately $100,000 for amounts owed to him
under certain Exchange-sponsored pension benefit plans.
Beneficial Ownership of Management
The following table lists the beneficial ownership, as defined under
the rules of the Securities and Exchange Commission, as of December 31, 1999, of
membership interests in the Exchange held by each of the Directors, each of the
executive officers named in the Summary Compensation Table on page 44 and the
Exchange's Directors and executive officers as a group. The table also indicates
the number of Class A shares and number of Class A equivalent shares that such
persons would hold upon completion of the demutualization transactions, all of
which are less than one percent of the Class A shares expected to be outstanding
at such time (except the total number of shares held by all directors and
officers as a group, which would represent 1.96% of the outstanding shares of
Class A common stock). There was no person known to the Exchange to be the
beneficial owner of more than five percent of the membership interests of the
Exchange as of December 31, 1999.
<TABLE>
<CAPTION>
Memberships Owned
--------------------------------------------------- Total Equity
Expressed in
GEM Class A Equivalent Class
CME IMM IOM GEM Fractions Shares A shares
--- --- --- --- --------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
M. Scott Gordon 0 1 * 0 0 0 10,800 12,000
Terrence A. Duffy 1 0 0 1 0 16,200 18,100
James E. Oliff 0 1 0 0 0 10,800 12,000
Thomas A. Kloet 0 1 0 0 0 10,800 12,000
Martin J. Gepsman 0 0 1 0 6 5,400 6,060
Leo Melamed 1 ** 1 ** 2 ** 0 0 37,800 42,000
John F. Sandner 3 2 4 0 14 91,800 102,140
H. Jack Bouroudjian 0 0 1 0 0 5,400 6,000
Timothy R. Brennan 1 0 1 0 2 21,600 24,020
Jeffrey R. Carter 1 0 1 * 0 0 21,600 24,000
E. Gerald Corrigan 0 0 0 0 0 0 0
Rahm Emanuel 0 0 0 0 0 0 0
Yra G. Harris 0 2 1 0 0 27,000 30,000
Robert L. Haworth 1 0 0 1 0 16,200 18,100
Leslie Henner Burns 1 0 0 0 2 16,200 18,020
Bruce F. Johnson 1 0 0 1 0 16,200 18,100
Gary M. Katler 0 0 0 0 0 0 0
Paul Kimball 0 0 0 0 0 0 0
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Memberships Owned
--------------------------------------------------- Total Equity
Expressed in
GEM Class A Equivalent Class
CME IMM IOM GEM Fractions Shares A shares
<S> <C> <C> <C> <C> <C> <C> <C>
John Lacey 0 0 0 0 0 0 0
Merton Miller 0 0 0 0 0 0 0
William Miller 0 0 0 0 0 0 0
Laurence E. Mollner 0 0 0 0 0 0 0
Patrick J. Mulchrone 1 1 1 1 0 32,400 36,100
John D. Newhouse 0 3 1 0 4 37,800 42,040
Ward Parkinson 0 0 0 0 0 0 0
Mark G. Papadopoulos 0 0 0 2 0 0 200
Robert J. Prosi 0 0 1 0 0 5,400 6,000
David M. Pryde 0 0 0 0 0 0 0
Irwin Rosen 1 * 0 1 * 0 1 21,600 24,010
William G. Salatich, Jr. 1 0 0 0 2 16,200 18,020
Verne Sedlacek 0 0 0 0 0 0 0
Leon C. Shender 0 0 1 0 0 5,400 6,000
William R. Shepard 1 1 1 0 5 32,400 36,050
Howard J. Siegel 1 0 1 0 0 21,600 24,000
David I. Silverman 0 1 0 0 0 10,800 12,000
Jeffrey L. Silverman 1 0 0 0 2 16,200 18,020
Paul Simon 0 0 0 0 0 0 0
Fred D. Arditti 0 0 0 0 0 0 0
Gerald D. Beyer 0 0 0 0 0 0 0
Craig S. Donohue 0 0 0 0 0 0 0
Phupinder Gill 0 0 0 0 0 0 0
David G. Gomach 0 0 0 0 0 0 0
William W. Jenks 0 0 0 0 0 0 0
Donald D. Serpico 0 0 0 0 0 0 0
Carol B. Sexton 0 0 0 0 0 0 0
Directors and Executive
Officers as a group 16 14 18 6 38 507,600 564,980
</TABLE>
* Membership held in a trust of which the indicated person is the trustee.
** Membership owned by Sakura Dellsher, Inc. ("SDI"). Mr. Melamed is deemed to
be the beneficial owner of these membership interests.
BUSINESS
Founded in 1898, the Exchange is one of the world's leading exchanges
for the trading of futures and options on futures contracts, with total volume
in 1999 of approximately 200 million contracts. The underlying notional value of
transactions, the most comprehensive measure of economic activity, was
approximately $138 trillion in 1999--exceeding that of any other derivatives
exchange in the world. According to industry data, we ranked third worldwide
among major futures exchanges in volume of contracts traded in 1999 and second
in terms of open interest (the number of futures contracts and options positions
outstanding at the close of trading). From our origins as a small agricultural
market, we have evolved into a major financial center offering a diverse range
of contracts based on interest rates, equity indices, foreign currencies,
agricultural commodities and other underlying instruments and risk-based
activities.
We operate markets for the trading of commodity and financial futures
contracts, as well as options on futures contracts. These contracts have been
developed through our extensive research and development efforts and
49
<PAGE>
through relationships that we have developed with market participants and other
financial institutions. We operate traditional open outcry auction markets and
we were the first major futures exchange in the world to develop an electronic
trading system--now known as our GLOBEX\\2\\ system. We also match, clear,
settle and guarantee all transactions executed on the Exchange through the CME
Clearing House, and we engage in extensive regulatory, compliance, market
surveillance and financial supervision activities designed to ensure market
integrity and provide financial safeguards for users of our markets. Our
traditional open outcry and electronic trade execution services provide "price
discovery" and trade matching services that offer market participants complete
price transparency, anonymity and immediacy. Our Clearing House provides market
participants with clearing, settlement, risk management and guarantee services
that provide near immediate transaction finality, resulting in the mitigation of
counterparty credit risk. We also market and distribute valuable real-time and
historical market data generated from trading activity in our markets to users
of our products and related cash and derivative markets.
Market participants include many of the world's largest banks and
investment firms. These participants use our products for hedging, risk
management, asset allocation, and speculation. Other market users include
financial institutions, such as public and private pension funds, mutual funds,
hedge funds and other managed funds, insurance companies, corporations,
commercial banks, professional independent traders, and retail customers. Our
users can be broadly categorized as hedgers or speculators--depending on whether
they transfer risk or accept risk. Hedgers are market participants who want to
transfer price risk in an underlying commodity (e.g., cattle) or financial
instrument (e.g., cash foreign currency or an interest rate swap agreement). Our
members serve as liquidity providers for our markets and as financial
intermediaries for customers who use our products.
We have developed innovative and cost-effective products, execution and
order routing systems, and clearing systems that have led to substantial volume
and to the benefit of our members and customers. As indicated in the chart
below, volume in our products remains strong and substantially greater today
than volume prior to 1994, despite recent fluctuations in volume. Fluctuations
in interest rate volatility, declines in currency volatility, growth in equity
trading, and the business cycle of the U.S. economy have led to the fluctuations
in our volume.
[Graphic: Bar graph entitled and showing "CME ANNUAL VOLUME OF
CONTRACTS TRADED 1990 - 1999". Below the horizontal axis each year for which
trading volume is measured is written in chronological order from left to right.
The vertical axis indicates the number of contracts traded, in millions,
beginning with zero and increasing, in intervals of 50, up to 250. The lower
portion of each bar is darkly shaded to the extent of the futures contracts
traded and the upper portion is lightly shaded to the extent of the options
contracts traded. Inset in a small square to the right of the graph is a legend
containing a lightly shaded box to the immediate left of the word "Options" and
immediately below which is a darkly shaded box to the immediate left of the word
"Futures". Futures contracts were traded at a rate of approximately 75 million
in 1990, 80 million in 1991, 100 million in 1992, 105 million in 1993, 155
million in 1994, 140 million in 1995, 135 million in 1996, 150 million in 1997,
170 million in 1998 and 160 million in 1999. Options contracts were traded at
the rate of approximately 25 million in 1990, 25 million in 1991, 25 million
in 1992, 40 million in 1993, 45 million in 1994, 30 million in 1995, 30
million in 1996, 40 million in 1997, 45 million in 1998 and 30 million in
1999.]
Presently, derivatives markets are experiencing significant and rapid
changes due to advances in technology, relaxation of regulatory barriers for
certain competitors, and resultant cost efficiencies. Computer and
telecommunications systems today can efficiently and economically bring buyers
and sellers together, presenting new challenges to centralized open outcry
auction markets. These changes are lowering barriers to entry and creating a
lower cost business model, forcing traditional exchanges to streamline their
operations and reduce costs. Large market users, and the threat of competition,
will force exchanges to seek more efficient trading, processing and clearing
facilities. We have responded to these challenges, and positioned the Exchange
to preserve and enhance our current business, by implementing technology to
streamline our trade execution and clearing facilities, by refining our existing
products and developing innovative new products to satisfy customer demands, and
by continually enhancing the ability of our independent traders to provide
liquidity in our markets.
In order to continue to enhance our ability to compete in this dynamic
marketplace, our organizational strategy is to convert the Exchange to a
demutualized for-profit corporation. We intend to improve our governance and
managerial structure by reducing our Board size and focusing the role of the
Board on traditional oversight activities. We will significantly reduce the
number and responsibility of existing committees and will enhance and expand the
responsibility and authority of our management and professional staff. The
demutualization will also reduce members' petition and referenda rights, except
for specific ratification rights reserved to the Class B
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<PAGE>
stockholders. We believe that demutualization will better enable us to
strengthen, expand and defend our core business.
Our core business consists of four main areas: development of risk
management products; operating execution facilities for such products; providing
clearing and settlement services; and collecting and selling market data.
Products
The range and diversity of our product portfolio is a significant
contributor to our success. Our product line includes futures contracts and
options on futures contracts based upon interest rates, stock indices, foreign
currencies, agricultural commodities and other underlying instruments and
risk-based activities. We also offer EFP markets whereby market participants can
establish or liquidate a futures position in one of our products in conjunction
with a simultaneous sale or purchase of the underlying cash commodity. We have a
research division and a marketing division to support market participants and
foster the trading and development of current and future products. Our research
and marketing staff meet regularly with market users, members and clearing
members to determine whether our current products, facilities and services meet
these participants' needs and whether modifications or enhancements are
necessary. Our research and marketing staff also develop new product ideas in
consultation with market users and other financial institutions. The charts
below depict the distribution of trading volumes and clearing fee revenues
across our four major product sectors.
[Graphic: Pie chart entitled "1999 CME TRADE VOLUME SUMMARY" and
representing the trading in each of the CME's four major product sectors as a
percentage of the total trading volume. The entire chart represents and is
subtitled "(100% = 201 million contracts". Trading volume percentages are:
Interest Rate Products - 60%, Equity Index Products - 24%, Currency Products -
12% and Agricultural Products - 4%.]
[Graphic: Pie chart entitled "1999 CLEARING FEE REVENUE" and
representing the sources of clearing fee revenue as a percentage of total
clearing fee revenue. The chart represents and is subtitled "(100% = $138.5
MILLION)", with revenue distributed as follows: Interest Rate Products - 36%,
Currency Products - 32%, Equity Index Products - 27% and Agricultural Products
5%.]
Interest Rate Products. Our interest rate product line includes our
Eurodollar futures and options contracts, a short term interest rate product and
one of the most successful products in our industry. The notional value of
outstanding Eurodollar futures contracts typically exceeds $2.5 trillion on any
given day. We also trade contracts based upon other short-term U.S. and foreign
interest rates, such as one-month LIBOR contracts and Euroyen. Eurodollars are
U.S. dollars on deposit in commercial banks outside of the United States. The
Eurodollar market has burgeoned over the past thirty years into a major
international capital market as the dollar has become a world reserve currency.
Eurodollar deposits play a major role in the international capital markets. The
interbank market for immediate (spot) and forward delivery of offshore dollars
is deep and liquid, giving banks the ability to fund dollar loans to foreign
importers without incurring currency exchange risks. Our market users are
generally banks and other financial institutions that face interest rate risks
from their lending and borrowing activities or their activities as dealers in
OTC interest rate swaps and structured derivative products. Many swap dealers
use our Eurodollar and other interest rate contracts to hedge and/or arbitrage
their money market swaps and to convert a floating interest rate exposure to a
fixed rate exposure. A significant number of our clearing member firms are
affiliates of major domestic and international banks who utilize our interest
rate markets for their proprietary trading activities. Asset managers also use
our interest rate products to lengthen the effective maturity of short-term
investment assets by buying futures contracts, or shorten the effective maturity
by selling futures. Our contracts are an attractive alternative when physical
restructuring of a portfolio is not possible or when futures transaction costs
are less than the cash market transaction costs.
Market users take advantage of the flexibility and liquidity of the
Eurodollar products we trade, which span forty-four contract months covering ten
years of short-term interest rate risk. Further, by trading multiple contract
months, market users can hedge and speculate on long-term interest rate
movements. We have introduced innovative product extensions--Eurodollar Bundles
and Packs--in order to facilitate such trading strategies. Eurodollar Bundles
allow traders to simultaneously buy or sell a pre-packaged 1-, 2-, 3-, 4-, 5- 7-
or 10-year "strip" of individual contracts in a single transaction, rather than
constructing the same positions with individual contracts. Similarly, Eurodollar
Packs allow traders to simultaneously purchase or sell a consecutive series of
four Eurodollar
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<PAGE>
futures. To further benefit market users, we have implemented a series of
product enhancements in recent years. We introduced quarter-tick trading for
front-month expiring Eurodollar and LIBOR futures and options contracts and we
expanded half-tick trading through the twentieth quarterly Eurodollar
expiration. We also implemented All-Or-None trading in the quarterly expirations
of Eurodollar futures, and in Eurodollar options contracts, permitting
transactions to be executed in full, at the size and price specified. All of
these changes have reduced costs and enhanced efficiency for market
participants.
As depicted in the chart below, our interest rate product trading
volumes have fluctuated over the last five years. These fluctuations reflect
primarily changes in central bank monetary policies and changing levels of
interest rate volatility during these periods, rather than successful
competition from other exchanges or increased use of alternative products or
markets by market users. Although the adoption in recent years of internal
netting mechanisms by banks that use our Eurodollar contracts has increased,
volume in these products continues to remain strong, and they constitute a
significant part of our business.
[Graphic: Bar graph representing and entitled "VOLUME OF INTEREST RATE
CONTRACTS TRADED 1994 - 1999". Below the horizontal axis each year for which
interest rate trading volume is measured is listed in chronological order from
left to right. The vertical axis indicates the number of interest rate contracts
traded, in millions, beginning with zero and increasing, in intervals of 50, to
150. The lower portion of each bar is darkly shaded to the extent of the futures
contracts traded and the top portion of each bar is lightly shaded to the extent
of options contracts traded. Inset in a small square to the right of the graph
is a legend containing a lightly shaded box to the immediate left of the word
"Options" and immediately below which is a darkly shaded box to the immediate
left of the word "Futures". Futures contracts were traded at the rate of
approximately 100 million in 1994, 85 million in 1995, 80 million in 1996, 90
million in 1997, 105 million in 1998 and 80 million in 1999. Options contracts
were traded at the rate of approximately 30 million in 1994, 30 million in 1995,
25 million in 1996, 30 million in 1997, 35 million in 1998 and 35 million in
1999.]
Stock Index Products. We offer trading in futures and options contracts
based upon the S&P 500(R) and Nasdaq 100(R) stock indices, as well as other
domestic and foreign small, medium and large cap indices. Over 90% of our volume
in stock index products is in products based on the S&P 500 Index, to which we
have an exclusive contract. Standard & Poor's Corporation designed and maintains
the S&P 500 Index to be an accurate proxy for a diversified equity portfolio
representing a broad cross-section of the U.S. equity market. The index is based
upon the stock prices of five hundred large-capitalization companies. In 1999,
the total notional value of S&P 500 futures contracts traded was $9.7 trillion
compared to the $8.9 trillion value of stocks traded on the New York Stock
Exchange. The Nasdaq 100 Index, also known as the "technology index," is based
on the one-hundred largest non-financial stocks listed on the Nasdaq stock
market. These products give market users the ability to hedge their equity
portfolios, to efficiently gain exposure to U.S. and foreign equity markets
without the execution and capital costs of implementing their trading strategy
in the underlying cash markets, to take advantage of spread opportunities
between different sectors of the market, to enhance the return or yield on an
underlying portfolio of stocks or commodities, and to diversify a portfolio.
Market users include public and private pension funds, investment companies,
mutual funds, insurance companies and other financial services companies that
benchmark their investment performance to different segments of the equity
markets.
As depicted in the chart below, our equity index product trading
volumes have increased substantially in the last two years. In addition, we
currently have about a 90% market share in all U.S. listed stock index futures
and options on futures. Our dominance in this market reflects the liquidity that
our members provide, as well as the fact that the S&P 500 Index is the U.S.
financial standard for benchmarking stock market returns. In addition to the
overall strength of the U.S. equity markets, our equity index volume growth in
1998 is attributable to a one-half reduction in the size of our S&P 500 futures
contract in November 1997, making the contract more attractive to smaller
institutions. To benefit market users of our equity index products, we have
introduced flexible term options on our equity index futures. These options
allow users to more precisely tailor expiration dates, strike prices, the
exercise style, and various other features of our standardized options
contracts, in order to meet their needs and complement their trading strategies.
[Graphic: Bar graph entitled "VOLUME OF EQUITY INDEX CONTRACTS TRADED
1994 - 1999" and representing the number of futures and options contracts on
various stock indices traded on the CME. Below the horizontal axis each year
measured is listed in chronological order from left to right. The vertical axis
indicates the number of contracts traded, in millions, beginning with zero and
increasing, in intervals of 10, to 50. The lower
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<PAGE>
portion of each bar is darkly shaded to the extent of the futures contracts
traded and the top portion is lightly shaded to the extent of the options
contracts traded. Inset in a small square to the right of the graph is a legend
containing a lightly shaded box to the immediate left of the word "Options" and
immediately below which is a darkly shaded box to the immediate left of the word
"Futures". Futures equity index contracts were traded at the rate of
approximately 17 million in 1994, 17 million in 1995, 19 million in 1996, 22
million in 1997, 36 million in 1998 and 41 million in 1999. Options equity index
contracts were traded at the rate of approximately 4 million in 1994, 5 million
in 1995, 4 million in 1996, 5 million in 1997, 5 million in 1998 and 3 million
in 1999.]
We have had a licensing arrangement with Standard & Poor's Corporation
since 1980 that gives us the exclusive right to trade futures and options on
futures contracts on specified S&P stock indices, including the S&P 500. In
1997, we extended this arrangement until 2008, ensuring the continued success
and expansion of this market. Our Nasdaq 100 license agreement will also
continue until 2005.
In 1997, we launched our highly successful E-Mini S&P 500 futures and
options contracts and, in 1999, we launched our E-Mini Nasdaq 100 futures
contracts. These contracts, which are traded both by electronic trading on
GLOBEX\\2\\ and open outcry pit trading, are one-fifth the size of our principal
S&P 500 and Nasdaq 100 futures contracts, and are designed to appeal to our
growing retail and small institutional customer segment. The method of execution
for these E-Mini products is determined by the size of the order. Smaller orders
utilize complete electronic order entry, routing and trade matching via
GLOBEX\\2\\. Larger orders are executed by open outcry on the trading floor via
our innovative All-Or-None (AON) facility. AON allows for pit transactions to be
executed in full, at the size and price specified. Since their introduction,
trading volumes in these products have grown rapidly. As the chart below
indicates, quarterly volume in our E-Mini S&P 500 futures and options contracts
recently exceeded three million contracts. The strong growth pattern is
indicative of the strength of the U.S. equity markets, as well as the increasing
prevalence of sophisticated retail customers interested in Internet access and
day trading. We expect continued growth in our existing E-Mini markets and to
develop E-Mini versions of some of our other products that will attract retail
customers and small institutions.
[Graphic: Bar graph entitled "E-MINI S&P QUARTERLY VOLUME Q4 1997 - Q4
1999" and representing the quarterly trading volume of E-Mini S&P 500 futures
and options contracts from the fourth quarter of 1997 through the fourth quarter
of 1999. Below the horizontal axis each quarter measured is listed in
chronological order from left to right. The vertical axis indicates the number
of contracts traded, in millions, beginning with zero and increasing, in
intervals of 0.5, to 3.5. E-Mini contracts were traded at the rate of
approximately 0.6 million in the fourth quarter of 1997, 0.7 million in the
first quarter of 1998, 0.8 million in the second quarter of 1998, 1.3 million in
the third quarter of 1998, 1.4 million in the fourth quarter of 1998, 2.0
million in the first quarter of 1999, 2.5 million in the second quarter of 1999,
3.0 million in the third quarter of 1999 and 3.2 million in the fourth quarter
of 1999.]
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Currency Products. Since developing financial futures for currencies in
1972, we have built a strong presence in foreign currency trading, providing
traders, investors and risk managers with tools to hedge their risk from foreign
exchange market movements. Average daily turnover in the interbank foreign
exchange market exceeds $1 trillion, making this market the world's largest. The
interbank foreign currency market is dominated by large banks and multinational
corporations. The CME provides an attractive alternative to this market by
offering foreign currency futures and futures options contracts so that large
and small investors alike can have equal access to the world of foreign
exchange. We offer futures and options on futures contracts on the world's major
currencies, including, among others, the Euro, Deutsche mark, Japanese yen,
British pound, Canadian dollar, French franc, Swiss franc, Mexican peso, and
Australian dollar. Users of these markets are institutions such as banks, hedge
funds, commodity trading advisors and corporations with foreign currency
exposures, and retail customers who speculate for profit on foreign currency
price movements. To benefit market users and compete effectively with the
interbank foreign currency market, we have introduced All-Or-None trading
whereby larger currency futures orders are filled in their entirety at a single
price, without the possibility of partial fills. Additionally, foreign currency
All-Or-None transactions can occur outside the bid/ask or daily high/low for
regular futures contracts, and market participants can receive competitive
quotes from multiple market makers.
As indicated in the charts below, our foreign currency futures and
options product trading volumes have declined significantly in the last five
years, while our foreign currency EFP transaction volumes have increased. The
decline in our futures and options trading volumes reflect several different
trends: bank consolidations and increased use of internal netting mechanisms by
our bank customers, reduced volatility in cash foreign currency markets, and the
introduction of the Euro and subsequent phasing out of certain major European
currencies. We also face significant competition in this product sector from the
inter-bank foreign currency market, which offers comparable and highly liquid
cash and forward rate agreement trading facilities in these foreign currencies.
Despite declines in our foreign currency futures and options trading volumes,
however, the growth in foreign currency EFP transactions and EFP fees have
stabilized revenues from our currency products.
[Graphic: Bar graph entitled "VOLUME OF CURRENCY CONTRACTS TRADED 1994
- - 1999" and representing the trading volume of foreign currency options and
futures contracts. Below the horizontal axis each year measured is listed in
chronological order from left to right. The vertical axis indicates the number
of contracts traded, in millions, beginning with zero and increasing, in
intervals of 10, to 50. The lower portion of each bar is darkly shaded to the
extent of the futures contracts traded and the top portion lightly shaded to the
extent of the options contracts traded. Inset in a small square to the right of
the graph is a legend containing a lightly shaded box to the immediate left of
the word "Options" and immediately below which is a darkly shaded box to the
immediate left of the word "Futures". Futures contracts were traded at the rate
of approximately 27 million in 1994, 21 million in 1995, 18 million in 1996, 23
million in 1997, 23 million in 1998 and 18 million in 1999. Options contracts
were traded at the rate of approximately 13 million in 1994, 10 million in 1995,
9 million in 1996, 6 million in 1997, 4 million in 1998 and 3 million in 1999.]
[Graphic: Bar graph entitled "CURRENCY EFP AND FUTURES/OPTIONS PIT
TRADING VOLUME 1994 - 1999" and representing trading volume in foreign currency
transactions via pit trading and over the Exchange-for-Physicals (EFP) market.
Below the horizontal axis each year measured is listed in chronological order
from left to right. The vertical axis indicates the number of contracts traded,
in millions, beginning with zero and increasing, in intervals of 10, to 50. The
lower portion of each bar is darkly shaded to the extent of the pit trading
volume and the top portion is lightly shaded to the extent of the EFP trading
volume. Inset in a small square to the right of the graph is a legend containing
a lightly shaded box to the immediate left of the initials "EFP" and immediately
below which is a small darkly shaded box to the immediate left of the word
"Pit". Pit trading volume was approximately 35 million in 1994, 27 million in
1995, 23 million in 1996, 22 million in 1997, 19 million in 1998 and 13 million
in 1999. EFP trading volume was approximately 4 million in 1994, 3 million in
1995, 4 million in 1996, 7 million in 1997, 7 million in 1998 and 8 million in
1999.]
Additionally, we have launched new E-Mini currency products based on
the Euro and the Japanese Yen that we are targeting toward the developing
electronic retail customer base opened up by the prevalence of on-line Internet
trading of equities, and by our developing franchise in E-Mini equity products.
Agricultural Products. Agricultural products were the core from which
we started at the turn of the last century. The Exchange has maintained a strong
franchise in our agricultural products, including contracts based on
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<PAGE>
cattle, hogs, pork bellies, dairy products, and other agricultural commodities.
Our market users include agricultural producers of commodities, food processors,
and retail customers. Extensive revisions to existing contracts and the
development of new products have led to stable volume and modest growth in this
product sector in recent years. Our agricultural product trading volumes are
depicted in the chart below. We believe that continuing consolidation and
restructuring in the agricultural sector, and the reduction or elimination of
government subsidies, could provide growth in our agricultural markets as large
producers and processors adopt formal hedging and risk management programs.
[Graphic: Bar graph representing and entitled "VOLUME OF AGRICULTURAL
CONTRACTS TRADED 1994 - 1999". Below the horizontal axis each year measured is
listed in chronological order from left to right. The vertical axis indicates
the number of contracts traded, in millions, beginning with zero and increasing,
in intervals of 2, to 10. The lower portion of each bar is darkly shaded to the
extent of the futures contracts traded and the top portion is lightly shaded to
the extent of options contracts traded. Inset in a small square to the right of
the graph is a legend containing a lightly shaded box to the immediate left of
the word "Options" and immediately below which is a darkly shaded box to the
immediate left of the word "Futures". Futures contracts were traded at the rate
of approximately 6.0 million in 1994, 5.7 million in 1995, 7.7 million in 1996,
7.6 million in 1997, 7.7 million in 1998 and 7.0 million in 1999. Options
contracts were traded at the rate of approximately 0.5 million in 1994, 0.6
million in 1995, 0.5 million in 1996, 0.5 million in 1997, 0.6 million in 1998
and 1.0 million in 1999.]
Other Products. We offer several interest rate, currency and index
contracts based upon the emerging markets of the world, providing tools for
managing the risk associated with emerging market financial flows, investments
and foreign exchange transactions. We also developed the first exchange-traded
credit and temperature-related weather derivatives contracts. We believe these
contracts will create new risk management opportunities for credit institutions
and insurance companies that face risks in their lending and insurance
activities. The CME Quarterly Bankruptcy Index, the world's first
exchange-listed consumer credit derivatives contract, is designed to allow
credit card companies and other lenders in the $1.4 trillion consumer credit
market to hedge risk associated with the escalating number of U.S. bankruptcy
filings in recent years. Our Heating Degree Day and Cooling Degree Day futures
and options on futures are designed to help businesses protect their revenues
during times of depressed demand or excessive costs because of unexpected or
unfavorable weather conditions. Weather affects an estimated 20 percent of the
$9 trillion U.S. economy, and the OTC market in managing weather-related risk
has grown significantly over the past few years.
Execution Facilities
As indicated in the diagram below, we operate two trade execution
facilities--open outcry trading pits and GLOBEX\\2\\. Both offer our users
secure and reliable facilities, immediacy of trade execution, anonymity, and
price transparency. Both the trading pits and GLOBEX\\2\\ are state-of-the-art
trading environments supported by substantial infrastructure and technology for
order routing, trade reporting, market data dissemination, and market
surveillance and regulation.
[Graphic: Flow-chart entitled and representing "CME Execution
Facilities". Each symbol in the flow chart is shaded and a symbol's label is
inscribed in that symbol. At the center of the chart is an octagon labeled "Pit
Bid/Ask Trade Execution". Abutting its right face is a square labeled "Floor
Broker", abutting its bottom face is a square labeled "Pit Reporter" and
abutting its left face is a square labeled "Independent Trader (Buyer)". A line
leads from the top center of the "Floor Broker" square, first branching
horizontally to the right with its arrowhead abutting the left face of a
rectangle labeled "Order". Farther upward, the line again branches horizontally
to the right with its arrowhead abutting a square labeled "Member Firm". To the
left of and parallel to the vertical portion of the line is written "Broker
endorses order and returns to firm". A line extends from the top face of that
square, connecting it to a rectangle labeled "Seller". That same line extends
from the bottom left face of the "Member Firm" square to the top left face of
the "Order" rectangle and resumes at the bottom left of that rectangle, turning
horizontally to the left with its arrowhead abutting the right face of the
"Floor Broker" square. A second line extends from the bottom center face of the
"Member Firm" square to the top center of the "Order" rectangle, resumes at the
bottom center of that rectangle until its arrowhead abuts the top face of a
rectangle labeled "GLOBEX\\2\\ Terminal (front end)". A line extends from the
lower right face of the "Member Firm" square, turning vertically downward and
then horizontally to the left, at which point "Trade Submission" is written
above the line, and the line's arrowhead abuts the upper left portion of a
circle labeled "Clearing House". A horizontal line leaves the bottom right
portion of the circle, at which point is written "Trade Confirmation" above the
line. The line turns
55
<PAGE>
vertically upward and then horizontally to the left where its arrowhead touches
the upper right face of the "Member Firm" square. Between the "Pit Reporter"
square and the "Clearing House" circle is a rectangle labeled "GLOBEX\\2\\
System". An arrow points from the bottom of that rectangle to the top of the
"Clearing House" circle. A line at the top face of the rectangle connects it to
the "Pit Reporter" square. Halfway up this line is an arrowhead, immediately
above which the line branches horizontally to the left and right. The arrow
branching left abuts a rectangle labeled "Quotation Boards" and the arrow
branching right abuts a rectangle labeled "Ticker Network". A two-headed arrow
in the shape of a backward "L" is set to the right of the "GLOBEX\\2\\ System"
rectangle, with the arrowheads pointing to the right face of the rectangle and
the bottom center of the "GLOBEX\\2\\ Terminal (front end)" rectangle. A two-
headed arrow in the shape of an "L" is set to the left of the "GLOBEX\\2\\
System" rectangle, with the arrowheads pointing to the left face of the
"GLOBEX\\2\\ System" box and a second box labeled "GLOBEX\\2\\ Terminal (front
end)". An arrow leads from the bottom center of a second square labeled "Member
Firm", which is aligned to the left of the previously described "Member Firm"
box, to the top center of the second "GLOBEX\\2\\ Terminal (front end)" box. A
line leaves from the bottom left face of the second "Member Firm" square and
turns vertically downward and then horizontally to the right where its arrowhead
abuts the left face of the "Independent Trader (Buyer)" box. Another line leads
from the lower left face of the "Member Firm" square, turning vertically
downward and then horizontally to the right where its arrowhead abuts the upper
left side of the "Clearing House" circle. To the left of the arrowhead and above
this horizontal segment is written "Trade Submission". A horizontal line leads
from lower left side of the circle, above which portion is written "Trade
Confirmation". The horizontal line then turns vertically upward and then
horizontally to the right where its arrowhead touches the upper left face of the
"Member Firm" square.]
Open Outcry Trading. Open outcry trading occurs in individual pits on
our two trading floors and represents ninety-two percent of our total volume in
1999. The pits are the centralized meeting place for floor brokers and
independent traders to trade contracts. Orders for market participants not on
the floor are relayed to brokers for execution in the pits. The trading floors,
covering 70,000 square feet, have tiered booths surrounding the pits from which
clearing member firm personnel can communicate with customers regarding current
market activity and prices and receive orders either electronically or by
telephone. In addition, our trading floors display current market information
and news on wallboards hung above the pits.
GLOBEX\\2\\ Electronic Trading. Our original GLOBEX System, which we
jointly developed in partnership with Reuters, was introduced in 1992.
GLOBEX\\2\\, the second generation system we introduced in 1998, is based on the
NSC system developed and licensed to us by our GLOBEX\\2\\ partner, ParisBourse.
GLOBEX\\2\\ maintains an electronic, centralized order book and trade execution
algorithm for futures and futures options contracts and allows users to directly
enter orders into the order book. Initially, these systems were used to offer
our products to market users after the close of our regular daytime trading
sessions. Today, however, we trade some of our most successful products
virtually around the clock on our GLOBEX\\2\\ system, including our E-Mini S&P
500 futures and options contracts, E-Mini Nasdaq 100 futures, E-Mini Euro FX
futures and E-Mini Japanese Yen futures. In 1999, we initiated simultaneous
"side-by-side" electronic and open outcry trading in our most successful
contracts--Eurodollar futures and options--expanding market users" alternatives
for trade execution facilities. Most recently, we have initiated trading
exclusively on our GLOBEX\\2\\ system, in certain foreign currency cross-rate
contracts, and in innovative new credit and weather derivatives products. Eight
percent of our 1999 volume was traded on GLOBEX\\2\\ and, as indicated in the
table below, our yearly GLOBEX\\2\\ volume is growing rapidly. GLOBEX\\2\\
trading volume has increased from 210,000 contracts in 1992, when the original
system was launched, to more than sixteen million contracts in 1999. Through
1998, GLOBEX\\2\\ volume doubled every year since 1996.
[Graphic: Bar graph entitled "GLOBEX VOLUME 1992 - 1999" and
representing the number of contracts traded over the GLOBEX System and its 1998
replacement the GLOBEX\\2\\ System. Below the horizontal axis each year measured
is listed in chronological order from left to right. The vertical axis indicates
the number of contracts traded over these Systems, in millions, beginning with 0
and increasing, in intervals of 5, to 20. System volume was approximately 0.2
million in 1992, 0.4 million in 1993, 1.0 million in 1994, 1.5 million in 1995,
2.0 million in 1996, 4.0 million in 1997, 8.0 million in 1998 and 16 million in
1999.]
GLOBEX\\2\\ users include clearing member firms, locals, market makers,
commodity trading advisors and individuals that have been issued electronic
trading hours permits. In response to the rapid growth in electronic trading of
financial instruments, we are significantly expanding the functionality,
capacity and distribution of GLOBEX\\2\\. The flexibility of the open
architecture design of GLOBEX\\2\\ allows us to add new products to the system
and to easily and quickly increase processing throughput.
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<PAGE>
Technology Supporting our Execution Facilities. We have enhanced our
open outcry and electronic markets with automation and cost efficiencies that
will help us retain our competitive advantage of instant liquidity for market
users. In order to streamline the trading operations of our members and link our
existing order routing technology, we have developed an application programming
interface, CME FIX API(TM), designed to efficiently route orders from
independent software vendors' and clearing member firms' order management
systems to our trading floors and to GLOBEX\\2\\.
As indicated in the diagram below, orders are sent from the end user or
member's trading application, through our secure network, and then delivered to
CUBS(TM), TOPS Route(TM) or GLOBEX\\2\\. These systems then execute in the case
of GLOBEX\\2\\ or, in the case of CUBS and TOPS Route, route the order to the
trading floor for execution and return the fill information back to the member
or end user. CUBS enables our floor brokers standing in the pits to
electronically receive orders and report fills to the order originator by
providing an electronic direct link between a clearing member firm's order desk
and a filling broker. TOPS Route, our electronic order entry, routing, and fill
reporting system, expedites the flow of orders permitting clearing member firms
and their customers to electronically route orders directly to our trading
floors. TOPS Route also generates fill reports and transmits trade records to
member firms' back office systems. TOPS Route can be accessed from a dedicated
TOPS Route terminal or through a firm's proprietary system connected via the CME
FIX API. GalaxC(TM), introduced in 1999, is our proprietary wireless handheld
unit that offers our local floor traders the ability to enter limit orders and
execute against orders resting on GLOBEX\\2\\, and to execute trades in the cash
foreign currency markets. Our development of links between open outcry,
electronic trading and electronic order routing will provide market users with
greater access to the liquidity and execution facilities we provide.
[Graphic: Flow-chart representing and titled "CME's Trading and Order
Routing Systems". Each symbol in the chart is shaded and a symbol's label is
inscribed in that symbol. Atop the chart, a two-headed arrow runs between a
rectangle labeled "Internet Access" and a rectangle below it labeled
"Retail-Ordering Clearing Firms". From the bottom left of the latter rectangle,
a two-headed arrow runs to the top left of an oval labeled "FIX API Access".
From the top right of that oval a two-headed arrow in the shape of two stair
steps leads to a rectangle labeled "Clearing Firm". From the top of that
rectangle, a two-headed arrow connects it to a rectangle labeled "Public
Customer" and from its right face a two-headed arrow connects it to a rectangle
labeled "Proprietary Trading Desk". From the bottom right of the "FIX API
Access" oval, a two-headed arrow in the shape of a backward "L" leads to the
right face of a square labeled "GLOBEX\\2\\". A two-headed arrow connects the
top center of the "GLOBEX\\2\\" square to the bottom center of a rectangle
labeled "GLOBEX Terminal". From the upper right face of the "GLOBEX\\2\\"
square, a two-headed arrow runs diagonally upward to a rectangle labeled "TOPS
ROUTE Order Routing System". An arrow runs from the right face of that rectangle
to the words "Other Exchanges", a two-headed arrow runs from its top face to a
rectangle labeled "TOPS Terminal" and a two-headed arrow runs from its left face
to the "FIX API Access" oval. From the bottom of the "FIX API Access" oval a
two-headed arrow in the shape of an "L" runs to the left angle point of a
hexagon labeled "CUBS II Amker Station". This hexagon is connected by two
chevrons, pointing left and running from its bottom face, to the top face of a
hexagon labeled "GalaxC Wireless Handheld". A two-headed arrow in the shape of
an "L" runs from the bottom face of the "GLOBEX\\2\\" square to left angle point
of the "GalaxC" hexagon. That hexagon is connected by two parallel lines running
from its right angle point and lower right face to a hexagon labeled "Telephone
Lines". Two chevrons, pointing to the right run from the latter hexagon's top
face to the bottom face of a fourth hexagon labeled "Ticket Printing & Trade".
Two parallel lines connect this fourth hexagon at its left angle point and lower
left face to the "CUBS II" hexagon. Each hexagon is the same size. Written
beneath the bottom two hexagons is "Open Outcry Trading." A two-headed arrow in
the shape of a single stair step runs upward and to the right from the top of
the "Ticket Printing & Trade" hexagon to the "TOPS ROUTE" rectangle.]
We are also expanding global access, virtually twenty-four hours a day,
to our trading, clearing and risk management facilities. Recognizing the growth
in electronic trading and our ability to expand our product reach around the
globe, we have nearly doubled the number of dedicated GLOBEX\\2\\ terminals in
use. In addition to the thousands of order routing terminals that interface with
our GLOBEX\\2\\ trading environment, we have over 1,200 GLOBEX\\2\\ execution
terminals in the United States and throughout the world: 855 in the U.S. (not
including over 300 on our two trading floors) and 54 terminals internationally
(Europe, Asia, Bermuda). In addition, many firms and customers route orders to
GLOBEX\\2\\ via the Internet, further extending electronic access to our
markets. Our ten largest retail-oriented clearing members have full Internet
order routing capabilities, including the ability to execute trades, check
account balances, and gain on-line access to quotes and charts.
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<PAGE>
In addition to technology, we offer market users other trade execution
efficiencies. For example, in 1992, we introduced the Average Price System(TM)
(APS), which enables clearing member firms to compute and confirm average prices
when multiple prices are received on the execution of an order or series of
orders during a single trading day. APS was developed to address the difficulty
account managers have when an order representing multiple accounts is executed
at different prices. These account managers sometimes prefer to use alternative
dealer markets where a single price execution is available--although sometimes
at less favorable prices. APS provides our market users with the operational
flexibility they need, while also providing the transparent, competitive and
efficient pricing that we provide in our markets.
Clearing
The CME Clearing House is one of the premier clearing organizations in
the financial services industry. It has set the standard for prudent risk
management and efficient, reliable operations. Our Clearing House clears,
settles, nets and guarantees performance of all matched transactions in our
contracts. Unlike most other exchanges, the Exchange owns and operates the
Clearing House, enabling the Exchange to achieve the closest possible
coordination between its clearing functions and its other main business areas of
risk management, new product initiatives, customer service and competitive
issues. The Clearing House marks all open positions to market at least twice a
day--more often if market volatility warrants. At each settlement cycle, the
Clearing House calls for payment from clearing members whose positions have lost
value, and it pays to clearing members whose positions have gained value. The
diagram below illustrates the daily mark-to-market and settlement activities of
Clearing House.
[Graphic: Flow-chart titled and representing "CME Clearing House
Activities". Each symbol in the chart is shaded and a symbol's label is
inscribed in that symbol. Atop the chart, two octagons are aligned horizontally,
with a horizontal arrow pointing from the right face of the octagon labeled
"LONG POSITION" to the left face of the octagon labeled "SHORT POSITION". A
single arrow points from the bottom face of each octagon to one of two ovals,
each oval being aligned horizontally and centered beneath each octagon. Each
oval is labeled "CLEARING FIRM MEMBER". An arrow bent as if signifying the time
five o'clock, points from the bottom right portion of the left oval to the top
of a large circle labeled "CLEARING HOUSE Match Trade Guarantee Trade Collect
margins and settlement variations". Inserted into the vertical portion of the
arrow line is an unshaded circle containing the number "2". Immediately above
the arrowhead and sloping downward to the right is written "TRADE DATA". Halfway
embedded in the top center of the large circle is a much smaller unshaded circle
containing the number "3". A two-headed arrow bent as if signifying the time
five o'clock, leads from the bottom center of the left oval to the top of the
large circle. Inserted after the bend into the arrow line and just above the
arrowhead is an unshaded circle containing the number "4". An arrow leads from
the lower left face of the left oval and turns vertically downward to abut the
top of a rectangle labeled "SETTLEMENT BANK Makes payment from clearing firm to
clearing house and safekeeps margin assets". An arrow leads upward from the top
left of the rectangle and turning horizontally to the right where its arrowhead
abuts the upper left face of the left oval. An arrow in the shape of an "L"
leads from the left face of the large circle to the rectangle. An unshaded
circle containing the number "4" is inserted into the horizontal segment of the
arrow line. An arrow in the shape of an "L" runs from the bottom of the
rectangle to the large circle. An unshaded circle containing the number "5" is
inserted into the perpendicular portion of the arrow line. Written below the
horizontal portion of the arrow line is "CONFIRMS PAYMENT". An arrow in the
shape bent as if signifying the time seven o'clock, points from the bottom left
face of the right oval to the top of the large circle. Inserted into the
vertical segment of the arrow line is an unshaded circle containing the number
"2". Above the arrowhead and sloping downward and to the left is written "TRADE
DATA". A two-headed arrow bent as if signifying the time seven o'clock, leads
from the bottom center of the left oval to the top of the large circle. Inserted
after the bend in the arrow line and just above the arrowhead is an unshaded
circle containing the number "4". A horizontal line leaves from the lower right
face of the right oval, turns vertically downward where its arrowhead touches
the top of a second rectangle labeled "SETTLEMENT BANK Makes payment from
clearing firm to clearing house and safekeeps margin assets". An arrow in the
shape of a backward "L" leads from the right face of the large circle to the
rectangle. An unshaded circle containing the number "4" is inserted into the
horizontal segment of the arrow line. An arrow in the shape of a backward "L"
runs from the bottom of the box to the large circle. An unshaded circle
containing the number "5" is inserted into the vertical segment of the arrow
line. Written below the horizontal segment of the arrow line is "CONFIRMS
PAYMENT". An arrow leads upward from the top right face of the box, turns
horizontally to the left and abuts the upper right face of the right oval. An
arrow leads from the lower right face of the oval, turns vertically
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<PAGE>
downward and abuts the rectangle.]
Our ability to conduct a minimum of two daily settlement cycles helps
protect the financial integrity of the Clearing House, our clearing member
firms, and market participants. The CME Clearing House has a perfect record for
performance on its obligations, and no clearing member firm has ever failed to
perform on its obligations to the CME Clearing House. On an average day, we act
as custodian for approximately $20 billion in performance bond assets, and we
move an average of $990 million of settlement variation funds through our
clearing system. As indicated below, our Clearing House guarantees the
performance of our contracts with approximately $64 billion in available assets.
CME Clearing House Available Assets as of December 31, 1999
(in billions)
Aggregate Performance Bond Deposits by Clearing Member Firms $18.9
Market Value of Pledged Memberships 0.1
CME Surplus Funds 0.1
Security Deposits of Clearing Members 0.4
Common Bond of Clearing Members 44.8
-----
Total $64.3
The CME Clearing House guarantee of performance is a significant
attraction of our markets: our market users do not need to evaluate the credit
of each potential counterparty or limit themselves only to a selected set of
counterparties. This increases the potential liquidity available for each trade
and reduces the costs of using our markets. Additionally, the substitution of
the CME Clearing House as the counterparty to every transaction allows our
market users to establish a position with one party, and then to offset the
position with another party. This contract netting process provides our market
users with significant flexibility in establishing and adjusting positions.
In order to ensure performance, we establish and monitor financial
requirements for our clearing members and set minimum performance bond levels
for our traded products. The CME Clearing House holds performance bond
collateral to cover the largest reasonable losses between marks-to-market. It
typically seeks to cover at least ninety-five percent of all daily price changes
in each product. The Clearing House uses its proprietary SPAN(R) system, which
targets performance bonds to risks, to simulate the gains and losses of complex
portfolios. We utilize risk management and financial surveillance programs
designed to prevent the accumulation of losses, ensure that sufficient resources
are available to cover future obligations, promptly detect financial and
operational weaknesses, and allow swift and appropriate action to be taken to
rectify any financial problems. In the unlikely event that a clearing member
defaults on any payment obligation to the Clearing House, we would apply the
clearing member's security deposit, its performance bonds on deposit with the
Clearing House, and any of its other assets available to the Exchange, including
the proceeds from the sale of any memberships owned by or assigned to the
defaulting clearing member, in order to discharge the clearing member's payment
obligation. If the Clearing House is unable to satisfy the default with such
assets, then the deficit would be reduced by the application of funds from the
following sources in the following order of priority: surplus funds of the
Exchange, security deposits of other clearing members, and funds collected
through the assessment of a common bond against all other clearing member firms.
In order to ensure adequate liquidity for the Clearing House in dealing with a
clearing member default, we have an unsecured, confirmed $350 million Line of
Credit Agreement with a consortium of banks. This line of credit may also be
utilized if there is a temporary problem with the domestic payments system that
would delay payments of settlement variation between the Clearing House and
clearing members.
The Clearing House also manages final settlement on all CME contracts,
including cash settlement, physical delivery of selected commodities, and option
exercise and assignment. Although more than ninety-five percent of all futures
contracts are liquidated before the expiration of a contract, the remainder must
be delivered according to detailed specifications. The Clearing House acts as
the delivery agent for all contracts. This ensures that timely delivery of the
exact quality and quantity specified in a contract is made by the seller, and
that full and timely payment is made by the buyer.
Our objective is to offer the highest possible risk management services
and financial safeguards to our clearing member firms while providing maximum
capital efficiencies to users of our markets. In 1999, we enhanced our financial
safeguards by increasing our security deposit pool from $125 million to $305
million. We also
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<PAGE>
introduced net margining in proprietary accounts, thereby reducing capital costs
for our clearing member firms by an estimated $900 million a day. We implemented
risk-based capital requirements to more closely match the capital requirements
of our clearing member firms to the actual risks borne by such firms.
In order to achieve further capital efficiencies for our clearing
member firms, we have also established our Interest Earning Facility(TM), two
money market funds managed by a third party investment manager, to allow
clearing member firms to enhance the yields that they receive on their
performance bond collateral deposits with the Clearing House. We currently have
approximately $1 billion in balances in these funds, which are benchmarked
against the ninety-day U.S. Treasury Bill average yield. Because initial and
maintenance performance bonds, as well as profits in some of our contracts, are
denominated in various foreign currencies, the Clearing House offers the
Moneychanger(TM) Service to its clearing member firms. This service provides
traders with access to overnight funds in various foreign currencies at
competitive bid/ask spreads free of charge for the transfer of funds to satisfy
the terms of a futures contract.
To support our objective to provide firms with high quality clearing
services, we have developed in conjunction with the New York Mercantile Exchange
a state-of-the-art clearing system, Clearing 21(R), which processes positions on
a near real-time basis, providing users with up-to-the-second data on trades,
positions, money and risk exposure. Clearing 21 supports futures and options
products, securities, and cash instruments, as well as complex new product types
including combinations, options on combinations, options on options, swaps,
repurchase and reverse repurchase agreements, and other instruments. Through
Clearing 21 workstations, our clearing member firms can electronically manage
their positions, exercise options, enter transactions related to foreign
currency deliveries, manage collateral posted to meet performance bond
requirements, and access all of our other on-line applications. Together with
GLOBEX2, we offer near straight-through processing of transactions in our
products.
The Clearing House's highly sophisticated SPAN system has now been
adopted by over thirty other exchanges and clearing organizations worldwide.
SPAN simulates the effects of changing market conditions on a complex portfolio
and uses standard options pricing models to determine a portfolio's overall
risk. SPAN then generates a performance bond requirement that covers the largest
reasonable overnight loss.
We have led the industry in establishing cross-margining agreements
with other leading clearing houses that reduce capital costs for clearing member
firms and users of our markets. We have implemented, or are in the process of
implementing, cross-margining arrangements with The Options Clearing
Corporation, and Commodity Clearing Corporation, the Board of Trade Clearing
Corporation, the London Clearing House, the Singapore Exchange Derivatives
Clearing and Clearnet.
The CME Clearing House has the operational capacity and organizational
expertise to extend its services flexibly and efficiently to a range of
potential new products and also to other exchanges and trading platforms.
Market Data
Our markets generate valuable information regarding prices and trading
activity in our products. We sell our "market data," which includes bids,
offers, trades, and trade size to banks, broker-dealers, public and private
pension funds, investment companies, mutual funds, insurance companies,
individual investors, and other financial services companies or organizations
that use our markets or monitor general economic conditions. Revenue from market
data represents approximately 20% of our revenue during the first nine months of
1999, and has grown at an annual rate of 5.6% over the last five years. In
general, the price information is sent via dedicated networks to 115 worldwide
quote vendors who consolidate our market data and information with that from
other exchanges and third party data and news services and resell the
consolidated data and information to their subscribers. These quote vendors
distribute our market data through dedicated networks, the Internet, and through
wireless handheld devices. We currently have over 36,000 subscribers of our real
time market data who display the data on over 175,000 screens. The market data
supplied by the Exchange is central to trading activity in our products and to
trading activity in related cash and derivatives markets The dissemination of
real time data generates revenue and supports our customer bases with timely
market information.
We believe that the evolution of technology and the financial services
industry will change the existing distribution channels, sales methods and
pricing structure for market data. Increases in the volume of electronic
trading, the use of the Internet as a distribution mechanism, and increases in
the use of our products by individual
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retail investors will all impact the sale of our market data. We have created
marketing programs to stimulate usage of our market data, and we have begun to
enter into new business relationships with companies that develop value-added
computer-based applications that use our market data to provide specific
insights into the dynamics of trading activity in our listed contracts.
International Alliances
We are expanding our network of international alliances and
partnerships with other exchanges in order to offer our products to customers on
a global basis and to access the existing distribution capabilities of some of
our partners' electronic trading systems. We have established the GLOBEX
Alliance with the derivatives markets operated by ParisBourse in France, The
Singapore Exchange Derivatives Trading Limited, the Bolsa de Mercadorias y
Futuros in Brazil, and the Montreal Exchange. We have also entered into a
partnership with the London International Financial Futures & Options Exchange
and its clearing partner, the London Clearing House. Through these alliances,
partnerships and relationships, we intend to offer our customers capital
efficiencies by cross-margining mutually agreed upon highly correlated products;
trading efficiencies by interconnecting our trading platforms and networks of
each exchange and by harmonizing trading rules and interfaces. Additionally,
when mutually beneficial, we will share in the cost in the development of
technology. We seek to expand these alliances to include other foreign and
domestic markets.
Marketing Programs and Advertising
Our marketing programs target both institutional and retail customers.
Our marketing programs for institutional customers aim to inform highly
sophisticated traders, portfolio managers, corporate treasurers and other market
professionals about novel uses of our products, such as new hedging and risk
management strategies. We also strive to educate these users about changes in
product design, margin requirements and new clearing services. Our marketing
typically involves the development of personal relationships with professional
traders who actively use our markets. We participate in all major domestic and
international trade shows and seminars regarding futures and options and other
derivatives products. In addition, we sponsor educational workshops and
marketing events designed to educate market users about our new products.
Through these relationships and programs, we ascertain the needs of our customer
base and we use information from them to drive our product development and
product maintenance efforts.
We advertise our products and our brand name to increase our trading
volumes. Our advertising strategy is twofold: to maintain awareness and
familiarity among our institutional target customers and to generate awareness
among our growing retail audience. Our primary method of communication is with
print media, using both monthly trade magazines and daily business publications.
We are also committing media dollars to Internet advertising given the growth of
the medium and the synergies with our electronically traded products.
Competition
We face a variety of competitors and competing marketplaces and
products. We compete by offering market participants efficient, cost-effective
and liquid marketplaces for trade execution through both open outcry and
electronic trading platforms, broadly disseminated and transparent market and
quotation data, a financially secure clearing system, access to market making,
superior product design, and state-of-the-art technology. Additionally, we are
continually enhancing our products and providing additional efficiencies to our
customers. For example, to address competitive threats to our Eurodollar market,
we have implemented trading in half-tick and quarter-tick increments; we have
introduced mid-curve options and Eurodollar packs and bundles, and we have
changed the final settlement procedures for these contracts to meet the needs of
our customers. Additionally, we offer Eurodollar participants both open outcry
and electronic trading platforms to choose from for trade execution. We believe
we are well prepared to meet potential competition, and we are committed to
maintaining the technology, services, market integrity and liquidity that make
us an industry leader.
OTC markets for interest rate and currency swaps, for cash currencies,
and for other bilaterally negotiated derivative products compete with our
products. However many of the participants in the over-the-counter markets use
our products to hedge the risk they acquire in the over-the-counter markets.
These over-the-counter markets depend heavily upon bilateral credit support;
therefore, they tend to be dominated by large financial institutions with very
high credit ratings. As a result, participation in these markets by certain
market participants and financial
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institutions with lesser credit ratings is sometimes limited or more expensive.
The mutualization of risk offered by our Clearing House guarantee, and the
mitigation of counterparty credit risk, allows us to service a broader segment
of customers in these financial markets.
In addition to competition from other exchanges that offer comparable
derivative products, we also face competition from other financial exchanges,
from electronic trading systems, from consortia of end users and futures
commission merchants, and from technology firms. Other financial exchanges have
trading platforms and financial market expertise that may lead them to consider
listing copies of our non-equity products. These potential competitors would
still need to obtain the regulatory approval, establish market liquidity, and
develop derivative product clearing services.
Electronic trading firms that currently specialize in the trading of
equity securities have electronic trade execution and routing systems that can
be used to trade products that compete with our products. Typically, while these
firms have advanced electronic and Internet technology, significant
capitalization, and competitive pricing, they lack the overall market liquidity,
distribution, neutrality and market integrity offered by our electronic and open
outcry trading platforms. They also lack the financial security and guarantees
offered by our Clearing House. In many cases these electronic trading systems do
not have the regulatory systems and approvals to trade products that compete
directly with ours.
Consortia owned by member firms and large market participants also may
become our competitors, particularly with respect to our Eurodollar futures and
options contracts. For instance, BrokerTec Global LLC, a proposed electronic
inter-dealer fixed income broker, has announced its intention to develop or
acquire a facility for electronic trading of U.S Treasury securities,
Euro-denominated sovereign debt and other fixed income securities and futures
related products. All of the members of BrokerTec Global LLC are either clearing
member firms of the Exchange or affiliates of our clearing member firms, and are
significant participants in the Eurodollar market. Similarly, Electronic
Brokerage System, a partnership of major market-making banks, has an electronic
trading system for currencies and short-term forward rate agreements that are
very similar to our Eurodollar futures contract.
Technology companies, market data and information vendors, and front
end software vendors also represent potential competitors because, as purveyors
of market data, these firms typically have substantial distribution. As
technology firms, they also have access to trading engines that can be connected
to their data and information networks. Additionally, technology and software
firms that develop trading systems, hardware and networks but who are otherwise
outside of the financial services industry may be attracted to enter our
markets.
Our Members
We are presently owned by our members who have purchased seats on the
Exchange. Members and individuals who have leased seats from members can execute
trades for their own accounts or for the accounts of customers of clearing
member firms. The trades of members and lessees of memberships for their own
accounts qualify for lower fees in recognition of the market liquidity that
their trading activity provides. Members and lessees also benefit from market
information advantages that may accrue from their proximity to trading activity
on the trading floors and from access to the GLOBEX\\2\\ order book. Memberships
are purchased from existing members at prevailing market prices. There are four
types of seats: CME, IMM, IOM, and GEM, each with different trading privileges
and voting rights. All membership applicants are subjected to a thorough review
process and must be approved.
Members can buy or sell memberships through mechanisms maintained by
the Exchange.
High/Low Sale Prices of Memberships
(in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
GEM
CME IMM IOM GEM Fraction
---------------------------------------------------------------------------------------------
Year Qtr. High Low High Low High Low High Low High Low
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1 $480.0 $459.0 $400.0 $390.0 $275.0 $255.0 $45.0 $38.0 $4.3 $3.5
- --------------------------------------------------------------------------------------------------------------------
2 410.0 390.0 335.0 210.0 245.0 135.0 30.0 21.5 3.6 1.5
- --------------------------------------------------------------------------------------------------------------------
3 333.0 251.0 242.5 180.0 151.0 110.0 28.0 15.0 2.3 1.5
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
GEM
CME IMM IOM GEM FRACTION
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
4 325.0 276.5 208.0 181.5 140.0 115.0 18.0 15.0 2.0 1.5
- --------------------------------------------------------------------------------------
1999 1 340.0 310.0 275.0 217.5 205.0 127.0 18.0 18.0 1.9 1.6
- --------------------------------------------------------------------------------------
2 345.0 320.0 250.0 222.0 190.0 173.0 18.5 15.0 1.9 1.6
- --------------------------------------------------------------------------------------
3 480.0 345.0 330.0 240.0 225.0 191.0 16.0 12.5 1.7 1.4
- --------------------------------------------------------------------------------------
4 550.0 450.0 400.0 320.0 248.0 220.0 22.0 17.0 2.7 1.6
- --------------------------------------------------------------------------------------
Source: Exchange records.
</TABLE>
Individual Members
Our Membership Committee reviews applicants and conducts proceedings to
determine whether candidates meet our membership criteria. Additionally,
registration or a temporary license to act as either a floor broker or a floor
trader must be granted by the National Futures Association before an individual
can begin trading on the Exchange's trading floors. All members must be
guaranteed or qualified to trade by a clearing member before they may personally
execute a transaction on the Exchange. With respect to GLOBEX\\2\\, qualified
members may obtain a terminal to trade for their own accounts and participate in
the P-M-T Partnership as Class A Limited Partners.
CME Division. The Chicago Mercantile Exchange division membership entitles
the holder to execute trades in all futures and options contracts listed on the
Exchange. There are 625 CME division memberships.
IMM Division. The International Monetary Market ("IMM") division membership
entitles the holder to execute trades in all currency and interest rate futures
and options contracts, as well as the contracts assigned to the IOM and GEM
divisions (defined below). There are 813 IMM division memberships.
IOM Division. Membership in the Index and Option Market ("IOM") division
entitles the holder to execute trades in all stock index futures contracts,
random length lumber futures contracts, all options contracts, and all contracts
assigned to the GEM division. There are 1,287 IOM division memberships.
GEM Division. The Growth and Emerging Markets ("GEM") division membership
entitles holders to execute trades in all growth and emerging market currency,
stock index and interest rate products that are assigned to that division by the
Board. When the GEM division was created in 1995, each member of the Exchange's
other three divisions received a fractional GEM membership, and 50 memberships
were sold to eligible third parties. GEM fractions may be sold and combined to
create, together with the 50 full memberships that were sold to third parties, a
total of 467 full memberships.
Clearing Members
An Exchange clearing member firm must satisfy our rigorous legal and
financial requirements, as well as the requirements imposed by the CFTC. Nearly
all of our clearing members are registered futures commission merchants.
Clearing membership entitles the firm to execute orders on the Exchange and to
clear resulting positions through the Exchange Clearing House. We have seventy
clearing members.
The right to be a clearing member in New CME will require an ownership
interest equivalent to current requirements. Exchange rules require that each
Exchange clearing member must own or have assigned to it at least two CME
memberships, at least two IMM memberships and at least two IOM memberships.
Additionally, a clearing member which was an IMM Class A clearing member on or
prior to May 6, 1987, must own or have assigned to it at least one CME
membership, three IMM memberships, and two IOM memberships. Finally, after
November 3, 2000, each clearing member must have at least one GEM membership
assigned to it. The rules also require that at least one CME, one IMM, one IOM
and one GEM membership assigned to the clearing member must be owned by the
clearing member or an officer, principal or partner with an acceptable
proprietary interest.
Upon completion of the demutualization transaction, each clearing member
will be required to satisfy the above-described criteria by owning Class A
shares and Class B shares in an amount reflecting the total shares allocated to
such clearing member in respect to the memberships held by it for purposes of
meeting those requirements. New CME management may choose to alter these
ownership interest requirements.
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Other Business Relationships And Subsidiaries
P-M-T Limited Partnership. P-M-T Limited Partnership ("P-M-T") is an
Illinois limited partnership that was formed in 1988 to initiate the development
of the GLOBEX system. P-M-T owns all rights to electronic trading of the
Exchange's products and has entered into contractual arrangements with the
Exchange for the provision of services in connection with the operation of the
system and the provision of related support services. The Exchange charges P-M-T
for such services. The Exchange is the general partner of P-M-T, and the
Exchange and certain of its members and clearing member firms are limited
partners in P-M-T. The Exchange owned three hundred and twenty-one Class A P-M-T
units as of September 30, 1999.
GFX Corporation. GFX Corporation ("GFX"), was established by the Exchange
for the purpose of maintaining and creating liquidity in our foreign currency
futures contracts. Experienced foreign currency traders employed by GFX buy and
sell our foreign currency futures contracts using our GLOBEX\\2\\ system.
Offsetting arbitrage transactions using futures contracts or spot foreign
currency transactions with approved counterparties in the interbank market are
used to limit risk. GFX does not seek to profit from its trading and seeks to
minimize risk. GFX's net trading gains amounted to $2.4 million in 1999, $4.8
million in 1998 and $2.2 million in 1997.
CME Trust. The Chicago Mercantile Exchange Trust was established to provide
financial assistance, on a discretionary basis, to customers of any clearing
member that becomes insolvent. The Trust, the first of its kind for any
exchange, contains $42.7 million in assets. The trustees of the fund, who are
also members of the Exchange's Board of Directors, have discretion to use the
fund to satisfy customer losses in the event a clearing member fails or is in
such severe financial condition that it cannot meet a customer's obligations
provided that those customers' losses are related to transactions in Exchange
contracts. Neither the CME nor its members have any residual interest in the
assets of the Trust.
Intellectual Property
We regard substantial elements of our brand name, marketing elements and
logos, products, market data, software, and technology as proprietary, and we
attempt to protect these elements by relying on trademark, service mark, patent,
copyright and trade secret laws, restrictions on disclosure and other methods.
Employees
As of November 1, 1999, we had 1,038 full-time equivalent employees. We
consider our relations with our employees to be good. We have never had a work
stoppage, and none of our employees are represented by a collective bargaining
agreement. However, since 1982, we have had an understanding with the
International Union of Operating Engineers, Local 399, AFL-CIO, relating to
building engineers at the headquarters building. At present, there are seven
employees to whom this understanding applies.
Facilities
The Exchange's principal executive offices are located at 30 South Wacker
Drive, Chicago Illinois 60606. Our telephone number is (312) 930-1000. Our
trading floor operations are also located there. We occupy approximately 430,000
square feet of office space under a lease that expires in 2003 and 70,000 square
feet of trading floor space under a lease with the CME Trust. The trading arena
has state-of-the-art wallboard price display systems, order-routing and
communications systems. On November 1, 1998, we entered into a first extension
of our lease with the CME Trust, and we have an option on three addition
extensions which will secure the availability of our trading facility until
October 2026. We maintain backup facilities for electronic systems in separate
office towers at 10 and 30 South Wacker Drive, Chicago, Illinois. We also
maintain remote offices in leased office space in Washington D.C., London,
England and Tokyo, Japan. We believe that our facilities are adequate for our
current operations and that additional space can be obtained if needed.
Legal Proceedings
From time to time, we are involved in legal proceedings and litigation
arising in the ordinary course of business. As of the date of this prospectus,
except as described below, we are not a party to any litigation or other legal
proceeding that, in our opinion, could have a material adverse effect on our
business, operating results or
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financial condition. While the ultimate results of such proceedings against the
Exchange cannot be predicted with certainty, management of the Exchange believes
that the resolution of these matters will not have a material adverse effect on
its consolidated financial position or results of operations.
In May 1999, Victor Niederhoffer, Niederhoffer Investments, Inc., and
several commodities pools controlled by Victor Niederhoffer filed a complaint
against the Exchange and a number of unidentified employees, officials and
members in federal district court in Chicago, under the Commodity Exchange Act.
(Niederhoffer Intermarket Fund, L.P., et al. v. Chicago Mercantile Exchange, No.
99 C 3223 (N.D. Ill.)) The complaint charges that the Exchange failed to enforce
its rules relating to the establishment of settlement prices on certain dates
and that as a consequence Niederhoffer, the pools, and their futures commission
merchant suffered damages of at least $105 million.
On May 5, 1999, the Exchange, the Chicago Board of Trade, the New York
Mercantile Exchange, and Cantor Fitzgerald, L.P., were sued by Electronic
Trading Systems, Inc. in the United States District Court for the Northern
District of Texas (Dallas Division) for alleged infringement of Wagner United
States patent 4,903,201, entitled "Automated Futures Trade Exchange." The patent
relates to a system and method for implementing an electronic, computer-
automated futures exchange. If the plaintiff is successful in the lawsuit, we
may be required to obtain a license to develop and market our electronic trading
system, to cease developing or marketing that system or to redesign the system.
We cannot assure you that we would be able to obtain such licenses or that we
would be able to obtain them at commercially reasonable rates, or, if unable to
obtain licenses, that we would be able to redesign our system to avoid
infringement.
Our defense has been undertaken by attorneys for Euronext, our licensor and
a subsidiary of ParisBourse, pursuant to an indemnification agreement. Euronext
has reserved its rights under such agreement in the event that any modifications
to the licensed system made by us result in liability.
Regulation
Regulation of the U.S. Futures Industry
Futures and options contracts, which are traded on futures exchanges, are
subject to regulation by the CFTC under the CEA. Futures exchanges in the United
States and elsewhere are subject to extensive regulation. Clearinghouses
affiliated with futures exchanges are similarly regulated. Our business
activities fall within the scope of this law and these regulations. We are a
designated contract market licensed by the CFTC.
As a matter of public policy, regulatory bodies in the United States and
the rest of the world are charged with safeguarding the integrity of futures
markets and with protecting the interests of investors participating in those
markets and in the cash markets underlying futures contracts. The Exchange
maintains broad powers to ensure that free and open markets exist for the
trading of futures and options contracts. In addition to its trading
regulations, the Exchange has the power to take immediate action in dealing with
an abrupt change in factors influencing futures markets in order to ensure
orderly trading. In the United States, the CFTC is the federal agency
responsible for the administration of the CEA.
The CEA and CFTC rules govern most aspects of our operations and impose
many affirmative obligations that can be costly and burdensome. Our ability to
continue operating depends on continued compliance with the CEA and CFTC rules
and regulations. Our ability to list new contracts is dependent on such
compliance. If we fail to comply, the CFTC may conduct administrative
proceedings which can result in censure, fine, the issuance of cease-and-desist
orders or the suspension of our designation as a contract market.
Changes in Existing Laws and Rules
Additional legislation or regulation, or changes in existing laws and rules
or their interpretation, may directly affect our mode of operation and our
profitability. The CFTC has recently adopted regulations that will reduce the
cost and burdens of listing new contracts for trading. Proposals for changes to
the CEA that have been suggested by other regulators might be less favorable to
our business. The regulations under which we have
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<PAGE>
operated since 1974 may be changed in a manner that will permit unregulated
competitors and competitors in other regulated industries to duplicate our
markets and trade our products.
The CEA requires all futures contracts to be executed on an exchange that
has been approved by the CFTC. The exchange trading requirement has been
modified by CFTC regulations to permit privately negotiated swap contracts to be
transacted in the OTC market. At the end of 1998, according to data from the
Bank for International Settlements, the total estimated notional amount of
outstanding OTC derivative contracts was $80 trillion compared to $13.5 trillion
for exchange-traded futures and options contracts. The CFTC exemption under
which the OTC derivative market operates precludes the OTC market from using
exchange-like electronic transaction systems and clearing. These limitations on
the exemptions granted to the OTC market have been called into question by a
recent report of the President's Working Group on Financial Markets ("PWG"). The
PWG is made up of the Treasury Secretary, and the Chairmen of the Securities and
Exchange Commission ("SEC"), the CFTC and the Board of Governors of the Federal
Reserve System.
The PWG advocates a complete exemption from the CEA for certain principal-
to-principal derivative exchanges that provide trade execution services
comparable to those performed by the Exchange. The customers who may access such
exchanges are also significant customers of regulated exchanges such as ours.
The PWG has not recommended equivalent treatment for the existing electronic
markets operated by regulated exchanges. The PWG also recommends legislation
that will permit CFTC regulated clearing organizations to clear futures, options
on futures contracts, and OTC derivatives that are not securities or securities
options. In contrast, the PWG recommends permitting banks and SEC regulated
clearing organizations to clear financial derivative contracts, as well as
equities, government securities, repurchase and reverse repurchase agreements,
and other instruments. Finally, the PWG recommends permitting the CFTC to
regulate foreign currency bucket shops, but also recommends permitting banks and
broker-dealers, and their affiliates, to operate currency futures markets for
retail customers without being subject to regulation under the CEA.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by reference to, our consolidated financial statements
appearing elsewhere in this document.
Historical Overview
We are currently a not-for-profit company and have operated in a manner
consistent with that structure. During the 1980's, we held the position as the
world's second largest derivatives exchange with volume growing from 25 million
contracts in 1981 to in excess of 100 million in 1989. Revenues increased
steadily over that period and, with a relatively fixed cost structure, profits
added to a growing working capital position. In addition, members' equity grew
from $17.0 million in 1980 to $89.0 million at the end of 1990. We continued to
expand our open outcry markets, and in 1994 volume exceeded 200 million
contracts traded. In 1993, we internally financed the construction of a second
37,000 square foot trading floor and began developing Clearing 21. During the
1990's, we continued to reinvest profits in product development and promotion
that gave customers new hedging and trading instruments and expanded the CME
product offering. In addition, we positioned ourselves for the future by adding
to our working capital position, making ongoing investments in electronic
trading and expanding strategic alliances.
The competitive landscape changed in the 1990's with increased competition
from the OTC market and the emergence of new electronic exchanges. Working
capital at the end of 1998 was $95.0 million. During 1999, we made significant
investments in technology infrastructure, trading floor technology and
performance upgrades to GLOBEX. We financed these strategic initiatives, in
part, through working capital--which declined to $74.9 million as of September
30, 1999.
The chart below and related overview is based on financial results for the
first nine months of 1999. Management believes they present a fair
representation of our sources of revenue and expense categories.
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[Graphic: Pie chart entitled "1999 REVENUE SOURCES" and displaying each
revenue source as a percentage of gross revenue for the first nine months of
1999. The entire chart represents and is subtitled "(100% = $158.5 MILLION)".
Revenues are broken down as follows: Clearing Fees - 68% or $106.6, Quotation
Data - 20% or $32.0, Investment Income - 4% or $6.5, Communications - 4% or $6.2
and Other - 4% or $7.1.]
Clearing fees and quotation data fees account for 88% percent of total
revenues, with investment income, communications charges to our members and
clearing member firms and other operating revenue making up the remaining 12% of
revenues.
Clearing fees, which also include GLOBEX fees and other volume related
fees, account for 68% of our revenues. Revenue from clearing fees is very
sensitive to volume and changes in product mix which drives the average rate per
trade. For the first nine months of 1999, the average rate per trade was
68(cent) and is a function of the following factors:
. Product mix (through September 30, 1999: futures 80%, options 16%,
EFPs 4%)
. Account ownership status (member, lessee, customer, etc.)
. Product (licensed, non-licensed, E-Mini, etc.)
. Trading venue (open outcry, GLOBEX\\2\\)
[Graphic: Line graph entitled "Average rate per trade (round-turn)" and
representing clearing fee per trade cleared by the CME. Below the horizontal
axis each year measured is listed in chronological order from left to right,
beginning with 1994 and ending with 1999. The vertical axis indicates the
average fee per trade in cents, beginning with $0.50 and increasing, in
intervals of $0.05, to $0.70. A continuous line graph connects the average
clearing fee per trade for each particular year. The average rate per trade was
$0.55 in 1994, $0.61 in 1995, $0.62 in 1996, $0.58 in 1997, $0.55 in 1998 and
$0.68 in 1999.]
The fluctuation in the rate per trade over the six year period is due to
several factors. Fee reduction programs and product promotion fee waivers put
downward pressure on the average rate per trade. Conversely, increases in the
EFP surcharge and the relative growth in GLOBEX\\2\\ volume has increased the
average rate per trade. Specifically, 8 cent of the increase in the rate per
trade from 1998 to 1999 is related to the end of the fee reduction program that
was in place during 1998, while approximately 3 cent is attributable to the
rapid growth in GLOBEX volume in 1999.
Pricing decisions for clearing fees are based on two primary factors.
First, based on the competitive environment, we may raise or lower fees to
address the business threat. Second, and somewhat related to the first, during
times of excess profit, the Board may take action to reduce fees to build
customer loyalty and increase pricing pressure on the competition. In 1998, we
implemented a fee reduction initiative which resulted in a $16.9 million
reduction in clearing fees and an additional $1.0 million waiver of lessee
brokerage fees. In addition to the 1998 fee reduction program, in 1997 we
reduced fees from August 1 through December 31. Fees were raised again in 1998,
but not back to their original rates that were in effect prior to August 1,
1997. The graph below illustrates the effect fee reduction programs have had on
clearing revenue.
[Graphic: Bar graph entitled and representing "CLEARING FEES 1994 -1999".
Below the horizontal axis each year measured is listed in chronological order
from left to right. The vertical axis indicates the fees that were received, and
would have been received had not some discount or fee waiver been in effect, in
millions, beginning with zero and increasing, at intervals of 50, to 200. The
lower portion of each bar is darkly shaded to the extent of the actual fees
received. To the extent any fee reductions or waivers apply, the bars are shaded
medium and lightly, respectively. Inset in a small square to the right of the
graph is a legend containing a lightly shaded box to the immediate left of the
word "Waiver", immediately below which is a slightly darker box to the immediate
left of the words "Reduction in Rate", and immediately below which is a darkly
shaded box to the immediate left of the word "Actual". Actual clearing fees were
approximately $105 million in 1994, $102 million in 1995, $109 million in 1996,
$117 million in 1997, $125 million in 1998 and $107 million for the nine months
ended September 30, 1999. Fee waivers during the period amounted to
approximately $15 million in 1994 and $25 million in 1998. Fee reductions during
the period amounted to approximately $10 million in each of 1997 and 1998 and $7
million for the nine months ended September 30, 1999.]
The second largest source of revenue, amounting to 20% of total revenue in
the first nine months of 1999,
67
<PAGE>
is quotation data fees from the sale of market data. We have contractual
relations with over 100 vendors who act as value-added resellers. The vendors
disseminate the data to over 36,000 subscribers and remit the exchange data fee
to us. Revenue growth in this key area has increased at a compounded annual rate
of 6.5% over the past ten years. The number of subscribers, the revenue driver,
has increased at a similar pace.
Other revenues, which make up 12% of total revenues, are derived from
telecommunications services provided to members, investment income and from
various services provided to members.
[Graphic: Pie chart entitled "1999 EXPENSES BY CATEGORY" and displaying
each expense category as a percentage of total expenses for the first nine
months of 1999. The entire chart represents and is subtitled "(100% = $147.6
MILLION)". Expenses are broken down as follows: Salaries & Benefits -40%,
Professional Fees & Outside Services - 15%, Communications & Computer Equipment-
13%, Depreciation & Amortization - 12%, Occupancy - 10%, Public Relations &
Promotion - 3% and Other - 7%.]
Our operating expenses have increased significantly since 1997 primarily
due to increased staffing and expenditures for technology projects. For 1999,
salaries and benefits accounted for 40% of our expenses as both the trading
floor and the systems development and maintenance areas required large
investments in human capital. The next largest category, professional fees and
outside services, represents 15% of total expenses in 1999 and is primarily
related to Information Technology ("IT") consultants that are working on
strategic initiatives. Also included in this category are legal fees and license
fees. The communications and computer equipment category accounts for 13% of our
expenses and includes expenses to support the GLOBEX\\2\\ network, computer
equipment and software and the cost to maintain the trading floors and tenant
phone systems which are administered by our Telecommunications Department. The
telecommunications revenue approximately offsets the related expense. Occupancy
related to staff offices, trading floors and remote offices represent 10% of the
expenses in 1999. Depreciation and amortization account for 12% of total
expenses. Together, occupancy and depreciation and amortization make up our
fixed costs and account for 22% of the budget. The last two categories, other
operating expenses and marketing and promotion, account for only 10% of our
expenses.
In general, the results of operations reflect our not-for-profit membership
structure. Only a very small percentage of our expenses are variable, thus,
revenues from volume increases flow directly to operating income. Since we do
not distribute earnings, we increase spending on discretionary items and reduce
fees as a way of providing value to our members and improving the competitive
position of the Exchange.
68
<PAGE>
Results of Operations
($'s = thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30 Twelve months ended December 31
----------------------- ----------------------------------------
1999 1998 1998 1997 1996
--------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Clearing fees $ 106,584 $ 107,098 $ 124,575 $ 116,917 $ 109,006
Quotation data fees 32,046 29,669 40,079 37,719 36,486
Communication fees 6,226 6,079 8,128 7,885 7,637
Investment income 6,542 6,791 9,610 7,760 5,593
Other operating revenue 7,092 8,892 12,317 6,945 5,490
--------- ---------- --------- ---------- ----------
Total revenues 158,490 158,529 194,709 177,226 164,212
--------- ---------- --------- ---------- ----------
Expenses:
Salaries and benefits 59,237 50,297 72,385 66,873 63,547
Occupancy 14,069 15,614 19,702 19,779 20,138
Professional fees, outside services and
licenses 22,533 18,652 28,754 17,587 16,693
Communications and computer equipment 19,593 15,900 22,731 17,197 17,352
Depreciation and amortization 18,030 13,335 17,943 16,689 16,038
Public relations and promotion 4,322 7,084 9,586 11,175 9,220
Other operating expense 9,849 8,268 9,415 8,868 8,815
--------- ---------- --------- ---------- ----------
Total operating expenses 147,633 129,150 180,516 158,168 151,803
--------- ---------- --------- ---------- ----------
Return of contributions from CME Trust 0 0 0 0 15,717
--------- ---------- --------- ---------- ----------
Income from continuing operations before
limited partners' interest in P-M-T
and income taxes 10,857 29,379 14,193 19,058 28,126
Limited partners' interest in earnings
of P-M-T (1,201) (1,957) (2,849) 0 0
Provision for income taxes (3,862) (10,969) (4,315) (6,963) (12,035)
--------- ---------- --------- --------- ----------
Income from continuing operations 5,794 16,453 7,029 12,095 16,091
Discontinued operations, net of tax 0 0 0 (3,428) (1,023)
--------- ---------- --------- ---------- ----------
Net income $ 5,794 $ 16,453 $ 7,029 $ 8,667 $ 15,068
========= ========== ========= ========== ==========
</TABLE>
Nine months ended September 30, 1999 compared to the nine months ended September
30, 1998
Revenues of $158.5 million for the nine month period ended September 30,
1999 were approximately equal to the nine month period ended September 30, 1998.
Clearing fees, which include GLOBEX/2/ transactions, were $106.6 million, $0.5
million less than the same nine month period in 1998 primarily due to a 8%
decrease in volume from 170 million contracts to 156 million contracts, offset
to some extent by a 3% shift in mix to higher priced customer business and
increased GLOBEX volume. The decrease in volume was primarily due to reduced
69
<PAGE>
volatility, continued consolidation of institutional customers and a slow down
in business as customers prepared for Y2K. Decreased interest rate volatility
was due to low inflation and no significant world events, such as the Asian
financial crisis, which had a positive effect on our interest rate products in
1997 and 1998. Revenue from quotation data fees was $32.0 million, up $2.4
million, due to an increase in the number of subscribers. Investment income was
down $0.2 million, largely due to a decrease in the amount of funds available
for investment. Other revenues decreased $1.8 million due to a reduction in
trading revenues from our GFX subsidiary and a reduction in member fines. These
reductions were partially offset by $1.4 million in revenues from GLOBEX\\2\\
terminal charges for which there was no revenue in 1998.
Operating expenses were $147.6 million for the nine months ended
September 30, 1999, an increase of $18.5 million from the same period last year.
Expenses increased as a result of the technology advancements in the areas of
GLOBEX\\2\\, trade order processing systems, hand-helds and infrastructure
improvements. Salaries and benefits expense was $59.2 million, up $8.9 million,
reflecting additional staff hired in information systems and the annual merit
increase. Occupancy expense was $1.5 million less than last year due to a
reduction in rent expense for the trading floor related to the lease renewal.
Professional fees, outside services and licenses expense of $22.5 million
reflected significant expenditures for GLOBEX\\2\\, Year 2000 compliance,
trading floor systems, recruiting, legal services and S&P license fees. Expenses
in this area increased by $3.9 million. Communications and computer equipment
expense of $19.6 million includes rental and maintenance for hardware, software,
networks and telecommunications systems for staff, tenants and the trading
floors. Expenses for communications and computer equipment increased by $3.7
million primarily due to our expanding GLOBEX\\2\\ network. Depreciation and
amortization expense increased by $4.7 million due to capital expenditures for
computer equipment. Public relations and promotions expenses were $4.3 million
for the first nine months, $2.8 million less than the same period last year
reflecting a reduction in advertising and new product promotion. Other operating
expense of $9.8 million was up $1.6 million due to increases in business and
travel, board stipends, department supplies and software, staff training, state
and local taxes and equipment lease interest.
The Exchange adopted SOP 98-1 effective January 1, 1999, and
accordingly, commenced capitalizing certain costs of developing internal use
software which would otherwise have been expensed under its previous accounting
policy. Costs capitalized during the nine months ended September 30, 1999
amounted to approximately $10.7 million.
Income from continuing operations, before a deduction for limited
partners' interest in the earnings of P-M-T and a provision for income taxes,
for the first nine months of 1999 was $10.9 million, representing a decrease of
$18.5 million versus the $29.4 million recorded in the first nine months of
1998.
The limited partners' interest in earnings of P-M-T was $1.2 million
for the first nine months of 1999, $0.8 million less than the same period in
1998 due to a reduction in partnership income.
The provision for income taxes, at an effective tax rate of 40%, was
$3.9 million compared to $11.0 million for the same nine month period in 1998.
Twelve months ended December 31, 1998 compared to the twelve months ended
December 31, 1997
Revenues for the year ended December 31, 1998 were $194.7 million
compared to $177.2 million for 1997. Clearing fees and GLOBEX\\2\\ transaction
fees increased to $124.6 million from $116.9 million in 1997 primarily due to a
13% increase in volume. Volume for 1998 was 227 million contracts traded as
compared to 201 million contracts in 1997. Trading volume on GLOBEX, included
above, increased 122% to surpass 9.7 million contracts, the sixth consecutive
year of record volume. The profit impact of this growth in volume was reduced by
a $16.9 million fee reduction program and an additional $1.0 million waiver of
lessee brokerage. The fee reduction program included fees paid by clearing firms
for the period October 12, 1998 through December 18, 1998. Quotation data fees
increased to $40.1 million in 1998 from $37.7 million in 1997 as a result of an
increase in subscribers and devices in service. Communication fees of $8.1
million increased $0.2 million, or 3% over 1997. Investment income was up $1.9
million due to an increase in the average invested balance which more than
offset the negative impact of declining interest rates. Other operating income
increased to $12.3 million from $6.9 million primarily due to an increase in GFX
trading revenues and systems consulting fees we received for enhancements to the
Clearing 21 system.
70
<PAGE>
Total expenses in 1998 were $180.5 million compared to $158.2 million
in 1997. The increase was due primarily to new strategic initiatives, electronic
trading and other technology projects and enhancements. Salaries and benefits
costs increased $5.5 million to $72.4 million due primarily to increases in
salaries and bonuses versus the prior year. Professional fees, outside services
and license fees of $28.8 million were $11.2 million greater than in 1997
primarily due to expenses associated with the strategic planning process and
increased spending on GLOBEX\\2\\, Year 2000 compliance and trading floor
technology. Expenses for communications and computer equipment were up $5.5
million due, in large part, to communications cost related to the GLOBEX\\2\\
network. The other expense categories were relatively flat year-to-year.
Income from continuing operations, before a deduction for limited
partners' interest in the earnings of P-M-T and a provision for income taxes,
was $14.2 million in 1998, a decrease of $4.9 million versus the $19.1 million
recorded in 1997. The primary reason for the decrease was the clearing fee
reduction program and waiver of lessee brokerage for the period October 12, 1998
through December 18, 1998.
The limited partners' interest in earnings of P-M-T was $2.8 million
for 1998 as compared to zero in 1997. Under the terms of the partnership
agreement, the CME as general partner, absorbs all losses, and in 1997 P-M-T had
a loss of $0.9 million.
The provision for income taxes, at an effective tax rate of 38%, was
$4.3 million in 1998 compared to $7.0 million for the same period in 1997.
In September 1997, the operations of CME Depository Trust Co.
("CME-DTC") were discontinued. The results of operations and its net assets were
included in the consolidated financial statements as discontinued operations.
Remaining deferred charges and capitalized software license fees were
written-off in 1997.
Twelve months ended December 31, 1997 compared to the twelve months ended
December 31, 1996
Revenues for the year ended December 31, 1997, were $177.2 million
compared to $164.2 million for 1996. Clearing fees were $116.9 million for 1997
as compared to $109.0 million for 1996. This resulted from a 13% increase in
trading volume from 177 million to 201 million contracts traded. The increase in
volume was partially offset by a reduction in clearing fee rates during 1997.
Greater investment balances resulted in an increase in investment income, and
increases in quotation data fees, communication fees and other operating revenue
helped to achieve an 8% increase in total revenue.
Total operating expenses for 1997 were $158.2 million compared to
$151.8 million in 1996. A significant portion of the increase was due to new
product launches, technology advancements and the first full year of operating
expenses of GFX. In 1996, the Exchange received a cash payment from the CME
Trust in the amount of $15.7 million representing the return of $12.1 million of
previous contributions, $0.7 million of interest income subject to federal
income tax, and $2.9 million of federally tax-exempt interest income.
Income before taxes from continuing operations for 1997 was $19.1
million, a decrease of $9.0 million from the $28.1 million earned in 1996.
Excluding the $15.7 million received in 1996 related to the Trust settlement,
income before taxes from continuing operations for 1997 would have been $6.6
million greater than in 1996.
The provision for income taxes, at an effective tax rate of 36.5%, was
$7.0 million in 1997 compared to $12.0 million for the same period in 1996. The
tax provision for income taxes for 1996 included approximately $8.4 million
related to the settlement of the CME Trust issue.
After taking into account a loss from the discontinued operations of
CME-DTC, net income was $8.7 million in 1997, compared to $15.1 million in 1996.
71
<PAGE>
Liquidity and Capital Resources
We have historically funded our operations primarily through cash
generated from operations. The following is a summary of recent cash flows (in
thousands):
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
----------------- --------------------------
1999 1998 1997
----------------- --------------------------
<S> <C> <C> <C>
Net cash provided by operating activities $ 8,219 $ 25,493 $ 26,071
Sales (Purchases) of property, net (36,125) (24,935) (14,346)
Capital lease financing, net 3,225 6,118 0
Sales (Purchases) of investment securities, net 19,016 (1,048) (10,242)
Distribution to limited partners of P-M-T 0 (1,957) 0
--------------- ---------- -----------
Net increase (decrease) in cash and cash equivalents $ (5,665) $ 3,671 $ 1,483
=============== ========== ===========
</TABLE>
Purchases of property to support technology and electronic trading both
on and off the trading floor increased significantly during 1998. That trend
accelerated during the nine months ended September 30, 1999, and is likely to
continue in the future.
At September 30, 1999, we had working capital of $74.9 million,
compared to $95.0 million at December 31, 1998. Management believes that
existing cash and investment balances will be sufficient to meet cash
requirements to fund operations and expected capital expenditures during the
next twelve months.
The Exchange is a designated contract market for futures and options on
futures, and clears and guarantees the settlement of all futures and options
contracts traded in our markets. In our guarantor role, the Exchange has
precisely equal and offsetting claims to and from clearing members on opposite
sides of each contract. The CME Clearing House bears counterparty credit risk in
the event that future market movements create conditions which could lead to
clearing members failing to meet their obligations to us. The Clearing House
reduces its exposure through a risk management program which includes rigorous
and ongoing financial standards for clearing membership, initial and maintenance
performance bond requirements and mandatory security deposits. In addition, the
Clearing House maintains an unsecured committed line of credit with a consortium
of banks in the amount of $350 million to provide liquidity and capacity to pay
settlement variation to all clearing members even if a clearing member may have
failed to meet its financial obligations to the Clearing House, or in the event
of a temporary problem with the domestic payments system that would delay
payments of settlement variation between us and our clearing members.
Accounting Standards
During 1998 and prior years, the Exchange expensed all internal and
external costs associated with the development of software for internal use. The
Exchange adopted SOP 98-1 effective January 1, 1999, and, accordingly, commenced
capitalization of certain costs of developing internal use software, which would
otherwise have been expensed under its previous accounting policy. Costs
capitalized during the nine months ended September 30, 1999 amounted to
approximately $10.7 million.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1997,
and for each of the three years ended December 31, 1998, included in this
document have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
72
<PAGE>
VALIDITY OF SECURITIES
Certain legal matters relating to the issuance of the shares of Class A
and Class B common stock in connection with the demutualization transactions
will be passed upon by Sidley & Austin, Chicago, Illinois.
73
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
As of September 30, 1999 and December 31, 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 9,176 $ 14,841
Investments 67,570 87,730
Accounts receivable and prepaid expenses 27,061 28,927
Cash performance bonds and security deposits 164,701 60,775
------------ -----------
Total current assets 268,508 192,273
Property, net of accumulated depreciation and amortization 89,700 71,266
Other assets 27,958 16,597
------------ -----------
Total Assets $ 386,166 $ 280,136
============ ===========
Liabilities and Members' Equity
Current liabilities
Accounts payable and accrued expenses $ 28,885 $ 36,470
Cash performance bonds and security deposits 164,701 60,775
------------ -----------
Total current liabilities 193,586 97,245
Limited Partners' interest in P-M-T Limited Partnership 2,092 891
Other liabilities 18,483 15,103
------------ -----------
Total Liabilities 214,161 113,239
Members' equity 172,005 166,897
------------ -----------
Total Liabilities and Members' Equity $ 386,166 $ 280,136
============ ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
74
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
Condensed Consolidated Statements of Income
For the Nine Months Ended September 30, 1999 and 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenues
Clearing fees $ 106,584 $ 107,098
Quotation data fees 32,046 29,669
Communication fees 6,226 6,079
Investment income 6,542 6,791
Other operating revenue 7,092 8,892
------------ -----------
Total revenues 158,490 158,529
------------ -----------
Expenses
Salaries and benefits 59,237 50,297
Occupancy 14,069 15,614
Communications and computer equipment 19,593 15,900
Professional fees, outside services and licenses 22,533 18,652
Depreciation and amortization 18,030 13,335
Advertising, public relations and marketing promotions 4,322 7,084
Other operating expense 9,849 8,268
------------ -----------
Total expenses 147,633 129,150
------------ -----------
Income before limited partners' interest in P-M-T and provision
for income taxes 10,857 29,379
Limited partners' interest in earnings of P-M-T (1,201) (1,957)
Provision for income taxes (3,862) (10,969)
------------ -----------
Net income $ 5,794 $ 16,453
============ ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
75
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
Condensed Consolidated Statements of Members' Equity and Comprehensive Income
For the Nine Months Ended September 30, 1999 and 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Total Proceeds Unrealized
Members' Retained From Issuance Securities
Equity Earnings of Memberships Gains, net
----------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1999 $ 166,897 $ 122,758 $ 43,605 $ 534
Comprehensive income:
Net income 5,794 5,794
Unrealized loss on securities, net of tax of $458 (686) (686)
----------
Total comprehensive income 5,108
----------------------------------------------------------
Balance, September 30, 1999 $ 172,005 $ 128,552 $ 43,605 $ (152)
==========================================================
Balance, January 1, 1998 $ 159,554 $ 115,729 $ 43,605 $ 220
Comprehensive income:
Net income 16,453 16,453
Unrealized gains on securities, net of tax of $291 436 436
----------
Total comprehensive income 16,889
----------------------------------------------------------
Balance, September 30, 1998 $ 176,443 $ 132,182 $ 43,605 $ 656
==========================================================
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
76
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 5,794 $ 16,453
------------ ------------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 18,030 13,335
(Increase) decrease in accounts receivable and prepaid expenses 1,867 (12,271)
Increase in other assets (11,701) (274)
Increase (decrease) in accounts payable and accrued expenses (8,992) 4,635
Increase in other liabilities 3,221 4,890
------------ ------------
Net cash provided by operating activities 8,219 26,768
------------ ------------
Cash Flows from Investing and Financing Activities
Purchases of property, net (36,125) (11,319)
Sales (purchases) of investments, net 19,016 (13,930)
New capitalized lease financing 4,608 --
Capitalized lease payments (1,383) --
------------ ------------
Net cash provided by (used in) investing and financing activities (13,884) (25,249)
------------ ------------
Net increase in cash and cash equivalents (5,665) 1,519
Cash and cash equivalents, beginning of period 14,841 11,170
------------ ------------
Cash and cash equivalents, end of period $ 9,176 $ 12,689
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
77
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The condensed consolidated financial statements include the accounts of the
Exchange and its controlled subsidiaries, P-M-T Limited Partnership and GFX
Corporation. All intercompany transactions and accounts have been
eliminated in consolidation. The interim financial statements as of
September 30, 1999 and for the nine months ended September 30, 1999 and
1998 are unaudited; however, in the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results for the interim periods have been made. The
results for interim periods are not necessarily indicative of the results
to be expected for the entire fiscal year. The condensed consolidated
financial statements should be read in connection with the audited
consolidated financial statements of the Exchange for the year ended
December 31, 1998 included elsewhere in this Proxy Statement/Prospectus.
2. Software Development Costs
During 1998 and prior years, the Exchange expensed all internal and
external costs associated with the development of software for internal
use. In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). This
pronouncement identifies the characteristics of internal use software and
provides guidance on new cost recognition principles. SOP 98-1 is effective
for financial statements for fiscal years beginning after December 15,
1998. The Exchange adopted SOP 98-1 effective January 1, 1999, and
accordingly, commenced capitalizing certain costs of developing internal
use software which would otherwise have been expensed under its previous
accounting policy. Costs capitalized during the nine months ended September
30, 1999 amounted to approximately $10.7 million.
3. Subsequent Event
On October 27, 1999, the Board of Directors approved a plan for
demutualization whereby the Exchange would be converted from an Illinois
not-for-profit corporation into a Delaware for-profit corporation. Under
this plan, membership interests in the Exchange would be converted into
shares of Class B common stock, and in the case of the CME, IMM and IOM
membership interests, shares of Class A common stock. Class B shares would
be issued in several series, each of which would contain the traditional
features of common stock and would confer the trading privileges associated
with the membership interest that was converted into such shares. Class A
shares would represent traditional common stock. Completion of the
demutualization transaction is subject to the affirmative vote of at least
two-thirds of membership votes present and voted, receipt of a favorable
ruling from the Internal Revenue Service regarding the federal income tax
consequences of the contemplated transactions, completion of the cash
purchase by the Exchange of the assets and business of P-M-T Limited
Partnership (which requires the approval of the holders of two-thirds of
the Class A partnership units of the partnership), and approval by the CFTC
of certain changes to Exchange rules to reflect the demutualization.
78
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Assets 1998 1997
----------- -----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 14,841 $ 11,170
Investments (Notes 1 and 2) 87,730 86,217
Accounts receivable 27,338 18,971
Prepaid expenses 1,589 682
Cash performance bonds and security deposits (Note 3) 60,775 229,280
- -------------------------------------------------------------------------------------------------------------
Total current assets 192,273 346,320
Property, net of accumulated depreciation and amortization (Note 4) 71,266 63,312
Other assets (Notes 2 and 6) 16,597 15,339
- -------------------------------------------------------------------------------------------------------------
Total assets $ 280,136 $ 424,971
=============================================================================================================
Liabilities and Members' Equity
Current Liabilities
Accounts payable $ 13,940 $ 10,077
Accrued expenses (Note 7) 22,530 17,092
Cash performance bonds and security deposits (Note 3) 60,775 229,280
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 97,245 256,449
Limited Partners' interest in net assets of PMT Limited Partnership (Note 5) 891 --
Long-term debt (Notes 9 and 10) 4,969 --
Other liabilities (Note 8) 10,134 8,968
- -------------------------------------------------------------------------------------------------------------
Total liabilities 113,239 265,417
Members' equity 166,897 159,554
- -------------------------------------------------------------------------------------------------------------
Total liabilities and members' equity $ 280,136 $ 424,971
=============================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
79
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
Revenues
Clearing fees $ 124,575 $ 116,917 $ 109,006
Quotation data fees 40,079 37,719 36,486
Communication fees 8,128 7,885 7,637
Investment income 9,610 7,760 5,593
Other operating revenue 12,317 6,945 5,490
- ----------------------------------------------------------------------------------------------------------
Total revenues 194,709 177,226 164,212
- ----------------------------------------------------------------------------------------------------------
Expenses
Salaries and benefits (Note 8) 72,385 66,873 63,547
Occupancy 19,702 19,779 20,138
Professional fees, outside services and licenses 28,754 17,587 16,693
Communications and computer equipment 22,731 17,197 17,352
Depreciation and amortization 17,943 16,689 16,038
Public relations and promotion 9,586 11,175 9,220
Other operating expense 9,415 8,868 8,815
- ----------------------------------------------------------------------------------------------------------
Total expenses 180,516 158,168 151,803
- ----------------------------------------------------------------------------------------------------------
Income from continuing operations before return of
contributions, limited partners' interest in PMT and
income taxes 14,193 19,058 12,409
Return of contributions from CME Trust (Note 15) -- -- 15,717
Limited partners' interest in earnings of
PMT Limited Partnership (Note 5) (2,849) -- --
Provision for income taxes (Note 6) (4,315) (6,963) (12,035)
- ----------------------------------------------------------------------------------------------------------
Income from continuing operations 7,029 12,095 16,091
Loss from discontinued operations, net of income
tax benefit of $2,285 and $648 (Note 16) -- (3,428) (1,023)
- ----------------------------------------------------------------------------------------------------------
Net income $ 7,029 $ 8,667 $ 15,068
==========================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
80
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
Consolidated Statements of Members' Equity and Comprehensive Income
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Total Proceeds Unrealized
Members' Retained From Issuance Securities
Equity Earnings of Memberships Gains, net
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ 134,108 $ 91,994 $ 41,889 $ 225
Comprehensive income:
Net income 15,068 15,068
Unrealized loss on securities, net of tax benefit
of $174 (261) (261)
---------
Total comprehensive income 14,807
Proceeds from issuance of memberships 1,716 1,716
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 150,631 $ 107,062 $ 43,605 $ (36)
Comprehensive income:
Net income 8,667 8,667
Unrealized gains on securities, net of tax of $171 256 256
---------
Total comprehensive income 8,923
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 159,554 $ 115,729 $ 43,605 $ 220
Comprehensive income:
Net income 7,029 7,029
Unrealized gains on securities, net of tax of $209 314 314
---------
Total comprehensive income 7,343
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 166,897 $ 122,758 $ 43,605 $ 534
===================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
81
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 7,029 $ 8,667 $ 15,068
Adjustments to reconcile net income to net cash provided by
Operating activities:
Limited partners' interest in earnings of PMT Partnership 2,849 -- --
Deferred income tax credit (1,311) (3,127) (3,378)
Depreciation and amortization 17,943 16,689 16,038
Gain on sale of investments (57) (196) (157)
Loss on disposal of fixed assets 125 98 13
Increase in accounts receivable (8,367) (533) (178)
Decrease (increase) in prepaid expenses (907) 127 (150)
Decrease (increase) in other assets (1,007) 1,285 8,356
Decrease (increase) in net assets of discontinued operations -- 3,363 (3,363)
Increase (decrease) in accounts payable and accrued expenses 8,152 440 (4,147)
Increase (decrease) in other liabilities 1,044 (742) 1,694
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 25,493 26,071 29,796
- --------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchases of property, net (18,817) (14,346) (14,775)
Purchases of investments (99,332) (139,865) (181,334)
Proceeds from sales and maturities of investments 98,284 129,623 163,778
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (19,865) (24,588) (32,331)
- --------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from issuance of memberships -- -- 1,716
Distribution to limited partners of PMT Limited Partnership (1,957) -- --
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities (1,957) -- 1,716
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,671 1,483 (819)
Cash and cash equivalents, beginning of year 11,170 9,687 10,506
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 14,841 $ 11,170 $ 9,687
==============================================================================================================
Supplemental disclosure of cash flow Information:
Interest paid $ 2 $ 26 $ 64
==============================================================================================================
Income taxes paid $ 9,042 $ 8,317 $ 6,206
==============================================================================================================
Leased asset additions and related obligations $ 6,118 $ -- $ --
==============================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
82
<PAGE>
1. Summary of Significant Accounting Policies:
Description of Business
- -----------------------
The Chicago Mercantile Exchange (the "CME") is a member-owned corporation
organized under Illinois not-for-profit law. It is subject to federal and state
corporate income tax and files a consolidated income tax return on Form 1120.
The CME is a designated contract market for the trading of futures and futures
on options contracts. Trades are executed through both open-outcry and
electronic trading systems. Through its in-house clearing division, the CME
clears, settles, nets and guarantees performance of all matched transactions in
its products. As an Illinois not-for-profit corporation, the Exchange may not
pay dividends to its members.
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts of the Chicago
Mercantile Exchange and its controlled subsidiaries, which include the P-M-T
Limited Partnership and GFX Corporation (collectively, the "Exchange").
Included as discontinued operations are the accounts of the CME Depository Trust
Co. ("CME-DTC") whose operations ceased in 1997 (See Note 16). All
intercompany transactions and accounts have been eliminated in consolidation.
Cash and Cash Equivalents
- -------------------------
Cash equivalents consist of highly liquid investments with maturities of three
months or less when purchased.
Investments
- -----------
Investment securities have generally been classified as available for sale and
are carried at fair value with unrealized gains and losses reported net of tax
as a component of members' equity and comprehensive income. Interest on
investment securities is recognized as income when earned and includes accreted
discount less amortized premium.
Additional securities held in connection with non-qualified deferred
compensation programs have been classified as trading securities. These
securities are included in other assets in the accompanying balance sheet at
fair value, and unrealized gains and losses are reflected in investment income.
Performance Bonds and Security Deposits
- ---------------------------------------
Performance bonds and security deposits held by the Exchange for the account of
clearing members may be in the form of cash or securities. Cash performance
bonds and security deposits are reflected in the accompanying balance sheets.
Cash received may be invested and any interest received accrues to the
Exchange. Securities consist primarily of short-term U.S. Treasury securities
and are not reflected in the accompanying balance sheets. These securities are
held in safekeeping, and interest and gain or loss on such securities accrues to
the clearing member.
Property
- --------
Property is stated at cost less accumulated depreciation and amortization.
Depreciation on furniture, fixtures and equipment is provided on the
straight-line method over the estimated useful lives of the assets, generally
three to seven years. Leasehold improvements are amortized over the lesser of
their estimated useful lives or the remaining term of the applicable leases.
Maintenance and repair items are charged to expense as incurred; renewals and
betterments are capitalized.
Software Development Costs
- --------------------------
During 1998 and prior years, the Exchange expensed all internal and external
costs associated with the development of software for internal use. In March
1998, the American Institute of Certified Public Accountants issued Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). This pronouncement identifies the
characteristics of internal use software and provides guidance on new cost
recognition principles. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. The Exchange will adopt SOP 98-1
effective January 1, 1999, and accordingly, will commence capitalizing certain
costs of developing internal use software which would otherwise have been
expensed under its previous accounting policy.
Fair Value of Financial Instruments
- -----------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of the fair value of financial instruments. The carrying values of
financial instruments included in assets and liabilities in the accompanying
consolidated balance sheets are reasonable estimates of their fair values.
83
<PAGE>
Impairment of Assets
- --------------------
The Exchange reviews its long-lived assets and intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amounts
may not be recoverable. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
Clearing Fees
- -------------
Clearing fees represent per contract charges for trade execution and clearing,
and also include GLOBEX electronic system fees. Fees are charged at various
rates based on the product traded and the account owner's Exchange membership.
Rates have been adjusted or waived periodically.
Quotation Data Fees
- -------------------
Quotation revenue represents fees charged for the dissemination of market
information.
Income Taxes
- ------------
Deferred income taxes are determined in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," and
arise from temporary differences between amounts reported for income tax and
financial statement purposes.
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, liabilities, revenues and expenses as
well as the disclosure of contingent assets and liabilities in the financial
statements. Actual results could differ from those estimates.
Reclassifications
- -----------------
Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform to the presentation in 1998. In addition, the
Exchange adopted a new balance sheet presentation for performance bonds and
security deposits as described above, and the accompanying balance sheets
reflect this new presentation. The Exchange previously included performance
bonds and security deposits received from its clearing members in the form of
securities as both an asset and a liability in its consolidated balance sheets.
2. Investment Securities
Investment securities included in current assets have been classified as
available for sale. The amortized cost and fair value of these investment
securities at December 31, 1998 and 1997, were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1997
------------------------ -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury $ 3,127 $ 3,127 $ 3,118 $ 3,118
U.S. Government agencies 23,073 23,308 34,674 34,750
State and municipal 60,641 61,295 48,058 48,349
--------- -------- --------- ---------
Total Investments $ 86,841 $ 87,730 $ 85,850 $ 86,217
========= ======== ========= =========
</TABLE>
Unrealized gains on investment securities classified as available for sale,
included in the accompanying consolidated statement of changes in members'
equity, are reported as a component of comprehensive income. The amortized cost
and fair value of these investment securities at December 31, 1998, by
contractual maturity, were as follows (dollars in thousands):
84
<PAGE>
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- --------
<S> <C> <C>
Maturity of one year or less $ 9,810 $ 9,830
Maturity between one and five years 54,613 55,413
Maturity greater than five years 22,418 22,487
--------- --------
Total $ 86,841 $ 87,730
========= ========
</TABLE>
Trading securities held in connection with non-qualified deferred compensation
plans are included in other assets and amounted to approximately $5.3 million at
December 31, 1998 and $4.1 million at December 31, 1997. Investment income
includes unrealized gains relating to trading securities of $407,000, $285,000
and $0 for the years ended December 31, 1998, 1997 and 1996, respectively.
3. Performance Bonds and Security Deposits
The Exchange is a designated contract market for futures and options on futures,
and clears and guarantees the settlement of all futures and options contracts
traded in its markets. In its guarantor role, the Exchange has precisely equal
and offsetting claims to and from clearing members on opposite sides of each
contract. The CME bears counter-party credit risk in the event that future
market movements create conditions which could lead to clearing members failing
to meet their obligations to the Exchange. The CME reduces its exposure through
a risk management program which includes rigorous initial and ongoing financial
standards for clearing membership, initial and maintenance performance bond
requirements and mandatory security deposits. In addition, the Exchange
maintains an unsecured committed line of credit with a consortium of banks (Note
11) in the amount of $350 million to provide liquidity and capacity to pay
settlement variation to all clearing members even if a clearing member may have
failed to meet its financial obligations to the CME, or in the event of a
temporary problem with the domestic payments system that would delay payments of
settlement variation between the Exchange and its clearing members.
The Exchange is required under the Commodity Exchange Act to segregate cash and
securities deposited by clearing members on behalf of their customers. In
addition, Exchange rules require a segregation of all funds deposited by
clearing members from operating funds.
Clearing members, at their option, may instruct the Exchange to invest cash on
deposit for performance bond purposes, in a portfolio of securities in the
Exchange's Interest Earning Facility ("IEF"). The IEF was organized in 1997
as two limited liability companies, and interest earned, net of expenses, is
passed on to participating member firms. IEF principal is guaranteed by the
Exchange. The IEF investment portfolio is managed by one of the Exchange's
approved settlement banks, and eligible investments include U.S. Treasury bills
and notes, U.S. Treasury strips, and reverse repurchase agreements. Repurchase
agreements are also permitted. The maximum average portfolio maturity is 90
days, and the maximum maturity for an individual security is 13 months. IEF
principal amounted to approximately $634 million at December 31, 1998.
Management believes that the market risk exposure relating to its guarantee is
not material to the financial statements taken as a whole. The Exchange earned
fees under the IEF program during 1998 and 1997 in the amount of $428,000 and
$96,000, respectively.
Each clearing member is required to deposit and maintain specified margin in the
form of cash, U.S. Government securities or bank letter of credit. These
performance bonds are available to meet only the financial obligations of that
clearing member to the Exchange. All obligations and non-cash margin deposits
are marked to market on a daily basis, and haircuts are applied for margin and
risk management purposes.
The Exchange and the Options Clearing Corporation ("OCC") have a cross-margin
arrangement whereby a common clearing member may maintain a cross-margin account
in which the clearing member's positions in certain futures and options on
futures are combined with certain OCC cleared option positions for purposes of
calculating performance bond requirements. The performance bond deposits are
held jointly by the Exchange and the OCC.
Each clearing member is also required to deposit and maintain specified security
deposits in the form of cash or U.S. Government Securities. In the event that
performance bonds and security deposits of a defaulting clearing member are
inadequate to fulfill that clearing member's outstanding financial obligation,
the entire security deposit fund is available to cover potential losses after
first utilizing surplus operating funds of the Exchange.
85
<PAGE>
Cash and securities held as performance bonds and security deposits at December
31 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------------------- -------------------------------
Securities and Securities and
Cash IEF Funds Cash IEF Funds
----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Performance bonds $ 56,164 $ 15,480,474 $ 219,029 $ 10,623,106
Security deposits 4,611 184,737 10,251 121,814
Cross-margin securities, held jointly with OCC -- 576,873 -- 256,728
----------- --------------- ----------- ---------------
Total $ 60,775 $ 16,242,084 $ 229,280 $ 11,001,648
============ ================ ============ ===============
</TABLE>
In addition irrevocable letters of credit, which are not included in the
accompanying balance sheets, held at December 31 were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Performance bonds $1,078,650 $737,350
Security deposits 9,000 10,000
Cross-margin accounts 4,110 119,365
- ---------------------------------------------------------------------------------------------------------------------
Total letters of credit $1,091,760 $866,715
=====================================================================================================================
</TABLE>
4. Property
A summary of the property accounts as of December 31 is presented below (dollars
in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Furniture, fixtures and equipment $101,022 $ 81,642
Leasehold improvements 77,855 73,784
- ----------------------------------------------------------------------------------------------------------------------
Total property 178,877 155,426
Less-Accumulated depreciation and amortization (107,611) (92,114)
- ----------------------------------------------------------------------------------------------------------------------
Net property $ 71,266 $ 63,312
======================================================================================================================
</TABLE>
5. PMT Limited Partnership
The Exchange is the general partner and members and clearing members of the
Exchange are limited partners of the P-M-T Limited Partnership ("PMT"), an
Illinois limited partnership. PMT was formed in 1987 to initiate the development
of the GLOBEX(R) global electronic trading system ("GLOBEX"). From May 1, 1996,
through November 1998, GLOBEX was operated by Reuter Futures Services Inc.
("Reuters") under an agreement with participating exchanges (the Exchange and
ParisBourse, a French equities, futures and options exchange). The system
previously operated by Reuters was replaced by a new system called GLOBEX \\2\\
which is operated by the Exchange and uses electronic trading software licensed
from ParisBourse. The Exchange charges PMT for services provided. PMT reported
operating income (loss) of $3,536,000, and ($872,000) and ($3,419,000) in 1998,
1997 and 1996, respectively, and made an income distribution of $2,393,000 in
1998.
6. Income Taxes
The provision (benefit) for income taxes included in the consolidated statements
of income is comprised of the following (in thousands):
86
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $ 4,613 $ 8,274 $ 12,639
State 1,013 1,816 2,774
-------- --------- ---------
Total 5,626 10,090 15,413
-------- --------- ---------
Deferred:
Federal (1,075) (2,564) (2,770)
State (236) (563) (608)
-------- --------- ---------
Total (1,311) (3,127) (3,378)
-------- --------- ---------
Total continuing operations 4,315 6,963 12,035
Total discontinued operations 0 (2,285) (648)
-------- --------- ---------
Total provision for income taxes $ 4,315 $ 4,678 $ 11,387
======== ========= =========
Reconciliation of the statutory U.S. federal income tax rate to the effective
tax rate on income from continuing operations is as follows:
<CAPTION>
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
Statutory U.S. federal tax rate 35.0 35.0% 35.0%
State taxes, net of federal benefit 3.8 4.3 4.8
Tax exempt interest income (6.6) (2.8) (5.1)
Non deductible expenses 3.7 2.1 1.8
Interest expense (Note 15) 0.0 0.0 10.4
Other, net 2.1 (2.1) (4.1)
-------- --------- ---------
Effective tax rate 38.0% 36.5% 42.8%
======== ========= =========
At December 31, the components of net deferred tax assets (liabilities) were as
follows (in thousands):
<CAPTION>
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Depreciation and amortization $ 5,813 $ 5,542 $ 2,763
Deferred compensation 2,167 1,622 1,682
Accrued expenses 2,828 2,482 2,469
-------- --------- ---------
Subtotal 10,808 9,646 6,914
Valuation allowance - - -
-------- --------- ---------
Deferred tax assets 10,808 9,646 6,914
-------- --------- ---------
Deferred tax liabilities:
Prepaid rent - (442) (971)
Unrealized gains on securities (356) (146) (24)
Other (95) (12) -
-------- --------- ---------
Deferred tax liabilities (451) (600) (995)
-------- --------- ---------
Net deferred tax assets $ 10,357 $ 9,046 $ 5,919
======== ========= =========
</TABLE>
7. Accrued Expenses
Accrued expenses include accrued salaries and benefits of $12.7 million and $8.5
million at December 31 1998 and 1997, respectively.
8. Employee Benefit Plans
87
<PAGE>
Pension Plan
- ------------
The Exchange maintains a noncontributory defined benefit cash balance pension
plan ("Plan") for eligible employees. Employees who have completed a continuous
12-month period of employment with 1,000 or more hours of service and have
reached the age of 21 are eligible to participate. Effective January 1, 1995,
the Plan was amended to provide for an age-based contribution to the cash
balance account, and to include cash bonuses in the definition of considered
earnings. Participant cash balance accounts receive an interest credit at the
one-year U.S. Treasury Bill rate. Participants become vested in their accounts
after five years. The Exchange's policy is to currently fund required pension
costs.
A reconciliation of beginning and ending balances of the benefit obligation and
fair value of Plan assets, the funded status of the Plan, certain actuarial
assumptions and the components of pension cost are indicated below (dollars in
thousands).
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $10,646 $ 9,964
Service cost 1,774 1,943
Interest cost 850 810
Actuarial loss (gain) 401 (351)
Benefits paid (1,845) (1,720)
- ---------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $11,826 $10,646
=====================================================================================================================
Change in plan assets
Fair value of plan assets at beginning of year $11,742 $10,477
Actual return on plan assets 1,530 1,368
Employer contribution 2,095 1,617
Benefits paid (1,845) (1,720)
- ---------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $13,522 $11,742
=====================================================================================================================
Funded status at December 31
Plan assets in excess of benefit obligation $ 1,696 $1,096
Unrecognized transition asset (410) (484)
Unrecognized prior service cost (credit) (278) (328)
Unrecognized net actuarial gain (1,962) (1,637)
- ---------------------------------------------------------------------------------------------------------------------
Accrued benefit cost $ (954) $(1,353)
=====================================================================================================================
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Actuarial assumptions as of December 31
Discount rate 6.75% 7.25% 7.50%
Rate of compensation increase 5.00% 5.00% 5.00%
Expected return on plan assets 8.00% 8.00% 8.00%
Components of pension cost
Service cost $1,774 $1,943 $2,025
Interest cost 850 810 651
Expected return on plan assets (803) (800) (470)
Amortization of prior service cost (125) (125) (125)
Recognized net actuarial gain -- (25) --
- ---------------------------------------------------------------------------------------------------------------------
Net pension cost $1,696 $1,803 $2,081
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Savings Plan
- -------------
The Exchange maintains a savings plan pursuant to Section 401(k) of the Internal
Revenue Code whereby all employees are participants and have the option to
contribute to the Plan. The Exchange matches employee contributions up to 3% of
the employee's base salary and makes an additional contribution of up to 2% of
salary based on annual trading volume. Total expense for the savings plan
amounted to $1,762,000, $1,682,000 and $1,041,000 in 1998, 1997, and 1996,
respectively.
88
<PAGE>
Non-Qualified Plans
- -------------------
The Exchange maintains the following non-qualified plans under which
participants may make assumed investment choices with respect to amounts
contributed on their behalf. Although not required to do so, the Exchange
invests such contributions in assets which mirror the assumed investment
choices. The balances in these plans are subject to the claims of general
creditors of the Exchange, and amounted to approximately $5.3 million and $4.1
million at December 31, 1998 and 1997.
Supplemental Plan - The Exchange maintains a non-qualified supplemental
plan to provide benefits for certain officers who have been impacted by
statutory limits under the provisions of the qualified pension and
savings plans. Total expense for the supplemental plan amounted to
$260,000, $230,000 and $269,000 in 1998, 1997, and 1996, respectively.
Deferred Compensation Plan - The Exchange maintains a deferred
compensation plan under which eligible officers and board members may
contribute a percentage of their compensation and defer income taxes
thereon until the time of distribution.
Supplemental Executive Retirement Plan - The Exchange maintains a
non-qualified, defined contribution plan for senior officers. Under the
plan, the Exchange contributes an amount equal to 8% of salary and
bonus of eligible employees annually. Post 1996 contributions are
subject to a vesting schedule under which each annual contribution
begins to vest after three years and is fully vested after five years.
Total expense for the plan amounted to $213,000, $186,000 and $252,000
in 1998, 1997, and 1996, respectively.
9. Lease Commitments
The Exchange has commitments under operating and capital leases for certain
facilities and equipment. Lease commitments for office space expire in the year
2003, with annual minimum rentals of approximately $7.3 million. The Exchange
leases trading facilities from the Chicago Mercantile Exchange Trust through
October 2005, with annual minimum rentals of approximately $1.3 million, and has
an option to extend the term of the lease thereafter. Total rental expense was
approximately $18.0 million in 1998, $18.9 million in 1997 and $21.1 million in
1996.
Future minimum obligations under lease commitments in effect at December 31,
1998 were as follows (dollars in thousands).
<TABLE>
<CAPTION>
Capitalized Operating
Leases Leases
- -------------------------------------------------------------------------------
<S> <C> <C>
1999 $1,524 $9,918
2000 1,487 9,291
2001 1,487 9,261
2002 1,451 9,187
2003 1,272 8,593
Thereafter -- 2,691
- -------------------------------------------------------------------------------
Total minimum lease payments 7,221 48,941
Less sublease commitments -- (592)
Less amount representing interest (1,103) --
- -------------------------------------------------------------------------------
$6,118 $ 48,349
===============================================================================
</TABLE>
10. Long Term Debt
Long-term debt consists of the long-term portion of capitalized lease
obligations, which were entered into in December, 1998.
11. Credit Facility
At December 31, 1998 and 1997, the Exchange had an unsecured committed line of
credit with a consortium of banks in the amount of $350 million. Interest on
amounts borrowed is calculated at the then-prevailing prime rate.
89
<PAGE>
The facility, which originated in 1988 and has never been used, may be utilized
if there is a temporary problem with the domestic payments system that would
delay payments of settlement variation between the Exchange and its clearing
members, or in the event of a clearing member default. Commitment fees for this
facility were $570,000, $494,000 and $482,000 for the years ended December 31,
1998, 1997, in 1996, respectively.
12. Contingencies
At December 31, 1998 the Exchange was contingently liable on irrevocable letters
of credit totaling $33 million in connection with its mutual offset agreement
with the Singapore International Monetary Exchange and $2.5 million in
connection with activities of GFX. The Exchange is a defendant in, and is
threatened with, various legal proceedings arising from its regular business
activities. While the ultimate results of such proceedings against the Exchange
cannot be predicted with certainty, management of the Exchange believes that the
resolution of these matters will not have a material adverse effect on its
consolidated financial position or results of operations.
13. GFX Derivative Transactions
GFX Corporation engages in the purchase and sale of CME foreign currency futures
contracts. GFX posts bids and offers in these products on the GLOBEX electronic
trading system in order to maintain a market and promote liquidity in the CME's
currency futures products. It limits risk from these transactions through
offsetting arbitrage transactions using futures contracts or spot foreign
currency transactions with approved counterparties in the interbank market.
Formal trading limits have been established. Futures transactions are cleared by
an independent clearing member. Any residual open positions are marked to market
on a daily basis, and all realized and unrealized gains and losses are included
in other revenue in the accompanying consolidated statements of income. Net
trading gains from all trading activities amounted to $4,786,000 in 1998,
$2,173,000 in 1997 and $6,000 in 1996.
14. Segment Reporting
The Exchange has three reportable operating segments: the Chicago Mercantile
Exchange ("CME", a designated contract market and clearing house), GFX
Corporation ("GFX", a wholly-owned trading subsidiary), and P-M-T Limited
Partnership ("PMT", a limited partnership which operates the GLOBEX2 electronic
trading system). A summary by business segment follows (dollars in thousands):
90
<PAGE>
<TABLE>
<CAPTION>
CME GFX PMT Eliminations Total
---------- --------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998
Total revenues from external customers $ 170,779 $ 4,786 $ 10,177 $ 0 $ 185,742
Intersegment revenues 5,441 0 0 (5,441) 0
Investment income 9,296 314 0 0 9,610
Depreciation and amortization 17,849 94 15 (15) 17,943
Operating profit (loss) 10,137 1,620 3,489 (1,053) 14,193
Total assets 279,229 8,663 1,803 (9,559) 280,136
Capital expenditures 24,927 8 0 0 24,935
Year ended December 31, 1997
Total revenues from external customers $ 162,149 $ 2,173 $ 5,547 $ 0 $ 169,869
Intersegment revenues 3,542 0 0 (3,542) 0
Investment income 7,442 318 0 0 7,760
Depreciation and amortization 16,031 595 66 (3) 16,689
Operating profit (loss) 19,928 1 (871) 0 19,058
Total assets 424,676 6,856 1,409 (7,970) 424,971
Capital expenditures 14,320 26 0 0 14,346
Year ended December 31, 1996
Total revenues from external customers $ 155,311 $ 6 $ 3,303 $ 0 $ 158,620
Intersegment revenues 2,928 0 0 (2,928) 0
Investment income 5,542 50 0 0 5,592
Depreciation and amortization 14,850 13 1,175 0 16,038
Operating profit (loss) 15,920 (544) (3,419) 452 12,409
Total assets 237,720 7,276 2,458 (4,555) 242,899
Capital expenditures 14,322 453 0 0 14,775
</TABLE>
15. Chicago Mercantile Exchange Trust
The Chicago Mercantile Exchange Trust ("Trust") was established by the Exchange
in 1969 for the purpose of providing financial assistance, on a discretionary
basis, to customers of any clearing member who should become insolvent. Such
assistance would be limited to transactions effected on the Exchange.
The Internal Revenue Service ("IRS") had challenged the deductibility of certain
of the Exchange's contributions to the CME Trust, and an agreement was reached
with the IRS on this issue during 1996. Under the terms of the agreement,
$12,112,500 representing a portion of contributions made and deducted by the
Exchange in 1988 through 1994 were disallowed as deductible expenses.
Under the terms of an agreement between the Exchange and the CME Trust, the
Exchange was entitled to reimbursement from the CME Trust for the amount of any
contributions paid by the Exchange to the CME Trust, and 80% of the income
earned thereon, in the event that any such contributions were disallowed as a
deductible expense for federal income tax purposes.
During 1996, the Exchange received a cash payment from the CME Trust in the
amount of $15,716,800 representing the return of $12,112,500 or previous
contributions, $684,300 of interest income subject to federal income tax, and
$2,920,000 of federally tax-exempt interest income. The total payment from the
CME Trust is reflected in income in 1996 in the accompanying financial
statements. The provision for income taxes for 1996 includes approximately $8.4
million relating to the settlement of this issue.
16. Discontinued Operations
91
<PAGE>
In September 1997, the operations of CME-DTC were discontinued. Accordingly, the
results of its operations and its net assets are included in the consolidated
financial statements as discontinued operations. Certain costs associated with
the start-up of CME-DTC were capitalized and were being amortized over a
thirty-six month period. Remaining deferred charges and capitalized software
license fees of approximately $1.8 million were written-off in 1997.
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Revenues of discontinued operations $ -- $ --
Expenses of discontinued operations 3,856 1,705
Income tax benefit (1,542) (682)
- --------------------------------------------------------------------------------------------------------
Loss from operations 2,314 1,023
Loss from discontinuance, net of income tax benefit of $743 1,114 --
- --------------------------------------------------------------------------------------------------------
Total loss from discontinued operations $ 3,428 $ 1,023
========================================================================================================
</TABLE>
17. Subsequent Event
On October 27, 1999, the Board of Directors approved a plan for demutualization
of the Chicago Mercantile Exchange whereby the Exchange would be converted from
an Illinois not-for-profit corporation into a Delaware for-profit corporation.
Under this plan, membership interests in the Exchange would be converted into
shares of Class B common stock, and in the cases of the CME, IMM and IOM
membership interests, shares of Class A common stock. Class B shares would be
issued in several series, each of which would contain the traditional features
of common stock and would confer the trading privileges associated with the
membership interest that was converted into such shares. Class A shares would
represent traditional common stock. Completion of the demutualization
transaction is subject to the affirmative vote of at least two-thirds of
membership votes present and voting, receipt of a favorable ruling from the
Internal Revenue Service regarding the Federal income tax consequences of the
contemplated transactions, completion of the cash purchase by the Exchange of
the assets and business of P-M-T Limited Partnership (which requires the
approval of the holders of two-thirds of the Class A partnership units of the
partnership), and approval by the Commodity Futures Trading Commission of
certain changes to Exchange rules to reflect the demutualization.
92
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Members of the Chicago Mercantile Exchange:
We have audited the accompanying consolidated balance sheets of the Chicago
Mercantile Exchange (an Illinois not-for-profit corporation) and subsidiaries as
of December 31, 1998 and 1997, and the related consolidated statements of
income, members' equity and comprehensive income and cash flows for each of the
years in the three-year period ended December 31, 1998. These financial
statements are the responsibility of the Exchange's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We 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, the financial statements referred to above present fairly, in
all material respects, the financial position of the Chicago Mercantile Exchange
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and cash flows for each of the years in the three-year period ended
December 31, 1988, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
December 29, 1999
93
<PAGE>
EXHIBIT A
CERTIFICATE OF INCORPORATION
OF
Chicago Mercantile Exchange Inc.
ARTICLE ONE: The name of the corporation is CHICAGO MERCANTILE EXCHANGE
INC.
ARTICLE TWO: The address of the corporation's registered office in the
State of Delaware is 1209 Orange Street, City of Wilmington, County of New
Castle, Delaware 19801. The name of the Corporation's registered agent at such
address is The Corporation Trust Company.
ARTICLE THREE: The purpose of the corporation shall be to engage in any
lawful act or activity for which corporations may be organized and incorporated
under the General Corporation Law of the State of Delaware.
ARTICLE FOUR: The total number of shares of all classes of capital stock
which the corporation is authorized to issue is 110,005,118 shares which shall
be divided into three classes as follows:
10,000,000 shares of Preferred Stock having a par value of $0.01 per
share (the "Preferred Stock"),
100,000,000 shares of Class A Common Stock having a par value of $0.01
per share (the "Class A Common Stock"), and
5,332 shares of Class B Common Stock having a par value of $0.01 per
share (the "Class B Common Stock").
The term "Common Stock" shall mean both the Class A Common Stock and the Class B
Common Stock.
The designations, voting powers, optional or other special rights and the
qualifications, limitations or restrictions thereof, of the above classes shall
be as follows:
Division A
Preferred Stock
The rights, preferences and privileges and qualifications, limitations and
restrictions granted to and imposed on the shares of Preferred Stock of the
corporation shall be as set forth below in this Division A.
Shares of Preferred Stock may be issued in one or more series at such time
or times, and for such consideration or considerations, as the Board of
Directors shall determine. The Board of Directors is hereby authorized to fix,
state and establish, in the resolution or resolutions providing for the issuance
of any wholly unissued series of Preferred Stock, the relative powers, rights,
designations, preferences, qualifications, limitations and restrictions of such
series in relation to any other series of Preferred Stock at the time
outstanding. The Board of Directors is also expressly authorized to fix the
number of shares of each such series, but not below the number of shares thereof
then outstanding. The authority of the Board of Directors with respect to each
series of Preferred Stock shall include (without limitation) the determination
of the following:
(a) the dividend rate on the shares of such series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the rights
of priority, if any, with respect to the payment of dividends on the shares
of such series relative to other series of Preferred Stock or classes of
stock;
A-1
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(b) whether the shares of such series shall have voting rights (other
than the voting rights provided by law) and, if so, the terms and extent of
such voting rights;
(c) whether the shares of such series shall have conversion
privileges, and, if so, the terms and conditions of such conversion,
including provision for adjustment of the conversion rate upon the
occurrence of such events as the Board of Directors may prescribe;
(d) whether the shares of such series shall be subject to redemption
by the corporation or at the request of the holder(s) thereof, and, if so,
the terms and conditions of any such redemption;
(e) the rights of the shares of such series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the corporation,
and the rights of priority, if any, with respect to the distribution of
assets on the shares of such series relative to other series of Preferred
Stock or classes of stock; and
(f) any other preferences, privileges and powers, and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions of such series, as the Board of Directors may
deem advisable and as shall not be inconsistent with the provisions of this
Certificate of Incorporation, as the same may be amended from time to time.
Division B
Common Stock
Subdivision 1: General Provisions
(1) Definitions. In addition to the terms defined elsewhere, the
following terms shall have the respective meanings set forth below:
"Additional Common Shares" shall mean all shares of Class A
Common Stock issued (or, pursuant to Section 6(b), deemed to be
issued) by the corporation after the Effectiveness Date, other than
shares of Class A Common Stock issued or issuable at any time:
(A) to officers, directors and employees of, and
consultants to, the corporation;
(B) as a dividend or distribution on shares of the Class B
Common Stock;
(C) pursuant to the conversion of shares of the Series B-5
Stock; or
(D) by way of dividend or other distribution on Common
Stock excluded from the definition of Additional Common Shares by
the foregoing clauses (A), (B), (C) or this clause (D).
"Applicable Equivalent Amount" means (i) with respect to shares
of Class A Common Stock, one, (ii) with respect to shares of Series B-
1 Stock, 1,800 (as adjusted from time to time in accordance with the
provisions of Section 6 of this Division), (iii) with respect to
shares of Series B-2 Stock, 1,200 (as adjusted from time to time in
accordance with the provisions of Section 6 of this Division), (iv)
with respect to shares of Series B-3 Stock, 600 (as adjusted from time
to time in accordance with the provisions of Section 6 of this
Division), (v) with respect to shares of Series B-4 Stock, 100 (as
adjusted from time to time in accordance with the provisions of
Section 6 of this Division), and (vi) with respect to shares of Series
B-5 Stock, 10 (as adjusted from time to time in accordance with the
provisions of Section 6 of this Division). For purposes of Section 6,
the term "Applicable Equivalent Amount" shall not include clause (i)
of the preceding sentence,
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<PAGE>
since no adjustment is to be made under that Section in respect of the
Applicable Equivalent Amount for shares of Class A Common Stock.
"Commitment to Maintain Floor Trading" shall mean the
corporation's obligation, (i) as long as an open outcry market is
"liquid," to maintain for such open outcry market a facility for
conducting business, for the dissemination of price information, and
for clearing and delivery and (ii) to provide reasonable financial
support (consistent with the calendar year 1999 budget levels
established by Chicago Mercantile Exchange, an Illinois not-for-
profit corporation) for technology, marketing and research for open
outcry markets. If an open outcry market is not liquid, as determined
by the Board of Directors, the Board may determine, in its sole
discretion, whether such obligations will continue, and for how long,
in respect of such market. For purposes of the foregoing, an open
outcry market will be deemed "liquid" if it meets any of the following
tests on a quarterly basis:
(1) if a comparable exchange-traded product exists, the
open outcry market has maintained at least 30 percent of the
average daily volume of such comparable product (including for
calculation purposes, volume from Exchange-For-Physicals
transactions in such open outcry market); or
(2) if a comparable exchange-traded product exists and the
product trades exclusively by open outcry, the open outcry market
has maintained at least 30 percent of the open interest of such
comparable product; or
(3) if no comparable exchange-traded product exists, the
open outcry market has maintained at least 40 percent of the
average quarterly volume in that market as maintained by Chicago
Mercantile Exchange, an Illinois not-for-profit corporation, in
1999 (including, for calculation purposes, volume from Exchange-
For-Physicals transactions in such open outcry market); or
(4) if no comparable exchange-traded product exists and the
product trades exclusively by open outcry, the open outcry market
has maintained at least 40 percent of the average open interest
in that market as maintained by Chicago Mercantile Exchange, an
Illinois not-for-profit corporation, in 1999.
"Convertible Securities" shall mean any evidences of
indebtedness, shares or other securities convertible into or
exchangeable for shares of Class A Common Stock.
"Core Rights" shall mean:
(1) the divisional product allocation rules applicable to
each series of Class B Common Stock as set forth in the rules of
the corporation;
(2) the trading floor access rights and privileges granted
to each series of Class B Common Stock, including the Commitment
to Maintain Floor Trading;
(3) the number of authorized and issued shares of any
series of Class B Common Stock; or
(4) eligibility requirements for an individual or entity to
hold shares of any series of Class B Common Stock or to exercise
any of the trading rights or privileges inherent in any series of
Class B Common Stock.
"Effectiveness Date" means the date of the effectiveness of the
merger of CME Transitory Co. into and with the corporation as
contemplated by that certain agreement and plan of merger dated as of
_______, 2000 between CME Transitory Co. and the corporation. Such
date of effectiveness shall be evidenced by or in a certificate of
merger filed with the Secretary of State of Delaware regarding such
merger.
"Fair Market Value" means (i) if shares of Class A Common Stock
are traded on a national securities exchange, the last sales or the
average of the bid and asked prices (if no sale has taken place), as
reported in the principal consolidated transaction reporting system
with respect to such exchange, (ii) if shares of Class A Common Stock
are not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of
the high bid and low asked prices in the over-the-counter market, as
reported by the National Association of Securities Dealers Automated
Quotation System or such other system then in use, or (iii) if neither
clause (i) or (ii) apply, as determined in good faith by the Board of
Directors.
"Options" shall mean rights, options or warrants to subscribe
for, purchase or otherwise acquire either shares of Class A Common
Stock or Convertible Securities.
"Share Equivalent Basis" means that (i) with respect to
participation in dividends, other distributions or liquidating
distributions, a stockholder's participation therein is determined
based upon the number of Class A Common Stock share equivalents that
such stockholder's shares represent in relation to the total number of
Class A Common Stock share equivalents that all stockholders' shares
represent, and (ii) with respect to voting, a stockholder's aggregate
votes available to be cast is determined based on the number of Class
A Common Stock share equivalents that such stockholder's shares
represent (with each whole share equivalent representing one vote and
each fractional share equivalent representing an equivalent fractional
vote). The number of Class A Common Stock share equivalents of a
share of Class A Common Stock, Series B-1 Stock, Series B-2 Stock,
Series B-3 Stock, Series B-4 Stock and Series B-5 Stock shall equal
the Applicable Equivalent Amount for such stock.
(2) Liquidation Rights. Upon the liquidation, dissolution or winding
up of the corporation, holders of Common Stock shall be entitled to receive
any amounts available for distribution to holders of Common Stock after the
payment of, or provision for, obligations of the corporation and any
preferential amounts payable to holders of any outstanding shares of
Preferred Stock. Such amounts as are available to
A-3
<PAGE>
the holders of Common Stock for distribution shall be distributed to such
holders on a Share Equivalent Basis.
Subdivision 2: Class A Common Stock
The rights, preferences and privileges, and qualifications, limitations and
restrictions granted to and imposed on the shares of Class A Common Stock of the
corporation shall be as set forth in Subdivision 1 and this Subdivision 2 of
this Division B.
(1) Dividend Rights. Subject to any preferential or participatory
rights of holders of any shares of Preferred Stock, the holders of shares
of Class A Common Stock shall be entitled to receive, when, as and if
declared by the Board of Directors, out of any assets of the corporation
legally available therefor, such dividends as may be declared from time to
time by the Board of Directors on shares of the outstanding Common Stock of
the corporation, participating with the holders of the outstanding shares
of the Class B Common Stock on a Share Equivalent Basis.
(2) Voting Rights. Each holder of shares of Class A Common Stock
shall have the right to one vote for each share held on each matter for
which the vote of the holders of the Class A Common Stock shall be required
or considered to be necessary. Each holder of Class A Common Stock shall
have the right, voting with the holders of the Class B Common Stock on a
Share Equivalent Basis, to vote in the election of the Equity Directors (as
defined below).
(3) Transfer Restrictions. Shares of Class A Common Stock shall be
subject to the following transfer restrictions during the indicated period:
(a) During the period commencing on the Effectiveness Date and
ending on the date occurring 180 days thereafter (inclusive), shares
of Class A Common Stock may only be transferred, sold or otherwise
disposed together with the associated shares of Class B Common Stock
(i.e., 16,200 shares of Class A Common Stock may be transferred with
one share of Series B-1 Stock, 10,800 shares of Class A Common Stock
may be transferred with one share of Series B-2 Stock, and 5,400
shares of Class A Common Stock may be transferred with one share of
Series B-3 Stock).
(b) During the period commencing on the 181st day after the
Effectiveness Date and ending on the date occurring 270 days after the
Effectiveness Date, up to twenty-five percent (25%) of the shares of
Class A Common Stock received by a holder on the Effectiveness Date or
thereafter acquired may be transferred, sold or otherwise disposed.
In addition, such holder may transfer, sell or otherwise dispose of
such holder's Class A Common Stock as described in clause (a) of this
Section 3.
(c) During the period commencing on the 271st day after the
Effectiveness Date and ending on the date occurring 360 days after the
Effectiveness Date, up to fifty percent (50%) of the shares of Class A
Common Stock received by a holder on the Effectiveness Date or
thereafter acquired may be transferred, sold or otherwise disposed.
In addition, such holder may transfer, sell or otherwise dispose of
such holder's Class A Common Stock as described in clause (a) of this
Section 3.
(d) During the period commencing on the 361st day after the
Effectiveness Date and ending on the date occurring 450 days after the
Effectiveness Date, up to seventy-five percent (75%) of the shares of
Class A Common Stock received by a holder on the Effectiveness Date or
thereafter acquired may be transferred, sold or otherwise disposed.
In addition, such holder may transfer, sell or otherwise dispose of
such holder's Class A Common Stock as described in clause (a) of this
Section 3.
(e) On and after the 451st day after the Effectiveness Date,
there shall be no restrictions applicable to the Class A Common Stock
under this Section 3.
A-4
<PAGE>
Subdivision 3: Class B Common Stock
The rights, preferences and privileges, and qualifications, limitations and
restrictions granted to and imposed on the shares of Class B Common Stock of the
corporation shall be as set forth in Subdivision 1 and this Subdivision 3 of
this Division B.
(1) Designation and Number of Shares Constituting Series. Shares of
the Class B Common Stock shall be issued in four series having the
designations and consisting of the number of shares set forth below:
625 shares designated as "Class B Common Stock, Series B-1" (the
"Series B-1 Stock"),
813 shares designated as "Class B Common Stock, Series B-2" (the
"Series B-2 Stock"),
1,287 shares designated as "Class B Common Stock, Series B-3"
(the "Series B-3 Stock"),
467 shares designated as "Class B Common Stock, Series B-4" (the
"Series B-4 Stock") and
2,140 shares designated as "Class B Common Stock, Series B-5"
(the "Series B-5 Stock").
(2) Trading Rights.
(a) Series B-1 Stock. The holders of shares of the Series B-1
Stock shall have the trading rights, including trading floor access
rights and privileges, set forth in the corporation's by-laws and
rules for its Chicago Mercantile Exchange Division Members.
(b) Series B-2 Stock. The holders of shares of the Series B-2
Stock shall have the trading rights, including trading floor access
rights and privileges, set forth in the corporation's by-laws and
rules for its International Monetary Market Division Members.
(c) Series B-3 Stock. The holders of shares of the Series B-3
Stock shall have the trading rights, including trading floor access
rights and privileges, set forth in the corporation's by-laws and
rules for its Index and Option Market Division Members.
(d) Series B-4 Stock. The holders of shares of the Series B-4
Stock shall have the trading rights, including trading floor access
rights and privileges, set forth in the corporation's by-laws and
rules for its Growth and Emerging Markets Division Members.
(e) Series B-5 Stock. The holders of shares of the Series B-5
Stock shall have the trading rights, including trading floor access
rights and privileges, set forth in the corporation's by-laws and
rules for holders of fractional interests in its Growth and Emerging
Markets Division.
(3) Dividend Rights. Subject to any preferential or participatory
rights of holders of any shares of Preferred Stock, the holders of shares
of Class B Common Stock shall be entitled to receive, when, as and if
declared by the Board of Directors, out of any assets of the corporation
legally available
A-5
<PAGE>
therefor, such dividends as may be declared from time to time by the Board
of Directors on shares of the outstanding Common Stock of the corporation,
participating with the holders of the outstanding shares of the Class A
Common Stock on a Share Equivalent Basis.
(4) Voting Rights. Holders of shares of Class B Common Stock shall
have the following voting rights:
(a) Election of Directors.
(i) Class B Directors. Holders of shares of Series B-1
Stock shall have the sole right to elect the Series B-1 Directors
(as defined below), and each holder of Series B-1 Stock shall
have one vote per share held in any such election. Holders of
shares of Series B-2 Stock shall have the sole right to elect the
Series B-2 Directors (as defined below), and each holder of
Series B-2 Stock shall have one vote per share held in any such
election. Holders of shares of Series B-3 Stock shall have the
sole right to elect the Series B-3 Director (as defined below),
and each holder of Series B-3 Stock shall have one vote per share
held in any such election.
(ii) Equity Directors. Each holder of Class B Common Stock
shall have the right, voting with the holders of the Class A
Common Stock on a Share Equivalent Basis, to vote in the election
of the Equity Directors.
(b) Core Rights. Any change, amendment or modification of the
Core Rights shall be submitted to a vote of the holders of the Class B
Common Stock for their consideration and approval. In any such vote,
holders of Series B-1 Stock shall be entitled to six votes for each
share of Series B-1 Stock held, holders of Series B-2 Stock shall be
entitled to two votes for each share of Series B-2 Stock held, holders
of Series B-3 Stock shall be entitled to one vote for each share of
Series B-3 Stock held, holders of Series B-4 Stock shall be entitled
to one-sixth vote for each share of Series B-4 Stock held and holders
of Series B-5 Stock shall be entitled to one-sixtieth vote for each
share of Series B-5 Stock held. Any such change, amendment or
modification must receive a majority of the aggregate votes cast by
the holders of the Class B Common Stock present (in person or by
proxy) and voting in order to be approved.
(c) Other Matters. Holders of shares of Class B Common Stock
shall be entitled to vote on a Share Equivalent Basis on any matters
not described in Sections 4(a) or (b) that require the approval of the
holders of the Class B Common Stock, whether voting together with the
holders of the Class A Common Stock or voting separately as a class.
(5) Transfer Restrictions. Shares of Class B Common Stock may be
transferred at any time, subject to the following restrictions:
(a) No individual or entity may acquire shares of a series of
Class B Common Stock, or receive or exercise rights in respect
thereof, unless such individual or entity (i) satisfies the trading
eligibility requirements specified for such series in the by-laws of
the corporation and in any rules or regulations as the Board of
Directors may provide and (ii) agrees to be bound by any rules or
regulations as the Board of Directors may provide with respect to such
series of Class B Common Stock.
(b) No sale, transfer or hypothecation of any share of any
series of Class B Common Stock or lease of the trading privilege
component thereof shall be valid and binding on the corporation unless
and until (x) the purchaser, lessee or transferee satisfies the
trading eligibility requirements specified for such shares in the by-
laws of the corporation and in any other rules or regulations as the
Board of Directors may provide, and (y) such sale, transfer,
hypothecation or lease has been reported to the corporation.
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<PAGE>
(c) No person who has sold a share of any series of Class B
Common Stock shall be eligible to purchase another share of the same
series of Class B common stock within six months of the closing of
such sale, except as may be otherwise allowed under rules adopted by
the Board of Directors.
(6) Adjustments to Applicable Equivalent Amounts For Dilutive Issues.
(a) No Adjustment Unless Economic Dilution. No adjustment in the
Applicable Equivalent Amount of any series of Class B Common Stock
shall be made in respect of the issuance or deemed issuance of
Additional Common Shares unless the consideration per share for an
Additional Common Share issued or deemed to be issued by the
corporation is less than the Fair Market Value of a share of Class A
Common Stock on the date of such issue or deemed issue.
(b) Deemed Issue of Additional Common Shares.
(1) Options and Convertible Securities. In the event the
corporation, at any time or from time to time after the
Effectiveness Date, shall issue any Options or Convertible
Securities or shall fix a record date for the determination of
holders of any class of securities entitled to receive any such
Options or Convertible Securities, then the maximum number of
shares of Class A Common Stock (as set forth in the instrument
relating thereto without regard to any provisions contained
therein for a subsequent adjustment of such number) issuable upon
the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of
such Convertible Securities, shall be deemed to be Additional
Common Shares (except as otherwise provided in the definition
thereof) issued as of the time of such issue or, in case such a
record date shall have been fixed, as of the close of business on
such record date, provided that in any such case in which
Additional Common Shares are deemed to be issued:
(A) no further adjustment in the Applicable Equivalent
Amounts shall be made upon the subsequent issue of
Convertible Securities or shares of Class A Common Stock
upon the exercise of such Options or conversion or exchange
of such Convertible Securities;
(B) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for
any increase or decrease in the consideration payable to the
corporation, or in the number of shares of Class A Common
Stock issuable upon the exercise, conversion or exchange
thereof, the Applicable Equivalent Amounts computed upon the
original issue thereof (or upon the occurrence of a record
date with respect thereto), and any subsequent adjustments
based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase
or decrease insofar as it affects such Options or the rights
of conversion or exchange under such Convertible Securities;
(C) upon the expiration of any such Options or any
rights of conversion or exchange under such Convertible
Securities which shall not have been exercised, the
Applicable Equivalent Amounts computed upon the original
issue thereof (or upon the occurrence of a record date with
respect thereto), and any subsequent adjustments based
thereon, shall, upon such expiration, be recomputed as if:
(I) in the case of Convertible Securities or
Options for Class A Common Stock, the only Additional
Common Shares issued were shares of Class A Common
Stock, if any, actually issued upon the exercise of
such Options or the conversion or exchange of such
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<PAGE>
Convertible Securities and the consideration received
therefor was the consideration actually received by the
corporation for the issue of all such Options, whether
or not exercised, plus the consideration actually
received by the corporation upon such exercise, or for
the issue of all such Convertible Securities which were
actually converted or exchanged, plus the additional
consideration, if any, actually received by the
corporation upon such conversion or exchange, and
(II) in the case of Options for Convertible
Securities, the only Convertible Securities issued were
Convertible Securities, if any, actually issued upon
the exercise of such Options, and the consideration
received by the corporation for the Additional Common
Shares deemed to have been issued was the consideration
actually received by the corporation for the issue of
all such Options, whether or not exercised, plus the
consideration actually received by the corporation upon
the issue of the Convertible Securities with respect to
which such Options were actually exercised;
(D) no readjustment pursuant to clause (B) or (C)
above shall have the effect of reducing any Applicable
Equivalent Amount to an amount which is less than the higher
of (i) the such Applicable Equivalent Amount on the original
adjustment date, or (ii) the Applicable Equivalent Amount
that would have resulted from any issuance of Additional
Common Shares between the original adjustment date and such
readjustment for which no adjustment was originally made;
and
(E) in the case of any Options, which expire by their
terms not more than 60 days after the date of issue thereof,
no adjustment of the Applicable Equivalent Amount shall be
made until the expiration or exercise of all such Options.
(2) Stock Dividends. In the event the corporation, at any
time or from time to time after the Effectiveness Date, shall
declare or pay any dividend on shares of its capital stock
payable in shares of Class A Common Stock, then and in any such
event, Additional Common Shares (except as otherwise provided in
the definition thereof) shall be deemed to have been issued
immediately after the close of business on the record date for
the determination of holders of any class of securities entitled
to receive such dividend for purposes of adjusting the Applicable
Equivalent Amounts; provided, however, that if such record date
is fixed and such dividend is not fully paid, the only Additional
Common Shares deemed to have been issued will be the number of
shares of Class A Common Stock actually issued in such dividend,
and such shares will be deemed to have been issued as of the
close of business on such record date, and such Applicable
Equivalent Amounts shall be recomputed accordingly.
(c) Adjustment of Applicable Equivalent Amounts Upon Issuance of
Additional Common Shares. In the event the corporation shall issue
Additional Common Shares (including Additional Common Shares deemed to
be issued pursuant to Section 6(b)) without consideration or for a
consideration per share less than the Fair Market Value of a share of
Class A Common Stock in effect immediately prior to such issue, then
and in such event, the Applicable Equivalent Amounts shall be
increased, concurrently with such issue, to amounts (calculated to the
nearest one-tenth of a share) determined by multiplying each
Applicable Equivalent Amount by a fraction, the numerator of which
shall be the number of shares of Class A Common Stock outstanding
immediately prior to such issue plus the number of such Additional
Common Shares so issued and the denominator of which shall be the
number of shares of Class A Common Stock outstanding immediately prior
to such issue plus the number of shares of Class A Common Stock which
the aggregate consideration received by the corporation for the total
number of Additional Common
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Shares so issued would purchase at such Fair Market Value; provided
that, for the purposes of this subsection (c), all shares of Class A
Common Stock issuable upon exercise of outstanding Options, and
conversion of outstanding Convertible Securities shall be deemed to be
outstanding.
(d) Determination of Consideration. For purposes of this
Section, the consideration received by the corporation for the issue
of any Additional Common Shares shall be computed as follows:
(1) Cash and Property. Such consideration shall:
(A) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the corporation
excluding amounts paid or payable for accrued interest or
accrued dividends;
(B) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of
such issue, as determined in good faith by the Board of
Directors; and
(C) in the event Additional Common Shares are issued
together with other shares or securities or other assets of
the corporation for the consideration so received, be
computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board of Directors.
(2) Options and Convertible Securities. The consideration
per share received by the corporation for Additional Common
Shares deemed to have been issued pursuant to Section 6(b)(1),
relating to Options and Convertible Securities, shall be
determined by dividing:
(A) the total amount, if any, received or receivable
by the corporation as consideration for the issue of such
Options or Convertible Securities, plus the minimum
aggregate amount of additional consideration (as set forth
in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of
such consideration) payable to the corporation upon the
exercise of such Options or the conversion or exchange of
such Convertible Securities, or in the case of Options for
Convertible Securities, the exercise of such options for
Convertible Securities and the conversion or exchange of
such Convertible Securities, by
(B) the maximum number of shares of Class A Common
Stock (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a
subsequent adjustment of such number) issuable upon the
exercise of such Options or the conversion or exchange of
such Convertible Securities.
(3) Stock Dividends. Any Additional Common Shares deemed
to have been issued relating to stock dividends shall be deemed
to have been issued for no consideration.
In the event that Additional Common Shares are proposed to be issued
in connection with an acquisition or other transaction subject to
certain conditions precedent, such that there will be a delay between
the execution of the associated agreement and the consummation of the
acquisition or transaction and the issuance of the Additional Common
Shares, the value of the consideration to be received per share shall
be compared to the Fair Market Value of a share of Class A Common
Stock as of the date of execution of the associated agreement for the
purposed of calculating any adjustments under this Section 6.
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(e) Adjustments for Subdivisions, Combinations or Consolidation
of Common Stock. In the event the outstanding Class A Common Stock
shall be subdivided (by stock split or otherwise) into a greater
number of shares of Class A Common Stock, the Applicable Equivalent
Amounts then in effect shall, concurrently with the effectiveness of
such subdivision, be proportionately increased. In the event the
outstanding Class A Common Stock shall be combined or consolidated (by
reclassification or otherwise) into a lesser number of shares of Class
A Common Stock, the Applicable Equivalent Amounts then in effect
shall, concurrently with the effectiveness of such combination or
consolidation, be proportionately decreased.
(f) No Impairment. The corporation will not, by amendment of
this Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale
of securities or any other voluntary action, avoid or seek to avoid
the observance or performance of any of the terms to be observed or
performed under this Section by the corporation but will at all times
in good faith assist in the carrying out of all the provisions of this
Section.
(7) Conversion Rights of Series B-5.
(a) Conversion. Subject to and upon compliance with the
provisions of this Section 7, each holder of any shares of Series B-5
Stock shall have the right at such holder's option, at any time or
from time to time prior to the close of business in Chicago, Illinois
on November 3, 2000, to convert such shares of Series B-5 Stock into
fully paid and nonassessable shares of Series B-4 Stock at the ratio
of ten shares of Series B-5 Stock for each share of Series B-4 Stock
to be received in conversion. Shares of Series B-5 Stock may be
converted into Series B-4 Stock only in integral multiples of ten. No
fractional shares of Series B-4 Stock will be issued upon conversion.
(b) Mechanics of Conversion. A holder of shares of Series B-5
Stock may exercise the conversion right specified in Section 7(a) as
to such holder's shares by surrendering to the corporation or any
transfer agent of the corporation the certificate or certificates for
the shares to be converted, accompanied by written notice stating that
the holder elects to convert all of the shares represented thereby.
Conversion shall be deemed to have been effected on the date when
delivery of such written notice and share certificates is made, and
such date is referred to herein as the Conversion Date. As promptly as
practicable after the Conversion Date, the corporation shall issue and
deliver to or upon the written order of such holder a certificate or
certificates for the number of full shares of Series B-4 Stock to
which such holder is entitled as a result of the exercise of such
conversion right. The person in whose name the certificate or
certificates for Series B-4 Stock are to be issued shall be deemed to
have become a holder of record of such Series B-4 Stock on the
applicable Conversion Date. After the initial issuance of shares of
Series B-4 Stock on the Effectiveness Date pursuant to the agreement
and plan of merger dated as of ___________, 2000 between CME
Transitory Co. and the corporation, shares of Series B-4 Stock may
only be issued upon the conversion pursuant to this Section 7 of
shares of Series B-5 Stock.
(c) Automatic Conversion. Each share of Series B-5 Stock shall
automatically be converted into ten shares of Class A Common Stock on
November 4, 2000.
(d) Status of Converted Shares. Shares of Series B-5 Stock that
are converted into shares of Series B-4 Stock or shares of Class A
Common Stock shall not be reissued.
ARTICLE FIVE: (A) The initial Board of Directors shall consist of thirty-
nine members. The terms of eighteen of the directors shall expire at the annual
meeting of the stockholders held in December 2000, and the terms of the
remaining twenty-one directors shall expire at the annual meeting of the
stockholders held in December 2001.
(B) At the annual meeting of stockholders held in December 2000, the size
of the Board of Directors shall be reduced to thirty members and nine directors
shall be elected to serve two-year terms as follows:
(1) Six directors shall be elected by the holders of Common Stock
voting together as a single class on a Share Equivalent Basis from a Board-
nominated slate of candidates nominated in accordance with the nominating
provisions as provided in the corporation's bylaws;
(2) One director shall be elected by the holders of Series B-1 Stock;
(3) One director shall be elected by the holders of Series B-2 Stock;
and
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(4) One director shall be elected by the holders of Series B-3 Stock.
(C) At the annual meeting of stockholders held in December 2001, the size
of the Board of Directors shall be reduced to nineteen members and ten directors
shall be elected to serve two-year terms as follows:
(1) Seven directors shall be elected by the holders of Common Stock
voting together as a single class on a Share Equivalent Basis from a Board-
nominated slate of candidates nominated in accordance with the nominating
provisions provided in the corporation's bylaws.
(2) Two directors shall be elected by the holders of Series B-1
Stock; and
(3) One director shall be elected by the holders of Series B-2 Stock.
The directors elected as provided in Sections (B)(1) and (C)(1) are referred to
as the "Equity Directors;" the directors elected as provided in Sections (B)(2)
and (C)(2) are referred to as the "Series B-1 Directors;" the directors elected
as provided in Sections (B)(3) and (C)(3) are referred to as the "Series B-2
Directors;' and the director elected as provided in Section (B)(4) is referred
to as the "Series B-3 Director." The Equity Directors shall include persons
fulfilling the requirements of any regulatory authority having jurisdiction over
the corporation.
(D) At each succeeding annual meeting of stockholders, the successors of
the Series B-1 Directors, the Series B-2 Directors, any Series B-3 Director and
the Equity Directors whose terms expire at that meeting shall be elected by the
holders of the Series B-1 Stock, the Series B-2 Stock, the Series B-3 Stock, and
the Common Stock voting as a single class on a Share Equivalent Basis,
respectively. The directors so elected shall be elected for a term expiring at
the annual meeting of stockholders held in the second year following the year of
their election, and until their successors are duly elected and qualified and
have accepted office, subject to death, resignation or removal from office. Any
vacancy occurring in a directorship may be filled by the Board of Directors;
provided, however, that any vacancy occurring with respect to a Series B-1
Director, a Series B-2 Director or a Series B-3 Director shall be filled from
the candidates who lost for such position from the most recent election, with
the candidates being selected to fill such vacancy in the order of the aggregate
number of votes received in such previous election. Any persons so elected shall
serve for the remaining term of his or her predecessor in office.
(E) No person shall be eligible for election as a Series B-1 Director, a
Series B-2 Director or a Series B-3 Director unless he or she shall own, or be
recognized under rules adopted by the Board of Directors as a permitted
transferee (other than temporary lease-type transfers) of, at least one share of
the series of Class B Common Stock entitled to elect such director.
(F) Any director may be removed from office at any time, but only for
cause and only by the affirmative vote of the holders of at least two-thirds of
the voting power of the shares entitled to elect such person as a director under
this Article.
ARTICLE SIX: The Board of Directors is hereby authorized to create and
issue, whether or not in connection with the issuance and sale of any of its
stock or other securities or property, rights entitling the holders thereof to
purchase from the corporation shares of Preferred Stock, Class A Common Stock or
securities of any other corporation. The times at which and the terms upon
which such rights are to be issued will be determined by the Board of Directors
and set forth in the contracts or instruments that evidence such rights. The
authority of the Board of Directors with respect to such rights shall include,
without limitation, determination of the following:
(A) The initial purchase price per share or other unit of the stock
or other securities or property to be purchased upon exercise of such
rights;
(B) Provisions relating to the times at which and the circumstances
under which such rights may be exercised or sold or otherwise transferred,
either together with or separately from, any other stock or other
securities of the corporation;
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(C) Provisions which adjust the number or exercise price of such
rights or amount or nature of the stock or other securities or property
receivable upon exercise of such rights in the event of a combination,
split or recapitalization of any stock of the corporation, a change in
ownership of the corporation's stock or other securities or a
reorganization, merger, consolidation, sale of assets or other occurrence
relating to the corporation or any stock of the corporation, and provisions
restricting the ability of the corporation to enter into any such
transaction absent an assumption by the other party or parties thereto of
the obligations of the corporation under such rights;
(D) Provisions which deny the holder of a specified percentage of the
outstanding stock or other securities of the corporation the right to
exercise such rights and/or cause the rights held by such holder to become
void;
(E) Provisions which permit the corporation to redeem or to exchange
such rights; and
(F) The appointment of a rights agent with respect to such rights.
ARTICLE SEVEN: (A) In furtherance of and not in limitation of the powers
conferred by law, the Board of Directors is expressly authorized and empowered
to adopt, amend, or repeal the bylaws of the corporation, provided, however,
that the bylaws may also be altered, amended, or repealed by the affirmative
vote of the holders of two-thirds of the voting power of the then outstanding
Common Stock, voting together as a single class on a Share Equivalent Basis.
(B) Unless and except to the extent that the by-laws of the corporation
shall so require, the election of directors of the corporation need not be by
written ballot.
ARTICLE EIGHT: No stockholder shall have any preemptive right to subscribe
to an additional issue of any class or series of the corporation's capital stock
or to any securities of the corporation convertible into such stock.
ARTICLE NINE: Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of at least two-thirds of
the voting power of the then outstanding Common Stock, voting together as a
single class on a Share Equivalent Basis, shall be required to amend, repeal, or
adopt any provisions inconsistent with paragraph (F) of Article Five or Articles
Six, Nine, Ten, Eleven, Twelve, Thirteen or Fourteen of this Certificate of
Incorporation.
ARTICLE TEN: No director of the corporation shall be personally liable to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation Law of the
State of Delaware, or (iv) for any transaction from which the director derived
an improper personal benefit. Any amendment or repeal of this Article by the
stockholders shall not adversely affect any right or protection of a director of
the corporation existing hereunder in respect of any act or omission occurring
prior to such amendment or repeal.
ARTICLE ELEVEN: The corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, as the same
may be amended and supplemented, have the power to indemnify any and all persons
whom it shall have the power to indemnify under said Section from and against
any and all expenses, liabilities or other matters referred to in or covered by
said Section, and the power provided for herein shall not be deemed exclusive of
any other right to which those indemnified may be entitled under any bylaw,
agreement, or vote of stockholders, disinterested directors or otherwise, both
as to action in his or her official capacity and as to action in another
capacity while holding such office.
ARTICLE TWELVE: In furtherance and not in limitation of the powers
conferred by law or in this Certificate of Incorporation, the Board of Directors
(and any committee of the Board of Directors) is expressly authorized, to the
extent permitted by law, to take such action or actions as the Board of
Directors or such committee
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may determine to be reasonably necessary or desirable to (A) encourage any
individual, limited partnership, general partnership, corporation or other firm
or entity (a "person") to enter into negotiations with the Board of Directors
and management of the corporation with respect to any transaction which may
result in a change in control of the corporation which is proposed or initiated
by such person or (B) contest or oppose any such transaction which the Board of
Directors or such committee determines to be unfair, abusive or otherwise
undesirable with respect to the corporation and its business, assets or
properties or the stockholders of the corporation, including, without
limitation, the adoption of such plans or the issuance of such rights, options,
capital stock, notes, debentures or other evidences of indebtedness or other
securities of the corporation, which rights, options, capital stock, notes,
debentures or other evidences of indebtedness and other securities (i) may be
exchangeable for or convertible into cash or other securities on such terms and
conditions as may be determined by the Board of Directors or such committee and
(ii) may provide for the treatment of any holder or class of holders thereof
designated by the Board of Directors or any such committee in respect of the
terms, conditions, provisions and rights of such securities which is different
from, and unequal to, the terms, conditions, provisions and rights applicable to
all other holders thereof.
ARTICLE THIRTEEN: No action required to, or which may, be taken at an
annual or special meeting of stockholders of the corporation may be taken
without a meeting, and the power of the stockholders of the corporation to act
by written consent, whether pursuant to Section 228 of the General Corporation
Law or otherwise, is specifically denied.
ARTICLE FOURTEEN: Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by this Certificate of
Incorporation, may be called by the Chairman of the Board, in his discretion,
and shall be called by the Chairman of the Board or the Secretary at the request
in writing of a majority of the directors then holding office. Any such written
request shall state the purpose or purposes of the proposed meeting.
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EXHIBIT B
AGREEMENT AND PLAN OF MERGER
OF
CHICAGO MERCANTILE EXCHANGE
AND
CME TRANSITORY CO.
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made and entered
into as of _________, 2000, between Chicago Mercantile Exchange, an Illinois
not-for-profit corporation (the "CME"), and CME Transitory Co., a Delaware
nonstock corporation ("Transitory" or "Surviving Corporation"), said
corporations hereinafter sometimes referred to jointly as the "Constituent
Corporations";
WITNESSETH:
WHEREAS, CME is a not-for-profit corporation duly organized and existing
under the Illinois Act, having as its registered agent Craig S. Donohue;
WHEREAS, Transitory is a nonstock corporation duly organized and existing
under the Delaware General Corporation Law, having as its registered agent The
Corporation Trust Company;
WHEREAS, the Constituent Corporations propose, pursuant to the applicable
provisions of the Illinois General Not For Profit Corporation Act and the
Delaware General Corporation Law, for CME to merge with and into Transitory,
which shall be the Surviving Corporation in consideration for which Members of
CME will receive Membership Interests in Transitory (the "Merger");
WHEREAS, all rights and privileges that Members of CME derive from their
Membership Interests shall be and remain as they exist immediately prior to the
Effective Date of this Agreement, preserved in the rights and privileges of the
Membership Interests in Transitory received by Members of CME in the Merger; and
WHEREAS, the respective Boards of Directors of the Constituent Corporations
have determined that it is advisable that CME be merged with and into Transitory
and have approved such Merger on the terms and conditions hereinafter set forth
in accordance with the applicable provisions of law permitting such Merger.
NOW, THEREFORE, in consideration of the foregoing and of the agreements,
covenants and provisions hereinafter set forth, the parties hereto, intending to
be legally bound, do hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement and in the Preamble, the following words or
phrases have the following meanings, and the following definitions shall be
equally applicable to both the singular and plural forms of any of the terms
herein defined:
"Consent" means any consent, license, permit, waiver, approval,
authorization or other action of, by or with respect to, or registration,
declaration or filing with, any court, Governmental Authority or Person.
"DGCL" means the General Corporation Law of the State of Delaware, as
amended.
"Effective Date" means the date on which the Merger becomes effective
as provided by the applicable provisions of the Illinois Act and the DGCL.
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"Governmental Approval" means any Consent of, with or to any
Governmental Authority, including the expiration of any waiting or other
time period required to pass before governmental consent or acquiescence
may be assumed or relied on.
"Governmental Authority" means any court or governmental authority,
department, commission, board, bureau, agency or instrumentality, domestic
or foreign, any tribunal or arbitrators of competent jurisdiction and any
self-regulatory organization.
"Illinois Act" means Illinois' General Not For Profit Corporation Act
of 1986, as amended.
"Member" means the owner of a Membership Interest, or any portion
thereof, in a Constituent Corporation. An owner of two or more Membership
Interests, or portions thereof, in a single Constituent Corporation shall
be deemed to be a separate Member with respect to each individual
Membership Interest owned.
"Membership Interest" means, with respect to a Constituent
Corporation, all the rights or interests of a Member in such Constituent
Corporation, including, but not limited to, any floor access and electronic
trading rights, any right to vote, any rights with regard to earnings,
surplus, or assets of such Constituent Corporation, and any other rights in
liquidation, merger, reorganization, or conversion of such Constituent
Corporation.
"Person" means an individual, corporation, joint venture, partnership,
association, trust, trustee, unincorporated entity, organization or
government or any department or agency thereof. A Person who owns a
Membership Interest in more than one capacity shall be deemed to be a
separate Person in each such capacity.
"Registration Statement" has the meaning specified in Section 6.1(b).
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
ARTICLE II
MERGER
Section 2.1 Effect of the Merger. Subject to the terms of this
Agreement, and as more fully set forth and supplemented by the other provisions
herein, upon the Effective Date and pursuant to the Merger:
(a) CME will merge with and into Transitory, the separate existence of
CME shall cease, except to the extent provided by the laws of the State of
Illinois in the case of a corporation after its merger into another
corporation, and Transitory shall be the Surviving Corporation.
(b) In connection with the Merger, each Membership Interest in CME
shall be converted into a Membership Interest in Transitory pursuant to and
in accordance with this Agreement.
(c) The Surviving Corporation shall possess all the rights,
privileges, immunities, powers and franchises, as well of a public as of a
private nature, of each of the Constituent Corporations, and all property,
real, personal and mixed, all debts due on whatever account, including
subscriptions to shares and all other choses in action, and all and every
other interest of, or belonging to, each of the Constituent Corporations
shall be taken and deemed to be transferred to and vested in the Surviving
Corporation without further act or deed; and the title to all real estate,
or any interest therein, vested in either of the Constituent Corporations
shall not revert or be in any way impaired by reason of the Merger.
(d) The Surviving Corporation shall be responsible and liable for all
of the liabilities and obligations of each of the Constituent Corporations,
and any claim existing or action or proceeding pending by or against either
of the Constituent Corporations may be prosecuted to judgment as if the
Merger had not taken place, or the
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Surviving Corporation may be substituted in its place, and neither the
rights of creditors nor any liens upon the property of either of the
Constituent Corporations shall be impaired by the Merger.
(e) Upon the Effective Date of this Agreement, (i) the respective
assets of CME and Transitory shall be taken up or continued on the books of
the Surviving Corporation in the amounts at which such assets shall have
been carried on their respective books immediately prior the Effective Date
of this Agreement; (ii) the respective liabilities and reserves of CME and
Transitory shall be taken up or continued on the books of the Surviving
Corporation in the amounts at which such liabilities and reserves shall
have been carried on their respective books immediately prior to the
Effective Date of this Agreement.
(f) All corporate acts, plans, policies, agreements, arrangements,
approvals and authorizations of CME, its Members, Board of Directors and
committees thereof, officers and agents, which were valid and effective
immediately prior to the Effective Date shall be taken for all purposes as
the acts, plans, policies, agreements, arrangements, approvals and
authorizations of the Surviving Corporation and shall be as effective and
binding thereon as the same were with respect to CME. The employees and
agents of CME shall become the employees and agents of the Surviving
Corporation and shall continue to be entitled to the same rights and
benefits which they enjoyed as employees and agents of CME.
(g) The Certificate of Incorporation of Transitory as in effect on the
Effective Date shall be and constitute the Certificate of Incorporation of
the Surviving Corporation until the same shall be altered, amended or
changed in accordance with its terms and applicable law.
(h) The By-laws of Transitory as in effect on the Effective Date shall
be and constitute the By-laws of the Surviving Corporation until the same
shall be properly altered, amended or repealed.
Section 2.2 Directors and Officers. The directors and officers of CME
prior to the Effective Date shall serve as the directors and officers of the
Surviving Corporation on and after the Effective Date, until new directors and
officers have been duly elected and qualified pursuant to the Certificate of
Incorporation and By-laws of the Surviving Corporation, or until their earlier
resignation, removal or replacement.
Section 2.3 Miscellaneous. CME and Transitory are empowered to adopt
further rules and regulations, not inconsistent with the provisions of this
Agreement, regarding the conversion of the Membership Interests in CME into
Membership Interests in Transitory.
ARTICLE III
CONVERSION OF MEMBERSHIP INTERESTS
Section 3.1 Conversion of Membership Interests. On the Effective Date,
and without any further action by CME or Transitory, all the Membership
Interests in CME shall be converted into Membership Interests in Transitory.
The Membership Interests in CME shall be converted in accordance with the
following:
(a) Each individual Chicago Mercantile Exchange division Membership
Interest in CME shall be converted into one Chicago Mercantile Exchange
division Membership Interest in Transitory.
(b) Each individual International Monetary Market division Membership
Interest in CME shall be converted into one International Monetary Market
division Membership Interest in Transitory.
(c) Each individual Index and Option Market division Membership
Interest in CME shall be converted into one Index and Option Market
division Membership Interest in Transitory.
(d) Each individual Growth and Emerging Markets division Membership
Interest in CME shall be converted into one Growth and Emerging Markets
division Membership Interest in Transitory.
(e) Each fractional Growth and Emerging Markets division Membership
Interest in CME shall be converted into an equivalent fractional Growth and
Emerging Markets division Membership Interest in Transitory.
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Each of the foregoing divisions of Membership Interest in Transitory, Chicago
Mercantile Exchange, International Monetary Market, Index and Option Market and
Growth and Emerging Markets, shall have the rights, preferences and privileges
provided for in the By-laws of CME.
ARTICLE IV
COVENANTS
Section 4.1 Further Actions. Each of the Constituent Corporations
agrees to use its reasonable efforts to take, or to cause to be taken, all
actions and to do, or to cause to be done, all things necessary, proper or
advisable to consummate and to make effective the transactions contemplated by
this Agreement, including, but not limited to:
(a) making, or causing to be made, all such filings and submissions
under any applicable law and giving such reasonable undertakings, as may be
necessary to consummate this Agreement and the transactions contemplated
hereby;
(b) using its reasonable efforts to obtain, or causing to be obtained,
all Governmental Approvals and other Consents necessary to be obtained in
order to consummate this Agreement and the transactions contemplated
hereby; and
(c) using its reasonable efforts to take, or causing to be taken, all
other actions, necessary, proper or advisable in order to fulfill its
obligations in respect of this Agreement and the transactions contemplated
hereby.
Each of the parties hereto shall coordinate and cooperate with the other
party in exchanging such information and supplying such reasonable assistance as
may be requested by such other party in connection with the filings and other
actions contemplated by this Section 4.1.
Section 4.2 Service in Illinois. Transitory, as the Surviving
Corporation, agrees that it may be served with process in Illinois in any
proceeding for enforcement of (i) any obligation of CME as well as (ii) any of
its obligations arising from this Merger. Transitory hereby irrevocably
appoints the Secretary of State of Illinois as its agent to accept service of
process in any such suit or other proceedings, and any such process so accepted
shall be mailed by the Secretary of State of Illinois to Chicago Mercantile
Exchange Inc., 30 South Wacker Drive, Chicago, Illinois 60606, attention:
General Counsel.
ARTICLE V
CONDITIONS TO MERGER
Section 5.1 Conditions to Effectiveness. The obligation of each of the
parties hereto to consummate the transactions contemplated by this Agreement
shall be subject to the fulfillment on or prior to the Effective Date of the
following conditions:
(a) No Injunctions or Restraints. Consummation of the transactions
contemplated by this Agreement shall not have been restrained, enjoined or
otherwise prohibited by any applicable law, including any order,
injunction, decree or judgment of any court or other Governmental
Authority, and no action or proceeding shall be pending or threatened by
any Governmental Authority on the Effective Date before any court or other
Governmental Authority to restrain, enjoin or otherwise prevent the
consummation of the transactions contemplated hereby or to recover any
material damages or obtain other material relief as a result of such
transactions. There shall not have been promulgated, entered, issued, or
determined by any court or other Governmental Authority to be applicable to
this Agreement any applicable law making illegal the consummation of the
transactions contemplated hereby, and no proceeding with respect to the
application of any such applicable law shall be pending.
(b) Effectiveness of the Registration Statement. The Registration
Statement on Form S-4 filed with the SEC by Chicago Mercantile Exchange
Inc., a Delaware corporation, relating to its issuance of its common
B-4
<PAGE>
stock (including the proxy statement and prospectus constituting part
thereof, the "Registration Statement") shall have become and remain
effective under the Securities Act. No stop order suspending the
effectiveness of the Registration Statement shall have been issued by the
SEC and no proceedings for that purpose and no similar proceeding in
respect of the Registration Statement shall have been initiated or
threatened by the SEC.
(c) Requisite Approvals. The Members of CME shall have approved this
Agreement as required by law.
(d) Internal Revenue Service Revenue Ruling. Issuance by the Internal
Revenue Service of a ruling that this Merger and the ultimate issuance of
common stock by Newco qualify for tax-free treatment under the Internal
Revenue Code of 1986, as amended.
(e) P-M-T. The offer by Chicago Mercantile Exchange Inc. to
purchase the assets and business of P-M-T Limited Partnership, an Illinois
limited partnership, for cash shall have been approved by the holders of
two-thirds of the outstanding P-M-T Class A partnership units (excluding
units held by CME).
ARTICLE VI
AMENDMENT; TERMINATION AND CORRECTIONS
Section 6.1 Amendment of Agreement. At any time prior to the Effective
Date, the parties hereto may agree to amend this Agreement. No such amendment
may, in the sole judgment of the Board of Directors of CME, materially and
adversely affect the rights of the Members of CME.
Section 6.2 Abandonment of Agreement. At any time prior to the
Effective Date, CME may abandon this Agreement by appropriate resolution of its
Board of Directors, notwithstanding prior approval at the Special Meeting. No
Person shall have any rights or claims against either Constituent Corporation or
its respective Board of Directors based on abandonment of this Agreement.
Section 6.3 Corrections. The Constituent Corporations may, until the
Effective Date, by an instrument executed by a Chairman, Chief Executive
Officer, Vice Chairman, President or any Executive Vice President of each
Constituent Corporation, attested to by a Secretary or any Assistant Secretary
of each Constituent Corporation under its respective corporate seal, make such
modifications as are appropriate to correct errors, clarify existing items or
make additions to correct manifest omissions in this Agreement.
ARTICLE VII
ADDITIONAL PROVISIONS
Section 7.1 Notices. If CME complies substantially and in good faith
with the requirements of the Illinois Act or the terms of this Agreement with
respect to the giving of any required notice to its Members, its failure in any
case to give such notice to any Person or Persons entitled thereto shall not
impair the validity of the actions and proceedings taken under the Illinois Act
or this Agreement or entitle such Person or Persons to any injunctive or other
equitable relief with respect thereto.
Section 7.2 Severability. To the extent possible, each provision of
this Agreement shall be interpreted in a manner as to be valid, legal and
enforceable. Any determination that any provision of this Agreement or any
application thereof is invalid, illegal or unenforceable in any respect or in
any instance shall be effective only to the extent of such invalidity,
illegality or unenforceablity and shall not effect the validity, legality or
enforceability of any other provision of this Agreement.
Section 7.3 Headings. Article and Section headings contained in this
Agreement are inserted for convenience and reference only, and shall not be
considered in construing or interpreting any of the provisions hereof.
B-5
<PAGE>
Section 7.4 Entire Agreement. This Agreement supersedes any and all
oral or written agreements heretofore made relating to the subject matter hereof
and constitutes the entire Agreement of the parties relating to the subject
matter hereof.
Section 7.5 Expenses. Transitory, as the Surviving Corporation, shall
pay all expenses of carrying this Merger into effect and accomplishing the
Merger herein provided for.
Section 7.6 Counterparts. This Agreement may be executed simultaneously
in two or more counterparts, each of which shall be deemed to be an original,
but all of which together shall constitute one and the same instrument.
Section 7.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Delaware, without
giving effect to any conflicts or choice of law provisions that would make
applicable the substantive laws of any other jurisdiction.
IN WITNESS WHEREOF, each of the Constituent Corporations, pursuant to
authority duly given by resolutions adopted by its Board of Directors, has
caused this Agreement to be executed in its name by its President or a Vice
President as of the day and year aforesaid.
CHICAGO MERCANTILE EXCHANGE
By: _________________________
Name:
Title:
CME TRANSITORY CO.
By: _________________________
Name:
Title:
B-6
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law provides that the Registrant
may, and in some circumstances must, indemnify the directors and officers of the
Registrant against liabilities and expenses incurred by such person by reason of
the fact that such person was serving in such capacity, subject to certain
limitations and conditions set forth in the statute. The Registrant's
Certificate of Incorporation and By-Laws provide that the Registrant will
indemnify its directors and officers, and may indemnify any person serving as
director or officer of another business entity at the Registrant's request, to
the extent permitted by the statute. In addition, the Registrant's Certificate
of Incorporation provides, as permitted by the the Delaware General Corporation
Law, that directors shall not be personally liable for monetary damages for
breach of fiduciary duty as a director, except (i) for breaches of their duty of
loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, and (iv)
for transactions from which a director derived an improper personal benefit.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
The following is a list of Exhibits included as part of this
Registration Statement. The Registrant agrees to furnish
supplementally a copy of any omitted schedule to the Securities and
Exchange Commission upon request.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
2.1 Form of Agreement and Plan of Merger dated as of _______, 2000 between Chicago Mercantile Exchange and CME
Transitory Co. (included as Exhibit B to the Proxy Statement/Prospectus).
2.2* Form of Agreement and Plan of Merger dated as of _______, 2000 between CME Transitory Co. and the Registrant
3.1 Certificate of incorporation of the Registrant
3.2 Amended and Restated Certificate of Incorporation (included as Annex A to the Proxy Statement/Prospectus)
3.3* By-laws of the Registrant
5.1* Opinion of Sidley & Austin regarding legality of securities being registered
8.1* Opinion of Sidley & Austin regarding tax matters
10.1* Material Contracts
23.1* Consent of Sidley & Austin (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
24.1 Form of Power of Attorney executed by Directors of Registrant
27.1 Financial Data Schedule
99.1 Form of proxy
</TABLE>
______________________
* To be filed by amendment.
<PAGE>
(b) Financial Statement Schedules
None.
Item 22. Undertakings.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(5) That every prospectus: (i) that is filed pursuant to paragraph
(4) immediately preceding, or (ii) that purports to meet the requirements
of Section 10(a)(3) of the Act and is used in connection with an offering
of securities subject to Rule 415, will be filed as a part of an amendment
to the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such
2
<PAGE>
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(6) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(7) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant 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 January 25, 2000.
CHICAGO MERCANTILE EXCHANGE INC.
By: /s/ M. Scott Gordon
-------------------------------------
M. Scott Gordon
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on this 25th day of January, 2000.
Name Title
---- -----
M. Scott Gordon Chairman of the Board and Director
- ---------------------------
M. Scott Gordon (Chief Executive Officer)
David G. Gomach Senior Vice President and Chief Financial Officer
- ---------------------------
David G. Gomach (Principal Financial Officer)
Raymond C. Repede Vice President and Controller
- ---------------------------
Raymond C. Repede (Principal Accounting Officer)
H. Jack Bouroudjian Director
- ---------------------------
H. Jack Bouroudjian
___________________________ Director
Timothy R. Brennan
Leslie Henner Burns Director
- ---------------------------
Leslie Henner Burns
Jeffrey R. Carter Director
- ---------------------------
Jeffrey R. Carter
___________________________ Director
E. Gerald Corrigan
Terrence A. Duffy Director
- ---------------------------
Terrence A. Duffy
___________________________ Director
Rahm Emanuel
4
<PAGE>
Martin J. Gepsman Director
- ---------------------------
Martin J. Gepsman
Yra G. Harris Director
- ---------------------------
Yra G. Harris
Robert L. Haworth Director
- ---------------------------
Robert L. Haworth
Bruce F. Johnson Director
- ---------------------------
Bruce F. Johnson
___________________________ Director
Gary M. Katler
___________________________ Director
Paul Kimball
Thomas A. Kloet Director
- ---------------------------
Thomas A. Kloet
___________________________ Director
John W. Lacey
Leo Melamed Director
- ---------------------------
Leo Melamed
___________________________ Director
Merton H. Miller
___________________________ Director
William P. Miller II
___________________________ Director
Laurence E. Mollner
Patrick J. Mulchrone Director
- ---------------------------
Patrick J. Mulchrone
John D. Newhouse Director
- ---------------------------
John D. Newhouse
James E. Oliff Director
- ---------------------------
James E. Oliff
Mark G. Papadopoulos Director
- ---------------------------
Mark G. Papadopoulos
___________________________ Director
Ward Parkinson
5
<PAGE>
Robert J. Prosi Director
- ---------------------------
Robert J. Prosi
___________________________ Director
David M. Pryde
Irwin Rosen Director
- ---------------------------
Irwin Rosen
William G. Salatich, Jr. Director
- ---------------------------
William G. Salatich, Jr.
John F. Sandner Director
- ---------------------------
John F. Sandner
___________________________ Director
Verne O. Sedlacek
Leon C. Shender Director
- ---------------------------
Leon C. Shender
William R. Shepard Director
- ---------------------------
William R. Shepard
Howard J. Siegel Director
- ---------------------------
Howard J. Siegel
David I. Silverman Director
- ---------------------------
David I. Silverman
Jeffrey L. Silverman Director
- ---------------------------
Jeffrey L. Silverman
___________________________ Director
Paul Simon
6
<PAGE>
Exhibit 3.1
Chicago Mercantile Exchange Inc.
Registration Statement on Form S-4
CERTIFICATE OF INCORPORATION
OF
Chicago Mercantile Exchange Inc.
First: The name of the corporation is Chicago Mercantile Exchange Inc.
Second: The address of the corporation's registered office in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name of the corporation's registered
agent at such address is The Corporation Trust Company.
Third: The purpose of the corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of Delaware.
Fourth: The total number of shares of all classes of capital stock
which the corporation shall have the authority to issue is one thousand (1,000)
shares of common stock with a par value of $.01 per share.
Fifth: In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, alter or
repeal the By-laws of the corporation, subject to any specific limitation on
such power contained in any By-laws adopted by the stockholders. Elections of
directors need not be by written ballot unless the By-laws of the corporation so
provide.
Sixth: A director of the corporation shall not be personally liable
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of Delaware or (iv) for any transaction from which the director derived an
improper personal benefit. If the General Corporation Law of Delaware is
amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
corporation shall be eliminated or limited to the fullest extent permitted by
the General Corporation Law of Delaware, as so amended. Any repeal or
modification of this Article Sixth by the stockholders of the corporation shall
not adversely affect any right or protection of a director of the corporation
existing at the time of such repeal or modification.
<PAGE>
Seventh: Each person who is or was a director or officer of the
corporation, and each person who serves or served at the request of the
corporation as a director or officer of another enterprise, shall be indemnified
by the corporation in accordance with, and to the fullest extent authorized by,
the General Corporation Law of Delaware as it may be in effect from time to
time.
Eighth: The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon the
stockholders herein are granted subject to this reservation.
Ninth: The name and mailing address of the incorporator are M. Scott
Gordon, Chicago Mercantile Exchange, 30 South Wacker Drive, Chicago, Illinois
60606.
THE UNDERSIGNED, being the incorporator named above, has executed this
Certificate on December 29, 1999.
______________________________
M. Scott Gordon
2
<PAGE>
Exhibit 23.2
Chicago Mercantile Exchange Inc.
Registration Statement on Form S-4
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of the attached
registration statement.
Arthur Andersen LLP
Chicago, Illinois
January 26, 2000
<PAGE>
Exhibit 24.1
Chicago Mercantile Exchange Inc.
Registration Statement on Form S-4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, being a Director of
Chicago Mercantile Exchange Inc., a Delaware corporation (the "Company"), does
hereby constitute and appoint M. Scott Gordon and Craig S. Donohue, and each of
them, his or her true and lawful attorneys and agents, each with full power and
authority (acting alone and without the other) to execute and deliver in the
name of and on behalf of the undersigned as such Director (i) a Registration
Statement on Form S-4 (the "Registration Statement") under the Securities Act of
1933, as amended, relating to the registration and issuance of shares of the
Class A common stock and Class B common stock of the Company, (ii) any and all
amendments to such Registration Statement and (iii) any and all documents and
instruments which such attorneys and agents may deem necessary or advisable in
connection with the filing of such Registration Statement and the registration
and issuance of shares of the Company's Class A common stock and Class B common
stock; and in connection with the foregoing, to do any and all acts and things
and execute any and all documents and instruments which such attorneys and
agents may deem necessary or advisable to enable the Company to comply with the
securities laws of the United States. The undersigned hereby grants to such
attorneys and agents, and each of them, full power of substitution and
revocation in the premises and hereby ratifies and confirms all that such
attorneys and agents, or either of them, may do or cause to be done by virtue of
these presents.
IN WITNESS WHEREOF, I have hereunto set my hand this ___ day of January,
2000.
__________________________
Signature
__________________________
Print Name
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> SEP-30-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 DEC-31-1998
<CASH> 9,176 14,841
<SECURITIES> 67,570 87,730
<RECEIVABLES> 27,061 28,927
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 268,508 192,273
<PP&E> 214,098 178,877
<DEPRECIATION> 124,398 107,611
<TOTAL-ASSETS> 386,166 280,136
<CURRENT-LIABILITIES> 193,586 97,245
<BONDS> 6,788 4,969
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 172,005 166,897
<TOTAL-LIABILITY-AND-EQUITY> 386,166 280,136
<SALES> 0 0
<TOTAL-REVENUES> 158,490 194,709
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 147,633 180,516
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 423 2
<INCOME-PRETAX> 10,857 14,193
<INCOME-TAX> 3,862 4,315
<INCOME-CONTINUING> 5,794 7,029
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,794 7,029
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<PAGE>
Exhibit 99.1
Chicago Mercantile Exchange Inc.
Registration Statement on Form S-4
PROXY CHICAGO MERCANTILE EXCHANGE PROXY
30 South Wacker Drive
Chicago, Illinois 60606
This proxy is solicited on behalf of the Board of Directors of
Chicago Mercantile Exchange (the "Exchange") for the
Special Meeting of Members on March __, 2000
The undersigned appoints ____________, ____________ and ____________, or
any of them, as Proxies each with the power to appoint his substitute, and
hereby authorizes them to represent and to vote, as designated on the reverse
side, all membership interests in the Exchange held in the undersigned's name at
the Special Meeting of Members to be held on March __, 2000, or any adjournment
thereof and, in the Proxies' discretion, to vote upon such other business as may
properly come before the meeting, all as more fully set forth in the Proxy
Statement/Prospectus related to such meeting, receipt of which is hereby
acknowledged.
PLEASE SEE
REVERSE SIDE
________________________________________________________________________________
[Reverse side of proxy]
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN.
IF NO DIRECTION IS MADE, IT WILL BE VOTED FOR APPROVAL OF THE DEMUTUALIZATION
PROPOSAL.
PROPOSAL TO DEMUTALIZE THE EXCHANGE BY MERGING INTO A DELAWARE NONSTOCK
CORPORATION AND THEN A DELAWARE STOCK CORPORATION.
[] FOR [] AGAINST [] ABSTAIN
SIGNATURE(S) ____________________DATE__________ The signer hereby
NOTE: Please sign exactly as name appears hereon. revokes all proxies
When signing as attorney, executor, heretofore given by
administrator, trustee or guardian, please the signer to vote at
give full title as such. said meeting or any
adjournment thereof.
