<PAGE>
As filed with the Securities and Exchange Commission on April 25, 2000
Registration No. 333-95561
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
AMENDMENT NO. 5
to
FORM S-4
REGISTRATION STATEMENT
----------------
Under The Securities Act of 1933
----------------
CHICAGO MERCANTILE EXCHANGE INC.
(Exact name of registrant as specified in its charter)
----------------
Delaware 6231 36-4340266
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
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.
Managing Director Business Development and Corporate/Legal Affairs
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. [_]
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. [_]
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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this proxy statement and prospectus is not complete and +
+may be changed. We may not issue these securities until the registration +
+statement filed with the Securities and Exchange Commission is effective. +
+This proxy statement and 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 APRIL 25, 2000
CHICAGO MERCANTILE EXCHANGE
CHICAGO MERCANTILE EXCHANGE
30 SOUTH WACKER DRIVE
CHICAGO, ILLINOIS 60606
April , 2000
Dear Member:
I would like to invite you to attend a special members' meeting at which we
will consider a proposed "demutualization" of our organization in which we will
change from a not-for-profit membership corporation to a for-profit stock
corporation.
As a result of the demutualization, shares of Class B common stock will be
issued to our members in series corresponding to our present membership
divisions. Each series will confer the trading privileges associated with the
membership interests that are converted into that series along with the
traditional features of common stock. In addition, shares of Class A common
stock will be issued only to CME, IMM and IOM members and will contain only the
traditional features of common stock. We have no current plans to list these
shares on an exchange. Additional information regarding the Class A and Class B
common stock is provided in this document under "Description of Capital Stock
of New CME."
Our board unanimously approved the proposed demutualization and unanimously
recommends that you vote for its approval. The board believes that the
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. In
addition, we will be better able to grow and to continue to provide high
quality products and services to all 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
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this proxy
statement and prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
This proxy statement and prospectus is dated April , 2000 and was first
mailed to members on or about April , 2000.
<PAGE>
CHICAGO MERCANTILE EXCHANGE
30 SOUTH WACKER DRIVE
CHICAGO, ILLINOIS 60606
NOTICE OF SPECIAL MEMBERS MEETING TO BE HELD ON MAY , 2000
To the Members of the Chicago Mercantile Exchange:
We will hold a special meeting of the members of the Chicago Mercantile
Exchange on , May , 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 April , 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 a 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 prior to the start of the meeting in
order to be counted.
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
Managing Director
Business Development and
Corporate/Legal Affairs
April , 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY OF DEMUTUALIZATION PROPOSAL........................................ 1
RISK FACTORS............................................................... 9
Risks Related to Demutualization......................................... 9
Risks Related to Our Business............................................ 12
Risks Related to Regulation and Litigation............................... 15
INFORMATION REGARDING SPECIAL MEETING...................................... 17
Persons Making the Solicitation.......................................... 17
Time and Place of Special Meeting........................................ 17
Eligibility to Vote...................................................... 17
Available Votes; Quorum Required for Meeting............................. 17
Manner of Voting......................................................... 17
Required Vote............................................................ 18
Board Recommendation..................................................... 18
Methods of Solicitation of Proxies; Costs................................ 18
DEMUTUALIZATION PROPOSAL................................................... 19
Reasons for Demutualization.............................................. 19
Description of Demutualization Transaction............................... 21
Conversion of Membership Interests into Shares........................... 22
Rights of Class B Common Stock........................................... 23
Election of Board of Directors........................................... 24
Differences in Ownership Rights.......................................... 25
Required Regulatory Approvals............................................ 27
Amendment or Termination................................................. 28
Conditions to Effectiveness of the Demutualization Transactions.......... 28
Effectiveness of the Demutualization Transactions........................ 28
Federal Income Tax Consequences.......................................... 29
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS............ 30
CAPITALIZATION............................................................. 33
DESCRIPTION OF CAPITAL STOCK OF NEW CME.................................... 34
Description of Common Stock.............................................. 34
Description of Additional Provisions of Class B Common Stock............. 35
Preferred Stock.......................................................... 37
Transfer Restrictions.................................................... 37
Other Charter Provisions................................................. 37
Transfer Agent........................................................... 39
MANAGEMENT................................................................. 40
Directors and Executive Officers......................................... 40
Director Compensation.................................................... 46
Committees of the Board of Directors..................................... 46
Limitation of Liability and Indemnification Matters...................... 47
Executive Compensation................................................... 47
Employee Benefit Plans................................................... 48
Employment-Related Agreements............................................ 50
Beneficial Ownership of Management....................................... 53
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
BUSINESS.................................................................. 56
Products................................................................ 58
Execution Facilities.................................................... 62
Clearing................................................................ 65
Market Data............................................................. 67
International Alliances................................................. 68
Marketing Programs and Advertising...................................... 68
Competition............................................................. 68
Our Members............................................................. 70
Other Business Relationships And Subsidiaries........................... 71
Intellectual Property................................................... 72
Employees............................................................... 72
Facilities.............................................................. 72
Legal Proceedings....................................................... 72
Regulation.............................................................. 73
WHERE YOU CAN FIND MORE INFORMATION....................................... 75
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 76
Historical Overview..................................................... 76
Results of Operations................................................... 78
Financial Position...................................................... 80
Liquidity and Capital Resources......................................... 81
Market Risk............................................................. 81
Accounting Standards.................................................... 82
EXPERTS................................................................... 83
VALIDITY OF SECURITIES.................................................... 83
EXHIBITS
</TABLE>
<PAGE>
This document describes a proposed series of transactions in which the
existing Chicago Mercantile Exchange will be converted from a membership
organization into a Delaware stock corporation. For ease of reference in this
document, the existing membership organization has been referred to as the
"Exchange" or "Existing CME," and the Delaware stock corporation as "New CME."
The Exchange has four membership divisions, which are referred to in this
document as "CME," meaning members of the Chicago Mercantile Exchange division;
"IMM," meaning members of the International Monetary Market division; "IOM,"
meaning members of the Index and Option Market division; and "GEM," meaning
members of the Growth and Emerging Markets division. These membership
divisions, and their relative trading rights, are described under the
subheading "Our Members" in "Business." Finally, members of the GEM division
hold both full and fractional membership interests. These fractional interests
must be combined into full interests by November 3, 2000 or, under the
Exchange's rules, they will be combined by the Exchange and sold for cash.
Because of this provision, fractional GEM membership interests have been
treated differently in the proposed demutualization than have full GEM
membership interests.
<PAGE>
SUMMARY OF DEMUTUALIZATION PROPOSAL
This summary highlights information contained elsewhere in this document. It
does not contain all of the information which you should consider before voting
on the proposed demutualization and may not contain all of the information that
is important to your individual situation. Consequently, you should read this
entire document carefully.
Proposed Transaction
We are proposing to convert Existing CME from an Illinois not-for-profit
membership corporation into a Delaware for-profit stockholder corporation. As a
result, you will become a stockholder of New CME. Immediately after the
demutualization transactions are completed, Exchange members will be the only
stockholders of New CME.
Conversion of Membership Interests into Shares of Stock
Existing memberships will be converted into shares of Class B common stock
of New CME and, in the cases of the CME, IMM and IOM memberships, shares of
Class A common stock. Both Class A and Class B shares will have the traditional
features of common stock; however, the primary purpose of the Class B shares is
to confer the trading privileges associated with the memberships in Existing
CME. Consequently, the Class B shares will be issued in four series
corresponding to those existing membership divisions, with a fifth series
corresponding to the GEM fractional membership interests. Each series will
confer the trading privileges associated with the membership interest that is
converted into that series. These conversions are illustrated below:
Distribution of Class A and B Shares By Individual Membership Interest
<TABLE>
<CAPTION>
Number of Shares to Be Received Per
Membership Interest
-------------------------------------------------------------------
Class B Shares
Membership --------------------------------------
Division Class A Shares Number Series
---------- -------------- ------ ------
<S> <C> <C> <C>
CME 16,200 1 B-1
IMM 10,800 1 B-2
IOM 5,400 1 B-3
GEM 1 B-4
GEM Fractions 1 B-5
</TABLE>
1
<PAGE>
The following table indicates the number of outstanding memberships and
members in each membership division of the Exchange. The tables below that
table indicate the relative distribution of shares of Class A and B common
stock following the demutualization:
Membership Divisions
<TABLE>
<CAPTION>
Membership Number of Number of Percentage of
Division Memberships Members Total Members
---------- ----------- --------- -------------
<S> <C> <C> <C>
CME 625 512 15.3%
IMM 813 676 20.3
IOM 1,287 1,026 30.8
GEM* 253 217 6.5
GEM Fractions* 2,140 902 27.1
----- ----- -----
5,118 3,333 100.0%
===== ===== =====
</TABLE>
Distribution of Class A and B Shares By Membership Division
<TABLE>
<CAPTION>
Membership Aggregate Class A Class A Aggregate Class B
Division Shares Percentage Shares
---------- ----------------- ---------- -----------------
<S> <C> <C> <C>
CME 10,125,000 39.1% 625
IMM 8,780,400 34.0 813
IOM 6,949,800 26.9 1,287
GEM* 253
GEM Fractions* 2,140
---------- ----- -----
25,855,200 100.0% 5,118
========== ===== =====
</TABLE>
Distribution of Relative Equity By Membership Division
<TABLE>
<CAPTION>
Equivalent Total Equity Percentage of
Class A Shares (Expressed in Equity
Membership Class A Class B Represented by Equivalent Distributed to
Division Shares Series Class B Shares** Class A Shares) Members
---------- ---------- ------- ---------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
CME 10,125,000 B-1 1,125,000 11,250,000 39.1%
IMM 8,780,400 B-2 975,600 9,756,000 33.9
IOM 6,949,800 B-3 772,200 7,722,000 26.8
GEM* B-4 25,300 25,300 0.1
GEM
Fractions* B-5 21,400 21,400 0.1
---------- --------- ---------- -----
Total 25,855,200 2,919,500 28,774,700 100.0%
========== ========= ========== =====
</TABLE>
- --------
* Based upon outstanding GEM fractions as of December 31, 1999. The conversion
of additional GEM fractions into full GEM membership interests prior to the
effectiveness of the demutualization will reduce the number of series B-5
shares issued and increase the number of series B-4 shares actually issued.
** Each Class B share is treated as representing a specified number of Class A
shares for purposes of dividends, liquidating distributions and voting on
matters on which holders of Class A and Class B shares vote together. See
"Class A Equivalence" below.
2
<PAGE>
Description of Class B Shares to be Received
The following table summarizes several features of the Class B shares that
will be issued to members in the demutualization:
<TABLE>
<CAPTION>
Number of Votes on Equivalent Class A Shares
"Core Rights" Represented by Series
------------------- ------------------------------
Number of As Percentage
Maximum Directors As Percentage of Aggregate
Number of Trading Series Per of Aggregate Number of Class A
Series Shares Privileges Can Elect Share Class B Vote* Shares Equivalents
- ------ --------- -------------- --------- ----- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
B-1..................... 625 CME 3 6 55.7% 1,125,000 3.9%
B-2..................... 813 IMM 2 2 24.1 975,600 3.4
B-3..................... 1,287 IOM 1 1 19.1 772,200 2.7
B-4..................... 253 GEM* 0 1/6 0.6 25,300 0.1
B-5..................... 2,140 GEM Fractions* 0 1/60 0.5 21,400 0.1
----- --- ----- --------------- ----------
5,118 6 100.0% 2,919,500 10.2%
===== === ===== =============== ==========
</TABLE>
- --------
* Based upon outstanding GEM fractions as of December 31, 1999. The conversion
of additional GEM fractions into full GEM membership interests prior to the
effectiveness of the demutualization will reduce the number of series B-5
shares issued and increase the number of series B-4 shares actually issued.
Election of Directors. New CME's board of directors will ultimately consist
of 19 directors. Holders of series B-1, B-2 and B-3 shares will have the right
to elect the number of directors set forth in the table. Holders of all series
of Class B shares will have the right, voting together with holders of the
Class A shares, to elect the remaining 13 directors. See "Board of Directors"
below for more information.
"Core Rights." New CME's charter grants solely to holders of Class B shares
the right to approve changes to specified "rights" associated with the trading
privileges conferred by those shares. Those rights, referred to as "Core
Rights" in the charter and this document, consist of:
. the allocation of products which a holder of a series of Class B shares
is permitted to trade on New CME's exchange facilities
. the trading floor access rights and privileges which a holder of a series
of Class B shares has, including the circumstances under which New CME
can determine that an existing open outcry-traded product will no longer
be traded by means of open outcry
. the number of authorized and issued shares of any series of Class B
shares
. the eligibility requirements to hold shares of a series of Class B shares
or to exercise the associated trading rights or privileges
As indicated in the table, votes on changes to Core Rights are weighted by
series. Changes to Core Rights must be approved by a majority of the votes cast
by the holders of the Class B shares. Due to the weighted voting, this
statement means that a change to Core Rights may be effected by the approval of
the holders of the series B-1 shares even though the holders of the other
series voted against the change. This result is consistent with the result that
would be obtained under the Exchange's existing rules and procedures. Holders
of Class A shares do not have the right to vote on changes to Core Rights.
Class A Equivalence. Each Class B share is treated as representing the
number of Class A shares specified in the table above for purposes of:
. voting on matters on which holders of Class A and B shares vote together,
including the election of 13 directors
3
<PAGE>
. the receipt of dividends if, and when, declared by the board
. the receipt of liquidating distributions if New CME is liquidated and
dissolved
Shares of Class B common stock will represent approximately 10% of the
outstanding equity of New CME following the demutualization. Consequently, the
voting privileges of the Class B shares will not have any significant impact on
matters put to a vote that includes both the Class A and B stockholders. Class
A stockholders do not have the right to vote on Core Rights or in the election
of the six directors to be elected by the series of Class B shares. For
information regarding the method by which Class A equivalence was determined,
see "Factors Considered in Arriving at Allocation Methodology" under the
subheading "Reasons for Demutualization" under "Demutualization Proposal"
below.
Series B-5 Shares. The series B-5 shares will be issued to holders of GEM
fractional membership interests. Each GEM fractional membership interest
represents one-tenth of a full GEM membership interest and will be converted
into one series B-5 share. There were 2,140 GEM fractional membership interests
outstanding as of December 31, 1999 held by 902 members. Series B-5 shares may
be converted into series B-4 shares by their holders at the ratio of ten series
B-5 shares for one series B-4 share. Individuals holding less than the
necessary ten shares may either sell their shares to another holder so that
holder will obtain the necessary ten shares, or purchase additional shares from
other holders to obtain the necessary ten shares. The process by which a holder
may purchase or sell series B-5 shares is expected to be similar to the process
currently followed for the purchase and sale of GEM fractions. In the event
that a holder does not convert his or her series B-5 shares on or before
November 3, 2000, those shares will be converted automatically into shares of
Class A common stock at the rate of ten Class A shares for each series B-5
share.
Differences in Ownership Rights
Following the demutualization, you will become a stockholder in a Delaware
corporation as opposed to a member in an Illinois not-for-profit corporation.
There are 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 the ability of Delaware corporation to
pay, and their stockholders to receive, dividends based upon earnings; the
availability under Delaware law of dissenters' rights in connection with
mergers or sales of all of the corporate assets; and the availability under
Delaware law of class voting for stockholders in the event that a charter
amendment adversely affects their rights.
Some of these differences arise from choices that we have made in drafting
the charter and by-laws for New CME. These differences include our decision to
insert antitakeover provisions into the charter of New CME; changes in the
composition of our board; changes in the vote required to approve major
corporate transactions, including charter amendments, mergers and sales of all
of the corporate assets; and changes in liquidation rights.
These differences are described under the subheading "Differences in
Ownership Rights" under "Demutualization Proposal."
Market for Shares; Stock Exchange Listing
No market presently exists for either the Class A shares or the Class B
shares. We expect a market for the Class B shares will develop that is similar
to the current market for corresponding membership interests. The current
markets for CME, IMM, IOM and GEM membership interests, and for GEM fractional
membership interests, should facilitate the development of new markets for each
series of Class B shares. We expect that,
4
<PAGE>
over time, a market for Class A shares will develop. We will undertake
educational and promotional efforts to communicate the value of Class A shares
to holders of those shares and to potential investors.
We have no current plans to list either the Class A or B shares on a stock
exchange.
Transfer Restrictions
Class B shares will not be subject to any transfer restrictions; however,
the exercise of the associated trading privileges will be subject to compliance
with our existing eligibility requirements for trading. Class A shares will be
subject to transfer restrictions, which will fall away over time. For the first
six months, Class A shares may be transferred only with the associated Class B
shares. Thereafter, an increasing portion of the Class A shares may be
transferred to nonmembers. After fifteen months, the Class A shares will not be
subject to the transfer restrictions. The charter grants authority to the board
to remove some or all of the Class A share transfer restrictions if they
consider that removal to be appropriate in their sole discretion.
Board of Directors
Following the demutualization, the size of the board of directors will be
reduced from 39 to 30 directors at the December 2000 annual meeting of
stockholders, and further reduced to 19 at the December 2001 annual meeting of
stockholders. In addition, the manner in which the directors are nominated and
elected will change. These changes are illustrated in the table below.
Nomination and Election of Board of Directors
Current Provisions After Demutualization
<TABLE>
<CAPTION>
Number of Candidates
Directors Nominated By Elected By
- --------------------------------------------------------------
Number of Candidates
Directors Nominated By Elected By
-------------------------------------------------------
<S> <C> <C>
12 CME Nominating CME
Committee members
<S> <C> <C>
3 Series B-1 Nominating Series B-1
Committee holders
8 IMM Nominating IMM
Committee members
2 Series B-2 Nominating Series B-2
Committee holders
4 IOM Nominating IOM
Committee members
1 Series B-3 Nominating Series B-3
Committee holders
0
1 GEM Nominating GEM
Committee members
0
12 Chairman of the Board of
Board Directors
13 Board Nominating Class A and B
Committee stockholders
2 * *
-------------------------------------------------------
- --------------------------------------------------------------
Total 19
Total 39
</TABLE>
- --------
*The Exchange's President serves as a non-voting member of the board. Leo
Melamed serves as a non-voting member of the board.
The Exchange's directors serve staggered two-year terms and will continue to
serve as directors of New CME for the remainder of their present terms.
Directors of New CME will also serve staggered two-year terms. The reduction in
the size of the board will be implemented by electing fewer directors than the
directors whose terms expire. A listing of the present directors and when their
terms expire is set forth under the subheading "Directors and Executive
Officers" under "Management."
5
<PAGE>
The right of series B-1, B-2 and B-3 stockholders and Class A and B
stockholders to elect directors will be phased-in as the terms of the existing
directors expire. This phase-in is described in a table under the subheading
"Election of Board of Directors" under "Demutualization Proposal."
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 conversion of your membership interest. Assuming this
nonrecognition treatment, the tax basis in your membership interest would
carryover to the stock received. If you received both Class A 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.
Accounting Treatment
The demutualization transaction will be treated in a manner similar to
"pooling-of-interests" accounting. Under this method of accounting, no gain or
loss will be recognized, and the assets and liabilities of Existing CME will
appear on the books of New CME at their same recorded amounts.
Risk Factors
There are 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 as a successful member-owned
institution, changes will be required in the manner in which we evaluate and
undertake activities.
Reasons for Demutualization
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
. 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
Conditions to Demutualization
The completion of the demutualization is subject to the following principal
conditions:
. 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. We filed a ruling request on December 30,
1999.
6
<PAGE>
. Completion of the cash purchase by Existing CME of the assets and
business of P-M-T Limited Partnership, which requires the approval of the
holders of two-thirds of the 4,786 Class A limited partnership units of
that partnership, not including the 321 units held by the Exchange. P-M-T
Limited Partnership provides electronic trading services for the Exchange
and owns the GLOBE(R) servicemark.
. Approval by the Commodity Futures Trading Commission of changes to our
rules to reflect the demutualization. These approvals will be sought
after the special meeting of members. These changes generally relate to
the changes in our structure resulting from the conversion to a stock
corporation and the fact that our existing rules will be reflected in the
charter, by-laws and rules of New CME.
Our Business
Founded in 1898, the Exchange provides facilities so that our members may
trade futures and options on futures contracts. These facilities include
physical floor trading facilities where our members may come together to trade
in a process known as "open outcry" and, through P-M-T Limited Partnership,
electronic trading facilities known as GLOBEX2. Members are able to trade
futures 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 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.
Absence of Appraisal or Dissenters' Rights
Members who object to the demutualization will have no appraisal or
dissenters' rights under applicable law. Appraisal or dissenters' rights, if
available, would allow a member who voted against the proposal and followed a
prescribed statutory process, to receive a cash payment equal to the fair value
of the member's membership interest in the Exchange. If the demutualization
transaction is completed and regardless of whether you voted for or against it,
your membership interest will be converted into stock of New CME.
7
<PAGE>
Selected Consolidated Financial Information
Selected consolidated financial data is set forth below. The income
statement and balance sheet data are taken from the audited consolidated
financial statements of the Exchange. The results of prior periods are not
necessarily indicative of future results. This data should be read in
conjunction with the audited consolidated financial statements of the Exchange
and related notes, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included toward the end of this document.
Selected Consolidated Financial Data
(amounts in thousands)
<TABLE>
<CAPTION>
As of or for the
Year Ended December 31,
--------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Total revenues.................... $208,488 $195,216 $177,644 $164,212 $164,459
Operating expenses................ 201,844 181,023 158,586 151,803 149,689
Other income (1).................. -- -- -- 15,717 --
Limited partners' interest in
earnings of P-M-T Limited
Partnership...................... 2,126 2,849 -- -- --
Net income........................ 2,663 7,029 8,667 15,068 8,631
Balance Sheet Data:
Total assets...................... 301,703 293,205 348,732 243,754 199,733
Current assets.................... 176,728 203,301 270,081 161,272 114,395
Current liabilities............... 109,953 110,670 180,210 83,584 57,780
Long-term obligations and limited
partners' interest in P-M-T...... 23,087 15,638 8,968 9,539 7,845
Members' equity................... 168,663 166,897 159,554 150,631 134,108
Other Data:
Total trading volume (round turn
trades).......................... 200,737 226,619 200,742 177,042 181,806
GLOBEX trading volume............. 16,135 9,744 4,388 2,018 1,326
Open interest at period-end....... 6,412 7,282 6,479 5,361 5,254
</TABLE>
- --------
(1) Consists of a 1996 return of contributions and interest from the CME Trust
resulting from an agreement reached with the Internal Revenue Service over
the deductibility of contributions made by the Exchange.
8
<PAGE>
RISK FACTORS
Upon demutualization 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. 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 no internal experience, and little representative external
experience, upon which to draw in operating as a for-profit enterprise.
We have always operated as a not-for-profit corporation for the benefit
of our members, where we have focused on delivering member benefits at
reasonable cost. Internal experience would assist us in dealing with the
problems of changing to, and operating as, a for-profit enterprise. The
experience of others would assist us in identifying problems and possible
solutions; however, there is little history or experience of U.S. futures
exchanges with for-profit operations. Consequently, our transition to for
profit operations will be subject to risks, expenses and difficulties which
we cannot predict and may not be capable of handling in an efficient
manner.
. Our new managers and staff may not be successful in running a for-profit
entity.
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 operate successfully 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 in running a for-profit entity. 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.
. Our board's role will change over a long transition period, which may delay
needed operational changes.
Our board has historically been involved actively in the day-to-day
functioning of our business. This role will change as management of New CME
assumes greater responsibility for operations. Management will assume
greater responsibility as the size of the board is reduced; however, the
reduction will not be completed until December 2001. The timing of this
role transition may slow changes in operations and procedures desired by
management to operate a for-profit enterprise.
. The change in the board election process may reduce the direct influence of
our members on the action of our board.
Holders of Class B shares will elect 6 of 19 directors of New CME and
will vote together with holders of Class A shares in the election of the
remaining 13 directors. The voting power of the holders of the Class B
shares, however, will represent only about 10% of the overall vote
available to be cast for those 13 directors. Members of the Exchange will
own 100% of the Class A shares following the demutualization; however,
subsequent sales of Class A shares by their holders, as well as subsequent
issuances and sales by New CME, will cause that percentage to fall.
. Other changes in our operating structure may diminish the influence of
members and may affect their desire to remain members, which ultimately may
affect our business.
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. As part of the
demutualization, we will eliminate many of these committees, convert some
into advisory bodies and
9
<PAGE>
change the membership of other committees. Management will generally make
decisions designed to enhance stockholder value, which may lead to
operational decisions or outcomes with which members disagree. 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 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.
. Our valuation of membership interests, and the assignment of relative equity
values, contains an element of uncertainty.
Our Board considered a number of factors in arriving at the relative
equity values of the existing membership interests. Ultimately, the board
based the assignment of those values on our prior 1987 experience with
respect to the allocation of equity interest in P-M-T Limited Partnership.
There are other equity allocation methods that might produce different
results if applied, including prevailing market prices for membership
interests, trading volumes, relative rights and other measures. The board
considered these alternatives but determined that the chosen formula best
accomplished a fair allocation of the equity values among the members. See
the subheading "Legal Proceedings" under "Business" for information
regarding claims made by several GEM members regarding the allocation of
equity in the proposed demutualization.
. The absence of a prior public market limits our ability to predict whether,
and to what extent, a public market will develop in our shares.
Currently, there are no public holders of New CME's stock and no market
for that stock. Further, we have not undertaken the traditional marketing
activities associated with bringing a company to the public markets,
because we are not offering any shares to outside investors, and have no
current plans to list our shares on a stock exchange. 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,
in order 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 that member
is in a deficit position. Any forced sales of Class A or B shares during
the time in which an orderly market is being developed could negatively
impact the market price for the 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 B shares received by you in the
demutualization may fluctuate widely. Factors causing these fluctuations
will include our perceived prospects, 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 B
shares may trade at prices significantly below
10
<PAGE>
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 and 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. While holders of Class B shares will have
protections with respect to Core Rights that may limit management's
decision-making authority, management will nonetheless acquire substantial
decision-making responsibility compared to Existing CME. 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.
. The exercise by Class B stockholders of their reserved rights could affect
adversely the market price of the Class A shares.
Class B stockholders will have the ability to preserve their trading
rights through special approval rights. In addition, holders of series B-1,
B-2 and B-3 shares will have the right to elect 6 of 19 directors, even
though those holders only represent approximately 10% of the overall equity
interest. Those directors will also participate in the nomination of
additional directors and the election of a chairman. The special approval
rights and, to a lesser degree, the election of directors, could be used to
block changes that management desires to make to enhance stockholder value.
. Delaware law may protect decisions of New CME's board that have a different
effect on Class A and 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 different groups of stockholders--subject
to applicable provisions set forth in a company's charter. With respect to
decisions not involving the Core Rights of Class B stockholders, you may
not be able to challenge decisions that have an adverse effect on the value
of your 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 antitakeover provisions that we have inserted in the governing
documents of New CME could enable the board to prevent or delay a change of
control of New CME and adversely affect market value.
We have inserted antitakeover provisions into the charter and by-laws of
New CME. These provisions, along with provisions of 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.
11
<PAGE>
These antitakeover provisions are described under the subheading "Other
Charter Provisions" under "Description of Capital Stock of New CME."
. Not paying dividends can have an adverse effect on the stock price.
We do not anticipate paying dividends on our shares in the foreseeable
future. This decision may affect the market price of our stock to the
extent that it causes investors seeking current income in the form of
dividends not to purchase our stock.
Risks Related to Our Business
. Our decision to operate both pit-based, open outcry trading systems and
electronic trading systems may adversely affect our operating costs and our
markets.
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.
Further, if both trading methods continue, liquidity on each may be less
than the liquidity on a competitive unified trading platform.
. Our trading volumes could be adversely affected if our customers prefer
conducting business on a mutual exchange.
The success of our business depends, in part, on our ability to maintain
and increase our trading volume by maintaining and expanding 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 status as a for-profit enterprise may intensify competition we face from
our member firms and other entities.
As a mutual company, we provide services to our member firms without
seeking a profit. With the advent of a for-profit enterprise, those firms
may seek to internalize some functions that we presently perform or may to
establish and use exchanges in which they have a more substantial ownership
interest. A number of our member firms are substantially larger than us and
have greater resources. In addition, many of our competitors and potential
competitors are more established, have more financial resources and have
greater marketing capabilities and technological and personnel resources.
These factors may enable them to develop similar products, to provide
better transaction costs and execution, and to carry out their business
strategies faster. We expect that competition will increase in the future.
. Our market data fees may be reduced or eliminated by the growth of
electronic trading and electronic order entry systems.
Electronic trading systems do not usually impose distinct charges for
supplying market data to trading terminals. If we follow that business
model and trading terminals with access to our markets become widely
available, we can expect to lose quote fee revenue from those persons who
have access to trading terminals. We may experience a reduction in our
revenues if we are unable to recover that lost revenue through terminal
usage fees or transaction fees.
. The value of our skill set and assets for operating a physical exchange may
be lost if futures trading migrates to electronic trading systems.
We own and lease significant assets devoted to operating a physical,
open outcry exchange. Many of those assets will have little or no residual
value if futures trading migrates to an electronic trading system. Our
skill at operating a complex physical exchange is also a significant asset
that would be lost in that
12
<PAGE>
migration. The competitive advantages that we own by reason of these assets
may be eroded by a transfer of trading activity to an electronic trading
system. The costs associated with those leases and disposition of those
assets may hurt profitability.
. The number and quality of companies providing electronic transaction
services in competition with us may increase significantly.
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. Two other significant U.S. futures
exchanges are in the process of demutualizing, which may intensify
competition for electronic transaction services.
Securities exchanges are planning to expand into derivative transaction
services. The existing option exchanges may expand their electronic
transaction services. A new electronic option exchange also has been
licensed by the SEC.
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.
. We may not effectively manage our growth.
Growth in our business may place a significant strain on our management,
personnel, systems and resources. We will need to continue to improve our
operational and financial systems and managerial controls and procedures,
and to continue to expand, train and manage our technology workforce. We
will need to maintain close coordination among our technology, compliance,
accounting, finance, marketing and sales organizations. We cannot assure
you that we will manage this growth effectively, and failure to do so 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.
. 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.
13
<PAGE>
. Failures in our computer and communications systems and capacity constraints
could harm our reputation and our business.
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. Failures in our systems or those of our third party
providers could cause:
. unanticipated service disruptions;
. slower response times and delays in trade execution;
. decreased customer satisfaction;
. incomplete or inaccurate accounting, recording or processing of
trades;
. financial losses;
. security breaches; and
. customer claims, litigation 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. A
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 affect materially and adversely our
reputation, business, financial condition and operating results.
. We may not be able to keep up with rapid technological changes.
To remain competitive, we need to 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 requirements, and a failure to respond could have a
material adverse effect on our business, financial condition and operating
results.
. Our financial position 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.
14
<PAGE>
. Our existing and future revenues depend upon maintaining current volume
levels in 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 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;
. 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.
. Our 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.
Risks Related to Regulation and Litigation
. The existing legal framework for our industry may be modified to lower entry
costs of competitors.
The existing legal and regulatory structure of the futures industry has
discouraged new entrants. A consensus is growing among legislators and
regulators that the Commodity Exchange Act ("CEA") should be modified by
amendment or administrative exemption to facilitate over-the-counter
derivative transactions and the development of other transaction execution
facilities with lesser regulatory compliance requirements and lesser levels
of regulatory oversight. These facilities may be authorized to compete for
our major customers and may take volume or place competitive pressure on
the fees we are able to charge.
. 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 discharge adequately its self-regulatory responsibilities.
We believe 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. If we are required to rely on a third party to
perform regulatory and oversight functions, we may incur substantial
expenses and suffer severe harm to our reputation if the regulatory
services are inadequate.
15
<PAGE>
. 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 GLOBEX2 system from foreign
locations.
The placement of GLOBEX2 terminals, and the provision of access to our
GLOBEX2 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 GLOBEX2 markets. We have received permission to place
GLOBEX2 terminals in the U.K., Japan and various other major world
financial centers.
. Litigation risks are significant to financial service providers such as the
Exchange.
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 CEA and our Commodity Futures Trading
Commission ("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. See the subheading "Legal
Proceedings" under "Business" for information regarding claims made by
several GEM members regarding the allocation of equity in the proposed
demutualization.
. Any infringement by us on patent rights of others could result in litigation
and could affect our operations.
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.
16
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INFORMATION REGARDING SPECIAL MEETING
Persons Making the Solicitation
The proxy solicitation represented by this document is being made on behalf
of the board of directors of the Exchange.
Time and Place of Special Meeting
The special meeting will be held on , May , 2000 at p.m.,
Central Standard Time, at 30 South Wacker Drive, Chicago, Illinois 60606.
Eligibility to Vote
You are eligible to vote at the special meeting only if you owned a
membership in the Exchange at the close of business on April , 2000, which is
the record date for the special meeting.
Available Votes; Quorum Required for Meeting
On the record date for the special meeting, we had 625 CME memberships, 813
IMM memberships, 1,287 IOM memberships, 253 GEM memberships and 2,140 GEM
fractional 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 250 members shall constitute a quorum for the consideration of the
proposal at the meeting. For the purpose of determining the presence of a
quorum, each member who is present in person or by proxy is counted only once
regardless of the number of membership interests that he or she holds.
Manner of Voting
You may vote on the demutualization 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:
. By sending written notice to Ms. Ann Cresce, Acting 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 of the meeting.
You may vote for, against or abstain on the demutualization proposal,
although an abstention has the legal effect of voting against the proposal. To
vote using the enclosed proxy, you 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 proxy 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. Ann
Cresce, Acting 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.
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To obtain a replacement proxy, please call Ms. Ann Cresce, Acting Director,
CME Membership Department, at (312) 930-3488, between the hours of 7:00 a.m.
and 5:00 p.m., Central Standard Time.
Required Vote
The proposal will require the affirmative vote of at least two-thirds of the
votes present and voted either in person or by proxy for approval.
Directors and officers of the Exchange hold memberships entitling them to
cast an aggregate of 143.63 votes on the proposal, representing 2.13% of the
total membership votes that may be cast.
Board Recommendation
Your board unanimously recommends that you vote FOR the demutualization.
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.
18
<PAGE>
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 those
transactions. 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 these intentions, and the
completion of the demutualization transaction is conditioned, among other
conditions, upon the receipt of this ruling. No gain or loss will be recognized
by the Exchange for Federal income tax purposes as a result of the
demutualization.
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 these users 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 Existing CME 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 this 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 Existing CME 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
19
<PAGE>
affairs; while on the other hand, some 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 these 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 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.
. 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 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 New CME (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 these partners,
facilitating our ability to enter into these transactions in the future.
Factors Considered in Arriving at Allocation Methodology. The board approved
the allocation of equity, as represented by the Class A shares and the equity
component or Class A equivalence of the Class B shares, in connection with its
approval of the demutualization. This approval was based upon the
recommendation delivered by the Strategic Planning Committee as well as the
board's own consideration of possible allocation scenarios.
20
<PAGE>
Both the Strategic Planning Committee and the board considered various
allocation methods in arriving at their decision. In these considerations, the
directors took into account historical membership prices, trading volume and
open interest information regarding products traded by the membership
divisions, and relative contributions by the membership divisions. The board
believed that setting an allocation based entirely on seat prices was not
entirely fair inasmuch as those prices reflected the value of trading rights
which were being captured, at least to some degree, in the Class B shares.
Other factors, including trading volume, governance and relative voting power,
did not necessarily reflect the relative contribution that the various
membership divisions had made, or could in the future make, to the Exchange.
Ultimately, the board found the mechanism for the allocation of equity in the
P-M-T Limited Partnership, followed in 1987 in connection with the organization
of that partnership, to be a useful precedent to the allocation of equity in
the demutualization.
Description of Demutualization Transaction
The proposed demutualization transaction will be effected through a two-step
merger which is illustrated below:
Chicago 1 CME 2 Chicago
Mercantile f Transitory f Mercantile
Exchange Merger Co. Merger Exchange
(Illinois (Delaware Inc.
not-for- nonstock (Delaware
profit corporation) stock
corporation) corporation)
Membership Interests Membership Interests Five classes of
for Membership for five classes of common stock
Interests common stock 3 converted into
f series of Class B
shares and, in the
case of CME, IMM and
IOM members, Class A
shares
Recapitalization
First Step: Illinois to Delaware. In the first step, Existing CME 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 in Illinois. Under Illinois law, an Illinois not-for-profit
corporation cannot merge directly into a for-profit corporation; however, a
merger with a Delaware not-for-profit corporation is permissible.
This merger will be effected under an agreement and plan of merger between
Existing CME and the nonstock corporation, which is named "CME Transitory Co."
Under this merger agreement, each membership interest in Existing CME 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." A copy of the merger agreement is
attached to this document as Exhibit B.
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. Existing CME 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 Existing CME, as its sole member, have also
approved this merger.
The merger agreement grants the board the authority to amend its provisions
as long as those changes do not materially and adversely affect the members. We
do not expect to use this authority; however, it may be used if minor changes
are required as a condition to receiving a favorable ruling from the Internal
Revenue Service.
21
<PAGE>
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. There will be changes in the rights of members as a
result of this merger and the third step recapitalization, which are described
below under the subheading "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 five classes
of common stock of New CME. This merger is conditioned upon the completion of
the first step merger of our existing corporation into CME Transitory Co. A
copy of this merger agreement is filed as an exhibit to the registration
statement that we filed with the SEC.
New CME was formed by Existing CME 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 Existing CME, 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.
The merger agreement grants the board the authority to amend its provisions
as long as those changes do not materially and adversely affect the members. We
do not expect to use this authority; however, it may be used if minor changes
are required as a condition to receiving a favorable ruling from the Internal
Revenue Service.
Third Step: Recapitalization of Stock of Delaware Stock Corporation. In the
third and final step, the shares of stock issued in the second step merger will
be converted into shares of Class A and Class B common stock. As noted, there
will be changes in the rights of members as a result of the second step merger
and this recapitalization, which are described below under the subheading
"Differences in Ownership Rights."
This recapitalization will be effected pursuant to a plan of
recapitalization adopted by the board of New CME. Under this plan, the shares
of common stock issued in the second step merger will be converted into shares
of Class A and Class B common stock as described in the following section. This
recapitalization is conditioned upon the completion of the second step merger
of CME Transitory Co. into New CME. A copy of the plan of recapitalization is
filed as an exhibit to the registration statement that we filed with the SEC.
The plan of recapitalization grants the board the authority to amend its
provisions as long as those changes do not materially and adversely affect the
members. We do not expect to use this authority; however, it may be used if
minor changes are required as a condition to receiving a favorable ruling from
the Internal Revenue Service.
Conversion of Membership Interests into Shares
As a result of the consummation of the transactions described above,
membership interests in Existing CME will be converted into shares of the
capital stock of New CME. Specifically, each membership interest in Existing
CME will be converted into shares of a series of Class B common stock and, in
the cases of the CME, IMM and IOM membership interests, shares of Class A
common stock, as indicated below:
<TABLE>
<CAPTION>
Number of Shares to
Be Received Per
Membership Interest
(or Fraction)
--------------------
Class B
Class Shares
A -------------
Membership Division Shares Number Series
------------------- ------ ------ ------
<S> <C> <C> <C>
CME.................................................. 16,200 1 B-1
IMM.................................................. 10,800 1 B-2
IOM.................................................. 5,400 1 B-3
GEM.................................................. 1 B-4
GEM Fractions........................................ 1 B-5
</TABLE>
22
<PAGE>
The principal purpose of the Class B shares is to confer the trading
privileges associated with the membership interests in Existing CME. Those
shares will also have traditional equity rights. The Class A shares will
represent solely equity rights. A description of the rights of the various
series of Class B shares and the Class A shares is set forth below under
"Description of Capital Stock of New CME."
The following tables illustrate the relative equity that will be received by
an Exchange member in respect of each membership division in the
demutualization. As discussed below, several series of Class B shares will have
the right to elect one or more members of the board, and all of the Class B
shares have the right to vote, as a single class or group, on changes to Core
Rights. These special voting rights are not illustrated in the following
tables.
Distribution to Individual Members
<TABLE>
<CAPTION>
Total
Equity per
Equivalent Membership
Class A (expressed
Shares in
Class Class Represented equivalent
A B by Class B Class A
Membership Division Shares Series Shares 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>
Total
Equivalent Equity
Class A (expressed
Shares in Percentage
Class Represented equivalent of Equity
Number of Class A B by Class B Class A Distributed
Membership Division Memberships Shares Series Shares shares) to 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 0.1
GEM Fractions*.......... 2,140 B-5 21,400 21,400 0.1
----- ---------- --------- ---------- ----
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. The
conversion of additional GEM fractions into full GEM membership interests
prior to the effectiveness of the demutualization will reduce the number of
series B-5 shares issued and increase the number of series B-4 shares
actually issued.
Rights of Class B Common Stock
Each series of Class B shares will carry traditional equity rights and also
will confer the trading rights of the associated membership division. Holders
of shares of each series of Class B common stock will have special voting
rights, consisting of the right (of B-1, B-2 and B-3 stockholders) to elect a
total of six members of the board of directors of New CME and the right to
approve actions that affect Core Rights. Holders of Class B shares will also
have the right to vote with holders of Class A shares in the election of the
remaining
23
<PAGE>
members of the board of directors of New CME, as well as on other matters for
which a vote of stockholders is required. These concepts are explained below
under the subheading "Description of Additional Provisions of Class B Common
Stock" under "Description of Capital Stock of New CME."
Election of Board of Directors
Board Size. The size of our board, and the manner in which directors are
elected, will be changed in the demutualization. Initially, New CME's board
will consist of 39 directors; and the existing directors of the Exchange will
continue as directors of New CME. The size of New CME's board will be reduced
in two steps: first by nine members at the December 2000 annual meeting of
stockholders; and second by eleven members at the December 2001 annual meeting
of stockholders. These reductions will be effected by electing fewer directors
that the number of directors whose terms expire.
Board Selection. We also have changed the manner in which directors will be
elected to the board. Under New CME's charter and by-laws, members of the board
will be nominated and elected as follows:
<TABLE>
<CAPTION>
Number of
Directors Candidates Nominated By Directors Elected By
--------- ----------------------- --------------------
<S> <C> <C>
13 Board Nominating Committee, elected Holders of Class A and B shares,
by the board voting together
3 Series B-1 Nominating Committee, elected Holders of series B-1 shares
by holders of series B-1 shares
2 Series B-2 Nominating Committee, elected Holders of series B-2 shares
by holders of series B-2 shares
1 Series B-3 Nominating Committee, elected Holders of series B-3 shares
by holders of series B-3 shares
</TABLE>
All directors will serve for two-year terms. Terms have been staggered so
that approximately one-half of the directors will be elected each year. The
following table indicates the number of directors to be elected at the annual
stockholders meeting each year, and who has the right to vote on their
election:
<TABLE>
<CAPTION>
Number of Directors to be Elected
At Annual Stockholders Meeting
---------------------------------------
Even Years Odd Years
(Starting (Starting
Directors To Be Elected By December 2000) December 2001)
-------------------------- ---------------- ----------------
<S> <C> <C>
Holders of Class A and Class
B shares, voting together.. 6 7
Holders of series B-1
shares..................... 1 2
Holders of series B-2
shares..................... 1 1
Holders of series B-3
shares..................... 1
Total................... 9 10
</TABLE>
Board Nominations. 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 current practice, the series B-1, B-2 and B-3 holders
will have the right to elect members of nominating committees for their
respective series, which would be responsible for nominating
24
<PAGE>
candidates for election by their series. Each committee 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 of Existing CME.
Differences in Ownership Rights
The demutualization will cause 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. These differences are described
in the following table:
<TABLE>
<CAPTION>
New CME Existing CME
------- ------------
<S> <C> <C>
Dividends Stockholders may receive Members are not allowed to
dividend distributions receive dividends based on
based on current or earnings.
accumulated earnings.
Authorized Capital Charter authorizes issuance Charter and by-laws
of up to (i) 100,000,000 authorize the issuance of
shares of Class A common (i) 625 CME memberships,
stock, (ii) 5,332 shares of (ii) 813 IMM memberships,
Class B common stock in (iii) 1,287 IOM memberships
five series and (iii) and (iv) 467 GEM
10,000,000 shares of memberships.
preferred stock.
Transfer Restrictions Class B share transfers Membership transfers are
will not be subject to subject to compliance with
restrictions; although rules, which require
exercise of the associated purchasers of membership
trading privileges will be interests to apply for
subject to the eligibility membership. Applicants must
requirements that presently be adults of good moral
apply to the exercise of character, reputation and
those trading privileges. business integrity, and
have adequate financial
resources and credit.
Class A share transfers
will be subject to
restrictions during the
first 15 months following
the demutualization. The
charter grants authority to
the board to remove some or
all of the Class A share
transfer restrictions. See
"Transfer Restrictions"
under "Description of
Capital Stock of New CME."
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
New CME Existing CME
------- ------------
<S> <C> <C>
Voting:
Directors Holders of Class B shares
will have the right to Members have the right to
elect an aggregate of 6 elect an aggregate of 25
directors as follows: directors as follows:
</TABLE>
<TABLE>
<CAPTION>
Membership Number of
Division Directors
---------- ---------
<S> <C>
CME 12
IMM 8
IOM 4
GEM 1
</TABLE>
<TABLE>
<CAPTION>
Associated
Membership Number of
Series Division Directors
------ ---------- ---------
<S> <C> <C>
B-1 CME 3
B-2 IMM 2
B-3 IOM 1
</TABLE>
Class B stockholders in Members in a division have
each series entitled to the right to elect
elect a director will have individuals to a nominating
the right to elect committee, which slates
individuals to a nominating candidates for election by
committee, which slates members of that division.
candidates for election by
stockholders of that
series.
The Chairman is empowered
to appoint up to 12
directors, who must be
approved by the board.
Holders of Class A and B
shares will have the right
to vote in the election of
the remaining 13 directors,
who will be nominated by
the Nominating Committee of
the board of New CME.
Rule Changes Charter and by-laws do not Members have the right, in
pick-up the "referendum" what is called a
process. Class B "referendum," to initiate
stockholders will be given rule changes, including
the right under the charter adopting new rules and
to approve changes to (i) amending or repealing
products permitted to be existing rules of the
traded by each series, (ii) Exchange. If the board does
floor access rights and not approve a member-
privileges, including initiated proposal, members
commitment to maintain open have the right, in essence,
outcry trading, (iii) the to override that action by
authorized and issued vote--provided at least
shares of each series and one-half of the votes
(iv) eligibility to hold eligible to be cast on the
shares of a series. Voting matter are cast and it is
will be on a weighted approved by a majority of
basis, with series B-1 the votes cast. Weighted
holders (CME) having 6 voting by membership
votes per share, series B-2 division is required on
holders (IMM) having 2 matters related to voting,
votes per share, series B-3 board or executive
holders (IOM) having 1 vote committee representation,
per share, series B-4 trading rights, rights upon
holders (GEM) having 1/6th dissolution or any other
vote per share, and series issue for which the board
B-5 holders (GEM fractions) determines weighted voting
having 1/60th vote per to be appropriate. Under
share. See "Description of weighted voting, CME
Additional Provisions of members have 6 votes per
Class B Common Stock" under membership, IMM members
"Description of Capital have 2 votes per
Stock of New CME." membership, IOM members
have 1 vote per membership,
GEM members have 1/6th vote
per membership, and holders
of GEM fractions have
1/60th vote per faction.
26
<PAGE>
New CME Existing CME
------- ------------
Extraordinary Transactions
Approval of a majority of Approval of two-thirds of
the outstanding shares will votes present and voting is
be required to authorize required to authorize
charter amendments, charter amendments,
mergers, sales of all of mergers, sales of all of
the corporate assets or a the corporate assets or a
dissolution. dissolution.
Class/Series Voting Holders of a class or No comparable statutory
series of stock will have provision.
the right by statute to
vote as a separate class or
series on charter
amendments that would
adversely affect their
rights granted by the
charter.
Dissenters' Rights In transactions involving a No dissenters' rights.
merger or sale of all of
the assets, stockholders
will have the right to
dissent and, by following a
statutory procedure,
receive a cash payment
equal to the appraised fair
value of their shares.
Liquidation Rights Liquidating distributions Liquidating distributions
will be made to are based on aggregate
stockholders based on the amounts originally paid-in
number of Class A shares for memberships.
they hold or are considered
to hold. The charter treats
each series of Class B
shares as representing a
specified number of Class A
shares. See "Description of
Common Stock" under
"Description of Capital
Stock of New CME."
Board of Directors 19 members (after December 39 members.
2001).
Ability to Limit Allowed. Charter will Not allowed.
Personal contain provision adopting
Liability of the maximum permitted
Directors limitation.
Antitakeover Provisions
Charter will contain None
antitakeover provisions.
See "Other Charter
Provisions" under
"Description of Capital
Stock of New CME."
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 provisions of the Commodity Exchange
Act or the regulations issued by the CFTC. We intend to make any necessary
submissions to the CFTC prior to the special meeting of members.
In addition, the registration statement that New CME filed with the SEC,
which contains this document, must be declared effective by the SEC.
27
<PAGE>
Amendment or Termination
Our board 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
amendment may, in the sole judgment of the board, materially and adversely
affect the rights of our members. The second step merger agreement and the
third step recapitalization 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 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 second step merger
agreement between CME Transitory Co. and New CME or the third step
recapitalization agreement 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 Existing CME into CME Transitory
Co. is subject to the following principal 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 limited 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 4,786 outstanding P-M-T Class A limited partnership
units, excluding the 321 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 filed the ruling request on December 30, 1999.
We do not expect to receive that ruling until 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. These changes relate to the fact that our
existing rules will be reflected in New CME's charter, by-laws and rules
and that membership interests will be represented by shares of stock.
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 that
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, whereupon it will become effective. Finally, we will cause an
amendment to the charter of New CME to be filed with the Delaware Secretary of
State in order to effect the recapitalization. Upon the effectiveness of that
filing, the demutualization will have been effected and you will hold shares of
New CME.
28
<PAGE>
Federal Income Tax Consequences
The following is a summary of Sidley & Austin's opinion filed as an exhibit
to the Registration Statement of which this document is a part. In the opinion
of Sidley & Austin, this summary of the tax consequences of the demutualization
transactions is materially correct assuming that those transactions occur
substantially as described in this document.
The demutualization transactions will have the following federal income tax
consequences to the members and the Exchange:
. No gain or loss will be recognized by a member on the conversion, through
the three-step demutualization, of his or her membership interest in the
Exchange into Class A common stock and Class B common stock or Class B
common stock only.
. The aggregate basis of the shares of New CME received by a member in
conversion of 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, that basis will be allocated in
proportion to the fair market value of each on the date of the mergers.
. The holding period of the Class A common stock and Class B common stock
received by a member in conversion of a membership interest will include
the period for which the membership interest has been held, provided that
the membership interest is held as a capital asset on the date of the
conversion.
. The Exchange will not recognize any gain or loss as a result of the
transfer of its assets to New CME and the assumption by New CME of the
liabilities of the Exchange.
It is a condition to the closing of the demutualization transactions that we
receive a private letter ruling from the Internal Revenue Service generally to
the effect that the demutualization transactions will have the foregoing
effects. An opinion of counsel does not satisfy this condition. We filed a
request for that 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 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 some 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 in this
section, 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.
29
<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
December 31, 1999, for purposes of the unaudited pro forma consolidated balance
sheet, and as of the beginning of the year for purposes of the unaudited pro
forma consolidated statement of income for the year ended December 31, 1999.
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
$3,018,000 at December 31, 1999. This acquisition 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, market value
and carrying value are approximately the same, 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 the sole general
partner since its inception, will be liquidated, with proceeds distributed to
its partners, after the proposed transaction has been completed. As of December
31, 1999, there were 4,786 Class A limited partnership units and 90 Class B
limited partnership units outstanding in P-M-T. As of that date, the Exchange
held 321 Class A units and 34 Class B units, representing 6.7% and 37.7%,
respectively, of the outstanding units of those classes.
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.
These 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 of
independent public accountants, and with the information set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
30
<PAGE>
CHICAGO MERCANTILE EXCHANGE
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 1999
<TABLE>
<CAPTION>
Pro Forma After
-----------------------
Acquisition Issuance of
of Interest Class A and
ASSETS Historical in P-M-T B Shares
------ ---------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................. $ 14,249 $ 11,231 $ 11,231
Investments............................... 60,156 60,156 60,156
Accounts receivable and prepaid expenses.. 29,189 29,189 29,189
Cash performance bonds and security
deposits................................. 73,134 73,134 73,134
-------- -------- --------
Total current assets.................... 176,728 173,710 173,710
Property, net of accumulated depreciation
and amortization........................... 93,531 93,531 93,531
Other assets................................ 31,444 31,444 31,444
-------- -------- --------
Total Assets............................ $301,703 $298,685 $298,685
======== ======== ========
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable.......................... $ 15,569 $ 15,569 $ 15,569
Other current liabilities................. 21,250 21,250 21,250
Cash performance bonds and security
deposits................................. 73,134 73,134 73,134
-------- -------- --------
Total current liabilities............... 109,953 109,953 109,953
Limited Partners' interest in P-M-T Limited
Partnership................................ 3,018 -- --
Other liabilities........................... 20,069 20,069 20,069
-------- -------- --------
Total liabilities....................... 133,040 130,022 130,022
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................... --
Additional paid-in capital................ 43,346
Retained earnings......................... 125,421 125,421 125,421
Proceeds from issuance of memberships..... 43,605 43,605 --
Accumulated unrealized losses on
securities............................... (363) (363) (363)
-------- --------
Total members' equity................... $168,663 $168,663 --
-------- -------- --------
Total stockholders' equity.............. $168,663
--------
Total Liabilities and Equity............ $301,703 $298,685 $298,685
======== ======== ========
</TABLE>
The accompanying introduction is an integral part of thisUnaudited Pro Forma
Condensed Consolidated Balance Sheet.
31
<PAGE>
CHICAGO MERCANTILE EXCHANGE
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the Year Ended December 31, 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............................. $138,526 $138,526 $138,526
Quotation data fees....................... 43,005 43,005 43,005
Communication fees........................ 8,165 8,165 8,165
Investment income......................... 9,091 9,038 9,038
Other operating revenue................... 9,701 9,701 9,701
-------- -------- --------
Total revenues............................ 208,488 208,435 208,435
-------- -------- --------
Expenses:
Salaries and benefits..................... 80,957 80,957 80,957
Occupancy................................. 17,773 17,773 17,773
Professional fees, outside services and
licenses................................. 28,319 28,319 28,319
Communications and computer and software
maintenance.............................. 28,443 28,443 28,443
Depreciation and amortization............. 25,274 25,274 25,274
Public relations and promotion............ 7,702 7,702 7,702
Other operating expense................... 13,376 13,376 13,376
-------- -------- --------
Total expenses.......................... 201,844 201,844 201,844
-------- -------- --------
Income before limited partners' interest in
P-M-T and provision for income taxes....... 6,644 6,591 6,591
Limited partners' interest in earnings of P-
M-T........................................ (2,126) -- --
Provision for income taxes.................. (1,855) (2,684) (2,684)
-------- -------- --------
Net income.................................. $ 2,663 $ 3,907 $ 3,907
======== ======== ========
Net income per share........................ $ 0.14
========
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.
32
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Exchange as of
December 31, 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
Limited Partnership, 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
related notes of the Exchange included elsewhere in this document and
"Unaudited Pro Forma Condensed Consolidated Financial Statements."
<TABLE>
<CAPTION>
As of December 31, 1999
-------------------------------
Pro Forma After
--------------------
Issuance
Acquisition of Class
of Interest A and B
Historical in P-M-T Shares
---------- ----------- --------
(in thousands)
<S> <C> <C> <C>
Limited partners' interest in P-M-T........ $ 3,018 $ -- $ --
Capitalized lease obligations.............. 8,132 8,132 8,132
Other long-term debt....................... -- -- --
-------- -------- --------
Total limited partners' interest and
long-term debt........................ 11,150 8,132 8,132
-------- -------- --------
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.................. --
Additional paid-in capital............... 43,346
Retained earnings........................ 125,421 125,421 125,421
Proceeds from issuance of memberships.... 43,605 43,605 --
Accumulated unrealized losses on
securities.............................. (363) (363) (363)
-------- -------- --------
Total members' equity.................. 168,663 168,663 --
-------- -------- --------
Total stockholders' equity............. 168,663
--------
Total Capitalization................... $179,813 $176,795 $176,795
======== ======== ========
</TABLE>
33
<PAGE>
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 Common Stock
Dividend Rights. Dividends on shares of common stock may be paid only if
holders of Class A and B shares receive dividends. If, and when, the board
declares any dividends on the outstanding shares of common stock, it is
expected that an amount per Class A share will be declared and paid. A holder
of a Class B share will be entitled to receive an amount equal to that amount
per Class A share multiplied by the number of shares of Class A stock which the
holder's Class B share represents, as shown in the table under "Description of
Additional Provisions of Class B Common Stock" below. For example, if a
dividend of $.25 per Class A share is declared, a holder of a Series B-2 share,
which represents 1,200 Class A shares, would be entitled to receive $300.
Voting. Holders of Class A and B shares will have the right to vote in the
election of 13 directors to New CME's 19-member board of directors. See
"Election of Directors" under "Demutualization Proposal" above for additional
information. Holders of common stock do not have the right to cumulate votes in
the election of directors. Under cumulative voting, a holder would have a
number of votes equal to the votes to which his or her shares are entitled,
multiplied by the number of directors to be elected, and may cast those votes
for a single nominee or allocate them among several nominees. The nominees
receiving the greatest number of votes would, under cumulative voting, be
elected to fill the available positions. A New CME common stockholder may not
allocate his or her aggregate votes among candidates but may vote only all or
none. The nominees receiving a plurality of the votes cast at a meeting at
which a quorum is present shall be elected to the board.
With the exception of the matters reserved to holders of Class B common
stock, holders of common stock will vote together on all matters for which a
vote of common stockholders is required. In these votes, a holder of Class A
shares has one vote per share and a holder of Class B shares has a number of
votes equal to the number of Class A shares represented by his or her share.
Matters reserved to the holders of Class B common stock are described below
under "Description of Additional Provisions of Class B Common Stock."
No Conversion, Preemptive or Subscription Rights. Holders of 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 common stock are entitled
to receive a distribution of the remaining assets. The amount to be distributed
per Class A share will be determined by dividing the aggregate amount available
for distribution to common stockholders by the total of the number of
outstanding Class A shares plus the number of Class A shares represented by the
outstanding Class B shares. The amount to be distributed per Class B share will
be determined by multiplying the amount to be distributed per Class A share by
the number of Class A shares represented by that Class B share.
Class A Equivalence of Class B Shares. Each Class B share represents a
specified number of Class A shares for purposes of determining its rights to
vote for directors to be elected by both the Class A and Class B stockholders,
to vote on matters submitted to a vote by both the Class A and Class B
stockholders, to receive dividends or to receive liquidating distributions.
These numbers, which are shown in the table below under "Description of
Additional Provisions of Class B Common Stock," are set forth in the charter.
The charter provides for an adjustment of these numbers in the event of a stock
split or stock dividend affecting the number of outstanding Class A shares. For
example, a 2-for-1 split of the outstanding Class A shares, which would have
the effect of doubling the number of outstanding Class A shares, would cause a
doubling of the number of
34
<PAGE>
Class A shares represented by each series of Class B shares. In addition, an
adjustment is provided if New CME issues shares of Class A common stock
(including options 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 specified 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.
Description of Additional Provisions of Class B Common Stock
The authorized shares of Class B common stock will be divided into five
series, having the following characteristics:
<TABLE>
<CAPTION>
Maximum Number of Number of Votes Equivalent Class A
Number of Trading Directors Series Per Share on Shares Represented
Series Shares Privileges Can Elect "Core Rights" by 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>
Trading Privileges. Each series of Class B shares will have the trading
privileges currently encompassed in the existing membership interest associated
with that series. New CME's rules 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.
. 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 GLOBEX2 system. This right is
restricted, when accessing GLOBEX2 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.
. Use and Leasing of Trading Privileges. A holder of Class B shares may use
the trading privileges associated with those shares or may transfer those
privileges to another person who satisfies the membership and eligibility
requirements imposed by New CME. These 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 charged for 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.
In addition, New CME's charter sets forth a commitment to maintain open outcry
floor trading for a particular traded product as long as the open outcry market
is "liquid." The commitment requires New CME to maintain a facility for
conducting business, for disseminating price information, and for clearing and
delivery, and to provide reasonable financial support (consistent with 1999
budget levels) for technology, marketing and
35
<PAGE>
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
the comparable product (including, for calculation purposes, volume from
Exchange-For-Physicals transactions in the 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 the 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 the 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 as a result of a failure to meet any of the
foregoing tests, management of New CME will make commercial decisions
consistent with the best interests of the stockholders.
Voting for Directors. Holders of series B-1, B-2 and B-3 shares will have
the right to elect the number of directors set forth in the table on page 41.
See "Election of Directors" under "Demutualization Proposal" for additional
information regarding the size of the board and the process for selecting and
electing candidates to the board.
Voting on Core Rights. Holders of Class B shares will have the right to
approve changes to specified "rights" associated with the trading privileges
conferred by those shares. These "Core Rights" consist of:
. the allocation of products which a holder of a series of Class B shares
is permitted to trade on New CME's exchange facilities;
. the trading floor access rights and privileges which a holder of a series
of Class B shares has, including the circumstances under which New CME
can determine that an existing open outcry-traded product will no longer
be traded by means of open outcry;
. 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
. the eligibility requirements to hold shares of a series of Class B shares
or to exercise the associated trading rights or privileges.
As indicated in the table on page 35, votes on changes to Core Rights are
weighted by series. The approval of a majority of the votes cast by the holders
of Class B shares is required in order to approve any changes to Core Rights.
Holders of Class A shares do not have the right to vote on changes to Core
Rights.
Under Delaware law, changes to the number of authorized shares of a series
also will require the approval of the holders of a majority of the outstanding
shares of that series. Otherwise, changes may be effected upon the approval of
a majority of the votes cast by the holders of Class B shares. Due to the
weighted voting, this statement means that a change to Core Rights may be
effected by the approval of the holders of the series B-1 shares even though
the holders of the other series voted against the change. This result is
consistent with the result that would be obtained under the Exchange's existing
rules and procedures.
Shares Not Convertible in Class A Shares. Class B shares are not convertible
into Class A shares except to the limited extent otherwise provided with
respect to series B-5 shares.
Conversion Rights of Series B-5 Shares. Series B-5 shares will be
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 series B-5
36
<PAGE>
shares for each series B-4 share. These shares also are subject to mandatory
conversion into Class A shares at the close of business on November 3, 2000, if
not previously converted into whole shares of series B-4 stock. In any
mandatory conversion, one series B-5 share is converted into ten Class A
shares.
Individuals holding less than the necessary ten shares may either sell their
shares to another holder so that holder will obtain the necessary ten shares,
or purchase additional shares from other holders to obtain the necessary ten
shares. The process by which a holder may purchase or sell series B-5 shares
will be similar to the process currently followed for the purchase and sale of
GEM fractions. In this process, the Exchange will act as a intermediary for the
dissemination of bid and asked prices with respect to series B-5 shares. Prices
with respect to those shares will be determined by the persons seeking to buy
or sell those shares. Any person will be eligible to buy a series B-5 share,
although the exercise of the underlying trading privilege will be subject to
the Exchange's eligibility requirements. There will be no limitation on the
number of series B-5 shares that a person may hold.
Preferred Stock
New CME will be authorized to issue up to 10,000,000 shares of preferred
stock. The charter authorizes the board to issue these shares 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 Class B shares. We have no current plans to issue any shares
of preferred stock.
Transfer Restrictions
Class A shares will be subject to transfer restrictions following the
completion of the demutualization transaction. These restrictions will fall
away over time. For the first six months following completion of the
demutualization transaction, those shares may only be transferred with the
associated Class B shares. Each three months thereafter, a portion of the Class
A shares (in 25% increments) will become transferable. After fifteen months,
the Class A shares would not be subject to these transfer restrictions. The
charter grants authority to the board to remove some or all of the Class A
share transfer restrictions if they consider that removal to be appropriate in
their sole discretion.
Class B shares will not be subject to transfer restrictions following the
completion of the demutualization transaction. However, exercise of the trading
privileges associated with those shares will be subject to the same 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 person wishing to exercise trading privileges will be required to
agree to be bound by the rules and regulations adopted by the board with
respect to the shares.
Other Charter Provisions
New CME's charter and by-laws will, upon consummation of the demutualization
transactions, include a number of antitakeover 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
37
<PAGE>
meetings of stockholders in December 2000 and 2001. As a result, at least
two annual meetings of stockholders may be required for the stockholders to
change a majority of the board. 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. 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 the 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 will make it more difficult to change the
composition of the board, 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 stockholder proposals must be timely and 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 the information required by the by-laws,
including information regarding the proposal and the proponent.
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 only the Chairman of the Board or a
majority of the board of directors may call special meetings of the
stockholders.
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 be amended only with the approval
of the Class B stockholders. Those provisions will make it more difficult
to dilute the antitakeover 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. Those 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 these rights. These 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 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
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any time, but not after a specified 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 the
proposal, as well as appropriate alternatives to it, 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 an
attempt could be beneficial to New CME and its stockholders.
Transfer Agent
New CME will serve as transfer agent for Class B shares. New CME expects to
select a third party to serve as transfer agent and registrar for the Class A
shares.
39
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MANAGEMENT
Directors and Executive Officers
The Exchange's board of directors currently consists of thirty-nine persons.
There are presently two vacancies. With the exceptions of Leo Melamed and James
J. McNulty, directors serve two-year terms, which are staggered so
approximately one-half of the board is elected at each annual meeting. Mr.
Melamed, who is our Chairman Emeritus and Senior Policy Advisor, serves as a
permanent, non-voting member of the Exchange's board. Mr. McNulty, who is our
President and Chief Executive Officer, serves as a non-voting member of our
board under the Exchange's rules.
The Exchange's directors are elected in one of two ways. Twenty-five
directors are elected by the members as follows: 12 directors are elected by
the CME members from candidates nominated by the CME Nominating Committee; 8
directors are elected by the IMM members from candidates nominated by the IMM
Nominating Committee; 4 directors are elected by the IOM members from
candidates nominated by the IOM Nominating Committee; and one member is elected
by the GEM members from candidates nominated by the GEM Nominating Committee.
The members of these nominating committees are elected by the respective CME,
IMM, IOM and GEM members. Twelve directors are elected by the members of the
board, who were elected by the Exchange's members, from persons appointed by
the Chairman of the Board. As noted, Messrs. Melamed and McNulty round-out the
remaining members of the board.
Following the effectiveness of the demutualization transactions, our board
will consist of the same people who were directors immediately before the
demutualization. At the annual meeting of stockholders 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. See "Election of Directors" under
"Demutualization Proposal" for more information.
Set forth below is information about our current board of directors and
executive officers.
<TABLE>
<CAPTION>
Name Age Positions Held Term Ends
---- --- -------------- ---------
<S> <C> <C> <C>
Scott Gordon 47 Chairman of the Board and Director 12/01
Terrence A. 41 12/00
Duffy Vice Chairman of the Board and Director
James E. Oliff 51 Second Vice Chairman of the Board and Director 12/00
Martin J. 47 12/01
Gepsman Secretary of the Board and Director
Robert L. 52 12/00
Haworth Treasurer and Director
Leo Melamed 67 Chairman Emeritus, Senior Policy Advisor and *
Non-Voting Member of the Board
John F. 58 12/00
Sandner Special Policy Advisor and Director
James J. 48 President and Chief Executive Officer and Non- **
McNulty Voting Member of the Board
H. Jack 38 12/01
Bouroudjian Director
Timothy R. 58 12/01
Brennan Director
Leslie Henner 44 12/01
Burns Director
Jeffrey R. 37 12/00
Carter Director
E. Gerald 58 ***
Corrigan Director
Yra G. Harris 46 Director 12/00
Bruce F. 57 12/01
Johnson Director
Gary M. Katler 53 Director 12/00
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Name Age Positions Held Term Ends
---- --- -------------- ---------
<S> <C> <C> <C>
Paul Kimball 48 Director 12/00
John W. Lacey 61 Director ***
Patrick B. 34 12/01
Lynch Director
Merton H. 76 ***
Miller Director
William P. 44 12/00
Miller II Director
Laurence E. 58 ***
Mollner Director
Patrick J. 42 12/01
Mulchrone Director
John D. 54 12/01
Newhouse Director
Mark G. 27 12/01
Papadopoulos Director
Ward 54 ***
Parkinson Director
Robert J. 52 12/01
Prosi Director
David M. 50 12/00
Pryde Director
Irwin Rosen 61 Director 12/00
William G. 48 12/00
Salatich,
Jr. Director
Verne O. 45 12/00
Sedlacek Director
Leon C. 45 12/00
Shender Director
William R. 53 12/00
Shepard Director
Howard J. 43 12/01
Siegel Director
David I. 40 12/00
Silverman Director
Jeffrey L. 53 12/01
Silverman Director
Paul Simon 71 Director 12/00
Craig S. 38 Managing Director, Business Development and
Donohue Corporate/Legal Affairs
Phupinder 39 Managing Director and President, Clearing House
Gill Division
David G. 41
Gomach Managing Director and Chief Financial Officer
Satish S. 36
Nandapurkar Managing Director, e-Business
Amy M. Savin 37 Managing Director and Chief Marketing Officer
Donald D. 54
Serpico Managing Director, Operations
Lewis C. Ting 48 Managing Director, Organizational Development
</TABLE>
- --------
* Mr. Melamed currently serves as a non-voting member of the board. Mr.
Melamed will continue as a non-voting member of the board of New CME until
the annual meeting in December 2001.
** Mr. McNulty is a non-voting member of the board as long as he is President
and Chief Executive Officer of the Exchange. Mr. McNulty will continue as a
non-voting member of the board of New CME until the annual meeting in
December 2001.
*** A director appointed by the Chairman of the Board. Each of the indicated
persons was appointed for a term ending on the later of December 1999 or
the date on which his successor is appointed by the Chairman of the Board
and elected to office by the board.
Scott Gordon has been Chairman of our board since 1998 and an IMM director
since 1982. He also served as Vice Chairman from 1995 to 1997 and our Secretary
from 1984 to 1985 and 1994 to 1999. Mr. Gordon has
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been 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., since 1999, having previously served as its Executive Vice President and
Director. Mr. Gordon 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. He is a director of the
National Futures Association and of the Futures Industry Institute. A member of
the Exchange for more than twenty-two years, Mr. Gordon owns one IMM membership
in trust.
Terrence A. Duffy has been Vice Chairman of our board since 1998 and a CME
Director since 1995. He has been President of TDA Trading, Inc. for the past
five years and an independent floor broker and trader since 1981. A member of
the Exchange for more than seventeen years, Mr. Duffy owns one CME membership
and one GEM membership interest.
James E. Oliff has been Second Vice Chairman of our board since 1998 and an
IMM Director since 1996. Mr. Oliff previously served on the board from 1985 to
1992, and as Second Vice Chairman from 1989 to 1992 and Secretary in 1996. He
has been Executive Director of International Futures and Options Associates and
President of FILO Corp, a floor brokerage business, since 1982, and 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
owns one IMM membership interest.
Martin J. Gepsman has been Secretary of our board since 1998 and an IOM
Director since 1994. He has been an independent floor broker and trader since
1985 and a member of the Exchange for more than fifteen years. Mr. Gepsman owns
one IOM membership and six fractional GEM membership interests.
Robert L. Haworth has been a CME Director since 1998 and our Treasurer since
April 2000. He also served as our Treasurer in 1998 and was Vice President of
the CME Audit Department in 1979. Mr. Haworth has been a self-employed floor
trader since 1979. 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 owns
one CME membership and one GEM membership interest.
Leo Melamed is our Chairman Emeritus and Senior Policy Advisor. Mr. Melamed
is currently appointed as a permanent non-voting member of the board, but was
previously elected and appointed for twenty-six years. He is a founding member
of and was Chairman of the International Monetary Market, was Special Counsel
to the board from 1977 until 1991, and was Special Counsel and Chairman of the
Exchange's Executive Committee from 1985 until 1991. Mr. Melamed previously
served as Chairman of the Exchange for four years and has been a member of the
Exchange for more than forty-five years. For more than five years, he has been
Chairman and CEO of Sakura Dellsher, Inc., one of our clearing member firms.
Mr. Melamed owns one CME membership, one IMM membership, two IOM membership and
six fractional GEM membership interests.
John F. Sandner has been the Special Policy Advisor since January 1998 and a
CME Director since 1977. Mr. Sandner previously served as Chairman of the
Exchange for thirteen years and was appointed chairman of GLOBEX in 1993. He
has been President and CEO of RB&H Financial Services L.P., a futures
commission merchant and one of our clearing member firms, for more than five
years. A member of the Exchange for more than twenty-seven years, Mr. Sandner
owns three CME membership, two IMM membership, four IOM membership and fourteen
fractional GEM membership interests. He also has voting power over two IOM
membership interests.
James J. McNulty became our President and Chief Executive Officer on
February 7, 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, for over the past five
years.
H. Jack Bouroudjian has been an elected IOM Director since 1996. He has been
Senior Vice President of Equity Futures with Commerz Futures since 1999. Prior
to that time, he was Vice President of Equity Futures
42
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with Nikko Securities from 1997 until 1999 and with Credit Agricole Futures,
Inc. from 1995 until 1997. A member of the Exchange for more than twelve years,
Mr. Bouroudjian owns one IOM membership.
Timothy R. Brennan has been a CME Director since 1990. He has been a floor
broker and trader since 1974 and Vice President of RB&H Financial Services,
L.P., one of our clearing member firms, for more than five years. A member of
the Exchange for more than twenty-four years, Mr. Brennan owns one CME
membership, one IOM membership and two fractional GEM membership interests.
Leslie Henner Burns has been a CME Director since January 2000. She has been
a self-employed floor trader since 1978 and was President of Leslie A. Henner,
Inc., a floor brokerage business, from 1981 until 1999. A member of the
Exchange for more than twenty-two years, Ms. Burns owns one CME membership and
two fractional GEM membership interests.
Jeffrey R. Carter has been a CME Director since 1999. He has been a market
maker-local trader since 1988. A member of the Exchange for more than ten
years, Mr. Carter owns one CME membership and one IOM membership interest in a
self-directed IRA.
E. Gerald Corrigan has been a director since October 1998. He has been
Managing Director at Goldman, Sachs & Co., an investment banking firm, for more
than five years. He has also served as co-chairman of its Risk Committee and
Global Compliance and Controls Committee. Prior to his employment by Goldman,
Sachs & Co., he was President and Chief Executive Officer of the Federal
Reserve Bank of New York and a member of the Federal Open Market Committee.
Yra G. Harris has been an IMM Director since 1997. He has been a self-
employed floor trader since 1977. A member of the Exchange for more than
twenty-two years, Mr. Harris owns two IMM memberships and one IOM membership
interest, and he has sole voting power over one IMM membership for which he
does not disclaim beneficial ownership.
Bruce F. Johnson has been a CME Director since 1998. He has been President
and part owner of Packers Trading Company, a futures commission merchant and
former clearing member firm, for over the past five years. A member of the
Exchange for more than twenty-nine years, Mr. Johnson owns one CME membership
and one GEM membership.
Gary M. Katler has been an IOM Director since 1993. He has been Senior Vice
President of ING Barings Futures and Options Inc. since 1994. Mr. Katler has
voting power over one IOM membership and one GEM membership interest, both of
which are owned by his employer and of which he disclaims beneficial interest.
Paul Kimball has been a director since February 1999. He has been Managing
Director and Global Co-Head of the Foreign Exchange Department of Morgan
Stanley Dean Witter, an investment banking firm, for over the past five years.
Mr. Kimball is also 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 has been a director since February 1998. He has been a Partner
in the Lacey Ranches, a family cow-calf operation, the Margarita Cattle Company
in Santa Margarita, California, and the Centennial Livestock. Mr. Lacey is also
Director of the National Cattlemen's Beef Association and Chairman of the
California Beef Council and 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.
Patrick B. Lynch has been an IMM director since April 2000. He has been a
floor trader since 1990. A member of the Exchange for more than ten years, Mr.
Lynch owns one IMM membership interest.
43
<PAGE>
Merton H. Miller has been a director since January 1990. He has been the
Robert R. McCormick Distinguished Service Professor of Finance Emeritus at the
Graduate School of Business, University of Chicago, for more than five years.
Professor Miller is also a director of Dimensional Fund Advisors Inc., located
in Santa Monica, California. 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 has been a director since February 1999. He has been
Senior Vice President and Independent Risk Oversight Officer for the Common
Fund Group, an investment management firm for educational institutions, since
September 1996. Prior to that, he was Director, Trading Operations and Asset
Mix Management with General Motors Investment Management Corporation. He is
also a director of the Association for Financial Professionals and of the
Investment Risk Institute, and Chairman, Executive Committee, End Users of
Derivatives Council.
Laurence E. Mollner has been a director since February 1991. He has been
President of Mariah Investment Company, a futures, equities and real estate
investment firm, since 1998. 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. to Carr Futures.
Prior to that, he was Executive Vice President for Dean Witter Reynolds Inc.,
Director of its Futures Markets Division, and a member of the board of
directors of Dean Witter International Limited in London. He joined Dean Witter
Reynolds Inc. in 1979. Mr. Mollner is the former Chairman of the Futures
Industry Association, and he currently serves as a director of both the Futures
Industry Association and National Futures Association.
Patrick J. Mulchrone has been an IMM Director since 1998. He was previously
a director from 1991 to 1996 and served as our Second Vice Chairman from 1993
to 1996. Mr. Mulchrone has been owner of P.J. Mulchrone Co. and a floor broker
and trader since 1979. A member of the Exchange for more than twenty years, Mr.
Mulchrone owns one CME membership, one IMM membership, one IOM membership and
one GEM membership interest.
John D. Newhouse has been an IMM Director since 1996 and was previously a
director from 1987 to 1988. He has been a floor broker and trader since 1974
and President of Euro Spread Brokers, a broker association filling orders in
Eurodollars, since 1980. A member of the Exchange for more than twenty-five
years, Mr. Newhouse owns three IMM membership, one IOM membership and four
fractional GEM membership interests.
Mark G. Papadopoulos has been a GEM Director since January 2000. He was Vice
Chairman of the Mexican Peso Futures Pit Committee, a position with the CME,
from 1998-1999, and has been an independent floor trader since 1996. Prior to
that, he was an Arbitrage Clerk with several independent floor trades from 1994
to 1996. A member of the Exchange for more than three years, Mr. Papadopoulos
owns two GEM membership interests.
Ward Parkinson has been a director since February 1998. He is 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 has been consulting in the electronics field for more than five years.
Mr. Parkinson has also been a partner in and director of PYCO, which invests in
commercial real estate, and a board member of Parkinson-Yanke Real Estate and
Parkinson-Nelson Real Estate for over the past five years. Mr. Parkinson serves
on the board of Ovonyx, sign-me-up.com and Odessy Computers.
Robert J. Prosi has been a CME Director since January 1998. He has been
First Vice President, Salomon Smith Barney Inc., an investment banking firm,
for more than five years. Mr. Prosi is also a member of the Chicago Council on
Foreign Relations. A member of the Exchange for more than twenty-three years,
Mr. Prosi owns one CME membership and one IOM membership interest, and he has
voting/investment power over one IOM membership interest for which he has not
disclaimed beneficial interest.
44
<PAGE>
David M. Pryde has been a director since February 1997. He has been Managing
Director at J. P. Morgan & Co. Inc., an investment banking firm, 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 its Board of Governors. Mr. Pryde has
voting/investment power over one CME membership, three IMM membership, nine IOM
membership and seventeen GEM fractional membership interests owned by various
J. P. Morgan Futures Inc. employees and for which he has not disclaimed
beneficial interest.
Irwin Rosen has been a CME Director since January 1997. He is an attorney
and has represented clients before the CME tribunal, for more than five years
and has been an independent floor broker and trader since 1970. A member of the
Exchange for more than twenty-nine years, Mr. Rosen owns one CME membership,
one IOM membership and one fractional GEM membership interest all held in
trust.
William G. Salatich, Jr. has been a CME Director January 1997. He has been
an independent floor broker and trader since 1970. A member of the Exchange for
more than twenty-four years, Mr. Salatich owns one CME membership and two
fractional GEM membership interests.
Verne O. Sedlacek has been a director since February 1997. He has been
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, since 1998. Prior
to that, he was the Executive Vice President and Chief Financial Officer of the
Harvard Management Company, Inc., a wholly owned subsidiary of Harvard
University, since 1983. 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. Mr. Sedlacek is a director of the Futures
Industry Association and is a certified public accountant.
Leon C. Shender has been an IOM Director since January 1999. He has been a
floor trader since 1976. A member of the Exchange for more than twenty-three
years, Mr. Shender owns one IOM membership.
William R. Shepard has been an IMM Director since January 1997. He is the
founder of and has been President of Shepard International, Inc., a futures
commission merchant, for more than five years. A member of the Exchange for
more than twenty-six years, Mr. Shepard owns one CME membership, one IMM
membership, one IOM membership and five fractional GEM membership interests.
Howard J. Siegel has been a CME Director since January 2000. He has been a
floor trader since 1977. A member of the Exchange for more than twenty-two
years, Mr. Siegel owns one CME membership, one IOM membership and three
fractional GEM membership interests.
David I. Silverman has been an IMM Director since 1995 and was previously a
director from 1990 to 1991. He was chairman of GFX Corporation, a subsidiary of
the Exchange, from 1997 until 2000. He has been an independent trader since
1982. A member of the Exchange for more than seventeen years, Mr. Silverman
owns one IMM membership interest.
Jeffrey L. Silverman has been a CME Director since 1994 and was our
Secretary in 1995. He has been a floor trader since 1979. A member of the
Exchange for more than twenty years, Mr. Silverman owns one CME membership and
two fractional GEM membership interests, and his wife owns one CME membership
and one fractional GEM membership interest.
Paul Simon has been a director since February 1997. He has been a Professor
at Southern Illinois University since 1997. He also serves on the board of
Penn-American Insurance Co. Mr. Simon was a U.S. Senator from Illinois from
1984 through 1997. Prior to that, he was a U.S. Congressman.
45
<PAGE>
Craig S. Donohue has been the Managing Director of Business Development and
Corporate/Legal Affairs since March 2000, having previously served since
October 1998 as Senior Vice President and General Counsel. Prior to that he was
Vice President, Market Regulation from 1997 to 1998 and Vice President and
Associate General Counsel from 1995 to 1997.
Phupinder Gill has been the Managing Director and President of the Clearing
House Division since March 2000, having previously served as President,
Clearing House Division since July 1998. Prior to that, he served as Senior
Vice President, since May 1997, and Vice President, since May 1994. Mr. Gill
has held numerous other positions with the Exchange since 1988.
David G. Gomach has been Managing Director and Chief Financial Officer since
March 2000, having previously served as Senior Vice President and Chief
Financial Officer since January 1998. Prior to that, he served as Vice
President, Administration and Finance, since December 1996. He is a certified
public accountant.
Satish Nandapurkar has been Managing Director of e-Business since joining
the Exchange in March 2000. Prior to joining the Exchange, he was Head of
Strategic Solutions for OptiMark Technologies. Prior to that, he served as
Managing Director and Global Head of Foreign Exchange Options for the Bank of
America in Chicago from 1997 to 1999, Managing Director and Head of Structured
Equity Products Trading at Deutsche Morgan Grenfell from 1996 to 1997, and
Managing Director and Global Head of Exotic Options and Quantitative
Methodologies for Swiss Bank Corporation in London from 1994 to 1996.
Amy M. Savin has been Managing Director and Chief Marketing Officer since
March 2000, having previously served as Senior Vice President of Marketing
Programs and services since joining the Exchange in 1998. For seven years prior
to that, she was a Senior Brand Manager at Kraft Foods.
Donald D. Serpico has been Managing Director of Operations since March 2000,
having previously served as Executive Vice President, Operations since July
1994. He previously served as our Senior Vice President, Operations, since
1988, Senior Vice President of the Clearing House from 1987, and Vice President
of Management Information Systems from 1985.
Lewis C. Ting has been Managing Director of Organizational Development since
joining the Exchange in March 2000. Since 1996, he has owned a consulting
business specializing in human resources, employee development and
organizational change. Prior to that, he served as a Senior Vice President for
Talegen, an insurance subsidiary of Xerox's Financial Services Division.
Director Compensation
Each director of New CME will receive an annual directors fee of $20,000,
plus a meeting attendance fee of $1,000 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.
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, 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
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<PAGE>
New CME's board following the effectiveness of the demutualization
transactions. These 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 charter, the by-
laws 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 New CME's management and employees.
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 the 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.
Limitation of Liability and Indemnification Matters
New CME's charter limits the liability of directors to the maximum extent
permitted by Delaware law. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies (i.e., injunctive relief or rescission).
New CME's charter and by-laws provide that it shall indemnify its directors
and executive officers and may indemnify its other officers and employees and
other agents to the fullest extent permitted by law. We believe that
indemnification under the provisions of the by-laws covers at least negligence
and gross negligence on the part of the indemnified parties. The by-laws also
permit New CME to secure insurance on behalf of any officer, director, employee
or other agent for any liability arising out of his or her actions in that
capacity, regardless of whether the by-laws would permit indemnification.
Executive Compensation
The following table sets forth 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.
47
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
------------------------------
Other Annual All Other
Name and Principal Position Salary Bonus Compensation Compensation (3)
--------------------------- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
T. 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 outlined in 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 during the remainder of 1999
following 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>
- --------
* Supplemental Executive Retirement Plan. See description below.
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 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.
48
<PAGE>
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 the 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 because committee members may
not include employees.
401(k) Plan. The Exchange 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. The
Plan permits additional contributions at the discretion of the Exchange.
The following table describes the employee and employer contributions
permitted under the plan, and the vesting of those contributions:
<TABLE>
<CAPTION>
Employee
Contributions Employer Contributions
------------- ----------------------
<S> <C> <C>
Amount 1-15% of base pay* Matching amount up to 3% of base pay
Additional amount up to 2% of base pay based upon
specified increases in trading volume
Vesting 100% 100% at end of second plan year following year in which
contributions made; 100% after five years of eligible service
</TABLE>
- --------
* Subject to plan limits and statutory annual limit.
The following chart demonstrates how vesting in the non-trading volume
matching contributions occurs with respect to a hypothetical employee who was
hired on August 1, 1995:
Vesting in Matching Contributions
<TABLE>
<CAPTION>
Date the
Year Contribution Contribution
Is Made Becomes Vested
----------------- -----------------
<S> <C>
1995................... December 31, 1997
1996................... December 31, 1998
1997................... December 31, 1999
1998................... August 1, 2000
1999................... August 1, 2000
2000................... August 1, 2000
</TABLE>
Also, an employee becomes 100% vested in the matching contributions if they
reach age 65 or become disabled or die before they complete five years of
service with 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. Our policy is to
fund currently required pension costs. Participants become vested in their
accounts after five years of service. An individual pension account is
maintained for each plan participant. During employment, each individual
pension account is credited with an amount equal to an age-based percentage of
that individual's considered earnings plus interest at the one-year U.S
Treasury Bill rate. The pension account is portable, and vested balances may be
paid out when a participant leaves the Exchange.
49
<PAGE>
Alternatively, a participant may elect to receive the balance in the account in
the form of one of various monthly annuities. The following is the schedule of
the employer contributions based on age:
<TABLE>
<CAPTION>
Employer
Contribution
Age Percentage
--- ------------
<S> <C>
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%
</TABLE>
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 the 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.
. Supplemental Plan--The Exchange maintains a non-qualified supplemental
plan to provide benefits for 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 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, 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, 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
50
<PAGE>
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 or cash 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. The Exchange will follow variable
accounting for the option up to the date of closing of the demutualization
transactions. This accounting method will require quarterly charges or credits
to income to recognize a portion of any changes in the value of the option due
to changes in the value of Exchange memberships. As a result, the Exchange's
reported earnings until the demutualization is completed will be more volatile
as a result of fluctuations in the value of those memberships. For example, due
to the recent significant increase in membership values, we expect that an
expense charge of $1.5 million will be recorded for the option for the first
quarter of 2000.
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, Mr. McNulty may
terminate the agreement at anytime after one year upon ninety days written
notice. He may also terminate the agreement for "good reason" 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 matters
previously described as "good reason," 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 that 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
conditions, prior to January 31, 2001. 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, his 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 reason," 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 the severance payments do not exceed
$8 million. The payment would be subject to reduction to the extent that it
51
<PAGE>
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 an 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 an Executive's base salary
are to be determined by the Exchange in accordance with its compensation
policies and practices. The executives are also entitled to participate in a
discretionary bonus program and in other benefit plans available generally to
Exchange employees and officers.
The Exchange may terminate an agreement in the event of the executive's
death or disability and also may terminate it for cause. The executive may
terminate the agreement 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
the termination.
Mr. Arditti resigned his position effective April 1, 2000. Pursuant to an
amendment to his employment agreement, he received $640,385 from the Exchange,
representing one-year's base salary and his accrued but unused vacation pay as
of his resignation date. He also received $197,351, representing his non-vested
amounts in the Exchange's Tax Efficient Savings Plan, the Pension Plan for
Employees of the Chicago Mercantile Exchange and the Supplemental Executive
Retirement Plan. Mr. Arditti and his dependents will remain covered under the
Exchange's current health, dental and vision insurance plans until the first
anniversary of his resignation. After that date, these benefits will be
provided as required under the Consolidated Omnibus Budget Reconciliation Act
("COBRA"). These insurance benefits terminate if Mr. Arditti obtains other
employment offering comparable coverage and at the time he first becomes
eligible for the coverage. The Exchange also has the right to pay Mr. Arditti
to convert his life and accidental death and dismemberment insurance to
individual coverage, to obtain equivalent individual coverage or to continue
the coverage already in place.
Messr. Jenks and Beyer resigned their positions effective March 24, 2000 and
April 12, 2000, respectively. Pursuant to their separation agreements, the
Exchange paid to Messr. Jenks and Beyer severance payments of $108,750 and $1
million, respectively. These sums, in part, satisfied the Exchange's
obligations for accrued and unused vacation pay due Messr. Jenks and Beyer as
of the effective dates of their resignations. The Exchange also reimbursed them
for all business and transportation expenses they had incurred through the
dates of their resignations. Mr. Jenks is and, on May 1, 2000, Mr. Beyer will
become eligible, at their own cost, for the Exchange's health, dental, and
vision insurance plans offered pursuant to the terms of COBRA. This coverage
terminates for a former employee once he obtains other employment offering
comparable coverage and first becomes eligible for the coverage.
52
<PAGE>
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 base salary for the calendar year plus a gross-up payment to
negate the effect of the additional taxes incurred because of the 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
the plans are determined by the terms of those plans. Mr. Kilcollin was paid a
single lump sum for amounts payable to him under the Exchange's Senior
Management Supplemental Deferred Savings Plan and the Supplemental Executive
Retirement Plan. In addition, he was paid $96,189.10, which represents the
present value, after a gross-up for income taxes, of the benefits he would have
received pursuant to the Pension Plan for Employees of the Chicago Mercantile
Exchange, the Exchange's Tax Efficient Savings Plan and the Exchange's
Supplemental Deferred Savings Plan had he remained employed with the Exchange
through the term of his agreement.
Beneficial Ownership of Management
The following table lists the shares of capital stock of New CME that will
be beneficially owned following the demutualization by each of the directors,
each of the executive officers named in the Summary Compensation Table on page
58 and the Exchange's directors and executive officers as a group. This
information is based on the beneficial ownership by those persons of Exchange
membership interests as of December 31, 1999. 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>
Class B
Shares Total Equity Expressed in
------------- --------------------------------
Class Equivalent Percent of
Name of Beneficial A Percent of Percent of Class A Total
Owner(1) Shares Class Number Series Class Shares(2) Equity
------------------ ------ ---------- ------ ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
M. Scott Gordon......... 10,800 * 1 B-2(3) * 12,000 *
Terrence A. Duffy....... 16,200 * 1 B-1 * 18,100 *
1 B-4
James E. Oliff.......... 10,800 * 1 B-2 * 12,000 *
Robert L. Haworth....... 16,200 * 1 B-1 * 18,000 *
1
Martin J. Gepsman....... 5,400 * 1 B-3 * 6,060 *
6 B-5
Leo Melamed............. 37,800 * 1 B-1(4) * 42,060 *
1 B-2
2 B-3
6 B-5
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Class B
Shares Total Equity Expressed in
------------- --------------------------------
Equivalent Percent of
Name of Beneficial Class A Percent of Percent of Class A Total
Owner(1) Shares Class Number Series Class Shares(2) Equity
------------------ ------- ---------- ------ ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
John F. Sandner......... 102,600 * 3 B-1 * 113,010 *
2 B-2
6 B-3(5)
14 B-5
H. Jack Bouroudjian..... 5,400 * 1 B-3 * 6,000 *
Timothy R. Brennan...... 21,600 * 1 B-1 * 24,020 *
1 B-3
2 B-5
Jeffrey R. Carter....... 21,600 * 1 B-1 * 24,000 *
1 B-3
E. Gerald Corrigan...... 0 0
Yra G. Harris........... 27,000 * 3 B-2(6) * 30,000 *
1 B-3
Leslie Henner Burns..... 21,600 * 2 B-1 * 24,020 *
2 B-5
Bruce F. Johnson........ 16,200 * 1 B-1 * 18,100 *
1 B-4
Gary M. Katler.......... 5,400 * 1 B-3(7) * 6,100
1 B-4
Paul Kimball............ 0 0
John Lacey.............. 0 0
Patrick B. Lynch........ 10,800 * 1 B-2 * 12,000 *
Merton Miller........... 0 0
William Miller.......... 0 0
Laurence E. Mollner..... 0 0
Patrick J. Mulchrone.... 32,400 * 1 B-1 * 36,100 *
1 B-2
1 B-3
1 B-4
John D. Newhouse........ 37,800 * 3 B-2 * 42,040 *
1 B-3
4 B-5
Mark G. Papadopoulos.... 0 2 B-4 * 200 *
Ward Parkinson.......... 0 0
Robert J. Prosi......... 27,000 * 1 B-1 * 30,000 *
2 B-3(8)
David M. Pryde.......... 97,200 * 1 B-1(9) * 108,000
3 B-2
9 B-3
17 B-5
Irwin Rosen............. 21,600 * 1 B-1 * 24,010 *
1 B-3
1 B-5
William G. Salatich,
Jr..................... 16,200 * 1 B-1 * 18,020 *
2 B-5
Verne Sedlacek.......... 0 0
Leon C. Shender......... 5,400 * 1 B-3 * 6,000 *
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
Class B
Shares Total Equity Expressed in
------------- --------------------------------
Equivalent Percent of
Name of Beneficial Class A Percent of Percent of Class A Total
Owner(1) Shares Class Number Series Class Shares(2) Equity
------------------ ------- ---------- ------ ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
William R. Shepard...... 32,400 * 1 B-1 * 36,050 *
1 B-2
1 B-3
5 B-5
Howard J. Siegel........ 21,600 * 1 B-1 * 24,030 *
1 B-3
3 B-5
David I. Silverman...... 10,800 * 1 B-2 * 12,000 *
Jeffrey L. Silverman.... 16,200 * 1 B-1 * 18,020 *
2 B-5
Paul Simon.............. 0 0
Fred D. Arditti......... 0 0
Gerald D. Beyer......... 0 0
Craig S. Donohue........ 0 0
Phupinder Gill.......... 0 0
David G. Gomach......... 0 0
William W. Jenks........ 0 0
Donald D. Serpico....... 0 0
Carol B. Sexton......... 0 0
Directors and Executive
Officers as a group.... 507,600 564,980 1.96
</TABLE>
- --------
* Less than one percent.
(1) The address for all persons listed in the table is Chicago Mercantile
Exchange, 30 South Wacker Drive, Chicago, Illinois 60606.
(2) Class A equivalent shares are based on the number of Class A shares and the
number of Class A shares that each series of Class B shares owned is
considered to represent. See "Description of Common Stock" under
"Description of Capital Stock of New CME."
(3) Share will be held in a trust over which Mr. Gordon will have investment
and voting power.
(4) Mr. Melamed will have voting and investment power over the indicated
shares, which are owned by Sakura Dellsher, Inc.
(5) Mr. Sandner will have voting and investment power over two series B-3
shares held by RB&H Financial Services L.P.
(6) Mr. Harris will have sole voting power over one series B-2 share.
(7) Mr. Katler will have voting power over one series B-3 share.
(8) Mr. Prosi will have voting power over one series B-3 share.
(9) Mr. Pryde will have voting power over each of the series B-1, B-2, B-3 and
B-5 shares, which will be owned by several employees of his employer, J. P.
Morgan Futures, Inc.
55
<PAGE>
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 201 million contracts. The underlying value of the
commodities involved in transactions (often referred to as the "notional
value"), a 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. That data also showed
that we ranked second in terms of open interest--representing 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 through
relationships that we have developed with market participants and other
financial institutions. We operate traditional open outcry auction markets
where members trade among themselves for their own account and the account of
their customers in a room known as a pit. We also operate an electronic trading
system--now known as our GLOBEX2 system--and were one of the first major
futures exchanges in the world to develop an electronic 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).
Speculators, on the other hand, accept price risk and attempt to make profits
through buying and selling futures contracts by anticipating price changes. A
speculator has no interest in making or taking delivery of the underlying
commodity. Our members serve as liquidity providers for our markets and as
financial intermediaries for customers who use our products.
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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.
[CHART APPEARS HERE]
Presently, derivatives markets are experiencing significant and rapid
changes due to relaxation of regulatory barriers and advances in technology.
Foreign exchanges and exchange-like enterprises operated by or for banks and
broker-dealers have gained increased access to U.S. markets through regulatory
concessions. 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 reduce significantly 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 the approval rights reserved to Class B stockholders with respect to Core
Rights. 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 those products;
providing clearing and settlement services; and collecting and selling market
data. Revenues from the first three business areas referred to in the preceding
sentence are derived from bundled clearing and transaction fees, which
represented 66% of total 1999 revenues. Revenue from the dissemination of
market quote data represented 21% of total 1999 revenue.
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<PAGE>
Products
The range and diversity of the products that may be traded on the Exchange's
facilities contributes significantly to our success. These products include
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 exchange-for-
physical transaction ("EFP") markets. These transactions involve simultaneous
transactions in the futures and cash commodity markets in which one party
establishes or liquidates a futures position in one of our products and the
other party sells or purchases 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 staffs 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 staffs 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.
[CHART APPEARS HERE]
Interest Rate Products. Our interest rate product line includes our
Eurodollar futures and options contracts. Eurodollar futures and option
contracts are a short term interest rate product and constitute 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, which stands for London Interbank Offered Rate,
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
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<PAGE>
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 these 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 futures. To benefit further market users,
we have implemented a series of product enhancements in recent years. We
introduced quarter-tick (smaller price increment) trading for "front-month
expiring" (contracts closest to expiration) 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 reflecting successful competition
from other exchanges or increased use of alternative products or markets by
market users. Presently, many banks that use Eurodollar futures have adopted
internal systems that allow separate divisions within the bank to offset their
positions as an alternative to using our markets. Despite these activities,
volume in these products continues to remain strong, and they constitute a
significant part of our business.
[CHART APPEARS HERE]
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 gain exposure efficiently 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.
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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 and 1999 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.
[CHART APPEARS HERE]
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
GLOBEX2 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 GLOBEX2. Larger orders are executed by open outcry on the trading
floor via our innovative all-or-none facility. This facility allows 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.
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[CHART APPEARS HERE]
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 Exchange 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 major European
currencies. We also face significant competition in this product sector from
the interbank 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.
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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 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.
[BAR GRAPH]
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 over-the-counter market in managing weather-related risk
has grown significantly over the past few years.
Execution Facilities
We operate two trade execution facilities--open outcry trading pits and
GLOBEX2. Both offer our users secure and reliable facilities, immediacy of
trade execution, anonymity, and price transparency. Both the trading pits and
GLOBEX2 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.
Open Outcry Trading. Open outcry trading occurs in individual pits on our
two trading floors and represent ninety-two percent of our total volume in
1999. The pits are the centralized meeting place for floor
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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.
GLOBEX2 Electronic Trading. Our original GLOBEX System, which we jointly
developed in partnership with Reuters, was introduced in 1992. GLOBEX2, the
second generation system we introduced in 1998, is based on the Nouveau Systeme
de Cotation developed and licensed to us by our GLOBEX2 partner, ParisBourse.
GLOBEX2 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 GLOBEX2 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, in response to customer
interest, 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 GLOBEX2 system, in some
foreign currency cross-rate contracts, and in innovative new credit and weather
derivatives products. Eight percent of our 1999 volume was traded on GLOBEX2
and, as indicated in the table below, our yearly GLOBEX2 volume has grown
rapidly. GLOBEX2 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, GLOBEX2 volume doubled every year since 1996.
[BAR GRAPH]
GLOBEX2 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 GLOBEX2. The flexibility of the open architecture
design of GLOBEX2 allows us to add new products to the system and to easily and
quickly increase processing throughput.
Technology Supporting our Execution Facilities. We have enhanced our open
outcry and electronic markets with automation and cost efficiencies that will
help us to 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 route orders efficiently
from independent software vendors' and clearing member firms' order management
systems to our trading floors and to GLOBEX2.
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 GLOBEX2. These systems
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then execute in the case of GLOBEX2 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
GLOBEX2, 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.
[FLOW CHART]
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 GLOBEX2 terminals in use.
In addition to the thousands of order routing terminals that interface with our
GLOBEX2 trading environment, we have over 1,200 GLOBEX2 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 GLOBEX2 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.
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
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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 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. At each settlement cycle, the Clearing House
"marks-to-market" all open positions by calling for payments from clearing
members whose positions have lost value, and by paying clearing members whose
positions have gained value. The Clearing House marks all open positions to
market at least twice a day--more often if market volatility warrants. The
diagram below illustrates the daily mark-to-market and settlement activities of
Clearing House.
[FLOW CHART]
Our ability to conduct a minimum of two daily settlement cycles helps to
protect the financial integrity of the Clearing House, our clearing member
firms, and market participants. This ability enables the Clearing House to
identify more quickly any clearing firms that may not be able to satisfy the
financial obligations resulting from changes in the prices of their open
contracts before those financial obligations become exceptionally large and
jeopardize the ability of the Clearing House to insure performance on their
open positions. 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.
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CME Clearing House Available Assets as of December 31, 1999
(in millions)
<TABLE>
<S> <C>
Aggregate Performance Bond Deposits by Clearing Member Firms........... $17,686
Market Value of Pledged Memberships.................................... 137
CME Surplus Funds...................................................... 36
Security Deposits of Clearing Members.................................. 308
Common Bond of Clearing Members........................................ 46,353
-------
Total.............................................................. $64,520
=======
</TABLE>
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. These programs are designed to prevent the accumulation
of losses, ensure the availability of sufficient resources 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 of a clearing member payment default, we would apply
the following assets of the clearing member to cover the member's payment
obligation:
. security deposit,
. performance bonds, and
. any other available assets, which could include proceeds from the sale of
any memberships owned by or assigned to the clearing member.
If the payment default remains unsatisfied, then the following assets would be
applied to address the deficit:
. 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.
The Exchange also maintains an unsecured, confirmed $350 million line of credit
agreement with a consortium of banks in order to ensure adequate liquidity to
deal with a clearing member payment default. 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.
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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 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 match
more closely the capital requirements of our clearing member firms to the
actual risks borne by those 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
reported trades and positions on a real-time basis, providing users with
instantaneous information 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 the GLOBEX2, we offer straight
through electronic processing of transactions in which an order is
electronically routed, matched, cleared, and made available to the clearing
firm's back office systems for further processing.
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 derivatives industry in establishing cross-margining
agreements with other leading clearing houses that reduce capital costs for
clearing member firms and users of our markets. The cross-margining agreements
permits an individual clearing house to recognize a clearing firm's open
positions at other clearing houses that produce risk offsets and to lower
capital requirements. We have implemented, or are in the process of
implementing, cross-margining arrangements with The Options Clearing
Corporation, 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 represented approximately 21% of our revenue during 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
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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 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. These changes might adversely impact our
sale of 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 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 and 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 of developing 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
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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.
Over-the-counter 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
some market participants and financial 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.
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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 GLOBEX2 order
book. Memberships are purchased from existing members at prevailing market
prices. There are four types of memberships: 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
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
</TABLE>
- --------
Source: Exchange records.
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 GLOBEX2,
qualified members may obtain a terminal to trade for their own accounts and
participate in the P-M-T Limited Partnership, the owner of the GLOBEX2 system,
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
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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 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, due to a rule change that occurred in May 1987, a clearing member
which was an IMM Class A clearing member on or prior to May 6, 1987, was
allowed to own or have assigned to it at least one CME membership, three IMM
memberships, and two IOM memberships. Twenty-two clearing firms were
grandfathered under this rule, which was amended so that clearing members would
no longer be divided into two different classes. The goal of the change was to
consolidate clearing members into one group for uniformity and simplicity.
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
the 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.
Other Business Relationships And Subsidiaries
P-M-T Limited Partnership. P-M-T Limited Partnership is an Illinois limited
partnership and a partially-owned subsidiary of the Exchange. It 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. It 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 these services. The Exchange is the sole general
partner of P-M-T. In addition, P-M-T has 1,695 owners of its Class A limited
partnership interest and 57 owners of its Class B limited partnership
interests. The following table indicates the number of units held by the
Exchange and by members:
<TABLE>
<CAPTION>
Number of Units Held By
-----------------------------------
Number Exchange Members
of ----------------- -----------------
Limited Partner Class Units Number Percentage Number Percentage
--------------------- ------ ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
A.............................. 4,786 321 6.7% 4,465 93.3%
B.............................. 90 34 37.7 56 62.3
</TABLE>
Class A limited partnership interests are held by CME, IOM and IMM members.
Class B limited partnership interests are held by clearing member firms.
GFX Corporation. GFX Corporation is a wholly-owned subsidiary of the
Exchange. It 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 GLOBEX2 system. Offsetting arbitrage transactions
using futures contracts or spot foreign currency
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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 in 1969 to
provide financial assistance, on a discretionary basis, to customers of any
clearing member that becomes insolvent. The Exchange funded the Trust through
contributions, which were tax deductible until a June 1996 closing agreement
with the Internal Revenue Services largely discontinued the availability of the
deduction. The Trust presently contains $42.7 million in assets as the result
of the contributions, investment income on the trust assets, and the absence of
payments from the Trust. 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 Exchange 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, servicemark,
copyright and trade secret laws, restrictions on disclosure and other methods.
For example, with respect to trademarks, we have registered marks in more than
twenty countries.
We are undertaking a review of our intellectual property to identify
property and methods of doing business which should be protected, the extent of
current protection for that property and the availability of additional
protection. We believe that our various trade and service marks have been
registered where needed. Recent legal developments allowing patent protection
for methods of doing business hold the possibility of additional protection,
which we are examining.
Employees
As of December 1, 1999, we had 1,054 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
additional 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
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other legal proceeding that, in our opinion, could have a material adverse
effect on our business, operating results or financial condition. While the
ultimate results of these 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
specified dates and that as a consequence Niederhoffer, the pools, and their
futures commission merchant suffered damages of at least $105 million. Based on
extensive pre-complaint investigation, discovery conducted to date, and advice
from legal counsel, we believe that the lawsuit is without merit and that the
plaintiffs are unlikely to prevail.
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. Defense of the Exchange has been undertaken by
attorneys for EuroNext, the licensor of our trading system and a subsidiary of
ParisBourse, pursuant to an indemnification agreement. EuroNext has reserved
its rights under that agreement in the event that any modifications to the
licensed system made by us result in liability. Counsel for EuroNext have
advised us that they do not believe that our licensed system infringes the
patent. Regardless of the outcome of the proceeding, we believe that the
indemnification agreement and the probability that a license will be available
preclude any material effect on the Exchange.
Several GEM members have complained that the proposed demutualization
transaction does not allocate Class A shares to them. These members sought to
bring their complaint before an appropriate committee of the Exchange, as
required by Exchange rules. The board has determined, however, that their
complaint is premature until the demutualization transaction is approved by the
members and all preconditions to the effectiveness of the transaction are
satisfied. If, at that time, these members continue to have a complaint
regarding the allocation of Class A shares, it is expected that the matter will
be referred to, and handled in accordance with, the internal dispute resolution
provisions of the Exchange's rules. The Exchange's rules require that disputes
be settled by mandatory arbitration. These members could seek an injunction to
prevent the consummation of the demutualization transaction, although the
Exchange believes that there is an adequate remedy in the form of money damages
in the event that their claims are upheld and that, as a result, an injunction
should not be issued. The Exchange believes that the allocation proposed in the
demutualization transaction is fair and reasonable.
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
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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 that
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 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 over-the-counter market. At the end of 1998, according to
data from the Bank for International Settlements, the total estimated notional
amount of outstanding over-the-counter derivative contracts was $80 trillion
compared to $13.5 trillion for exchange-traded futures and options contracts.
The CFTC exemption under which the over-the-counter derivative market operates
precludes the over-the-counter market from using exchange-like electronic
transaction systems and clearing. These limitations on the exemptions granted
to the over-the-counter 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 SEC, the CFTC and
the Board of Governors of the Federal Reserve System.
The PWG advocates a complete exemption from the CEA for some principal-to-
principal derivative exchanges that provide trade execution services comparable
to those performed by the Exchange. The customers who may access those
exchanges are also significant customers of regulated exchanges like ours. The
PWG does not recommend equivalent treatment for the existing electronic markets
operated by regulated exchanges. The PWG 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 banks and broker-
dealers, and their affiliates, to operate currency futures markets for retail
customers without being subject to regulation under the CEA. All of the PWG
proposals are likely to increase the number and quality of competitors who
provide execution and clearing services for standardized derivative contracts.
A February 2000 CFTC staff report suggests that the CFTC use its exemptive
power to create a regulatory environment that will permit the futures industry
to accommodate itself to real world conditions. Its goal is regulation by
oversight rather than prescription. The degree of regulation proposed is
directly related to the characteristics of the product and the type of customer
that has direct or indirect access to the market, with retail customer markets
being subject to greater regulation. The CFTC will not discriminate against
open outcry markets in favor of electronic systems. The report's proposals, if
adopted, should reduce our costs and increase our efficiency.
Various congressional committees are in the process of drafting legislation
to implement the suggestions of the PWG and the CFTC staff. Industry groups and
other regulators are lobbying for changes to the CEA. We cannot predict the
outcome of these efforts.
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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 those requirements by filing periodic reports, proxy statements
and other information with the SEC. Those 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with 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 our
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 over-the-counter market and the emergence of new electronic exchanges.
Working capital at the end of 1998 was $92.6 million. During 1999, we made
significant investments in technology infrastructure, trading floor technology
and performance upgrades to GLOBEX2. We financed these strategic initiatives,
in part, through working capital, which declined to $66.8 million at December
31, 1999.
The chart below and related overview is based on financial results for the
year ended December 31, 1999. Management believes they present a fair
representation of our sources of revenue and expense categories.
[CHART]
Clearing fees, transaction fees and quotation data fees account for 87%
percent of total revenues. Investment income, communications charges to our
members and clearing member firms and other operating revenue comprise the
remaining 13% of revenues.
Clearing and transaction fees include GLOBEX2 fees and other volume related
fees, and account for 66% of our revenues. Revenue from clearing fees is very
sensitive to volume and changes in product mix which drives the average rate
per trade. During 1999, the average rate per trade was 69c and is a function of
the following factors:
. Product mix (1999 volume: futures 80%, options 16%, EFPs 4%)
. Account ownership status (member, lessee, customer, etc.)
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. Product (licensed, non-licensed, E-Mini, etc.)
. Trading venue (open outcry, GLOBEX2)
[CHART]
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 GLOBEX2 volume have increased the
average rate per trade. Specifically, 8c 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 3c is attributable to the rapid
growth in GLOBEX2 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 the original rates that were in effect prior to August 1, 1997.
The graph below illustrates the effect of fee reduction programs on clearing
revenue.
[CHART]
The second largest source of revenue, amounting to 21% of total revenue in
1999, is quotation data fees from the sale of market data. We have contractual
relations with over 100 vendors who act as value-added
77
<PAGE>
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 13% of total revenues, are derived from
telecommunications services provided to members, investment income and from
various services provided to members.
[CHART]
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 14% of total expenses in 1999 and is primarily
related to information technology consultants that are working on strategic
initiatives. Also included in this category are legal fees and license fees.
The communications and computer maintenance category accounts for 14% of our
expenses and includes expenses to support the GLOBEX2 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 8% of the
expenses in 1999. Depreciation and amortization account for 13% of total
expenses. Together, occupancy and depreciation and amortization make up our
fixed costs and account for 21% of the budget. The last two categories, other
operating expenses and marketing and promotion, account for only 11% 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.
Results of Operations
1999 Compared to 1998
Revenues of $208.5 million for the year ended December 31, 1999, increased
$13.3 million compared to the prior year. Clearing fees and GLOBEX2 transaction
fees were $138.5 million in 1999, representing an increase of $14.0 million
over 1998. This increase is attributable primarily to the effect of a program
which reduced clearing fees approximately $17.9 million in the fourth quarter
of 1998, offset by an 11% decrease in volume from 226.6 million contracts
traded in 1998 to 200.7 million contracts traded in 1999. There was no similar
fee reduction program during 1999. The decrease in volume was primarily due to
reduced volatility, continued consolidation of institutional customers and a
slowdown in business as customers prepared for Y2K. Low inflation, stable
economic conditions, and the absence of world financial crises, such as the
Asian financial
78
<PAGE>
crisis which added to our interest rate product volume in 1998, contributed to
reduced volatility and decreased volume in interest rate products. Revenue from
quotation data fees in 1999 was $43.0 million, an increase of $3.0 million
compared to 1998, resulting from an increase in the number of subscribers.
Investment income decreased $1.0 million due to a decrease in average invested
balances. Other revenues decreased $2.6 million as a result of a reduction in
trading revenues from our GFX subsidiary and a lower level of member fines.
These reductions were partially offset by $1.7 million in revenues from GLOBEX2
terminal charges for which there were no similar charges in 1998.
Operating expenses in 1999 were $201.8 million, an increase of $20.8 million
over 1998. Expenses increased as a result of technology advancements in the
areas of GLOBEX2, trade order processing systems, hand-held trading devices,
infrastructure improvements, and the support of both open outcry and electronic
trading systems. Salaries and benefits increased $8.6 million in 1999 to $81.0
million, reflecting additional technology staff and merit increases. Occupancy
expense decreased $1.9 million in 1999 due primarily to a reduction in rent
expense for the trading floor resulting from our exercise of an option to
extend the term of the lease. Professional fees, outside services and license
fees amounted to $28.3 million in 1999 and include significant expenditures for
GLOBEX2, Year 2000 compliance, trading floor systems, recruiting, legal
services and S&P license fees. These expenses increased $0.3 million compared
to 1998, and are net of capitalized software development costs as described in
the following paragraph. Communications and computer and software maintenance
expenses increased $5.7 million in 1999 primarily due to the expansion of the
GLOBEX2 electronic trading network. Depreciation and amortization expense
increased $7.3 million in 1999 as a result of computer equipment additions and
the amortization of capitalized software development costs. Public relations
and promotion expenses decreased $1.9 million compared to 1998, reflecting a
reduction in advertising and new product promotions. Other operating expenses
increased $2.7 million in 1999 to $13.4 million due to increases in equipment
lease interest, travel, board stipends, department supplies, staff training,
and state and local sales and use taxes.
We adopted Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("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 our
previous accounting policy. Costs capitalized during 1999 amounted to $15.3
million, and consist primarily of staff salaries and outside consulting costs.
Amortization of capitalized software development costs in 1999 amounted to $0.9
million.
Income from continuing operations, before a deduction for limited partners'
interest in the earnings of P-M-T Limited Partnership and a provision for
income taxes, was $6.6 million in 1999, representing a decrease of $7.5 million
compared to 1998. The limited partners' interest in the earnings of P-M-T was
$2.1 million in 1999, $0.7 million less than 1998 as a result of a $1.0 million
decrease in operating income of the partnership.
The provision for income taxes decreased in 1999 to $1.9 million compared to
$4.3 million in 1998 as a result of lower pre-tax income in 1999. The increase
in our effective income tax rate from 38% in 1998 to 41% in 1999 was primarily
due to greater nondeductible expenses, including costs associated with our
pending demutualization transaction.
Net income for the year ended December 31, 1999, was $2.7 million compared
to $7.0 million for the year ended December 31, 1998.
1998 Compared to 1997
Revenues for the year ended December 31, 1998, were $195.2 million compared
to $177.6 million for 1997. Clearing fees and GLOBEX2 transaction fees
increased to $124.6 million from $116.9 million in 1997 primarily due to a 13%
increase in volume from 200.7 million contracts traded in 1997 to 226.6 million
contracts traded in 1998. Trading volume on GLOBEX2, included above, increased
122% to 9.7 million contracts traded in 1998. The revenue impact of this
increased volume was partially offset by a $16.9 million
79
<PAGE>
fee reduction program and an additional $1.0 million waiver of lessee brokerage
during the fourth quarter of 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 increased $1.9
million to $10.1 million in 1998 due to an increase in the average invested
balance which more than offset the impact of declining interest rates. Other
operating revenue 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(R) system.
Total expenses in 1998 were $181.0 million compared to $158.6 million in
1997. The increase was due primarily to new strategic initiatives, electronic
trading and other technology projects and enhancements. Salaries and benefits
increased $5.5 million to $72.4 million in 1998 due primarily to increases in
salaries and bonuses compared to the prior year. Professional fees, outside
services and license fees of $28.0 million were $11.1 million greater than in
1997 primarily due to expenses associated with the strategic planning process
and increased spending on GLOBEX2, Year 2000 compliance and trading floor
technology. Expenses for communications and computer equipment increased $5.5
million due, in large part, to communications cost related to the GLOBEX2
network.
Income from continuing operations, before a deduction for limited partners'
interest in the earnings of PMT and a provision for income taxes, was $14.2
million in 1998, a decrease of $4.9 million compared to 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 the earnings
of P-M-T was $2.8 million for 1998 compared to zero in 1997. Under the terms of
the partnership agreement, the CME, as general partner, absorbed P-M-T's entire
1997 loss of $0.9 million.
The provision for income taxes on income from continuing operations, at an
effective tax rate of 38%, was $4.3 million in 1998 compared to $7.0 million
for the same period in 1997. The loss from discontinued operations during the
year ended December 31, 1997, consists of operating losses and the write-off of
certain assets of the CME Depository Trust Company, which ceased operation in
September 1997. No further adjustments were required in 1998. CME Depository
Trust Company had been developing collateral management services for the over-
the-counter derivatives market. It had not reported any revenue, and the
Exchange determined that additional developmental efforts were not warranted.
Net income was $7.0 million for the year ended December 31, 1998, compared to
$8.7 million for the year ended December 31, 1997.
Financial Position
Total assets increased to $301.7 million at December 31, 1999, from $293.2
million at December 31, 1998. Current assets decreased to $176.7 million at
December 31, 1999, from $203.3 million at December 31, 1998, due primarily to a
decrease of $27.6 million in investment securities. Property, net of
accumulated depreciation, increased to $93.5 million at the end of 1999
compared to $71.3 million at the end of 1998 primarily due to purchases of
computer equipment to support technology and electronic trading both on and off
the trading floor. Other assets increased to $31.4 million from $18.6 million
at the end of 1998 due primarily to an increase of $14.4 million in capitalized
software development costs net of accumulated amortization, an increase in
computer software of $1.3 million, and an increase of $1.6 million in
securities held in connection with deferred compensation plans partially offset
by a $4.5 million decrease in net deferred tax assets. At December 31, 1999, we
held cash, cash equivalents and investment securities of $74.4 million, had
working capital of $66.8 million and had a current ratio of 1.6-to-1. This
compares to cash, cash equivalents and investment securities of $102.6 million,
working capital of $92.6 and a 1.8-to-1 current ratio at December 31, 1998.
Total liabilities increased to $133.0 million at December 31, 1999, from
$126.3 million at December 31, 1998. Current liabilities decreased to $110.0
million at December 31, 1999, from $110.7 million at December 31, 1998. A
decrease in accounts payable in 1999 was largely offset by an increase in the
current
80
<PAGE>
portion of long-term debt and an increase in cash performance bonds and
security deposits. The limited partners' interest in PMT Limited Partnership
increased to $3.0 million at December 31, 1999, compared to $0.9 million a year
earlier due to 1999 net income of this consolidated partnership in the amount
of $2.6 million. Long-term debt consists of the long-term portion of
capitalized lease obligations and increased to $8.1 million at December 31,
1999, from $5.0 million at December 31, 1998. Other liabilities increased to
$11.9 million at December 31, 1999, from $9.8 million at December 31, 1998, due
primarily to a $1.6 million increase in deferred compensation liabilities.
Members' equity was $168.7 million at December 31, 1999, and $166.9 million at
December 31, 1998.
Liquidity and Capital Resources
For the year ended December 31, 1999, net cash provided from operating
activities was $13.3 million, a decrease of $12.1 million from $25.5 million in
1998. This decrease was primarily due to an increase in capitalized software
development costs in 1999. For the year ended December 31, 1998, net cash
provided from operating activities was $25.5 million, a decrease of $0.6
million from $26.1 million in 1997.
For the year ended December 31, 1999, net cash used in investing activities
decreased to $11.3 million from $19.9 million in 1998. Purchases of computer
equipment and other property increased $18.7 million in 1999 compared to 1998.
This increase was more than offset by an increase of $27.3 million in net sales
of investment securities in 1999 compared to 1998. For the year ended December
31, 1998, net cash used in investing activities decreased to $19.9 million from
$24.6 million in 1997 due primarily to reduced net investment purchases in
1998.
Net cash used in financing activities consisted of $2.7 in payments on
capital lease obligations in the year ended December 31, 1999, and a cash
distribution to P-M-T limited partners in the amount of $2.0 million during the
year ended December 31, 1998.
For the year ended December 31, 1999, interest payments amounted to $0.7
million and consisted primarily of interest paid on capital lease obligations.
New capital lease additions increased $1.8 million to $7.9 million in 1999 from
$6.1 million during 1998.
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. 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 fails to meet its financial
obligations to the Clearing House. This line of credit is renewed annually and
has never been utilized.
We expect that the principal use of funds in the foreseeable future will be
to fund operations, capital expenditures and working capital, and anticipate
that existing cash and investment balances will be sufficient to meet our needs
for at least the next year.
Market Risk
Interest Rate Risk
Interest income from investment securities, temporary cash investments and
cash performance bonds and security deposits amounted to approximately $7.9
million in 1999. Realized and unrealized gains (losses) on our investment
portfolio amounted to approximately $(1.4) million, $0.6 million and $0.6
million in 1999, 1998 and 1997, respectively. An increase (decrease) in market
interest rates would have a corresponding increase (decrease) on interest
income from temporary cash investments, cash performance bonds and security
deposits, variable rate investment securities and new purchases of investment
securities. An increase (decrease) in market interest rates would also result
in an opposite increase (decrease) in the fair value of investment securities
held. At December 31, 1999, our investment portfolio consisted primarily of
U.S. government agency and state and
81
<PAGE>
municipal securities, including approximately $8.4 million in variable rate
securities. Contractual maturities and interest coupon rates for fixed rate
investment securities at December 31, 1999 were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Weighted
Principal Average
Year Amount Interest Rate
---- --------- -------------
<S> <C> <C>
2000.............................................. $ 5,689 5.3%
2001.............................................. 22,220 6.1%
2002.............................................. 7,911 6.4%
2003.............................................. 6,000 5.2%
2004.............................................. 9,300 6.0%
------- ----
Total......................................... $51,120 5.9%
======= ====
</TABLE>
Derivative Trading Risk
Through our GFX trading subsidiary, we engage in the purchase and sale of
CME foreign currency futures contracts to promote liquidity in our markets, and
enter into offsetting arbitrage transactions using futures contracts or spot
foreign currency transactions to limit market risk. Net position limits are
established for each trader and currently amount to $6 million in aggregate
notional value. At December 31, 1999, we held futures positions with a notional
value of approximately $4 million, offset by a similar amount of spot foreign
currency positions resulting in a zero net position. All positions are marked
to market through a charge or credit to income on a daily basis. Net trading
gains amounted to $2.4 million, $4.8 million and $2.2 million in 1999, 1998 and
1997, respectively.
Accounting for Stock Option Agreement
Our President and Chief Executive Officer, James J. McNulty, received a non-
qualified stock option upon the commencement of his employment with the
Exchange on February 7, 2000. The agreement provides that he has the
opportunity to receive a portion of the appreciation in equity values over a
stated period. The option is designed to reward him for increasing the value of
the Exchange, as measured by the increase in aggregate membership values up to
the date of demutualization and the increase in the value of common stock after
demutualization. Total expense relating to the option will be measured by the
excess of the fair market value of the option shares over their exercise price
as of the date of the demutualization. This expense will be amortized from the
February 7, 2000 grant date over the four-year vesting period. Until the
demutualization date, we will follow variable accounting which means that total
expense will be re-measured based on the aggregate value of Exchange
memberships at each month-end. During each month until the demutualization
date, we will recognize approximately 5% of the total option expense, and we
will recognize the remaining unamortized expense measured as of the
demutualization date on a straight-line basis over the remaining vesting period
thereafter. The total expense relating to the option measured by the value of
Exchange memberships at March 31, 2000 was approximately $14.8 million, and
approximately $1.5 million of this amount will be recognized during the first
quarter, 2000. Any increase or decrease in the aggregate value of Exchange
memberships up to the demutualization date will cause this expense to increase
or decrease proportionately.
Accounting Standards
In June, 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. This
statement requires that all derivative instruments be recorded in the statement
of financial position at fair value. This statement is effective for all fiscal
years commencing after June 15, 2000. We currently report all derivative
transactions at fair market value, with changes in fair value recognized in our
statement of income, and this practice will not be affected by SFAS No. 133.
82
<PAGE>
EXPERTS
Our consolidated financial statements as of December 31, 1999 and 1998, and
for each of the three years in the period ended December 31, 1999, are included
in this document together with Arthur Andersen LLP's audit report on these
financial statements. Arthur Andersen LLP issued their report as independent
public accountants and as experts in auditing and accounting.
VALIDITY OF SECURITIES
The validity of the shares of Class A and Class B common stock to be issued
in connection with the demutualization transactions will be passed upon for New
CME by Sidley & Austin, Chicago, Illinois.
83
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1999 and December 31, 1998. F-3
Consolidated Statements of Income for the Years Ended December 31, 1999,
1998 and 1997 ........................................................... F-4
Consolidated Statements of Members' Equity and Comprehensive Income for
the Years Ended December 31, 1999, 1998 and 1997......................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of
their operations and cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
Arthur Andersen, LLP
Chicago, Illinois
February 2, 2000
F-2
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
At December 31,
-----------------
ASSETS 1999 1998
------ -------- --------
(dollars in
thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents.................................. $ 14,249 $ 14,841
Investments (Note 2)....................................... 60,156 87,730
Accounts receivable........................................ 26,534 27,338
Prepaid expenses........................................... 2,655 1,589
Cash performance bonds and security deposits (Note 3)...... 73,134 71,803
-------- --------
Total current assets..................................... 176,728 203,301
Property, net of accumulated depreciation and amortization
(Note 4).................................................... 93,531 71,266
Other assets (Notes 2, 5 and 7).............................. 31,444 18,638
-------- --------
Total assets............................................. $301,703 $293,205
======== ========
<CAPTION>
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable........................................... $ 15,569 $ 19,070
Other current liabilities (Note 8)......................... 21,250 19,797
Cash performance bonds and security deposits (Note 3)...... 73,134 71,803
-------- --------
Total current liabilities................................ 109,953 110,670
Limited Partners' interest in net assets of PMT Limited
Partnership (Note 6)........................................ 3,018 891
Long-term debt (Notes 10 and 11)............................. 8,132 4,969
Other liabilities (Note 9)................................... 11,937 9,778
-------- --------
Total liabilities........................................ 133,040 126,308
Members' equity.............................................. 168,663 166,897
-------- --------
Total liabilities and members' equity.................... $301,703 $293,205
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Revenues
Clearing and transaction fees.................. $138,526 $124,575 $116,917
Quotation data fees............................ 43,005 40,079 37,719
Communication fees............................. 8,165 8,128 7,885
Investment income.............................. 9,091 10,117 8,178
Other operating revenue........................ 9,701 12,317 6,945
-------- -------- --------
Total revenues............................... 208,488 195,216 177,644
-------- -------- --------
Expenses
Salaries and benefits (Note 9)................. 80,957 72,385 66,873
Occupancy...................................... 17,773 19,702 19,779
Professional fees, outside services and
licenses...................................... 28,319 28,038 16,913
Communications and computer and software
maintenance................................... 28,443 22,731 17,197
Depreciation and amortization.................. 25,274 17,943 16,689
Public relations and promotion................. 7,702 9,586 11,175
Other operating expense........................ 13,376 10,638 9,960
-------- -------- --------
Total expenses............................... 201,844 181,023 158,586
-------- -------- --------
Income from continuing operations before limited
partners' interest in PMT and income taxes...... 6,644 14,193 19,058
Limited partners' interest in earnings of PMT
Limited Partnership (Note 6).................... (2,126) (2,849) --
Provision for income taxes (Note 7).............. (1,855) (4,315) (6,963)
-------- -------- --------
Income from continuing operations................ 2,663 7,029 12,095
Loss from discontinued operations, net of income
tax benefit of $2,285 (Note 16)................. -- -- (3,428)
-------- -------- --------
Net income................................... $ 2,663 $ 7,029 $ 8,667
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Total Proceeds from Unrealized
Members' Retained Issuance of Securities
Equity Earnings Memberships Gains (losses)
-------- -------- ------------- --------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Balance, December 31, 1996..... $150,631 $107,062 $43,605 $ (36)
Comprehensive income:
Net income................... 8,667 8,667
Unrealized net gain 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 net gain 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
Comprehensive income:
Net income................... 2,663 2,663
Unrealized net loss on
securities,
net of tax benefit of $597.. (897) (897)
--------
Total comprehensive income. 1,766
-------- -------- ------- -----
Balance, December 31, 1999..... $168,663 $125,421 $43,605 $(363)
======== ======== ======= =====
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
------- ------- --------
(dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income....................................... $ 2,663 $ 7,029 $ 8,667
Adjustments to reconcile net income to net cash
provided by operating activities:
Limited partners' interest in earnings of PMT
Partnership................................. 2,126 2,849 --
Deferred income tax provision................ 5,087 (1,311) (3,127)
Depreciation and amortization................ 25,274 17,943 16,689
Gain on sale of investments.................. (135) (57) (196)
Loss on disposal of fixed assets............. 7 125 98
Decrease (increase) in accounts receivable... 804 (8,367) (533)
Decrease (increase) in prepaid expenses...... (1,066) (907) 127
Decrease (increase) in other assets.......... (19,412) (859) 1,910
Decrease (increase) in net assets of
discontinued operations..................... -- -- 3,363
Increase (decrease) in accounts payable...... (3,501) 2,524 4,090
Increase (decrease) in other current
liabilities................................. (661) 5,628 (3,650)
Increase (decrease) in other liabilities..... 2,160 896 (1,367)
------- ------- --------
Net cash provided by operating activities.. 13,346 25,493 26,071
------- ------- --------
Cash Flows from Investing Activities
Purchases of property, net....................... (37,480) (18,817) (14,346)
Purchases of investments......................... (41,938) (99,332) (139,865)
Proceeds from sales and maturities of
investments..................................... 68,144 98,284 129,623
------- ------- --------
Net cash used in investing activities...... (11,274) (19,865) (24,588)
------- ------- --------
Cash Flows from Financing Activities...............
Payments on long-term debt....................... (2,664) -- --
Distribution to limited partners of PMT Limited
Partnership..................................... -- (1,957) --
------- ------- --------
Net cash used in financing activities...... (2,664) (1,957) --
------- ------- --------
Net increase (decrease) in cash and cash
equivalents....................................... (592) 3,671 1,483
Cash and cash equivalents, beginning of year....... 14,841 11,170 9,687
------- ------- --------
Cash and cash equivalents, end of year............. $14,249 $14,841 $ 11,170
======= ======= ========
Supplemental Disclosure of Cash Flow Information
Interest paid.................................... $ 705 $ 2 $ 26
======= ======= ========
Income taxes paid (refunded)..................... $ (265) $ 9,042 $ 8,317
======= ======= ========
Leased asset additions and related obligations... $ 7,940 $ 6,118 $ --
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The CME is a
designated contract market for the trading of futures and options on futures
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 CME 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 PMT
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 plans have been classified as trading securities. These securities
are included in other assets in the accompanying consolidated balance sheets 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 consolidated
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 consolidated 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.
F-7
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. Capitalized costs are generally
amortized over three years, commencing with the completion of the project.
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.
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 and Transaction Fees
Clearing and transaction fees include per contract charges for trade
execution and clearing and GLOBEX2 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 and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the 1998 and 1997 consolidated
financial statements to conform to the presentation in 1999. 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.
F-8
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1999 and 1998, were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- -------
<S> <C> <C> <C> <C>
U.S. Treasury......................... $ 64 $ 64 $ 3,127 $ 3,127
U.S. Government agency................ 16,563 16,191 23,073 23,308
State and municipal................... 44,135 43,901 60,641 61,295
------- ------- ------- -------
Total investment securities....... $60,762 $60,156 $86,841 $87,730
======= ======= ======= =======
</TABLE>
Unrealized gains (losses) 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,
1999, by contractual maturity, were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- -------
<S> <C> <C>
Maturity of one year or less........................... $ 5,678 $ 5,662
Maturity between one and five years.................... 46,684 46,094
Maturity greater than five years....................... 8,400 8,400
------- -------
Total.............................................. $60,762 $60,156
======= =======
</TABLE>
Trading securities held in connection with non-qualified deferred
compensation plans are included in other assets and amounted to approximately
$6.9 million at December 31, 1999, and $5.3 million at December 31, 1998.
Investment income includes unrealized gains relating to trading securities of
$469,000, $407,000 and $285,000 for the years ended December 31, 1999, 1998 and
1997, 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 counterparty 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 12) 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.
F-9
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $762 million and $634 million at December
31, 1999 and 1998, respectively. 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 in the amount
of $932,000, $428,000 and $96,000 during 1999, 1998 and 1997, respectively.
Each clearing member is required to deposit and maintain specified margin in
the form of cash, U.S. Government securities or bank letters 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. Under an agreement with the CME and the Board of
Trade Clearing Corporation ("BOTCC"), firms that are clearing members of both
the CME and BOTCC may place required performance bonds in one common bank
account and designate the portion allocable to each clearing organization.
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 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.
Cash and securities held as performance bonds and security deposits at
December 31 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
Securities Securities
and and
Cash IEF Funds Cash IEF Funds
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Performance bonds................ $68,738 $17,841,859 $67,192 $15,469,446
Security deposits................ 4,396 351,897 4,611 184,737
Cross-margin securities, held
jointly with OCC................ -- 1,056,709 -- 576,873
------- ----------- ------- -----------
Total........................ $73,134 $19,250,465 $71,803 $16,231,056
======= =========== ======= ===========
</TABLE>
In addition, irrevocable letters of credit, which are not included in the
accompanying consolidated balance sheets, held at December 31 were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Performance bonds.................................. $1,000,350 $1,078,650
Cross-margin accounts.............................. 77,010 4,110
---------- ----------
Total letters of credit........................ $1,077,360 $1,082,760
========== ==========
</TABLE>
F-10
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Property
A summary of the property accounts as of December 31 is presented below
(dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Furniture, fixtures and equipment..................... $140,836 $101,022
Leasehold improvements................................ 83,461 77,855
-------- --------
Total property........................................ 224,297 178,877
Less accumulated depreciation and amortization........ (130,766) (107,611)
-------- --------
Net property.......................................... $ 93,531 $ 71,266
======== ========
</TABLE>
5. Other assets
Other assets consisted of the following at December 31 (dollars in
thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Software development costs.............................. $15,326 $ --
Less accumulated amortization......................... (935) --
Software................................................ 9,300 6,812
Less accumulated amortization......................... (5,469) (4,286)
Deferred compensation assets............................ 6,934 5,345
Net deferred tax asset.................................. 5,868 10,357
Other................................................... 420 410
------- -------
Total................................................... $31,444 $18,638
======= =======
</TABLE>
6. P-M-T Limited Partnership
The Exchange is the general partner and members and clearing members of the
Exchange are limited partners of the PMT 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 MATIF, a French futures 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
ParisBourseSBFSA. The Exchange charges PMT for services provided. PMT reported
net income (loss) of $2,578,000, $3,536,000 and $(872,000) in 1999, 1998 and
1997, respectively, and made an income distribution of $2,393,000 in 1998.
Losses in excess of limited partner capital account balances are allocated to
the Exchange as general partner. As a result, PMT's entire 1997 loss was
absorbed by the CME.
F-11
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Income Taxes
The provision for income taxes from continuing operations is comprised of
the following (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal...................................... $(2,721) $ 4,613 $ 8,274
State........................................ (511) 1,013 1,816
------- ------- -------
Total...................................... (3,232) 5,626 10,090
------- ------- -------
Deferred:
Federal...................................... 4,166 (1,075) (2,564)
State........................................ 921 (236) (563)
------- ------- -------
Total...................................... 5,087 (1,311) (3,127)
------- ------- -------
Total continuing operations.................... 1,855 4,315 6,963
Total discontinued operations.................. -- -- (2,285)
------- ------- -------
Total provision for income taxes........... $ 1,855 $ 4,315 $ 4,678
======= ======= =======
</TABLE>
Reconciliation of the statutory U.S. federal income tax rate to the
effective tax rate on income from continuing operations is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Statutory U.S. federal tax rate........................ 35.0% 35.0% 35.0%
State taxes, net of federal benefit.................... 5.9 3.8 4.3
Tax exempt interest income............................. (15.0) (6.6) (2.8)
Non deductible expenses................................ 21.1 3.7 2.1
Other, net............................................. (5.9) 2.1 (2.1)
----- ---- ----
Effective tax rate..................................... 41.1% 38.0% 36.5%
===== ==== ====
</TABLE>
At December 31, the components of deferred tax assets (liabilities) were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
------ -------
<S> <C> <C>
Deferred tax assets:
Depreciation and amortization.......................... $6,085 $ 5,813
Deferred compensation.................................. 2,452 2,167
Accrued expenses....................................... 2,929 2,828
Unrealized losses on securities........................ 242 --
------ -------
Subtotal............................................. 11,708 10,808
Valuation allowance.................................. -- --
------ -------
Deferred tax assets.................................. 11,708 10,808
------ -------
Deferred tax liabilities:
Software development costs............................. (5,709) --
Unrealized gains on securities......................... -- (356)
Other.................................................. (131) (95)
------ -------
Deferred tax liabilities............................... (5,840) (451)
------ -------
Net deferred tax asset................................... $5,868 $10,357
====== =======
</TABLE>
F-12
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Other Current Liabilities
Other current liabilities include accrued salaries and benefits of $13.0
million and $12.7 million at December 31, 1999 and 1998, respectively. Also
included in other current liabilities is the current portion of long-term debt
which totaled $3.3 million at December 31, 1999, and $1.1 million at December
31, 1998.
9. Employee Benefit Plans
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 and have reached the age of 21 are
eligible to participate. The Plan provides for an age-based contribution to the
cash balance account and includes 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>
1999 1998
------- -------
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year.............. $11,826 $10,646
Service cost......................................... 2,052 1,774
Interest cost........................................ 988 850
Actuarial loss (gain)................................ (303) 401
Benefits paid........................................ (1,095) (1,845)
------- -------
Benefit obligation at end of year.................. $13,468 $11,826
======= =======
Change in plan assets
Fair value of plan assets at beginning of year....... $13,522 $11,742
Actual return on plan assets......................... 1,741 1,530
Employer contribution................................ 1,000 2,095
Benefits paid........................................ (1,095) (1,845)
------- -------
Fair value of plan assets at end of year........... $15,168 $13,522
======= =======
Funded status at December 31
Plan assets in excess of benefit obligation.......... $ 1,700 $ 1,696
Unrecognized transition asset........................ (335) (410)
Unrecognized prior service cost (credit)............. (227) (278)
Unrecognized net actuarial gain...................... (3,082) (1,962)
------- -------
Accrued benefit cost............................... $(1,944) $ (954)
======= =======
</TABLE>
F-13
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Actuarial assumptions as of December 31
Discount rate................................... 7.75% 6.75% 7.25%
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.................................... $2,052 $1,774 $1,943
Interest cost................................... 988 850 810
Expected return on plan assets.................. (925) (803) (800)
Amortization of prior service cost.............. (51) (51) (51)
Amortization of transition asset................ (74) (74) (74)
Recognized net actuarial gain................... -- -- (25)
------ ------ ------
Net pension cost.............................. $1,990 $1,696 $1,803
====== ====== ======
</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 $1,264,000, $1,762,000 and $1,682,000 in 1999, 1998
and 1997, respectively.
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 $6.9 million and $5.3
million at December 31, 1999 and 1998, respectively.
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 $319,000,
$260,000 and $230,000 in 1999, 1998 and 1997, 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 $461,000, $213,000 and $186,000 in 1999, 1998 and 1997,
respectively.
10. 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 $7.9 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 $15.1 million in 1999, $18.0 million in 1998 and $18.9
million in 1997.
F-14
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum obligations under lease commitments in effect at December 31,
1999, were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Capitalized Operating
Leases Leases
----------- ---------
<S> <C> <C>
2000................................................ $ 4,037 $10,097
2001................................................ 3,856 10,008
2002................................................ 3,021 9,737
2003................................................ 2,051 9,110
2004................................................ -- 1,557
Thereafter.......................................... -- 1,124
------- -------
Total minimum lease payments.................... 12,965 41,633
Less sublease commitments........................... -- (1,256)
Less amount representing interest................... (1,571) --
------- -------
Total........................................... $11,394 $40,377
======= =======
</TABLE>
11. Long-Term Debt
Long-term debt consists of the long-term portion of capitalized lease
obligations.
12. Credit Facility
At December 31, 1999 and 1998, 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. 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
$516,000, $570,000 and $494,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
13. Contingencies
At December 31, 1999, the Exchange was contingently liable on irrevocable
letters of credit totaling $33 million in connection with its mutual offset
agreement with the Singapore Exchange Derivatives Trading Ltd. (formerly SIMEX)
and $2.5 million in connection with activities of GFX Corporation. 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.
14. 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\\2\\ 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 (losses) are included in other revenue in the accompanying
consolidated statements of income. Net trading gains amounted to $2,392,000 in
1999, $4,786,000 in 1998 and $2,173,000 in 1997.
F-15
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. 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 PMT Limited
Partnership ("PMT", a limited partnership which operates the GLOBEX\\2\\
electronic trading system). A summary by business segment follows (dollars in
thousands):
<TABLE>
<CAPTION>
CME GFX PMT Eliminations Total
-------- ------ ------- ------------ --------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1999
Total revenues from external
customers................... $178,792 $2,392 $18,213 $ -- $199,397
Intersegment revenues........ 15,173 1,190 -- (16,363) --
Investment income............ 8,750 310 31 -- 9,091
Depreciation and
amortization................ 25,141 133 -- -- 25,274
Operating profit (loss)...... 4,236 (675) 2,578 505 6,644
Total assets................. 298,385 7,990 3,761 (8,433) 301,703
Capital expenditures......... 37,438 42 -- -- 37,480
Year Ended December 31, 1998
Total revenues from external
customers................... $170,136 $4,786 $10,177 $ -- $185,099
Intersegment revenues........ 5,441 -- -- (5,441) --
Investment income............ 9,803 314 -- -- 10,117
Depreciation and
amortization................ 17,849 94 15 (15) 17,943
Operating profit (loss)...... 10,218 1,620 3,570 (1,215) 14,193
Total assets................. 292,298 8,663 1,803 (9,559) 293,205
Capital expenditures......... 18,809 8 -- -- 18,817
Year Ended December 31, 1997
Total revenues from external
customers................... $161,746 $2,173 $ 5,547 $ -- $169,466
Intersegment revenues........ 3,542 -- -- (3,542) --
Investment income............ 7,860 318 -- -- 8,178
Depreciation and
amortization................ 16,031 595 66 (3) 16,689
Operating profit (loss)...... 19,930 1 (872) (1) 19,058
Total assets................. 328,436 6,856 1,409 (7,970) 328,731
Capital expenditures......... 14,320 26 -- -- 14,346
</TABLE>
16. Discontinued Operations
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
----------
(dollars
in
thousands)
<S> <C>
Revenues of discontinued operations............................ $ --
Expenses of discontinued operations............................ (3,856)
Income tax benefit............................................. 1,542
-------
Loss from operations........................................... (2,314)
Loss from discontinuance, net of income tax benefit of $743.... (1,114)
-------
Total loss from discontinued operations........................ $(3,428)
=======
</TABLE>
F-16
<PAGE>
CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. Demutualization Plan
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 PMT 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.
18. Subsequent Event
During January 2000, the Exchange entered into an employment agreement with
James J. McNulty to serve as its President and Chief Executive Officer from
February 7, 2000, through December 31, 2003. Mr. McNulty was granted an option
to purchase up to 2.5% of the stock of the Exchange at a price equal to 2.5% of
the aggregate value of the Exchange memberships, as defined, and an option to
purchase up to an additional 2.5% of the stock of the Exchange at a price equal
to 3.75% of the aggregate value of the Exchange memberships. These options vest
40% after one year and an additional 20% after each of the succeeding three
years, and are exercisable for a period of ten years. In the event that the
Exchange does not demutualize, Mr. McNulty will be entitled to a cash payment
based on the increase in the value of Exchange memberships on the exercise date
over the value of Exchange memberships on the grant date in an amount similar
to that described above.
F-17
<PAGE>
EXHIBIT A
AMENDED AND RESTATED
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 110,005,332 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
A-1
<PAGE>
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;
(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, 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,
A-2
<PAGE>
for the dissemination of price information, 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 acceptance by the Delaware
Secretary of State of the filing of this Amended and Restated Certificate.
"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
A-3
<PAGE>
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 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, conveyed, 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, conveyed, sold or otherwise
disposed; and any shares so permitted to be transferred shall not
thereafter be subject to any restrictions under this Section 3. In
addition, such holder may transfer, convey, 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, conveyed, sold or otherwise
disposed; and any shares so permitted to be transferred shall not
thereafter be subject to any restrictions under this Section 3. In
addition, such holder may transfer, convey, sell or otherwise dispose
of such holder's Class A Common Stock as described in clause (a) of
this Section 3.
A-4
<PAGE>
(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, conveyed, sold or otherwise
disposed; and any shares so permitted to be transferred shall not
thereafter be subject to any restrictions under this Section 3. In
addition, such holder may transfer, convey, 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.
Notwithstanding the foregoing provisions of this Section 3, the Board of
Directors may remove some or all of the foregoing restrictions on transfer if
it determines, in its sole discretion, that such removal is appropriate.
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 five 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 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.
A-5
<PAGE>
(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 exercise any of the trading rights in
respect of a series of Class B Common Stock 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 lease of the trading privilege component of any series of
Class B Common Stock shall be valid and binding on the corporation
unless and until (x) the lessee 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 lease has been reported to the corporation.
(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
A-6
<PAGE>
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 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.
A-7
<PAGE>
(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 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.
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(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.
(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 recapitalization contemplated by
Subdivision 4 of this Article, 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.
Subdivision 4: Recapitalization
Upon the filing of this Amended and Restated Certificate of Incorporation
with the Secretary of State of Delaware:
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(1) Each of the then outstanding shares of the corporation's CME Class
Common Stock, $0.01 par value, authorized immediately prior to the
effectiveness of such filing, shall be converted into (i) 16,200 shares of
Class A Common Stock, $0.01 par value, and (ii) one share of Class B Common
Stock, Series B-1, $0.01 par value.
(2) Each of the then outstanding shares of the corporation's IMM Class
Common Stock, $0.01 par value, authorized immediately prior to the
effectiveness of such filing, shall be converted into (i) 10,800 shares of
Class A Common Stock, $0.01 par value, and (ii) one share of Class B Common
Stock, Series B-2, $0.01 par value.
(3) Each of the then outstanding shares of the corporation's IOM Class
Common Stock, $0.01 par value, authorized immediately prior to the
effectiveness of such filing, shall be converted into (i) 5,400 shares of
Class A Common Stock, $0.01 par value, and (ii) one share of Class B Common
Stock, Series B-3, $0.01 par value.
(4) Each of the then outstanding shares of the corporation's GEM Class
Common Stock, $0.01 par value, authorized immediately prior to the
effectiveness of such filing, shall be converted into one share of Class B
Common Stock, Series B-4, $0.01 par value.
(5) Each of the then outstanding shares of the corporation's Fractional
GEM Class Common Stock, $0.01 par value per share, authorized immediately
prior to the effectiveness of such filing, shall be converted into one
share of Class B Common Stock, Series B-5, $0.01 par value.
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
(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.
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(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;
(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.
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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
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permitted by law, to take such action or actions as the Board of Directors or
such committee 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 April 1, 2000, between Chicago Mercantile Exchange, an Illinois not-for-
profit corporation ("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
In addition to the words defined elsewhere in this Agreement, the following
words have the following respective meanings, and such definitions shall be
equally applicable to both the singular and plural forms of any of the words
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.
"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.
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"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 the 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.
"New CME" means Chicago Mercantile Exchange Inc., a Delaware
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.
"Plan of Recapitalization" means the Plan of Recapitalization dated as
of April 1, 2000 of New CME.
"SEC" means the Securities and Exchange Commission.
"Second Merger" means the merger of Transitory into and with New CME
contemplated by the Agreement and Plan of Merger dated as of April 1, 2000
between Transitory and New CME.
"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) 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, of a public or private nature, of each
of the Constituent Corporations, and all property, real, personal and
mixed, all debts due on whatever account, including subscriptions to
membership interests and all other choses in action, and all and every
other interest, of or belonging to or due 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 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.
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(e) (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 to the Effective Date; and (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.
(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.
Section 2.2 Charter and By-Laws. The Certificate of Incorporation and By-
laws of Transitory as in effect on the Effective Date shall be and constitute
the Certificate of Incorporation and By-Laws of the Surviving Corporation until
the same shall be altered, amended or changed in accordance with their
respective terms and applicable law.
Section 2.3 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 2.4 Employees and Agents. 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.
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.
Each of the Membership Interests in Transitory described in the foregoing
clauses (a) through (e) (inclusive) shall have the rights, preferences and
privileges provided for in the Consolidated Rules of CME for the corresponding
Membership Interests in CME as of the Effective Date.
Section 3.2 Further Rules. 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.
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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 cause 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 New CME, relating to its
issuance of its common 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
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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 Ruling. Issuance by the Internal Revenue
Service of a ruling generally to the effect that the conversion of
Membership Interests into Class A Common Stock and Class B Common Stock, or
Class B Common Stock only, of New CME through the Merger, the Second Merger
and the Plan of Recapitalization qualifies for tax-free treatment under the
Internal Revenue Code of 1986, as amended.
(e) P-M-T. The offer by New CME 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, Vice Chairman,
President or any Vice President of each Constituent Corporation, 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 unenforceability 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.
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.
B-5
<PAGE>
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 duly authorized officer
as of the day and year aforesaid.
Chicago Mercantile Exchange
By: _________________________________
Scott Gordon
Chairman of the Board
CME Transitory Co.
By: _________________________________
Scott Gordon
Chairman of the Board
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
------- ----------------------
<C> <S> <C>
2.1 Form of Agreement and Plan of Merger dated as of April 1,
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 April 1,
2000 between CME Transitory Co. and the Registrant
2.3* Plan of Recapitalization dated as of April 1, 2000
3.1* Certificate of incorporation of the Registrant
3.2* Amended and Restated Certificate of Incorporation (as in
effect immediately prior to the recapitalization
contemplated by the Plan of Recapitalization)
3.3* By-laws of the Registrant
3.4 Amended and Restated Certificate of Incorporation of
Registrant (as in effect immediately after the
recapitalization contemplated by the Plan of
Recapitalization) (included as Exhibit A to the Proxy
Statement/Prospectus)
5.1* Opinion of Sidley & Austin regarding legality of
securities being registered
8.1 Opinion of Sidley & Austin regarding tax matters
10.1* Chicago Mercantile Exchange Omnibus Stock Plan, effective
February 7, 2000.
10.2* Chicago Mercantile Exchange Senior Management Supplemental
Deferred Savings Plan, including First Amendment thereto
dated December 14, 1994, Second Amendment thereto dated
December 8, 1998 and Administrative Guidelines thereto.
10.3* Chicago Mercantile Exchange Directors' Deferred
Compensation Plan, including First Amendment thereto dated
December 8, 1998.
10.4* Chicago Mercantile Exchange Supplemental Executive
Retirement Plan, including First Amendment thereto dated
December 31, 1996, Second Amendment thereto dated January
14, 1998 and Third Amendment thereto dated December ,
1998.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S> <C>
10.5* Chicago Mercantile Exchange Supplemental Executive
Retirement Trust, including First Amendment thereto dated
September 7, 1993.
10.6* Agreement dated March 21, 1997 between Chicago Mercantile
Exchange and T. Eric Kilcollin.
10.7* Separation Agreement and General Release, executed
December 31, 1998 between T. Eric Kilcollin and Chicago
Mercantile Exchange.
10.8* Agreement dated February 7, 2000 between Chicago
Mercantile Exchange and James J. McNulty.
10.9* Employment Agreement dated October 27, 1998 between
Chicago Mercantile Exchange and Frederick Arditti, and
First Amendment thereto dated October 27, 1998 and Second
Amendment thereto dated October 27, 1998.
10.10* Employment Agreement dated December 10, 1999 between
Chicago Mercantile Exchange and Gerald D. Beyer.
10.11* Employment Agreement, executed September 8, 1999 between
Chicago Mercantile Exchange and Phupinder Gill.
10.12* Employment Agreement dated July 17, 1998 between Chicago
Mercantile Exchange and William Jenks
10.13* License Agreement, effective as of September 24, 1997
between Standard & Poor's, a Division of The McGraw-Hill
Companies, Inc., and Chicago Mercantile Exchange.
(confidential material appearing in this document has been
omitted and filed separately with the Securities and
Exchange Commission in accordance with the Securities Act
of 1933, as amended, and 17 C.F.R. 230.406 and 200.80
promulgated thereunder. Omitted information has been
replaced with asterisks.)
10.14* Lease dated as of November 11, 1983 between Chicago
Mercantile Exchange Trust (successor to CME Real Estate
Co. of Chicago, Illinois) and Chicago Mercantile Exchange,
including amendment thereto dated as of December 6, 1989.
10.15* Lease dated March 31, 1988 between EOP--10 & 30 South
Wacker, L.L.C., as beneficiary of a land trust dated
October 1, 1997 and known as American National Bank and
Trust Company of Chicago Trust No. 123434 (as successor in
interest to American National Bank and Trust Company of
Chicago, not individually but solely as trustee under
Trust Agreement dated June 2, 1981 and known as Trust No.
51234) and Chicago Mercantile Exchange relating to 10
South Wacker Drive, including First Amendment thereto
dated as of November 1, 1999.
10.16* Lease dated May 11, 1981 between EOP--10 & 30 South
Wacker, L.L.C., as beneficiary of a land trust dated
October 1, 1997 and known as American National Bank and
Trust Company of Chicago Trust No. 123434-06 (as successor
in interest to American National Bank and Trust Company of
Chicago, not individually but solely as trustee under
Trust Agreement dated March 20, 1980 and known as Trust
No. 48268) and Chicago Mercantile Exchange relating to 30
South Wacker Drive, including First Amendment thereto
dated as of February 1, 1982, Second Amendment thereto
dated as of April 26, 1982, Third Amendment thereto dated
as of June 29, 1982, Fourth Amendment thereto dated as of
July 28, 1982, Fifth Amendment thereto dated as of October
7, 1982, Sixth Amendment thereto dated as of July 5, 1983,
Seventh Amendment thereto dated as of September 19, 1983,
Eighth Amendment thereto dated as of October 17, 1983,
Ninth Amendment thereto dated as of December 3, 1984,
Tenth Amendment thereto dated as of March 16, 1987,
Eleventh Amendment thereto dated as of January 1, 1999,
Twelfth Amendment thereto dated as of June 30, 1999.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S> <C>
10.17* Third Amendment to Employment Agreement dated March 3,
2000, between Chicago Mercantile Exchange and Frederick
Arditti.
10.18* Separation Agreement and General Release dated March 21,
2000 between Gerald D. Beyer and Chicago Mercantile
Exchange.
10.19* Separation Agreement and General Release dated March 21,
2000 between William W. Jenks and Chicago Mercantile
Exchange.
21.1* Subsidiaries of the Registrant
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>
- --------
*Previously filed.
(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
II-3
<PAGE>
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 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.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 4 to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Chicago, State of Illinois, on April
25, 2000.
Chicago Mercantile Exchange Inc.
/s/ M. Scott Gordon
By: ____________________________
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 April, 2000.
<TABLE>
<CAPTION>
Name Title
---- -----
<S> <C>
M. Scott Gordon Chairman of the Board and Director
___________________________________________ (Chief Executive Officer)
M. Scott Gordon
David G. Gomach Senior Vice President and Chief Financial
___________________________________________ Officer (Principal Financial Officer)
David G. Gomach
Raymond C. Repede Vice President and Controller
___________________________________________ (Principal Accounting Officer)
Raymond C. Repede
* Director
___________________________________________
H. Jack Bouroudjian
* Director
___________________________________________
Timothy R. Brennan
* Director
___________________________________________
Leslie Henner Burns
* Director
___________________________________________
Jeffrey R. Carter
Director
___________________________________________
E. Gerald Corrigan
* Director
___________________________________________
Terrence A. Duffy
* Director
___________________________________________
Martin J. Gepsman
* Director
___________________________________________
Yra G. Harris
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Name Title
---- -----
<S> <C>
* Director
___________________________________________
Robert L. Haworth
* Director
___________________________________________
Bruce F. Johnson
* Director
___________________________________________
Gary M. Katler
* Director
___________________________________________
Paul Kimball
* Director
___________________________________________
John W. Lacey
Director
___________________________________________
Patrick B. Lynch
* Director
___________________________________________
Leo Melamed
* Director
___________________________________________
Merton H. Miller
* Director
___________________________________________
William P. Miller II
* Director
___________________________________________
Laurence E. Mollner
* Director
___________________________________________
Patrick J. Mulchrone
* Director
___________________________________________
John D. Newhouse
* Director
___________________________________________
James E. Oliff
* Director
___________________________________________
Mark G. Papadopoulos
* Director
___________________________________________
Ward Parkinson
* Director
___________________________________________
Robert J. Prosi
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Name Title
---- -----
<S> <C>
Director
___________________________________________
David M. Pryde
* Director
___________________________________________
Irwin Rosen
* Director
___________________________________________
William G. Salatich, Jr.
* Director
___________________________________________
John F. Sandner
* Director
___________________________________________
Verne O. Sedlacek
* Director
___________________________________________
Leon C. Shender
* Director
___________________________________________
William R. Shepard
* Director
___________________________________________
Howard J. Siegel
* Director
___________________________________________
David I. Silverman
* Director
___________________________________________
Jeffrey L. Silverman
* Director
___________________________________________
Paul Simon
</TABLE>
/s/ Craig S. Donohue
*By: _________________________________
Craig S. Donohue
Attorney-in-Fact
II-7
<PAGE>
Exhibit 8.1
Chicago Mercantile Exchange Inc.
Registration Statement on Form S-4
Sidley & Austin
Bank One Plaza
10 South Dearborn Street
Chicago, Illinois 60603
April 25, 2000
Chicago Mercantile Exchange Inc.
30 South Wacker Drive
Chicago, Illinois 60606
Ladies and Gentlemen:
We have acted as counsel to the Chicago Mercantile Exchange Inc.,
a Delaware corporation ("New CME") in connection with the proposed conversion of
the Chicago Mercantile Exchange, an Illinois not for profit corporation ("Old
CME"), from a not-for-profit membership corporation to a for-profit stock
corporation (the "demutualization"), as described in the Registration Statement
on Form S-4 (the "Registration Statement"), filed by New CME with the Securities
and Exchange Commission pursuant to the Securities Act of 1933, as amended. The
Registration Statement includes the Proxy Statement/Prospectus (the
"Prospectus") relating to the demutualization. Capitalized terms not defined
herein have the meanings specified in the Prospectus.
As more fully described in the Prospectus, the demutualization
will be effected in a three-step process. First, Old CME will be merged into CME
Transitory Co. ("Transitory Co."), a newly formed, not for profit Delaware
corporation (the "First Merger"). Second, Transitory Co. will be merged into New
CME (the "Second Merger"). Third, the stock issued by New CME in the Second
Merger will be converted into Class A and Class B common stock of New CME in a
recapitalization (the "Recapitalization"). It is a condition to the closing of
the demutualization transaction that Old CME receive 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
conversion of his or her membership interest in Old CME into Class A common
stock and Class B common stock.
In rendering the opinions expressed below, we have examined the
Prospectus and such other documents as we have deemed relevant and necessary,
including, without limitation, the forms of Certificate of Incorporation of New
CME, the Agreement and Plan of Merger between Old CME and Transitory Co., the
Agreement and Plan of Merger between Transitory Co. and New CME and the Plan of
Recapitalization of New CME attached as exhibits to the Registration Statement.
Such opinions are conditioned upon the accuracy and completeness of the facts,
information and factual representations contained in the Prospectus and such
other
<PAGE>
Sidley & Austin Chicago
Chicago Mercantile Exchange Inc.
April 25, 2000
Page 2
documents as of the date hereof and the continuing accuracy and completeness
thereof as of the date of the consummation of the demutualization. We have
assumed that the transactions contemplated by the Prospectus and such other
documents will occur as provided therein and that there will be no material
change to the Prospectus or any of such other documents between the date hereof
and the date of the consummation of the demutualization.
We have assumed the authenticity of all documents submitted to us as
originals, the genuineness of all signatures, the legal capacity of all natural
persons and the conformity with original documents of all copies submitted to us
for our examination. We have further assumed that the written statements as to
factual matters made by the executives of Old CME contained in the ruling
request submission dated December 30, 1999, as supplemented by letter dated
March 17, 2000, are accurate in all respects as of the date hereof and will
continue to be accurate in all respects as of the consummation of the
demutualization.
In rendering the opinions expressed below, we have considered the
applicable provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), Regulations promulgated thereunder by the United States Treasury
Department (the "Regulations"), pertinent judicial authorities, rulings and
interpretations of the Internal Revenue Service and such other authorities as we
have considered relevant. It should be noted that the Code, the Regulations and
such judicial authorities, rulings, interpretations and other authorities are
subject to change at any time and, in some circumstances, with retroactive
effect; and any such change could affect the opinions stated herein.
Based upon and subject to the foregoing, we are of the opinion that,
for federal income tax purposes:
(i) No gain or loss will be recognized by a member on the
conversion, through the three-step demutualization, of his or her
membership interest in Old CME into Class A common stock and Class B common
stock or Class B common stock only.
(ii) The aggregate basis of the shares of New CME received by a
member in conversion of 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, that basis will be allocated in
proportion to the fair market value of each on the date of the
demutualization.
(iii) The holding period of the Class A common stock and Class B
common stock received by a member in conversion of a membership interest
will include the period for which the membership interest has been held,
provided that the membership interest is held as a capital asset on the
date of the conversion.
<PAGE>
Sidley & Austin Chicago
Chicago Mercantile Exchange Inc.
April 25, 2000
Page 3
(iv) Old CME will not recognize any gain or loss as a result of the
transfer of its assets to New CME and the assumption by New CME of the
liabilities of Old CME.
Based upon and subject to the foregoing, we are also of the opinion
that the discussion set forth in the Prospectus under the caption
"Demutualization Proposal--Federal Income Tax Consequences" constitutes, in all
material respects, a fair and accurate summary of the matters addressed therein,
based upon current law and the assumptions stated or referred to therein.
Except as expressly set forth above, you have not requested, and we do
not herein express, any opinion concerning the tax consequences of, or any other
matters related to, the demutualization.
We assume no obligation to update or supplement this letter to reflect
any facts or circumstances which may hereafter come to our attention with
respect to the opinions expressed above, including any changes in applicable law
which may hereafter occur.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to all references to our Firm included in or made a
part of the Registration Statement.
Very truly yours,
/s/ Sidley & Austin
-------------------
