<PAGE>
As filed with the Securities and Exchange Commission on April 21, 2000
Registration No. 333-95561
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
___________
Amendment No.4
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)
___________
<TABLE>
<S> <C> <C>
Delaware 6231 36-4340266
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
30 South Wacker Drive
Chicago, Illinois 60606
(312) 930-1000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Craig S. Donohue, Esq.
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 21, 2000
[LOGO]
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
<PAGE>
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..................................................................................... 10
Risks Related to Demutualization.............................................................. 10
Risks Related to Our Business................................................................. 14
Risks Related to Regulation and Litigation.................................................... 19
INFORMATION REGARDING SPECIAL MEETING............................................................ 20
Persons Making the Solicitation............................................................... 20
Time and Place of Special Meeting............................................................. 20
Eligibility to Vote........................................................................... 21
Available Votes; Quorum Required for Meeting.................................................. 21
Manner of Voting.............................................................................. 21
Required Vote................................................................................. 22
Board Recommendation.......................................................................... 22
Methods of Solicitation of Proxies; Costs..................................................... 22
DEMUTUALIZATION PROPOSAL......................................................................... 22
Reasons for Demutualization................................................................... 23
Description of Demutualization Transaction.................................................... 25
Conversion of Membership Interests into Shares................................................ 27
Rights of Class B Common Stock................................................................ 28
Election of Board of Directors................................................................ 28
Differences in Ownership Rights............................................................... 30
Required Regulatory Approvals................................................................. 32
Amendment or Termination...................................................................... 33
Conditions to Effectiveness of the Demutualization Transactions............................... 33
Effectiveness of the Demutualization Transactions............................................. 34
Federal Income Tax Consequences............................................................... 34
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS................................................................ 35
CAPITALIZATION................................................................................... 39
DESCRIPTION OF CAPITAL STOCK OF NEW CME.......................................................... 40
Description of Common Stock................................................................... 40
Description of Additional Provisions of Class B Common Stock.................................. 41
Preferred Stock............................................................................... 44
Transfer Restrictions......................................................................... 44
Other Charter Provisions...................................................................... 45
Transfer Agent................................................................................ 46
</TABLE>
<PAGE>
<TABLE>
<S> <C>
MANAGEMENT....................................................................................... 47
Directors and Executive Officers.............................................................. 47
Director Compensation......................................................................... 55
Committees of the Board of Directors.......................................................... 55
Limitation of Liability and Indemnification Matters........................................... 56
Executive Compensation........................................................................ 57
Employee Benefit Plans........................................................................ 59
Employment-Related Agreements................................................................. 61
Beneficial Ownership of Management............................................................ 65
BUSINESS......................................................................................... 68
Products...................................................................................... 70
Execution Facilities.......................................................................... 76
Clearing...................................................................................... 79
Market Data................................................................................... 83
International Alliances....................................................................... 84
Marketing Programs and Advertising............................................................ 84
Competition................................................................................... 84
Our Members................................................................................... 86
Other Business Relationships And Subsidiaries................................................. 88
Intellectual Property......................................................................... 88
Employees..................................................................................... 89
Facilities.................................................................................... 89
Legal Proceedings............................................................................. 89
Regulation.................................................................................... 90
WHERE YOU CAN FIND MORE INFORMATION.............................................................. 92
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 92
Historical Overview........................................................................... 92
Results of Operations......................................................................... 95
Financial Position............................................................................ 97
Liquidity and Capital Resources............................................................... 98
Market Risk................................................................................... 99
Accounting Standards.......................................................................... 100
EXPERTS.......................................................................................... 100
VALIDITY OF SECURITIES........................................................................... 100
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.
The demutualization will be effected in a three-step process. First,
our existing corporation will be merged into an intermediate Delaware nonstock
membership corporation, which we have formed called "CME Transitory Co." Second,
CME Transitory Co. will be merged into a Delaware stock corporation. Third, the
stock issued by the Delaware stock corporation in the second step merger will be
converted into shares of Class A and Class B common stock of the Delaware stock
corporation in a recapitalization. These steps are depicted in the following
chart.
[Graphic: Three rectangular boxes aligned from left to right, with an
arrow silhouette pointing from the first to the second box and pointing from the
second to the third box. Inscribed in the first box is "Chicago Mercantile
Exchange (Illinois not-for-profit corporation)", inscribed in the second is "CME
Transitory Co. (Delaware nonstock corporation)", and inscribed in the third is
"Chicago Mercantile Exchange Inc. (Delaware stock corporation)". Written above
the first arrow is the number "1" and below the arrow the phrases the phrases
"Merger" and "Membership Interests for Membership Interests". Written above the
second arrow is the number "2" and below the arrow the phrases "Merger" and
"Membership Interests for five classes of common stock". A third arrow
silhouette pointing to the right is set forth below the third box. Written above
the arrow is the number "3" and below the arrow the word "Recapitalization". The
arrow points to the phrase "Five classes of common stock converted into series
of Class B shares and, in the case of CME, IMM and IOM members, Class A
shares".]
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:
1
<PAGE>
<TABLE>
<CAPTION>
Distribution of Class A and B Shares By Individual Membership Interest
------------------------------------------------------------------------
Number of Shares to be Received Per Membership Interest
Membership Class B Shares
---------------------------------
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>
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:
<TABLE>
<CAPTION>
Membership Divisions
------------------------------------------------------------------------
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>
<TABLE>
<CAPTION>
Distribution of Class A and B Shares By Membership Division
------------------------------------------------------------------------
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>
<TABLE>
<CAPTION>
Distribution of Relative Equity by Membership Division
- -------------------------------------------------------------------------------------------------
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>
___________________
* 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.
** 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.
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 0 1/60 0.5 21,400 0.1
Fractions*
- --------------------------------------------------------------------------------------------------------------------
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
3
<PAGE>
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
. 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.
4
<PAGE>
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, 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 (in 25% increments each three months) 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.
5
<PAGE>
Nomination and Election of Board of Directors
<TABLE>
<CAPTION>
- ---------------------------------------------------- ------------------------------------------------------
Current Provisions After Demutualization
Number of Candidates Number of Candidates
Directors Nominated By Elected By Directors Nominated By Elected By
- ---------------------------------------------------- ------------------------------------------------------
<S> <C> <C> <C> <C> <C>
12 CME Nominating CME members 3 Series B-1 Nominating Series B-1
Committee Committee holders
8 IMM Nominating IMM members 2 Series B-2 Nominating Series B-2
Committee Committee holders
4 IOM Nominating IOM members 1 Series B-3 Nominating Series B-3
Committee Committee holders
1 GEM Nominating GEM members 0
Committee
12 Chairman of Board of Directors 0
the Board
2 * *
13 Board Nominating Class A and B
Committee stockholders
- ---------------------------------------------------- ------------------------------------------------------
Total 39 Total 19
- ---------------------------------------------------- ------------------------------------------------------
</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."
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.
6
<PAGE>
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.
. 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 GLOBEX(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
7
<PAGE>
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.
8
<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.
<TABLE>
<CAPTION>
Selected Consolidated Financial Data
(amounts in thousands)
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.
9
<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.
10
<PAGE>
. 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 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
11
<PAGE>
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 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.
12
<PAGE>
. 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.
13
<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.
14
<PAGE>
. 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 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
15
<PAGE>
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.
. 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;
16
<PAGE>
. 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.
17
<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.
18
<PAGE>
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.
. 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,
19
<PAGE>
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.
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.
20
<PAGE>
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
21
<PAGE>
Department, 30 South Wacker Drive, Chicago, Illinois 60606. Your proxy must be
received prior to the start of the meeting in order to be counted.
To obtain a replacement 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.
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.
22
<PAGE>
Reasons for Demutualization
The financial and risk management markets in which we operate are
experiencing significant and rapid changes. These changes are largely due to
advances in technology, a relaxation of regulatory barriers and resultant cost
efficiencies. Computer and telecommunications systems today can efficiently and
economically bring buyers and sellers together in ways that present new
challenges to the traditional exchange model of centralized physical auction
markets. The Internet and proprietary networks are changing investor behavior
and revolutionizing how investors interface with financial markets. Other
technological innovations are reducing the costs and barriers to entry for
alternative exchange-type systems.
The traditional exchange model is undergoing a significant
transformation with the emergence of electronic trading technologies.
Technological innovations and reduced regulatory burdens in the global financial
markets have lowered barriers to entry, have created new competitors, and are
encouraging traditional exchanges to modernize their operations. In order to
achieve the necessary economies of scale and remain competitive in a
low-price/high-volume environment, consolidation among exchanges and financial
intermediaries is likely to continue. With respect to exchanges, large market
users are expected to continue to seek more efficient trading, processing and
clearing facilities. Although 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 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
23
<PAGE>
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
24
<PAGE>
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.
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:
[Graphic: Three rectangular boxes aligned from left to right, with an
arrow silhouette pointing from the first to the second box and pointing from the
second to the third box. Inscribed in the first box is "Chicago Mercantile
Exchange (Illinois not-for-profit corporation)", inscribed in the second is "CME
Transitory Co. (Delaware nonstock corporation)", and inscribed in the third is
"Chicago Mercantile Exchange Inc. (Delaware stock corporation)". Written above
the first arrow is the number "1" and below the arrow the phrases the phrases
"Merger" and "Membership Interests for Membership Interests". Written above the
second arrow is the number "2" and below the arrow the phrases "Merger" and
"Membership Interests for five classes of common stock". A third arrow
silhouette pointing to the right is set forth below the third box. Written above
the arrow is the number "3" and below the arrow the word "Recapitalization". The
arrow points to the phrase "Five classes of common stock converted into series
of Class B shares and, in the case of CME, IMM and IOM members, Class A
shares".]
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
25
<PAGE>
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.
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.
26
<PAGE>
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:
Number of Shares To Be Received Per Membership
Interest (or Fraction)
Class B Shares
Membership Division Class A Shares Number Series
------------------- -------------- ------ ------
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
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.
27
<PAGE>
Distribution to Individual Members
<TABLE>
<CAPTION>
Total Equity
Equivalent Class A Shares per Membership
Membership Class A Class B Represented by Class B (expressed in equivalent
Division Shares Series Shares Class A shares)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CME 16,200 B-1 1,800 18,000
IMM 10,800 B-2 1,200 12,000
IOM 5,400 B-3 600 6,000
GEM B-4 100 100
GEM Fractions B-5 10 10
</TABLE>
Distribution of Relative Equity by Membership Division
<TABLE>
<CAPTION>
Total Equity
Equivalent (expressed in Percentage
Class Class A Shares equivalent of Equity
Membership Number of Class A B Represented by Class A Distributed
Division Memberships Shares Series Class B 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 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
28
<PAGE>
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 by the Holders of Class A and B shares,
board voting together
3 Series B-1 Nominating Committee, elected by Holders of series B-1 shares
holders of series B-1 shares
2 Series B-2 Nominating Committee, elected by Holders of series B-2 shares
holders of series B-2 shares
1 Series B-3 Nominating Committee, elected by Holders of series B-3 shares
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:
----------------------------------------------------------------------
Number of Directors to be Elected
At Annual Stockholders Meeting
----------------------------------------------------------------------
Even Years Odd Years
Directors To Be Elected By (Starting (Starting
December 2000) December 2001)
----------------------------------------------------------------------
Holders of Class A and Class 6 7
B shares, voting together
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
----------------------------------------------------------------------
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.
29
<PAGE>
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 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
--------------------------------------------------------------------------------------
Dividends Stockholders may receive dividend Members are not allowed to receive
distributions based on current or dividends based on earnings.
accumulated earnings.
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Authorized Capital Charter authorizes issuance of up to (i) Charter and by-laws authorize the
100,000,000 shares of Class A common issuance of (i) 625 CME memberships, (ii)
stock, (ii) 5,332 shares of Class B 813 IMM memberships, (iii) 1,287 IOM
common stock in five series and (iii) memberships and (iv) 467 GEM memberships.
10,000,000 shares of preferred stock.
- -------------------------------------------------------------------------------------------------------------------
Transfer Restrictions Class B share transfers will not be Membership transfers are subject to
subject to restrictions; although compliance with rules, which require
exercise of the associated trading purchasers of membership interests to
privileges will be subject to the apply for membership. Applicants must be
eligibility requirements that presently adults of good moral character,
apply to the exercise of those trading reputation and business integrity, and
privileges. 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>
30
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
New CME Existing CME
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Voting:
Directors Holders of Class B shares will have the Members have the right to elect an
right to elect an aggregate of 6 aggregate of 25 directors as follows:
directors as follows:
Associated Membership Number of
Membership Number of Division Directors
Series Division Directors -------- ---------
------ -------- ---------
CME 12
B-1 CME 3 IMM 8
B-2 IMM 2 IOM 4
B-3 IOM 1 GEM 1
Class B stockholders in each series Members in a division have the right to
entitled to elect a director will have elect individuals to a nominating
the right to elect individuals to a committee, which slates candidates for
nominating committee, which slates election by members of that division.
candidates for election by stockholders
of that series.
The Chairman is empowered to appoint up
Holders of Class A and B shares will have to 12 directors, who must be approved by
the right to vote in the election of the the board.
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 pick-up the Members have the right, in what is called
"referendum" process. Class B a "referendum," to initiate rule changes,
stockholders will be given the right including adopting new rules and amending
under the charter to approve changes to or repealing existing rules of the
(i) products permitted to be traded by Exchange. If the board does not approve
each series, (ii) floor access rights and a member-initiated proposal, members have
privileges, including commitment to the right, in essence, to override that
maintain open outcry trading, (iii) the action by vote - provided at least
authorized and issued shares of each one-half of the votes eligible to be cast
series and (iv) eligibility to hold on the matter are cast and it is approved
shares of a series. Voting will be on a by a majority of the votes cast.
weighted basis, with series B-1 holders Weighted voting by membership division is
(CME) having 6 votes per share, series required on matters related to voting,
B-2 holders (IMM) having 2 votes per board or executive committee
share, series B-3 holders (IOM) having 1 representation, trading rights, rights
vote per share, series B-4 holders (GEM) upon dissolution or any other issue for
having 1/6/th/ vote per share, and which the board determines weighted
series B-5 holders (GEM fractions) having voting to be appropriate. Under weighted
1/60/th / vote per share. See voting, CME members have 6 votes per
"Description of Additional Provisions of membership, IMM members have 2 votes per
Class B Common Stock" under "Description membership, IOM members have 1 vote per
of Capital Stock of New CME." membership, GEM members have 1/6/th/ vote
per membership, and holders of GEM
fractions have 1/60/th/ vote per faction.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
New CME Existing CME
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Extraordinary Approval of a majority of the outstanding Approval of two-thirds of votes present
Transactions shares will be required to authorize and voting is required to authorize
charter amendments, mergers, sales of all charter amendments, mergers, sales of all
of the corporate assets or a dissolution. of the corporate assets or a dissolution.
- -------------------------------------------------------------------------------------------------------------------
Class/Series Holders of a class or series of stock No comparable statutory provision.
Voting will have 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 merger or No dissenters' rights.
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 will be made to Liquidating distributions are based on
stockholders based on the number of Class aggregate amounts originally paid-in for
A shares they hold or are considered to memberships.
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 2001). 39 members.
- -------------------------------------------------------------------------------------------------------------------
Ability to Limit Personal Allowed. Charter will contain provision Not allowed.
Liability of Directors adopting the maximum permitted limitation.
- -------------------------------------------------------------------------------------------------------------------
Antitakeover Provisions Charter will contain antitakeover None
provisions. See "Other Charter
Provisions" under "Description of Capital
Stock of New CME."
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
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
32
<PAGE>
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.
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.
33
<PAGE>
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.
Federal Income Tax Consequences
One of the conditions to the closing of the demutualization transaction is
our receipt of a private letter ruling from the Internal Revenue Service
generally to the effect that, for federal income tax purposes, no gain or loss
will be recognized by a member on the conversion of his or her membership
interest in the Exchange into Class A common stock and Class B common stock or
for Class B common stock only. Assuming this nonrecognition treatment, the
members would have the following additional federal income tax consequences:
. The aggregate basis of the shares of New CME received by a member in
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.
34
<PAGE>
We filed a request for the foregoing ruling with the Internal Revenue
Service on December 30, 1999. Because of the novelty of the demutualization
transactions, it is unclear at this time whether the Internal Revenue Service
will issue a favorable ruling or, if the Internal Revenue Service is willing to
issue 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.
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.
35
<PAGE>
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."
36
<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
Historical in P-M-T B Shares
------------- ------------- -------------
Assets (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
=========== =========== ===========
Liabilities and Equity
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 this
Unaudited Pro Forma Condensed Consolidated Balance Sheet.
37
<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.
38
<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
---------------------------
Acquisition Issuance of
of Interest Class A and
Historical in P-M-T B 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>
39
<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
40
<PAGE>
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 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.
41
<PAGE>
. 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 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
42
<PAGE>
. 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 41, 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
43
<PAGE>
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 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.
44
<PAGE>
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
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
45
<PAGE>
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 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
46
<PAGE>
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.
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. Duffy 41 Vice Chairman of the Board and Director 12/00
James E. Oliff 51 Second Vice Chairman of the Board and Director 12/00
Martin J. Gepsman 47 Secretary of the Board and Director 12/01
Robert L. Haworth 52 Treasurer and Director 12/00
Leo Melamed 67 Chairman Emeritus, Senior Policy Advisor and Non-Voting *
Member of the Board
</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
annual meeting in December 2001.
47
<PAGE>
<TABLE>
Name Age Positions Held Term Ends
---- --- --------------- ---------
<S> <C> <C> <C>
John F. Sandner 58 Special Policy Advisor and Director 12/00
James J. McNulty 48 President and Chief Executive Officer and Non-Voting Member **
of the Board
H. Jack Bouroudjian 38 Director 12/01
Timothy R. Brennan 58 Director 12/01
Leslie Henner Burns 44 Director 12/01
Jeffrey R. Carter 37 Director 12/00
E. Gerald Corrigan 58 Director ***
Yra G. Harris 46 Director 12/00
Bruce F. Johnson 57 Director 12/01
Gary M. Katler 53 Director 12/00
Paul Kimball 48 Director 12/00
John W. Lacey 61 Director ***
Patrick B. Lynch 34 Director 12/01
Merton H. Miller 76 Director ***
William P. Miller II 44 Director 12/00
Laurence E. Mollner 58 Director ***
Patrick J. Mulchrone 42 Director 12/01
John D. Newhouse 54 Director 12/01
Mark G. Papadopoulos 27 Director 12/01
Ward Parkinson 54 Director ***
Robert J. Prosi 52 Director 12/01
David M. Pryde 50 Director 12/00
Irwin Rosen 61 Director 12/00
William G. Salatich, Jr. 48 Director 12/00
Verne O. Sedlacek 45 Director 12/00
Leon C. Shender 45 Director 12/00
William R. Shepard 53 Director 12/00
Howard J. Siegel 43 Director 12/01
David I. Silverman 40 Director 12/00
Jeffrey L. Silverman 53 Director 12/01
Paul Simon 71 Director 12/00
Craig S. Donohue 38 Managing Director of Business Development and
</TABLE>
_____________________
** 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.
48
<PAGE>
<TABLE>
<CAPTION>
Name Age Positions Held Term Ends
---- --- --------------- ---------
<S> <C> <C> <C>
Corporate/Legal Affairs
Phupinder Gill 39 Managing Director and President, Clearing House Division
David G. Gomach 41 Managing Director and Chief Financial Officer
Satish S. Nandapurkar 36 Managing Director of e-Business
Amy M. Savin 37 Managing Director and Chief Marketing Officer
Donald D. Serpico 54 Managing Director of Operations
Lewis C. Ting 48 Managing Director of Organizational Development
</TABLE>
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 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.
49
<PAGE>
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 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
50
<PAGE>
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.
51
<PAGE>
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.
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
52
<PAGE>
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.
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
53
<PAGE>
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.
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.
54
<PAGE>
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 Mnaging 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 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
55
<PAGE>
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
56
<PAGE>
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.
57
<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.
58
<PAGE>
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.
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.
59
<PAGE>
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
Year Contribution Date the Contribution
Is Made Becomes Vested
------- --------------
1995 December 31, 1997
1996 December 31, 1998
1997 December 31, 1999
1998 August 1, 2000
1999 August 1, 2000
2000 August 1, 2000
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. 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:
Employer Contribution
Age Percentage
------------ -----------------------
under age 30 3%
age 30 - 34 4%
age 35 - 39 5%
age 40 - 44 6%
age 45 - 49 7%
age 50 - 54 8%
over age 54 9%
The individuals named below have projected annual retirement benefits,
based on current accumulated balances, an annual interest credit rate of 6% and
future service to age 65 at current salary levels as follows: Mr. Kilcollin,
none; Mr. Gordon, none; Mr. Arditti, $10,600; Mr. Beyer, $51,500; Mr. Gill,
$92,600; and Mr. Jenks, $43,600.
Non-Qualified Plans. The Exchange maintains the following non-qualified
plans which
60
<PAGE>
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 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
61
<PAGE>
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 change 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
62
<PAGE>
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 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,
63
<PAGE>
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.
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
64
<PAGE>
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.
65
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Total Equity
Expressed in
Name of Beneficial Class A Percent of Class B Shares Percent of Equivalent Class Percent of
Owner (1) Shares Class Number Series Class A shares (2) Total 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 * 18,100 *
1 B-4
- ---------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------
</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.
66
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Total Equity
Expressed in
Name of Beneficial Class A Percent of Class B Shares Percent of Equivalent Class Percent of
Owner (1) Shares Class Number Series Class A shares (2) Total Equity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 *
- ---------------------------------------------------------------------------------------------------------------------
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 *
- ---------------------------------------------------------------------------------------------------------------------
</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."
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.
67
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Total Equity
Expressed in
Name of Beneficial Class A Percent of Class B Shares Percent of Equivalent Class Percent of
Owner (1) Shares Class Number Series Class A shares (2) Total Equity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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."
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
68
<PAGE>
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.
We have developed innovative and cost-effective products, execution and
order routing systems, and clearing systems that have led to substantial volume
and to the benefit of our members and customers. As indicated in the chart
below, volume in our products remains strong and substantially greater today
than volume prior to 1994, despite recent fluctuations in volume. Fluctuations
in interest rate volatility, declines in currency volatility, growth in equity
trading, and the business cycle of the U.S. economy have led to the fluctuations
in our volume.
[Graphic: Bar graph entitled and showing "CME ANNUAL VOLUME OF
CONTRACTS TRADED 1990 - 1999". Below the horizontal axis each year for which
trading volume is measured is written in chronological order from left to right.
The vertical axis indicates the number of contracts traded, in millions,
beginning with zero and increasing, in intervals of 50, up to 250. The lower
portion of each bar is darkly shaded to the extent of the futures contracts
traded and the upper portion is lightly shaded to the extent of the options
contracts traded. Inset in a small square to the right of the graph is a legend
containing a lightly shaded box to the immediate left of the word "Options" and
immediately below which is a darkly shaded box to the immediate left of the word
"Futures". Futures contracts were traded at a rate of approximately 84 million
in 1990, 87 million in 1991, 107 million in 1992, 116 million in 1993, 176
million in 1994, 160 million in 1995, 141 million in 1996, 160 million in 1997,
184 million in 1998 and 168 million in 1999. Options contracts were traded at
the rate of approximately 18 million in 1990, 21 million in 1991, 27 million in
1992, 30 million in 1993, 50 million in 1994, 43 million in 1995, 35 million in
1996, 41 million in 1997, 43 million in 1998 and 33 million in 1999.]
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
69
<PAGE>
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.
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.
[Graphic: Pie chart entitled "1999 CME TRADE VOLUME SUMMARY" and
representing the trading volume in each of the CME's four major product sectors
as a percentage of the total trading volume. The entire chart represents and is
subtitled "(100% = 201 million contracts". Trading volume percentages are:
Interest Rate Products - 60%, Equity Index Products - 24%, Currency Products -
12% and Agricultural Products - 4%.]
70
<PAGE>
[Graphic: Pie chart entitled "1999 CLEARING FEE REVENUE" and
representing the sources of clearing fee revenue as a percentage of total
clearing fee revenue. The chart represents and is subtitled "(100% = $138.5
MILLION)", with revenue distributed as follows: Interest Rate Products - 36%,
Currency Products - 32%, Equity Index Products - 27% and Agricultural Products -
5%.]
Interest Rate Products. Our interest rate product line includes our
Eurodollar futures and options contracts. 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 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.
71
<PAGE>
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.
[Graphic: Bar graph representing and entitled "VOLUME OF INTEREST RATE
CONTRACTS TRADED 1994 - 1999". Below the horizontal axis each year for which
interest rate trading volume is measured is listed in chronological order from
left to right. The vertical axis indicates the number of interest rate contracts
traded, in millions, beginning with zero and increasing, in intervals of 50, to
150. The lower portion of each bar is darkly shaded to the extent of the futures
contracts traded and the top portion of each bar is lightly shaded to the extent
of options contracts traded. Inset in a small square to the right of the graph
is a legend containing a lightly shaded box to the immediate left of the word
"Options" and immediately below which is a darkly shaded box to the immediate
left of the word "Futures". Futures contracts were traded at the rate of
approximately 119 million in 1994, 110 million in 1995, 91 million in 1996, 103
million in 1997, 112 million in 1998 and 95 million in 1999. Options contracts
were traded at the rate of approximately 20 million in 1994, 21 million in 1995,
22 million in 1996, 25 million in 1997, 33 million in 1998 and 25 million in
1999.]
Stock Index Products. We offer trading in futures and options contracts
based upon the S&P 500(R) and Nasdaq 100(R) stock indices, as well as other
domestic and foreign small, medium and large cap indices. Over 90% of our volume
in stock index products is in products based on the S&P 500 Index, to which we
have an exclusive contract. Standard & Poor's Corporation designed and maintains
the S&P 500 Index to be an accurate proxy for a diversified equity portfolio
representing a broad cross-section of the U.S. equity market. The index is based
upon the stock prices of five hundred large-capitalization companies. In 1999,
the total notional value of S&P 500 futures contracts traded was $9.7 trillion
compared to the $8.9 trillion value of stocks traded on the New York Stock
Exchange. The Nasdaq 100 Index, also known as the "technology index," is based
on the one-hundred largest non-financial stocks listed on the Nasdaq stock
market. These products give market users the ability to hedge their equity
portfolios, to 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.
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
72
<PAGE>
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.
[Graphic: Bar graph entitled "VOLUME OF EQUITY INDEX CONTRACTS TRADED
1994 - 1999" and representing the number of futures and options contracts on
various stock indices traded on the CME. Below the horizontal axis each year
measured is listed in chronological order from left to right. The vertical axis
indicates the number of contracts traded, in millions, beginning with zero and
increasing, in intervals of 10, to 50. The lower portion of each bar is darkly
shaded to the extent of the futures contracts traded and the top portion is
lightly shaded to the extent of the options contracts traded. Inset in a small
square to the right of the graph is a legend containing a lightly shaded box to
the immediate left of the word "Options" and immediately below which is a darkly
shaded box to the immediate left of the word "Futures". Futures equity index
contracts were traded at the rate of approximately 20 million in 1994, 21
million in 1995, 22 million in 1996, 25 million in 1997, 39 million in 1998 and
43 million in 1999. Options equity index contracts were traded at the rate of
approximately 5 million in 1994, 6 million in 1995, 5 million in 1996, 5 million
in 1997, 5 million in 1998 and 5 million in 1999.]
We have had a licensing arrangement with Standard & Poor's Corporation
since 1980 that gives us the exclusive right to trade futures and options on
futures contracts on specified S&P stock indices, including the S&P 500. In
1997, we extended this arrangement until 2008, ensuring the continued success
and expansion of this market. Our Nasdaq 100 license agreement will also
continue until 2005.
In 1997, we launched our highly successful E-Mini S&P 500 futures and
options contracts and, in 1999, we launched our E-Mini Nasdaq 100 futures
contracts. These contracts, which are traded both by electronic trading on
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.
[Graphic: Bar graph entitled "E-MINI S&P QUARTERLY VOLUME Q4 1997 - Q4
1999" and representing the quarterly trading volume of E-Mini S&P 500 futures
and options
73
<PAGE>
contracts from the fourth quarter of 1997 through the fourth quarter of 1999.
Below the horizontal axis each quarter measured is listed in chronological order
from left to right. The vertical axis indicates the number of contracts traded,
in millions, beginning with zero and increasing, in intervals of 0.5, to 3.5. E-
Mini contracts were traded at the rate of approximately 0.6 million in the
fourth quarter of 1997, 0.7 million in the first quarter of 1998, 0.8 million in
the second quarter of 1998, 1.3 million in the third quarter of 1998, 1.4
million in the fourth quarter of 1998, 2.0 million in the first quarter of 1999,
2.5 million in the second quarter of 1999, 3.0 million in the third quarter of
1999 and 3.2 million in the fourth quarter of 1999.]
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.
[Graphic: Bar graph entitled "VOLUME OF CURRENCY CONTRACTS TRADED 1994
- - 1999" and representing the trading volume of foreign currency options and
futures contracts. Below the horizontal axis each year measured is listed in
chronological order from left to right. The vertical axis indicates the number
of contracts traded, in millions, beginning with zero and increasing, in
intervals of 10, to 50. The lower portion of each bar is darkly shaded to the
extent of the futures contracts traded and the top portion is lightly shaded to
the extent of the options contracts traded. Inset in a small square to the right
of the graph is a legend containing a lightly shaded box to the immediate left
of the word "Options" and immediately below which is
74
<PAGE>
a darkly shaded box to the immediate left of the word "Futures". Futures
contracts were traded at the rate of approximately 30 million in 1994, 23
million in 1995, 21 million in 1996, 25 million in 1997, 25 million in 1998 and
22 million in 1999. Options contracts were traded at the rate of approximately
12 million in 1994, 10 million in 1995, 7 million in 1996, 5 million in 1997, 4
million in 1998 and 2 million in 1999.]
[Graphic: Bar graph entitled "CURRENCY EFP AND FUTURES/OPTIONS PIT
TRADING VOLUME 1994 - 1999" and representing trading volume in foreign currency
transactions via pit trading and over the Exchange-for-Physicals (EFP) market.
Below the horizontal axis each year measured is listed in chronological order
from left to right. The vertical axis indicates the number of contracts traded,
in millions, beginning with zero and increasing, in intervals of 10, to 50. The
lower portion of each bar is darkly shaded to the extent of the pit trading
volume and the top portion is lightly shaded to the extent of the EFP trading
volume. Inset in a small square to the right of the graph is a legend containing
a lightly shaded box to the immediate left of the initials "EFP" and immediately
below which is a small darkly shaded box to the immediate left of the word
"Pit". Pit trading volume was approximately 37 million in 1994, 29 million in
1995, 25 million in 1996, 24 million in 1997, 27 million in 1998 and 23 million
in 1999. EFP trading volume was approximately 4 million in 1994, 3 million in
1995, 4 million in 1996, 6 million in 1997, 7 million in 1998 and 7 million in
1999.]
Additionally, we have launched new E-Mini currency products based on
the Euro and the Japanese Yen that we are targeting toward the developing
electronic retail customer base opened up by the prevalence of on-line Internet
trading of equities, and by our developing franchise in E-Mini equity products.
Agricultural Products. Agricultural products were the core from which
we started at the turn of the last century. The Exchange has maintained a strong
franchise in our agricultural products, including contracts based on cattle,
hogs, pork bellies, dairy products, and other agricultural commodities. Our
market users include agricultural producers of commodities, food processors, and
retail customers. Extensive revisions to existing contracts and the development
of new products have led to stable volume and modest growth in this product
sector in recent years. Our agricultural product trading volumes are depicted in
the chart below. We believe that continuing consolidation and restructuring in
the agricultural sector, and the reduction or elimination of government
subsidies, could provide growth in our agricultural markets as large producers
and processors adopt formal hedging and risk management programs.
[Graphic: Bar graph representing and entitled "VOLUME OF AGRICULTURAL
CONTRACTS TRADED 1994 - 1999". Below the horizontal axis each year measured is
listed in chronological order from left to right. The vertical axis indicates
the number of contracts traded, in millions, beginning with zero and increasing,
in intervals of 2, to 10. The lower portion of each bar is darkly shaded to the
extent of the futures contracts traded and the top portion is lightly shaded to
the extent of the options contracts traded. Inset in a small square to the right
of the graph is a legend containing a lightly shaded box to the immediate left
of the word "Options" and immediately below which is a darkly shaded box to the
immediate left of the word "Futures". Futures contracts were traded at the rate
of approximately 6.4 million in 1994, 6.3 million in 1995, 7.7 million in 1996,
7.7 million in 1997, 7.9 million in 1998 and 7.5 million in 1999. Options
contracts were traded at the rate of approximately 1.0 million in 1994, 0.9
million in 1995, 1.0 million in 1996, 1.0 million in 1997, 1.1 million in 1998
and 1.0 million in
75
<PAGE>
1999.]
Other Products. We offer several interest rate, currency and index
contracts based upon the emerging markets of the world, providing tools for
managing the risk associated with emerging market financial flows, investments
and foreign exchange transactions. We also developed the first exchange-traded
credit and temperature-related weather derivatives contracts. We believe these
contracts will create new risk management opportunities for credit institutions
and insurance companies that face risks in their lending and insurance
activities. The CME Quarterly Bankruptcy Index, the world's first
exchange-listed consumer credit derivatives contract, is designed to allow
credit card companies and other lenders in the $1.4 trillion consumer credit
market to hedge risk associated with the escalating number of U.S. bankruptcy
filings in recent years. Our Heating Degree Day and Cooling Degree Day futures
and options on futures are designed to help businesses protect their revenues
during times of depressed demand or excessive costs because of unexpected or
unfavorable weather conditions. Weather affects an estimated 20 percent of the
$9 trillion U.S. economy, and the 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 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
76
<PAGE>
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.
[Graphic: Bar graph entitled "GLOBEX VOLUME 1992 - 1999" and
representing the number of contracts traded over the GLOBEX System and its 1998
replacement the GLOBEX2 System. Below the horizontal axis each year measured is
listed in chronological order from left to right. The vertical axis indicates
the number of contracts traded over these Systems, in millions, beginning with 0
and increasing, in intervals of 5, to 20. System volume was approximately 0.2
million in 1992, 1.0 million in 1993, 1.0 million in 1994, 1.3 million in 1995,
2.0 million in 1996, 4.4 million in 1997, 9.7 million in 1998 and 16.1 million
in 1999.]
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 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.
77
<PAGE>
[Graphic: Flow-chart representing and entitled "CME's Trading and Order
Routing Systems". Each symbol in the chart is shaded and a symbol's label is
inscribed in that symbol. Atop the chart, a two-headed arrow runs between a
rectangle labeled "Internet Access" and a rectangle below it labeled
"Retail-Ordering Clearing Firms". From the bottom left of the latter rectangle,
a two-headed arrow runs to the top left of an oval labeled "FIX API Access".
From the top right of that oval a two-headed arrow in the shape of two stair
steps leads to a rectangle labeled "Clearing Firm". From the top of that
rectangle, a two-headed arrow connects it to a rectangle labeled "Public
Customer" and from its right face a two-headed arrow connects it to a rectangle
labeled "Proprietary Trading Desk". From the bottom right of the "FIX API
Access" oval, a two-headed arrow in the shape of a backward "L" leads to the
right face of a square labeled "GLOBEX2". A two-headed arrow connects the top
center of the "GLOBEX2" square to the bottom center of a rectangle labeled
"GLOBEX Terminal". From the upper right face of the "GLOBEX2" square, a
two-headed arrow runs diagonally upward to a rectangle labeled "TOPS ROUTE Order
Routing System". An arrow runs from the right face of that rectangle to the
words "Other Exchanges", a two-headed arrow runs from its top face to a
rectangle labeled "TOPS Terminal" and a two-headed arrow runs from its left face
to the "FIX API Access" oval. From the bottom of the "FIX API Access" oval a
two-headed arrow in the shape of an "L" runs to the left angle point of a
hexagon labeled "CUBS II Amker Station". This hexagon is connected by two
chevrons, pointing left and running from its bottom face, to the top face of a
hexagon labeled "GalaxC Wireless Handheld". A two-headed arrow in the shape of
an "L" runs from the bottom face of the "GLOBEX2" square to left angle point of
the "GalaxC" hexagon. That hexagon is connected by two parallel lines running
from its right angle point and lower right face to a hexagon labeled "Telephone
Lines". Two chevrons, pointing to the right run from the latter hexagon's top
face to the bottom face of a fourth hexagon labeled "Ticket Printing & Trade".
Two parallel lines connect this fourth hexagon at its left angle point and lower
left face to the "CUBS II" hexagon. Each hexagon is the same size. Written
beneath the bottom two hexagons is "Open Outcry Trading". A two-headed arrow in
the shape of a single stair step runs upward and to the right from the top of
the "Ticket Printing & Trade" hexagon to the "TOPS ROUTE" rectangle.]
We are also expanding global access, virtually twenty-four hours a day,
to our trading, clearing and risk management facilities. Recognizing the growth
in electronic trading and our ability to expand our product reach around the
globe, we have nearly doubled the number of dedicated 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 a single trading day. APS was developed to address the difficulty
account managers have when an order representing multiple accounts is
78
<PAGE>
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.
[Graphic: Flow-chart titled and representing "CME Clearing House
Activities". Each symbol in the chart is shaded and a symbol's label is
inscribed in that symbol. Atop the chart, two octagons are aligned horizontally,
with a horizontal arrow pointing from the right face of the octagon labeled
"LONG POSITION" to the left face of the octagon labeled "SHORT POSITION". A
single arrow points from the bottom face of each octagon to one of two ovals,
each oval being aligned horizontally and centered beneath each octagon. Each
oval is labeled "CLEARING FIRM MEMBER". An arrow bent as if signifying the time
five o'clock, points from the bottom right portion of the left oval to the top
of a large circle labeled "CLEARING HOUSE Match Trade Guarantee Trade Collect
margins and settlement variations". Inserted into the vertical portion of the
arrow line is an unshaded circle containing the number "2". Immediately above
the arrowhead and sloping downward to the right is written "TRADE DATA". Halfway
embedded in the top center of the large circle is a much smaller unshaded circle
containing the number "3". A two-headed arrow bent as if signifying the time
five o'clock, leads from the bottom center of the left oval to the top of the
large circle. Inserted after the bend into the arrow line and just above the
arrowhead is an unshaded circle containing the number "4". An arrow leads from
the lower left face of the left oval and turns vertically downward to abut the
top of a rectangle labeled "SETTLEMENT BANK Makes payment from clearing firm to
clearing house and safekeeps margin assets". An arrow leads upward from the top
left of the rectangle and turning horizontally to the right where its arrowhead
abuts the upper left face of the left oval. An arrow in the shape of an "L"
leads from the left face of the large circle to the rectangle. An unshaded
circle containing the number "4" is inserted into the horizontal segment of the
arrow line. An arrow in the shape of an "L" runs from the bottom of the
rectangle to the large circle. An unshaded circle containing the number "5" is
inserted into the perpendicular portion of the arrow line. Written below the
horizontal portion of the arrow line is "CONFIRMS PAYMENT". An arrow bent as if
signifying the time seven o'clock, points from the bottom left face of the right
oval to the top of the large circle. Inserted into the vertical segment of the
arrow line is an unshaded circle containing the number "2". Above the arrowhead
and sloping downward and to the left is written "TRADE DATA". A two-headed arrow
bent as if signifying the time seven o'clock, leads from the bottom center of
the left oval to the top of the large circle. Inserted after the bend in the
arrow line and just above the arrowhead is an unshaded circle
79
<PAGE>
containing the number "4". A horizontal line leaves from the lower right face of
the right oval, turns vertically downward where its arrowhead touches the top of
a second rectangle labeled "SETTLEMENT BANK Makes payment from clearing firm to
clearing house and safekeeps margin assets". An arrow in the shape of a backward
"L" leads from the right face of the large circle to the rectangle. An unshaded
circle containing the number "4" is inserted into the horizontal segment of the
arrow line. An arrow in the shape of a backward "L" runs from the bottom of the
box to the large circle. An unshaded circle containing the number "5" is
inserted into the vertical segment of the arrowline. Written below the
horizontal segment of the arrow line is "CONFIRMS PAYMENT". An arrow leads
upward from the top right face of the box, turns horizontally to the left and
abuts the upper right face of the right oval. An arrow leads from the lower
right face of the oval, turns vertically downward and abuts the rectangle.]
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.
80
<PAGE>
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.
81
<PAGE>
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.
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.
82
<PAGE>
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 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.
83
<PAGE>
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 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
84
<PAGE>
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
85
<PAGE>
engines that can be connected to their data and information networks.
Additionally, technology and software firms that develop trading systems,
hardware and networks but who are otherwise outside of the financial services
industry may be attracted to enter our markets.
Our Members
We are presently owned by our members who have purchased seats on the
Exchange. Members and individuals who have leased seats from members can execute
trades for their own accounts or for the accounts of customers of clearing
member firms. The trades of members and lessees of memberships for their own
accounts qualify for lower fees in recognition of the market liquidity that
their trading activity provides. Members and lessees also benefit from market
information advantages that may accrue from their proximity to trading activity
on the trading floors and from access to the 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
86
<PAGE>
625 CME division memberships.
IMM Division. The International Monetary Market ("IMM") division membership
entitles the holder to execute trades in all currency and interest rate futures
and options contracts, as well as the contracts assigned to the IOM and GEM
divisions (defined below). There are 813 IMM division memberships.
IOM Division. Membership in the Index and Option Market ("IOM") division
entitles the holder to execute trades in all stock index futures contracts,
random length lumber futures contracts, all options contracts, and all contracts
assigned to the GEM division. There are 1,287 IOM division memberships.
GEM Division. The Growth and Emerging Markets ("GEM") division membership
entitles holders to execute trades in all growth and emerging market currency,
stock index and interest rate products that are assigned to that division by the
board. When the GEM division was created in 1995, each member of the Exchange's
other three divisions received a fractional GEM membership, and 50 memberships
were sold to eligible third parties. GEM fractions may be sold and combined to
create, together with the 50 full memberships that were sold to third parties, a
total of 467 full memberships.
Clearing Members
An Exchange clearing member firm must satisfy our 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.
87
<PAGE>
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:
Limited Number of Units Held By
-----------------------------------------------
Partner Number of Exchange Members
-----------------------------------------------
Class Units Number Percentage Number Percentage
------------------------------------------------------------------------
A 4,786 321 6.7% 4,465 93.3%
B 90 34 37.7 56 62.3
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 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
88
<PAGE>
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 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
89
<PAGE>
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
90
<PAGE>
the trading of futures and options contracts. In addition to its trading
regulations, the Exchange has the power to take immediate action in dealing with
an abrupt change in factors influencing futures markets in order to ensure
orderly trading. In the United States, the CFTC is the federal agency
responsible for the administration of the CEA.
The CEA and CFTC rules govern most aspects of our operations and impose
many affirmative obligations that can be costly and burdensome. Our ability to
continue operating depends on continued compliance with the CEA and CFTC rules
and regulations. Our ability to list new contracts is dependent on 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
91
<PAGE>
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
out-cry 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.
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.
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
92
<PAGE>
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.
[Graphic: Pie chart entitled "1999 REVENUE SOURCES" and displaying each
revenue source as a percentage of gross revenue for the first nine months of
1999. The entire chart represents and is subtitled "(100% = $208.5 MILLION)".
Revenues are broken down as follows: Clearing Fees and Transaction Fees - 66% or
$138.5, Quotation Data - 21% or $43.0, Investment Income - 4% or $9.1,
Communications - 4% or $8.2 and Other - 5% or $9.7.]
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 69(cent) 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.)
. Product (licensed, non-licensed, E-Mini, etc.)
. Trading venue (open outcry, GLOBEX2)
[Graphic: Line graph entitled "Average rate per trade (round-turn)" and
representing clearing fee per trade cleared by the CME. Below the horizontal
axis each year measured is listed in chronological order from left to right,
beginning with 1994 and ending with 1999. The
93
<PAGE>
vertical axis indicates the average fee per trade in cents, beginning with $0.50
and increasing, in intervals of $0.05, to $0.70. A continuous line graph
connects the average clearing fee per trade for each particular year. The
average rate per trade was $0.55 in 1994, $0.61 in 1995, $0.62 in 1996, $0.58 in
1997, $0.55 in 1998 and $0.69 in 1999.]
The fluctuation in the rate per trade over the six year period is due
to several factors. Fee reduction programs and product promotion fee waivers put
downward pressure on the average rate per trade. Conversely, increases in the
EFP surcharge and the relative growth in GLOBEX2 volume have increased the
average rate per trade. Specifically, 8(cent) of the increase in the rate per
trade from 1998 to 1999 is related to the end of the fee reduction program that
was in place during 1998, while approximately 3(cent) is attributable to the
rapid growth in 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.
[Graphic: Bar graph entitled and representing "CLEARING FEES 1994
- -1999". Below the horizontal axis each year measured is listed in chronological
order from left to right. The vertical axis indicates the fees that were
received and that would have been received had not some discount or fee waiver
been in effect, in millions, beginning with zero and increasing, at intervals of
50, to 200. The lower portion of each bar is darkly shaded to the extent of the
actual fees received. To the extent any fee reductions or waivers apply, the
bars are shaded medium and lightly, respectively. Inset in a small square to the
right of the graph is a legend containing a lightly shaded box to the immediate
left of the word "Waiver", immediately below which is a slightly darker box to
the immediate left of the words "Reduction in Rate", and immediately below which
is a darkly shaded box to the immediate left of the word "Actual". Actual
clearing fees were approximately $114 million in 1994, $111 million in 1995,
$109 million in 1996, $117 million in 1997, $125 million in 1998 and $139
million in 1999. Fee waivers during the period amounted to approximately $12
million in 1994 and $18 million in 1998. Fee reductions during the period
amounted to approximately $11 million in 1997, $13 million in 1998 and $10
million for the nine months ended September 30, 1999.]
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 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
94
<PAGE>
provided to members.
[Graphic: Pie chart entitled "1999 EXPENSES BY CATEGORY" and displaying
each expense category as a percentage of total expenses for the first nine
months of 1999. The entire chart represents and is subtitled "(100% = $201.8
MILLION)". Expenses are broken down as follows: Salaries & Benefits - 40%,
Professional Fees & Outside Services - 14%, Communications & Computer
Maintenance - 14%, Depreciation & Amortization - 13%, Occupancy - 8%, Public
Relations & Promotion - 4% and Other - 7%.]
Our operating expenses have increased significantly since 1997
primarily due to increased staffing and expenditures for technology projects.
For 1999, salaries and benefits accounted for 40% of our expenses as both the
trading floor and the systems development and maintenance areas required large
investments in human capital. The next largest category, professional fees and
outside services, represents 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 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
95
<PAGE>
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.
96
<PAGE>
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 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
97
<PAGE>
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 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.
98
<PAGE>
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 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
99
<PAGE>
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
demutualizaton 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.
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.
100
<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.
A-1
<PAGE>
Shares of Preferred Stock may be issued in one or more series at such time
or times, and for such consideration or considerations, as the Board of
Directors shall determine. The Board of Directors is hereby authorized to fix,
state and establish, in the resolution or resolutions providing for the issuance
of any wholly unissued series of Preferred Stock, the relative powers, rights,
designations, preferences, qualifications, limitations and restrictions of such
series in relation to any other series of Preferred Stock at the time
outstanding. The Board of Directors is also expressly authorized to fix the
number of shares of each such series, but not below the number of shares thereof
then outstanding. The authority of the Board of Directors with respect to each
series of Preferred Stock shall include (without limitation) the determination
of the following:
(a) the dividend rate on the shares of such series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the rights
of priority, if any, with respect to the payment of dividends on the shares
of such series relative to other series of Preferred Stock or classes of
stock;
(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.
A-2
<PAGE>
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, for the dissemination of price information, for
clearing and delivery and (ii) to provide reasonable
A-3
<PAGE>
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;
A-4
<PAGE>
(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 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
A-5
<PAGE>
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
A-6
<PAGE>
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.
(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.
A-7
<PAGE>
(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.
(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
A-8
<PAGE>
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.
A-9
<PAGE>
(6) Adjustments to Applicable Equivalent Amounts For Dilutive Issues.
(a) No Adjustment Unless Economic Dilution. No adjustment in the
Applicable Equivalent Amount of any series of Class B Common Stock
shall be made in respect of the issuance or deemed issuance of
Additional Common Shares unless the consideration per share for an
Additional Common Share issued or deemed to be issued by the
corporation is less than the Fair Market Value of a share of Class A
Common Stock on the date of such issue or deemed issue.
(b) Deemed Issue of Additional Common Shares.
(1) Options and Convertible Securities. In the event the
corporation, at any time or from time to time after the
Effectiveness Date, shall issue any Options or Convertible
Securities or shall fix a record date for the determination of
holders of any class of securities entitled to receive any such
Options or Convertible Securities, then the maximum number of
shares of Class A Common Stock (as set forth in the instrument
relating thereto without regard to any provisions contained
therein for a subsequent adjustment of such number) issuable upon
the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of
such Convertible Securities, shall be deemed to be Additional
Common Shares (except as otherwise provided in the definition
thereof) issued as of the time of such issue or, in case such a
record date shall have been fixed, as of the close of business on
such record date, provided that in any such case in which
Additional Common Shares are deemed to be issued:
(A) no further adjustment in the Applicable Equivalent
Amounts shall be made upon the subsequent issue of
Convertible Securities or shares of Class A Common Stock
upon the exercise of such Options or conversion or exchange
of such Convertible Securities;
(B) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for
any increase or decrease in the consideration payable to the
corporation, or in the number of shares of Class A Common
Stock issuable upon the exercise, conversion or exchange
thereof, the Applicable Equivalent Amounts computed upon the
original issue thereof (or upon the occurrence of a record
date with respect thereto), and any subsequent adjustments
based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase
or decrease insofar as it affects such Options or the rights
of conversion or exchange under such Convertible Securities;
A-10
<PAGE>
(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
A-11
<PAGE>
adjustment of the Applicable Equivalent Amount shall be made
until the expiration or exercise of all such Options.
(2) Stock Dividends. In the event the corporation, at any
time or from time to time after the Effectiveness Date, shall
declare or pay any dividend on shares of its capital stock
payable in shares of Class A Common Stock, then and in any such
event, Additional Common Shares (except as otherwise provided in
the definition thereof) shall be deemed to have been issued
immediately after the close of business on the record date for
the determination of holders of any class of securities entitled
to receive such dividend for purposes of adjusting the Applicable
Equivalent Amounts; provided, however, that if such record date
is fixed and such dividend is not fully paid, the only Additional
Common Shares deemed to have been issued will be the number of
shares of Class A Common Stock actually issued in such dividend,
and such shares will be deemed to have been issued as of the
close of business on such record date, and such Applicable
Equivalent Amounts shall be recomputed accordingly.
(c) Adjustment of Applicable Equivalent Amounts Upon Issuance of
Additional Common Shares. In the event the corporation shall issue
Additional Common Shares (including Additional Common Shares deemed to
be issued pursuant to Section 6(b)) without consideration or for a
consideration per share less than the Fair Market Value of a share of
Class A Common Stock in effect immediately prior to such issue, then
and in such event, the Applicable Equivalent Amounts shall be
increased, concurrently with such issue, to amounts (calculated to the
nearest one-tenth of a share) determined by multiplying each
Applicable Equivalent Amount by a fraction, the numerator of which
shall be the number of shares of Class A Common Stock outstanding
immediately prior to such issue plus the number of such Additional
Common Shares so issued and the denominator of which shall be the
number of shares of Class A Common Stock outstanding immediately prior
to such issue plus the number of shares of Class A Common Stock which
the aggregate consideration received by the corporation for the total
number of Additional Common 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-12
<PAGE>
(A) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the corporation
excluding amounts paid or payable for accrued interest or
accrued dividends;
(B) insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of
such issue, as determined in good faith by the Board of
Directors; and
(C) in the event Additional Common Shares are issued
together with other shares or securities or other assets of
the corporation for the consideration so received, be
computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board of Directors.
(2) Options and Convertible Securities. The consideration
per share received by the corporation for Additional Common
Shares deemed to have been issued pursuant to Section 6(b)(1),
relating to Options and Convertible Securities, shall be
determined by dividing:
(A) the total amount, if any, received or receivable
by the corporation as consideration for the issue of such
Options or Convertible Securities, plus the minimum
aggregate amount of additional consideration (as set forth
in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of
such consideration) payable to the corporation upon the
exercise of such Options or the conversion or exchange of
such Convertible Securities, or in the case of Options for
Convertible Securities, the exercise of such options for
Convertible Securities and the conversion or exchange of
such Convertible Securities, by
(B) the maximum number of shares of Class A Common
Stock (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a
subsequent adjustment of such number) issuable upon the
exercise of such Options or the conversion or exchange of
such Convertible Securities.
(3) Stock Dividends. Any Additional Common Shares deemed to
have been issued relating to stock dividends shall be deemed to
have been issued for no consideration.
In the event that Additional Common Shares are proposed to be issued
in connection with an acquisition or other transaction subject to
certain conditions precedent, such that there will be a delay between
the execution of the associated agreement and the consummation of the
acquisition or transaction and the
A-13
<PAGE>
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
A-14
<PAGE>
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:
(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.
A-15
<PAGE>
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.
(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
A-16
<PAGE>
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;
A-17
<PAGE>
(E) Provisions which permit the corporation to redeem or to exchange
such rights; and
(F) The appointment of a rights agent with respect to such rights.
ARTICLE SEVEN: (A) In furtherance of and not in limitation of the powers
conferred by law, the Board of Directors is expressly authorized and empowered
to adopt, amend, or repeal the bylaws of the corporation, provided, however,
that the bylaws may also be altered, amended, or repealed by the affirmative
vote of the holders of two-thirds of the voting power of the then outstanding
Common Stock, voting together as a single class on a Share Equivalent Basis.
(B) Unless and except to the extent that the by-laws of the corporation
shall so require, the election of directors of the corporation need not be by
written ballot.
ARTICLE EIGHT: No stockholder shall have any preemptive right to
subscribe to an additional issue of any class or series of the corporation's
capital stock or to any securities of the corporation convertible into such
stock.
ARTICLE NINE: Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of at least two-thirds of
the voting power of the then outstanding Common Stock, voting together as a
single class on a Share Equivalent Basis, shall be required to amend, repeal, or
adopt any provisions inconsistent with paragraph (F) of Article Five or Articles
Six, Nine, Ten, Eleven, Twelve, Thirteen or Fourteen of this Certificate of
Incorporation.
ARTICLE TEN: No director of the corporation shall be personally liable to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation Law of the
State of Delaware, or (iv) for any transaction from which the director derived
an improper personal benefit. Any amendment or repeal of this Article by the
stockholders shall not adversely affect any right or protection of a director of
the corporation existing hereunder in respect of any act or omission occurring
prior to such amendment or repeal.
ARTICLE ELEVEN: The corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, as the same
may be amended and supplemented, have the power to indemnify any and all persons
whom it shall have the power to indemnify under said Section from and against
any and all expenses, liabilities or other matters referred to in or covered by
said Section, and the power provided for herein shall not be deemed exclusive of
any other right to which those indemnified may be entitled under any bylaw,
agreement, or vote of stockholders, disinterested directors or otherwise, both
as to action in his or her official capacity and as to action in another
capacity while holding such office.
ARTICLE TWELVE: In furtherance and not in limitation of the powers
conferred by law or in this Certificate of Incorporation, the Board of Directors
(and any committee of the Board of Directors) is expressly authorized, to the
extent permitted by law, to take such action or actions as the Board of
Directors or such committee may determine to be reasonably necessary
A-18
<PAGE>
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.
A-19
<PAGE>
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 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:
1
<PAGE>
"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.
"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.
"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.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
2
<PAGE>
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.
(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 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.
3
<PAGE>
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.
4
<PAGE>
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.
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
5
<PAGE>
prohibited by any applicable law, including any order, injunction, decree
or judgment of any court or other Governmental Authority, and no action or
proceeding shall be pending or threatened by any Governmental Authority on
the Effective Date before any court or other Governmental Authority to
restrain, enjoin or otherwise prevent the consummation of the transactions
contemplated hereby or to recover any material damages or obtain other
material relief as a result of such transactions. There shall not have been
promulgated, entered, issued, or determined by any court or other
Governmental Authority to be applicable to this Agreement any applicable
law making illegal the consummation of the transactions contemplated
hereby, and no proceeding with respect to the application of any such
applicable law shall be pending.
(b) Effectiveness of the Registration Statement. The Registration
Statement on Form S-4 filed with the SEC by Chicago Mercantile Exchange
Inc., a Delaware corporation ("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 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 to the effect that the Merger and the ultimate issuance
of common stock by New CME qualify 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.
6
<PAGE>
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 unenforceablity and shall not effect the validity, legality or
enforceability of any other provision of this Agreement.
Section 7.3 Headings. Article and Section headings contained in this
Agreement are inserted for convenience and reference only, and shall not be
considered in construing or interpreting any of the provisions hereof.
Section 7.4 Entire Agreement. This Agreement supersedes any and all oral
or written agreements heretofore made relating to the subject matter hereof and
constitutes the entire Agreement of the parties relating to the subject matter
hereof.
Section 7.5 Expenses. Transitory, as the Surviving Corporation, shall pay
all expenses of carrying this Merger into effect and accomplishing the Merger
herein provided for.
Section 7.6 Counterparts. This Agreement may be executed simultaneously
in two or more counterparts, each of which shall be deemed to be an original,
but all of which together shall constitute one and the same instrument.
Section 7.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Delaware, without
giving effect to any conflicts or choice of law provisions that would make
applicable the substantive laws of any other jurisdiction.
7
<PAGE>
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: ____________________________
Name: Scott Gordon
Title: Chairman of the Board
CME TRANSITORY CO.
By: ____________________________
Name: Scott Gordon
Title: Chairman of the Board
8
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law provides that the Registrant
may, and in some circumstances must, indemnify the directors and officers of the
Registrant against liabilities and expenses incurred by such person by reason of
the fact that such person was serving in such capacity, subject to certain
limitations and conditions set forth in the statute. The Registrant's
Certificate of Incorporation and By-Laws provide that the Registrant will
indemnify its directors and officers, and may indemnify any person serving as
director or officer of another business entity at the Registrant's request, to
the extent permitted by the statute. In addition, the Registrant's Certificate
of Incorporation provides, as permitted by the the Delaware General Corporation
Law, that directors shall not be personally liable for monetary damages for
breach of fiduciary duty as a director, except (i) for breaches of their duty of
loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, and (iv)
for transactions from which a director derived an improper personal benefit.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
The following is a list of Exhibits included as part of this
Registration Statement. The Registrant agrees to furnish
supplementally a copy of any omitted schedule to the Securities and
Exchange Commission upon request.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
2.1 Form of Agreement and Plan of Merger dated as of 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.
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.
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.
<PAGE>
(b) Financial Statement Schedules
None.
Item 22. Undertakings.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(5) That every prospectus: (i) that is filed pursuant to paragraph
(4) immediately preceding, or (ii) that purports to meet the requirements
of Section 10(a)(3) of the Act and is used in connection with an offering
of securities subject to Rule 415, will be filed as a part of an amendment
to the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such
2
<PAGE>
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(6) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(7) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this 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 20, 2000.
CHICAGO MERCANTILE EXCHANGE INC.
By: /s/ M. Scott Gordon
-------------------------------------
M. Scott Gordon
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on this 20th day of April, 2000.
Name Title
---- -----
M. Scott Gordon Chairman of the Board and Director
- ---------------------------
M. Scott Gordon (Chief Executive Officer)
David G. Gomach Senior Vice President and Chief Financial Officer
- ---------------------------
David G. Gomach (Principal Financial Officer)
Raymond C. Repede Vice President and Controller
- ---------------------------
Raymond C. Repede (Principal Accounting Officer)
* Director
- ---------------------------
H. Jack Bouroudjian
* Director
- ---------------------------
Timothy R. Brennan
* Director
- ---------------------------
Leslie Henner Burns
* Director
- ---------------------------
Jeffrey R. Carter
Director
- ---------------------------
E. Gerald Corrigan
* Director
- ---------------------------
Terrence A. Duffy
4
<PAGE>
* Director
- ---------------------------
Martin J. Gepsman
* Director
- ---------------------------
Yra G. Harris
* 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
5
<PAGE>
* Director
- ---------------------------
Robert J. Prosi
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
* By: /s/ Craig S. Donohue
----------------------
Craig S. Donohue
Attorney-in-Fact
6
<PAGE>
Exhibit 3.3
Chicago Mercantile Exchange Inc.
Registration Statement on Form S-4
BY-LAWS
OF
Chicago Mercantile Exchange Inc.
ARTICLE I
Stockholders' Meetings
Section 1.1. Annual Meetings. (a) An annual meeting of stockholders
shall be held in December of each year for the election of Directors at such
date, time and place, either within or without the state of Delaware, as may be
fixed by resolution of the Board of Directors from time to time. In the absence
of any designation as to date, such meeting shall be held on the first Thursday
after the second business Wednesday in December in each year. Subject to
paragraph (b) of this Section 1.1, any other proper business may be transacted
at an annual meeting.
(b) Only such business, other than the election of the Board of
Directors, shall be conducted at an annual meeting of stockholders as shall have
been properly brought before the meeting. For such business to be properly
brought before the meeting, it must be: (i) authorized by the Board of Directors
and specified in the notice, or a supplemental notice, of the meeting, (ii)
otherwise brought before the meeting by or at the direction of the Board of
Directors or the chairman of the meeting, or (iii) otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
an annual meeting by a stockholder, the stockholder must have given written
notice thereof to the Secretary, delivered or mailed to and received at the
principal executive offices of the Corporation (x) not less than 90 days nor
more than 120 days prior to the meeting, or (y) if less than 100 days notice of
the meeting or prior public disclosure of the date of the meeting is given or
made to stockholders, not later than the close of business on the tenth day
following the day on which the notice of the meeting was mailed or, if earlier,
the day on which such public disclosure was made. A stockholder's notice to the
Secretary shall set forth as to each item of business the stockholder proposes
to bring before the meeting (1) a brief description of such item and the reasons
for conducting such business at the meeting and a representation that the
stockholder intends to appear in person or by proxy at the meeting to introduce
the business specified in the notice, (2) the name and address, as they appear
on the Corporation's records, of the stockholder proposing such business, (3)
the class, and series if any, and number of shares of stock of the Corporation
which are beneficially owned by the stockholder (for purposes of the regulations
under Sections 13 and 14 of the Securities Exchange Act of 1934, as amended),
and (4) any material interest of the stockholder in such business. No business
shall be conducted at any annual meeting except in accordance with the
procedures set forth in this paragraph (b). The
1
<PAGE>
chairman of the meeting at which any business is proposed by a stockholder
shall, if the facts warrant, determine and declare to the meeting that such
business was not properly brought before the meeting in accordance with the
provisions of this paragraph (b), and, in such event, the business not properly
before the meeting shall not be transacted.
Section 1.2. Special Meetings. Special meetings of stockholders for
any purpose or purposes may be called at any time only by the Chairman of the
Board or by a majority of the Board of Directors. The business transacted at a
special meeting of stockholders shall be limited to the purpose or purposes for
which such meeting is called.
Section 1.3. Notice of Meetings. A written notice of each annual or
special meeting of stockholders shall be given stating the place, date and time
of the meeting, and, in the case of a special meeting, the purpose or purposes
for which the meeting is called. Unless otherwise provided by law, the
Certificate of Incorporation or these By-laws, such notice of meeting shall be
given not less than 10 nor more than 60 days before the date of the meeting to
each stockholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be given when deposited in the mail, postage prepaid,
directed to the stockholder at such stockholder's address as it appears on the
records of the Corporation. An affidavit of the Secretary or an Assistant
Secretary or of the transfer agent of the Corporation that the notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
Section 1.4. Adjournments. Any annual or special meeting of
stockholders may be adjourned from time to time to reconvene at the same or some
other place, and notice need not be given of any such adjourned meeting if the
date, time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting any business may be transacted
which might have been transacted at the original meeting. If the adjournment is
for more than 30 days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the adjourned meeting in
accordance with Section 1.3.
Section 1.5. Quorum. Except as otherwise provided by law, the
Certificate of Incorporation or these By-laws, the presence in person or by
proxy of the holders of stock having not less than one-third of the votes which
could be cast by the holders of all outstanding stock entitled to vote at the
meeting shall constitute a quorum at each meeting of stockholders. In the
absence of a quorum, then either (i) the chairman of the meeting or (ii) the
stockholders may, by the affirmative vote of the holders of stock having a
majority of the votes which could be cast by all such holders, adjourn the
meeting from time to time in the manner provided in Section 1.4 of these By-laws
until a quorum is present. If a quorum is present when a meeting is convened,
the subsequent withdrawal of stockholders, even though less than a quorum
remains, shall not affect the ability of the remaining stockholders lawfully to
transact business.
Section 1.6. Organization. Meetings of stockholders shall be
presided over by the Chairman of the Board, the Vice Chairman of the Board, the
Second Vice Chairman of the Board or the President (in that order), or in their
absence, inability or unwillingness, by a chairman designated by the Board of
Directors, or in the absence of such designation, by a chairman chosen at the
meeting. The Secretary shall act as secretary of the meeting, but in his or
2
<PAGE>
her absence the chairman of the meeting may appoint any person to act as
secretary of the meeting. The chairman of any meeting of the stockholders shall
determine the order of business and the procedure at the meeting, including such
regulation of the manner of voting and the conduct of business.
Section 1.7. Voting. (a) The stockholders entitled to vote at any
meeting of stockholders shall be determined in accordance with the provisions of
Section 1.10 of these By-laws, subject to the provisions of Sections 217 and 218
of the General Corporation Law of Delaware (relating to voting rights of
fiduciaries, pledgors and joint owners of stock and to voting trusts and other
voting agreements).
(b) Except as may be otherwise provided in the Certificate of
Incorporation or in these By-laws, or as may be otherwise required by applicable
law: (i) in all matters other than the election of Directors, the affirmative
vote of the holders of shares representing a majority of the votes present in
person or represented by proxy at the meeting and entitled to vote on the
subject matter shall be the act of the stockholders; (ii) each Director shall be
elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of such
Director; and (iii) where a separate vote by a class or series is required,
other than with respect to the election of Directors, the affirmative vote of
the holders of shares of such class or series representing a majority of the
votes present in person or represented by proxy at the meeting shall be the act
of such class or series.
(c) Voting at meetings of stockholders need not be by written ballot
and need not be conducted by inspectors of election unless so required by
Section 1.9 of these By-laws or so determined by the holders of stock having a
majority of the votes which could be cast by the holders of all outstanding
stock entitled to vote which are present in person or represented by proxy at
such meeting.
(d) Stock of the Corporation belonging to the Corporation, or to
another Corporation a majority of the shares entitled to vote in the election of
Directors of which are held by the Corporation, shall not be voted at any
meeting of stockholders and shall not be counted in the total number of
outstanding shares for the purpose of determining whether a quorum is present.
Nothing in this Section 1.7 shall limit the right of the Corporation to vote
shares of stock of the Corporation held by it in a fiduciary capacity.
Section 1.8. Proxies. (a) Each stockholder entitled to vote at a
meeting of stockholders may authorize another person or persons to act for such
stockholder by proxy filed with the Secretary before or at the time of the
meeting. No such proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period. A duly executed proxy
shall be irrevocable if it states that it is irrevocable and if, and only as
long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A stockholder may revoke any proxy which is not irrevocable
by attending the meeting and voting in person or by filing with the Secretary an
instrument in writing revoking the proxy or another duly executed proxy bearing
a later date.
3
<PAGE>
(b) A stockholder may authorize another person or persons to act for
such stockholder as proxy (i) by executing a writing authorizing such person or
persons to act as such, which execution may be accomplished by such stockholder
or such stockholder's authorized officer, Director, partner, employee or agent
(or, if the stock is held in a trust or estate, by a trustee, executor or
administrator thereof) signing such writing or causing his or her signature to
be affixed to such writing by any reasonable means, including, but not limited
to, facsimile signature, or (ii) by transmitting or authorizing the transmission
of a telegram, cablegram or other means of electronic transmission (a
"Transmission") to the person who will be the holder of the proxy or to a proxy
solicitation firm, proxy support service organization or like agent duly
authorized by the person who will be the holder of the proxy to receive such
Transmission; provided that any such Transmission must either set forth or be
submitted with information from which it can be determined that such
Transmission was authorized by such stockholder.
(c) Any inspector or inspectors appointed pursuant to Section 1.9 of
these By-laws shall examine each Transmission to determine whether it is valid.
If no inspector or inspectors are so appointed, the Secretary or such other
person or persons as shall be appointed from time to time by the Board of
Directors shall examine Transmissions to determine if they are valid. If it is
determined a Transmission is valid, the person or persons making that
determination shall specify the information upon which such person or persons
relied. Any copy, facsimile telecommunication or other reliable reproduction of
such a writing or Transmission may be substituted or used in lieu of the
original writing or Transmission for any and all purposes for which the original
writing or Transmission could be used; provided that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction of the
entire original writing or Transmission.
Section 1.9. Voting Procedures and Inspectors of Elections. (a)
Unless otherwise provided in the Certificate of Incorporation or required by
law, the following provisions of this Section 1.9 shall apply only if and when
the Corporation has a class of voting stock that is (i) listed on a national
securities exchange, (ii) authorized for quotation on an interdealer quotation
system of a registered national securities association or (iii) held of record
by more than 2,000 stockholders.
(b) The Corporation shall, in advance of any meeting of stockholders,
appoint one or more inspectors of election (individually an "inspector," and
collectively the "inspectors") to act at such meeting and make a written report
thereof. The Board of Directors may designate one or more persons as alternate
inspectors to replace any inspector who fails to act. If no inspector or
alternate is able to act at such meeting, the chairman of the meeting shall
appoint one or more inspectors to act at the meeting. Each inspector of
election, before entering upon the discharge of his duties, shall take and sign
an oath to execute faithfully the duties of inspector with strict impartiality
and according to the best of his ability.
(c) The inspectors shall (i) ascertain the number of shares of stock
of the Corporation outstanding and the voting power of each, (ii) determine the
number of shares of stock of the Corporation present in person or by proxy at
such meeting and the validity of proxies and ballots, (iii) count all votes and
ballots, (iv) determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the inspectors
4
<PAGE>
and (v) certify their determination of the number of such shares present in
person or by proxy at such meeting and their count of all votes and ballots. The
inspectors may appoint or retain other persons or entities to assist them in the
performance of their duties.
(d) The date and time of the opening and the closing of the polls for
each matter upon which the stockholders will vote at a meeting shall be
announced at such meeting. No ballots, proxies or votes, nor any revocations
thereof or changes thereto, shall be accepted by the inspectors after the
closing of the polls unless the Court of Chancery of the State of Delaware upon
application by any stockholder shall determine otherwise.
(e) In determining the validity and counting of proxies and ballots,
the inspectors shall be limited to an examination of the proxies, any envelopes
submitted with such proxies, any information referred to in paragraphs (b) and
(c) of Section 1.8 of these By-laws, ballots and the regular books and records
of the Corporation, except that the inspectors may consider other reliable
information for the limited purpose of reconciling proxies and ballots submitted
by or on behalf of banks, brokers, their nominees or similar persons which
represent more votes than the holder of a proxy is authorized by a stockholder
of record to cast or more votes than such stockholder holds of record. If the
inspectors consider other reliable information for the limited purpose permitted
herein, the inspectors, at the time they make their certification pursuant to
paragraph (c) of this Section 1.9, shall specify the precise information
considered by them, including the person or persons from whom such information
was obtained, when and the means by which such information was obtained and the
basis for the inspectors' belief that such information is accurate and reliable.
Section 1.10. Fixing Date of Determination of Stockholders of Record.
(a) In order that the Corporation may determine the stockholders entitled (i)
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, (ii) to receive payment of any dividend or other distribution or
allotment of any rights, (iii) to exercise any rights in respect of any change,
conversion or exchange of stock or (iv) to take, receive or participate in any
other action, the Board of Directors may fix a record date, which shall not be
earlier than the date upon which the resolution fixing the record date is
adopted by the Board of Directors and which (1) in the case of a determination
of stockholders entitled to notice of or to vote at any meeting of stockholders
or adjournment thereof, shall, unless otherwise required by law, be not more
than 60 nor less than 10 days before the date of such meeting; (2) in the case
of a determination of stockholders entitled to express consent to corporate
action in writing without a meeting, shall be not more than 10 days after the
date upon which the resolution fixing the record date is adopted by the Board of
Directors; and (3) in the case of any other action, shall be not more than 60
days before such action.
(b) If no record date is fixed, (i) the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held; (ii) the record date for
determining stockholders entitled to express consent to corporate action in
writing without a meeting when no prior action of the Board of Directors is
required by law, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is
5
<PAGE>
delivered to the Corporation in accordance with applicable law, or, if prior
action by the Board of Directors is required by law, shall be at the close of
business on the day on which the Board of Directors adopts the resolution taking
such prior action; and (iii) the record date for determining stockholders for
any other purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
(c) A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting, but the Board of Directors may fix a new record date for the adjourned
meeting.
Section 1.11. List of Stockholders Entitled to Vote. The Secretary
shall prepare, at least 10 days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least 10 days prior to the meeting, either at
a place within the city where the meeting is to be held, which place shall be
specified in the notice of meeting, or, if not so specified, at the place where
the meeting is to be held. The list shall also be produced and kept at the time
and place of the meeting during the whole time thereof and may be inspected by
any stockholder who is present. The stock ledger shall be the only evidence as
to who are the stockholders entitled to examine the stock ledger or to vote in
person or by proxy at any meeting of stockholders.
Section 1.12. No Action by Consent of Stockholders. No action
required to be, or which may be, taken at an annual or special meeting 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 of Delaware or otherwise, is specifically
prohibited.
ARTICLE II
Board of Directors
Section 2.1. Number; Qualifications. The Board of Directors shall
consist of the number of Directors as provided in the Certificate of
Incorporation, and no person shall serve as a Director unless he or she meets
the requirements, if any, provided in the Certificate of Incorporation for
service on the Board of Directors.
Section 2.2. Election; Resignation; Vacancies. (a) Subject to the
provisions of the Certificate of Incorporation, at each annual meeting of
stockholders, the stockholders shall elect, pursuant to the terms of the
Certificate of Incorporation, the successors to the Directors whose terms expire
at that meeting, and each Director shall hold office until the annual meeting at
which such Director's term expires and the election and qualification of his or
her successor, or until his or her earlier death, resignation or removal. Any
Director may resign at any time by giving written notice to the Chairman of the
Board, if any, the President or the Secretary. Unless
6
<PAGE>
otherwise stated in a notice of resignation, it shall take effect when received
by the officer to whom it is directed, without any need for its acceptance.
(b) Nominees for election as Equity Directors (as defined in the
Certificate of Incorporation) shall be selected by the Nominating Committee.
Nominees for election as Series B-1 Directors, Series B-2 Directors and Series
B-3 Director (as such terms are defined in the Certificate of Incorporation)
shall be selected by the respective Series B Nominating Committees as provided
in Article IV.
(c) A vacancy, howsoever occurring, in a directorship shall be filled
in the manner specified in the Certificate of Incorporation.
Section 2.3. Regular Meetings. Regular meetings of the Board of
Directors may be held without call or notice at such times and at such places,
within or without the state of Delaware, as shall be fixed by resolution of the
Board of Directors.
Section 2.4. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board, the President, the
Secretary, or by a majority of the members of the Board of Directors then in
office and may be held at any time, date or place, within or without the State
of Delaware, as the person or persons calling the meeting shall fix. Notice of
the time and place of special meetings shall be delivered personally or by
telephone to each Director or sent by first-class mail or telegram, charges
prepaid, addressed to each Director at that Director's address as it is shown on
the records of the Corporation. If the notice is mailed, it shall be deposited
in the United States mail at least 4 days before the time of the holding of the
meeting. If the notice is delivered personally or by telephone or by telegram,
it shall be delivered personally or by telephone or to the telegraph company at
least 48 hours before the time of the holding of the meeting. Any oral notice
given personally or by telephone may be communicated either to the Director or
to a person at the office of the Director who the person giving the notice has
reason to believe will promptly communicate it to the Director. The notice need
not specify the purpose or the place of the meeting, if the meeting is to be
held at the principal executive office of the Corporation.
Section 2.5 Organization. Meetings of the Board of Directors shall
be presided over by the Chairman of the Board, the Vice Chairman of the Board,
the Second Vice Chairman of the Board or the President (in that order), or in
their absence, inability or unwillingness, by a chairman chosen at the meeting.
The Secretary shall act as secretary of the meeting, but in his or her absence
the chairman of the meeting may appoint any person to act as secretary of the
meeting. A majority of the Directors present at a meeting, whether or not they
constitute a quorum, may adjourn such meeting to any other date, time or place
without notice other than announcement at the meeting.
Section 2.6. Quorum; Vote Required for Action. (a) At all meetings
of the Board of Directors, a majority of the whole Board of Directors shall
constitute a quorum for the transaction of business. Unless the Certificate of
Incorporation or these By-laws otherwise provide, the vote of a majority of the
Directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors. A meeting at which a quorum is initially present may
7
<PAGE>
continue to transact business notwithstanding the withdrawal of Directors, if
any action taken is approved by at least a majority of the required quorum for
that meeting.
(b) If a quorum is not present at any meeting of the Board of
Directors, then the Directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
(c) Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware, the Certificate of Incorporation or these
By-laws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the Directors, or members of a committee of Directors, need be specified in
any written waiver of notice unless so required by the Certificate of
Incorporation or these By-laws.
Section 2.7. Telephonic Meetings. Directors, or any committee of
Directors designated by the Board of Directors, may participate in a meeting of
the Board of Directors or such committee by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in a meeting pursuant to this
Section 2.8 shall constitute presence in person at such meeting.
Section 2.8. Informal Action by Directors. Unless otherwise
restricted by the Certificate of Incorporation or these By-laws, any action
required or permitted to be taken at any meeting of the Board of Directors or of
any committee thereof, may be taken without a meeting if all members of the
Board of Directors or such committee, as the case may be, consent thereto in
writing (which may be in counterparts), and the written consent or consents are
filed with the minutes of proceedings of the Board of Directors or such
committee.
Section 2.9. Reliance Upon Records. Every Director, and every member
of any committee of the Board of Directors, shall, in the performance of his or
her duties, be fully protected in relying in good faith upon the records of the
Corporation and upon such information, opinions, reports or statements presented
to the Corporation by any of its officers or employees, or committees of the
Board of Directors, or by any other person as to matters the Director or member
reasonably believes are within such other person's professional or expert
competence and who has been selected with reasonable care by or on behalf of the
Corporation, including, but not limited to, such records, information, opinions,
reports or statements as to the value and amount of the assets, liabilities
and/or net profits of the Corporation, or any other facts pertinent to the
existence and amount of surplus or other funds from which dividends might
properly be declared and paid, or with which the Corporation's capital stock
might properly be purchased or redeemed.
Section 2.10. Interested Directors. Whenever the Board considers a
matter in which a board member is likely to have a significant and direct
financial interest, the Board shall
8
<PAGE>
take all necessary steps to ensure that no participating Board member has a
conflict of interest. A Board member shall be excused from the meeting during
the Board's consideration of such matter if: (1) he or she directly or
indirectly owns or controls an account that is likely to be directly and
materially affected by the decision; (2) he or she has substantial financial
interest in a clearing member that may be directly and materially affected by
the Board's decision; or (3) he or she has an interest in the outcome, which a
majority of the Board, present and voting, deems to require his or her
disqualification.
Section 2.11. Compensation. Unless otherwise restricted by the
Certificate of Incorporation, the Board of Directors shall have the authority to
fix the compensation of Directors. The Directors shall be paid their reasonable
expenses, if any, of attendance at each meeting of the Board of Directors or a
committee thereof and may be paid a fixed sum for attendance at each such
meeting and an annual retainer or salary for services as a Director or committee
member. No such payment shall preclude any Director from serving the
Corporation in any other capacity and receiving compensation therefor.
Section 2.12. Presumption of Assent. Unless otherwise provided by
the laws of the State of Delaware, a Director who is present at a meeting of the
Board of Directors or of a committee thereof at which action is taken on any
matter shall be presumed to have assented to the action taken unless his or her
dissent shall be entered in the Minutes of such meeting or unless he or she
shall file his or her written dissent to such action with the person acting as
secretary of such meeting before the adjournment thereof or shall forward such
dissent by registered mail to the Secretary immediately after the adjournment of
such meeting. Such right to dissent shall not apply to a Director who voted in
favor of such action.
ARTICLE III
Committees of the Board of Directors
Section 3.1. Committees. The Board of Directors shall have an
Executive Committee, an Audit Committee, a Compensation Committee, a Nominating
Committee and any additional committees it may designate from time to time by
resolution passed by a majority of the whole board, with each committee to
consist of one or more of the Directors of the Corporation.
Section 3.2. Executive Committee. The Executive Committee shall
consist of such number of Directors as may be elected from time to time by the
Board. Whenever the Board is not in session, and subject to the provisions of
applicable law, the Certificate of Incorporation or these By-laws, the Executive
Committee shall have and exercise the authority of the Board in the management
of the Corporation. A majority of the Executive Committee shall constitute a
quorum necessary to transact business.
Section 3.3. Audit Committee. The Audit Committee shall consist of
such number of Directors (none of whom shall be an employee of the Corporation)
as may be elected
9
<PAGE>
from time to time by the Board. The Audit Committee shall review the results and
scope of the audit and all other services provided by the Corporation's
independent auditors, as well as the Corporation's accounting and internal
control procedures and policies. A majority of the Audit Committee shall
constitute a quorum necessary to transact business.
Section 3.4. Compensation Committee. The Compensation Committee
shall consist of such number of Directors (none of whom shall be an employee of
the Corporation) as may be elected from time to time by the Board. The
Compensation Committee shall oversee the compensation and benefits of the
employees and management of the Corporation. A majority of the Compensation
Committee shall constitute a quorum necessary to transact business.
Section 3.5. Nominating Committee. The Nominating Committee shall be
composed of five Directors. The Committee shall review the qualifications of
potential candidates for the Board of Directors (including candidates
recommended by stockholders, provided such recommendation is submitted in
writing and accompanied by a description of the proposed nominee's
qualifications and other relevant biographical information and evidence of the
consent of the proposed nominee) and shall propose nominees for the positions on
the Board of Directors that are nominated by the Board. In making their
nominations, the Nominating Committee and the Board of Directors shall take into
consideration that (i) the Board of Directors should have meaningful
representation of a diversity of interests, including floor brokers, floor
traders, futures commission merchants, producers, consumers, processors,
distributors and merchandisers of commodities traded on the Chicago Mercantile
Exchange, participants in a variety of pits or principal groups of commodities
traded on the Chicago Mercantile Exchange and other market users or
participants; (ii) at least 10 percent of the members of Board of Directors
should be comprised of persons representing farmers, producers, merchants or
exporters of principal commodities traded on the Chicago Mercantile Exchange;
and (iii) at least 20 percent of the members of the Board of Directors should be
comprised of persons who do not possess trading privileges on the Chicago
Mercantile Exchange or are not currently salaried employees of the Corporation,
primarily performing services for the Corporation in a capacity other than
having trading privileges on the Chicago Mercantile Exchange or officers,
principals or employees of a person that possesses trading privileges on the
Chicago Mercantile Exchange. A majority of the Nominating Committee shall
constitute a quorum necessary to transact business.
Section 3.6. Committee Governance. The Board may designate one or
more Directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not such
member or members constitute a quorum, may unanimously appoint another member of
the Board to act at the meeting in the place of any such absent or disqualified
member. Subject to the provisions of law, any such committee, to the extent
provided in the resolution of the Board or in these By-laws, shall have and may
exercise all the powers and authority of the Board in the management of the
business and affairs of the Corporation. Each committee shall keep regular
minutes of its meetings and report the same to the Board of Directors when
required. Each committee may adopt rules for its governance not inconsistent
with the provisions of these By-laws.
10
<PAGE>
ARTICLE IV
Series B Nominating Committees
Section 4.1. Series B Nominating Committees. The holders of shares
of Class B Common Stock, Series B-1; Class B Common Stock, Series B-2; and Class
B Common Stock, Series B-3, shall each elect a nominating committee for their
respective series (each, a "Series B Nominating Committee"). Each Series B
Nominating Committee shall be composed of five members.
Section 4.2. Election. (a) The initial members of the Series B
Nominating Committee for the Class B Common Stock, Series B-1, shall consist of
the members of the CME Nominating Committee of Chicago Mercantile Exchange, an
Illinois not-for-profit corporation (the "Exchange"), in office on the date that
the merger of the Exchange into and with CME Transitory Co., a Delaware nonstock
corporation, becomes effective (the "Effective Date"); the initial members of
the Series B Nominating Committee for the Class B Common Stock, Series B-2,
shall consist of the members of the IMM Nominating Committee of the Exchange in
office on the Effective Date; and the initial members of the Series B Nominating
Committee for the Class B Common Stock, Series B-3, shall consist of the members
of the IOM Nominating Committee of the Exchange in office on the Effective Date.
At each annual meeting of stockholders thereafter, holders of the Class B Common
Stock, Series B-1; Class B Common Stock, Series B-2; and Class B Common Stock,
Series B-3, shall elect the members of their respective Series B Nominating
Committees from candidates selected as provided in Section 4.2(b). Members of
each Series B Nominating Committee shall hold office for a term of one year and
until their successors are duly elected and qualified.
(b) Commencing with the annual meeting held in 2000, each Series B
Nominating Committee shall nominate, by letter directed to the Chairman of the
Board not later than ninety days prior to an annual meeting, candidates for
election to such Committee at such annual meeting. Each Series B Nominating
Committee shall nominate ten candidates. Such nominations shall include, as
part of or in addition to such ten candidates, (i) any candidate who is
nominated by the holders of at least 100 shares of Class B Common Stock, Series
B-1, in the case of the Series B Nominating Committee representing such series,
(ii) any candidate who is nominated by the holders of at least 100 shares of
Class B Common Stock, Series B-2, in the case of the Series B Nominating
Committee representing such series, and (iii) any candidate who is nominated by
the holders of at least 150 shares of Class B Common Stock, Series B-3, in the
case of the Series B Nominating Committee representing such series; provided,
however, in the case of any such nominations, the nomination is submitted in
writing and 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 five nominees receiving the greatest
number of votes for a particular Series B Nominating Committee shall be elected
to such Committee. In the event of a vacancy, howsoever occurring, in a
committee position, the candidate in the most recent election for such position
who received the next highest number of votes to the last person currently
serving shall be named to fill such vacancy.
11
<PAGE>
Section 4.3. Director Nominations. Each Series B Nominating
Committee shall be responsible for assessing the qualifications of candidates to
serve as Directors to be elected by the particular series. Not less than 90
days but not more than 120 days prior to an annual meeting of stockholders at
which a Series B-1 Director, a Series B-2 Director or a Series B-3 Director is
to be elected, the applicable Series B Nominating Committee(s) shall select
nominees for election to such directorship. Such Series B Nominating
Committee(s) shall select, subject to the provisions of the Certificate of
Incorporation, two nominees for each directorship to be filled by the applicable
series of Class B Common Stock at such meeting. Such nominations shall include,
as part of or in addition to such two nominees, (i) any nominee who is nominated
by the holders of at least 100 shares of Class B Common Stock, Series B-1, in
the case of the Series B Nominating Committee representing such series, (ii) any
nominee who is nominated by the holders of at least 100 shares of Class B Common
Stock, Series B-2, in the case of the Series B Nominating Committee representing
such series, and (iii) any nominee who is nominated by the holders of at least
150 shares of Class B Common Stock, Series B-3, in the case of the Series B
Nominating Committee representing such series; provided, however, in the case of
any such nominations, the nomination is submitted in writing and accompanied by
a description of the proposed nominee's qualifications and other relevant
biographical information and evidence of the consent of the proposed nominee.
All nominees shall meet the requirements, if any, in the Certificate of
Incorporation or in these By-laws for service on the Board of Directors. No
nominee shall be a candidate for more than one directorship. If a nominee
withdraws, dies, becomes incapacitated or disqualified to serve, the applicable
Series B Nominating Committee shall, as quickly as practicable, submit a new
nominee to the Chairman of the Board. Each Series B Nominating Committee shall
submit its nominees in writing to the Chairman of the Board. Such writing shall
set forth as to each nominee for election or re-election as a Director: (1) the
name, age, business address and residence address of such person, (2) the
principal occupation or employment of such person, (3) the class and number of
shares of stock of the Corporation which are owned (or, under the rules of the
Corporation, would be recognized as a permitted transferee), and (4) such
person's written consent to serving as a Director if elected.
ARTICLE V
Officers
Section 5.1. Executive Officers; Election; Qualification; Term of
Office. The Board of Directors shall elect from among its members a Chairman of
the Board, a Vice Chairman of the Board and a Second Vice Chairman of the Board.
The Board of Directors shall also elect a President, a Secretary and a
Treasurer, and may elect one or more Vice Presidents, one or more Assistant
Secretaries and one or more Assistant Treasurers. Any number of offices may be
held by the same person. Each officer shall hold office until his or her
successor is elected and qualified or until his or her earlier death,
resignation or removal.
Section 5.2. Resignation; Removal; Vacancies. Any officer may resign
at any time by giving written notice to the Chairman of the Board, the President
or the Secretary. Unless otherwise stated in a notice of resignation, it shall
take effect when received by the officer to whom it is directed, without any
need for its acceptance. Any resignation is without prejudice
12
<PAGE>
to the rights, if any, of the Corporation under any contract to which the
officer is a party. The Board of Directors may remove any officer with or
without cause at any time by an affirmative vote of the majority of the Board of
Directors, but such removal shall be without prejudice to the contractual
rights, if any, of such officer with the Corporation. A vacancy occurring in any
office of the Corporation may be filled for the unexpired portion of the term
thereof by the Board of Directors at any regular or special meeting.
Section 5.3. Powers and Duties of Executive Officers. The officers
of the Corporation shall have such powers and duties in the management of the
Corporation as may be prescribed by the Board of Directors and, to the extent
not so provided, as generally pertain to their respective offices, subject to
the control of the Board of Directors. The Board of Directors may require any
officer, agent or employee to give security for the faithful performance of his
or her duties.
ARTICLE VI
Provisions Regarding Class B Common Stock
Section 6.1. Eligibility Criteria. Any adult of good moral
character, reputation and business integrity, with adequate financial resources
and credit to assume the responsibilities and privileges of the exercise of the
trading privileges associated with a share or shares of Class B Common Stock of
any series, is eligible to exercise such trading privileges. A person allowed to
exercise such trading privileges is presumed to know all the rules and
regulations of the Corporation and agrees to abide by them while exercising such
trading privileges. A person exercising such trading privileges agrees to be
responsible for any violations of the Corporation's rules and regulations
committed by him or her, and agrees to have any disputes, which relate to or
arise out of any transaction upon the Chicago Mercantile Exchange, resolved in
accordance with the rules of the Corporation.
Section 6.2. Application. An individual desiring to exercise the
trading privileges associated with a share of Class B Common Stock of any series
shall file an application with the Corporation in the form prescribed from time
to time by the Board of Directors. Such application shall: (i) include an
agreement by the applicant to take no recourse against the Corporation in the
event that his or her application is rejected (except as provided in Section 8c
of the Commodity Exchange Act); (ii) set forth all financial arrangements made
in connection with the proposed exercise of such trading privileges; (iii)
contain an agreement to abide by the rules and regulations of the Corporation
and all amendments thereto; and (iv) contain an acceptance of the burdens and
risks inherent in an application to exercise trading privileges which may be
rejected.
Section 6.3. Trading Rights and Privileges. Holders of shares of
Class B Common Stock or their permitted transferees, who meet the Corporation's
eligibility criteria for exercise of trading privileges, shall have the
following trading privileges:
13
<PAGE>
(a) Such holder or permitted transferee of a series of shares of Class
B Common Stock will be entitled to appear upon the floor of the Chicago
Mercantile Exchange and to act as a floor broker and/or trader for the
contracts assigned to that series.
(b) Such holder or permitted transferee of a series of shares of Class
B Common Stock shall have the right to trade electronically through the
GLOBEX2 system. Such 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.
(c) Such holder of a series of shares of Class B Common Stock shall be
able to lease out to another person who satisfies the eligibility criteria
of the Corporation the trading privileges associated with that share of
Class B Common Stock.
(d) The Corporation shall charge clearing firms a lower clearing fee
for trades made for the account of a holder of a series of shares of Class
B Common Stock, or a lessee of the trading privileges associated with such
shares, with respect to contracts assigned to such holder's series of
shares of Class B Common Stock as of the Effective Date. The Corporation
shall not charge a higher clearing fee for any trade for the account of
such shareholder or lessee executed in the open outcry environment than the
clearing fee for the same trade executed in another trading environment.
Section 6.4 Claims Against Stockholder; Application of Proceeds. For
the purposes of this Section, the term "sale" shall include any transfer of
ownership, and the term "seller" shall include firms that are considered under
applicable rules of the Corporation to have ownership privileges in respect of
any shares of Class B Common Stock. When the President receives notification and
confirmation of the sale of a share of Class B Common Stock (such share being
referred to herein as the "Proposed Sale Share"), he or she shall promptly
request the Division of Market Regulation and the Membership Department to
conduct an investigation of claims made pursuant to this Section against the
Proposed Sale Share by the Corporation, other holders of Class B Common Stock of
the Corporation, clearing members or the public, which arise out of futures
transactions on the Chicago Mercantile Exchange. This investigation shall be
completed within 20 days of the date the President receives notification and
confirmation of the sale of said Proposed Sale Share.
All claims against the seller of a Proposed Sale Share shall be
submitted in writing to the Membership Department within 20 days of the posting
of notice of the sale of said Proposed Sale Share.
14
<PAGE>
The proceeds of the sale of a Proposed Sale Share shall be applied to
the following purposes and in the following order of priority:
(i) Payment of all dues, fines, contributions, charges and other
indebtedness due to the Corporation or the CME Gratuity Fund;
(ii) Payment of any indebtedness to the clearing member who last
qualified the selling owner arising out of a pledge of such Proposed Sale
Share as collateral security on such indebtedness, or a deficit which the
President determines to have arisen directly out of futures transactions on
the Chicago Mercantile Exchange;
(iii) Payment of amounts due to holders of Class B Common Stock and
other clearing members on claims filed which the President determines to
have arisen directly out of futures transactions on the Chicago Mercantile
Exchange;
(iv) Payment of amounts due to public customers of the seller, based
on claims filed by such customers or based on reports of the Division of
Market Regulation, which claims are determined by the President to be based
upon misappropriation of customer funds, improperly executed futures
transactions, unpaid credit balances, or other similar matters, directly
related to futures transactions on the Chicago Mercantile Exchange;
(v) No other claims against the proceeds of the sale of a Proposed
Sale Share shall be recognized and administered by the Corporation, but the
creditors of the seller of a Proposed Sale Share not falling in the
foregoing categories may pursue other legal means of securing payment of
their obligations.
The President shall make a final determination of all claims filed in
time or reported by the Division of Market Regulation and the Membership
Department against the proceeds of the sale of a Proposed Sale Share.
Except as provided in the case of a withdrawal from clearing
membership, the President shall make a distribution of such proceeds within 30
days after receiving notification and confirmation of the sale of the Proposed
Sale Share, unless claims to the proceeds are not resolved within that period.
If, however, at such time a disciplinary proceeding under the Corporation's
rules is pending against the seller or, based upon a pending investigation, is
highly probable, or if a legal proceeding, in respect to which the
indemnification provisions of the rules of the Corporation applicable to holders
of Class B Common Stock would operate, is pending, has been announced or is
highly probable, then the President shall retain so much of the proceeds as he
judges will be required to satisfy the seller's obligations until such time as
the pending matter is concluded.
Distribution of proceeds shall be made by the payment of claims in the
categories listed in this Section to the extent the proceeds from the sale are
sufficient to meet those obligations. If the proceeds of the sale of a Proposed
Sale Share are insufficient to pay all amounts determined to be due under the
categories listed in this Section, the proceeds shall be
15
<PAGE>
applied to pay the full amounts determined to be due under subsections (i)
through (iv) (inclusive) in the priority named. If the proceeds are insufficient
to pay the amounts determined to be due under any priority, the claims due under
that priority shall be paid pro rata, and the remaining priorities shall be left
unpaid. In determining the amount of any claim, the President shall first deduct
the fair cash value of any collateral held by that claimant.
The surplus, if any, shall be paid to the person whose Proposed Sale
Share was sold or his legal representative upon the execution of a satisfactory
release. The President's determination and allowance of claims hereunder shall
be final. The death, incompetency, expulsion or suspension of a member shall
not affect the rights of claimants under this Section.
ARTICLE VII
Stock Certificates and Transfers
Section 7.1. Certificates. Every holder of stock shall be entitled
to have a certificate signed by or in the name of the Corporation by its
Chairman of the Board, a Vice Chairman of the Board, its President or a Vice
President, and by its Secretary or an Assistant Secretary, certifying the number
of shares owned by such stockholder in the Corporation. Any of or all the
signatures on the certificate may be facsimile. In case any officer, transfer
agent, or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the Corporation
with the same effect as if such officer, transfer agent or registrar continued
to be such at the date of issue.
Section 7.2. Lost, Stolen or Destroyed Certificates; Issuance of New
Certificates. The Corporation may issue a new certificate for stock in the
place of any certificate theretofore issued by it, alleged to have been lost,
stolen or destroyed, and the Corporation may require the owner of the lost,
stolen or destroyed certificate, or such stockholder's legal representative, to
indemnify the Corporation and/or to give the Corporation a bond sufficient to
indemnify it against any claim that may be made against it on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate.
Section 7.3. Transfers of Stock. Upon surrender to the Corporation
or the transfer agent of the Corporation of a certificate for stock of the
Corporation duly endorsed or accompanied by proper evidence of succession,
assignment or authority to transfer or, if the relevant stock certificate is
claimed to have been lost, stolen or destroyed, upon compliance with the
provisions of Section 7.2 of these By-laws, and upon payment of applicable taxes
with respect to such transfer, and in compliance with the transfer restrictions
applicable to such shares under the Certificate of Incorporation, these By-laws
or rules of the Corporation and any other applicable transfer restrictions of
which the Corporation shall have notice, the Corporation shall issue a new
certificate or certificates for such stock to the person entitled thereto,
cancel the old certificate and record the transaction upon its books. Transfers
of stock shall be made only on the books of the Corporation by the registered
holder thereof or by such holder's attorney or successor duly authorized as
evidenced by documents filed with the Secretary. Whenever any transfer of stock
shall be made for collateral security, and not absolutely, it shall be so
expressed
16
<PAGE>
in the entry of transfer if, when the certificate or certificates representing
such stock are presented to the Corporation for transfer, both the transferor
and transferee request the Corporation to do so.
Section 7.4. Special Designation on Certificates. The designations,
preferences, and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the Corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the Corporation shall issue to represent
such class or series of stock a statement that the Corporation will furnish
without charge to each stockholder who so requests the powers, designations,
preferences, and the relative, participating, optional or other special rights
of each class of stock, or series thereof, and the qualifications limitations or
restrictions of such preferences and/or rights.
Section 7.5. Stock Transfer Agreements. Subject to the provisions of
the Certificate of Incorporation, the Corporation shall have power to enter into
and perform any agreement with any number of stockholders of any one or more
classes, or series thereof, of stock of the Corporation to restrict the transfer
of such shares owned by such stockholders in any manner not prohibited by the
General Corporation Law of Delaware.
Section 7.6. Registered Stockholders. The Corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends and to vote as such owner, shall be
entitled to hold liable for calls and assessments the person registered on its
books as the owner of shares, and shall not be bound to recognize any equitable
or other claim to or interest in such share or shares on the part of another
person, whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Delaware.
Section 7.7. Other Regulations. The issue, transfer, conversion and
registration of stock certificates shall be governed by such other regulations
as the Board of Directors may establish.
ARTICLE VIII
Notices
Section 8.1. Manner of Notice. Except as otherwise provided by law,
the Certificate of Incorporation or these By-laws, whenever notice is required
to be given to any stockholder, Director or member of any committee of the Board
of Directors, such notice may be given by personal delivery or by depositing it,
in a sealed envelope, in the United States mails, first class, postage prepaid,
addressed, or by transmitting it via telecopier, to such stockholder, Director
or member, either at the address of such stockholder, Director or member as it
appears on the records of the Corporation or, in the case of such a Director or
member, at his or her
17
<PAGE>
business address; and such notice shall be deemed to be given at the time when
it is thus personally delivered, deposited or transmitted, as the case may be.
Such requirement for notice shall also be deemed satisfied, except in the case
of stockholder meetings, if actual notice is received orally or by other writing
by the person entitled thereto as far in advance of the event with respect to
which notice is being given as the minimum notice period required by law or
these By-laws.
Section 8.2. Dispensation with Notice. (a) Whenever notice is
required to be given by law, the Certificate of Incorporation or these By-laws
to any stockholder to whom (i) notice of two consecutive annual meetings of
stockholders, and all notices of meetings of stockholders or (ii) all, and at
least two, payments (if sent by first class mail) of dividends or interest on
securities of the Corporation during a 12-month period, have been mailed
addressed to such stockholder at the address of such stockholder as shown on the
records of the Corporation and have been returned undeliverable, the giving of
such notice to such stockholder shall not be required. Any action or meeting
which shall be taken or held without notice to such stockholder shall have the
same force and effect as if such notice had been duly given. If any such
stockholder shall deliver to the Corporation a written notice setting forth the
then current address of such stockholder, the requirement that notice be given
to such stockholder shall be reinstated.
(b) Whenever notice is required to be given by law, the Certificate of
Incorporation or these By-laws to any person with whom communication is
unlawful, the giving of such notice to such person shall not be required, and
there shall be no duty to apply to any governmental authority or agency for a
license or permit to give such notice to such person. Any action or meeting
which shall be taken or held without notice to any such person with whom
communication is unlawful shall have the same force and effect as if such notice
had been duly given.
Section 8.3. Waiver of Notice. Any written waiver of notice, signed
by the person entitled to notice, whether before or after the time stated
therein, shall be deemed equivalent to notice. Attendance of a person at a
meeting shall constitute a waiver of notice of such meeting, except when the
person attends a meeting for the express purpose of objecting, at the beginning
of the meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of any regular or special meeting of the stockholders, Directors, or
members of a committee of Directors need be specified in any written waiver of
notice.
ARTICLE IX
Indemnification
Section 9.1. Right to Indemnification. In addition and subject to
the indemnification provisions contained in the Certificate of Incorporation,
and subject to applicable law, the following Sections of this Article IX shall
apply with respect to any person subject to the indemnification provisions of
the Corporation.
18
<PAGE>
Section 9.2. Prepayment of Expenses. The Corporation may pay or
reimburse the reasonable expenses incurred in defending any proceeding in
advance of its final disposition if the Corporation has received in advance an
undertaking by the person receiving such payment or reimbursement to repay all
amounts advanced if it should be ultimately determined that he or she is not
entitled to be indemnified under this Article IX or otherwise. The Corporation
may require security for any such undertaking.
Section 9.3. Claims. If a claim for indemnification or payment of
expenses under this Article IX is not paid in full within 60 days after a
written claim therefor has been received by the Corporation, the claimant may
file suit to recover the unpaid amount of such claim and, if successful in whole
or in part, shall be entitled to be paid the expense of prosecuting such claim.
In any such action the Corporation shall have the burden of proving that the
claimant was not entitled to the requested indemnification or payment of
expenses under applicable law.
Section 9.4. Non-Exclusivity of Rights. The rights conferred on any
person by this Article IX shall not be exclusive of any other rights which such
person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, these By-laws, agreement, vote of stockholders or
disinterested Directors or otherwise.
Section 9.5. Other Indemnification. The Corporation's obligation, if
any, to indemnify any person who was or is serving at its request as a Director,
officer, employee, partner or agent of another corporation, partnership, joint
venture or other enterprise shall be reduced by any amount such person may
collect as indemnification from such other corporation, partnership, joint
venture or other enterprise.
Section 9.6. Amendment or Repeal. Any repeal or modification of the
foregoing provisions of this Article IX shall not adversely affect any right or
protection hereunder of any person in respect of any act or omission occurring
prior to the time of such repeal or modification.
ARTICLE X
General
Section 10.1. Form of Records. Any records maintained by the
Corporation in the regular course of its business, including its stock ledger,
books of account, and minute books, may be kept on, or be in the form of,
magnetic tape, diskette, photographs, microphotographs, or any other information
storage device, provided that the records so kept can be converted into clearly
legible form within a reasonable time. The Corporation shall so convert any
records so kept upon the request of any person entitled to inspect the same.
Section 10.2. Execution of Corporate Contracts and Instruments. The
Board of Directors, except as otherwise provided in these By-laws, may authorize
any officer or officers, or agent or agents, to enter into any contract or
execute any instrument in the name of and on behalf of the Corporation; such
authority may be general or confined to specific
19
<PAGE>
instances. Unless so authorized or ratified by the Board of Directors or within
the agency power of an officer, no officer, agent or employee shall have any
power or authority to bind the Corporation by any contract or engagement or to
pledge its credit or to render it liable for any purpose or for any amount.
Section 10.3. Severability. If any provision of these By-laws shall
be held to be invalid, illegal, unenforceable or in conflict with the provisions
of the Corporation's Certificate of Incorporation, then such provision shall
nonetheless be enforced to the maximum extent possible consistent with such
holding and the remaining provisions of these By-laws (including without
limitation, all portions of any section of these By-laws containing any such
provision held to be invalid, illegal, unenforceable or in conflict with the
Certificate of Incorporation, that are not themselves invalid, illegal,
unenforceable or in conflict with the Certificate of Incorporation) shall remain
in full force and effect.
Section 10.4. Construction; Definitions. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions in the
General Corporation Law of Delaware shall govern the construction of these By-
laws. Without limiting the generality of this provision, the singular number
includes the plural, the plural number includes the singular, and the term
"person" includes both a corporation and a natural person.
Section 10.5. Dividends. The Board of Directors, subject to any
restrictions contained in the General Corporation Law of Delaware or the
Certificate of Incorporation, may declare and pay dividends upon the shares of
its capital stock. Dividends may be paid only in cash or in property. The
Board of Directors may set apart out of any of the funds of the Corporation
available for dividends a reserve or reserves for any proper purpose and may
abolish any such reserve. Such purposes shall include, but not be limited to,
equalizing dividends, repairing or maintaining any property of the Corporation,
and meeting contingencies.
Section 10.6 Consolidated Rules of the Chicago Mercantile Exchange.
The affairs and operations of the Corporation in addition to being governed by
the Delaware General Corporation Law, the Certificate of Incorporation and these
By-laws, shall also be governed by the Consolidated Rules of the Chicago
Mercantile Exchange (the "CME Rules"). Where there exists any inconsistency
between the CME Rules and the General Corporation Law of the State of Delaware,
the Certificate of Incorporation or these By-laws, the General Corporation Law
of the State of Delaware, the Certificate of Incorporation or these By-laws
shall govern to the extent of the inconsistency.
20
<PAGE>
AGREEMENT
---------
THIS AGREEMENT, made and entered into this 7th day of February, 2000, by
and between THE CHICAGO MERCANTILE EXCHANGE ("Employer"), an Illinois not for
profit corporation, having its principal place of business at 30 South Wacker
Drive, Chicago, Illinois, and James J. McNulty ("Employee").
R E C I T A L S:
---------------
WHEREAS, Employer wishes to retain the services of Employee in the capacity
of president and chief executive officer upon the terms and conditions
hereinafter set forth and Employee wishes to accept such employment;
NOW, THEREFORE, in consideration of the mutual promises contained herein,
the parties mutually agree as follows:
1. Employment. Subject to the terms of the Agreement, Employer hereby
agrees to employ Employee during the Agreement Term as president and chief
executive officer and Employee hereby accepts such employment. Employee shall
report to the Employer's Board of Directors, or any successor to the Board of
Directors (hereinafter, "Board" shall mean the Board of Directors of Employer
and/or any successor thereto). The duties of Employee as president and chief
executive officer shall include, but not be limited to, the performance of all
duties associated with the management and operation of Employer, including the
execution of all policies formulated by the Board, the selection and hiring of
personnel for the various divisions and departments, the training and
establishing of duties and responsibilities of supervisory personnel, and
improvements in organization, accounting procedures and financial policy for
Employer. Further, and without limiting the generality of the foregoing,
Employee, pursuant to the direction
<PAGE>
of the Board, shall be expected to successfully oversee and implement the
"demutualization" of Employer, defined herein as the change of Employer from a
member-owned not for profit corporation to a stockholder-owned for-profit
corporation. Employee shall devote his full time, ability and attention to the
business of Employer during the Agreement Term, subject to the direction of the
Board.
Notwithstanding anything to the contrary contained herein, nothing in the
Agreement shall preclude Employee from participating in the affairs of any
governmental, educational or other charitable institution, engaging in
professional speaking and writing activities, and serving as a member of the
board of directors of a publicly held corporation (except for a competitor of
Employer), as long as the Board does not determine that such activities
interfere with or diminish Employee's obligations under the Agreement. Employee
shall be entitled to retain all fees, royalties and other compensation derived
from such activities, in addition to the compensation and other benefits payable
to him under the Agreement, but shall disclose such fees to Employer.
2. Agreement Term. Employee shall be employed hereunder for a term
commencing on February 7, 2000 and expiring on December 31, 2003, unless sooner
terminated as herein provided ("Agreement Term"). The Agreement Term may be
extended or renewed by the mutual written agreement of the parties.
3. Compensation.
(a) Sign-on Bonus. Within thirty (30) days of Employee's commencement
of employment with Employer, Employer shall pay to Employee, in a single lump
sum, a sign-on bonus of two million dollars ($2,000,000), less applicable
deductions and withholdings, to compensate Employee for the loss of benefits
from Employee's previous employment.
2
<PAGE>
(b) Annual Base Salary. During the Agreement Term, Employee shall
receive an Annual Base Salary of one million dollars ($1,000,000) payable semi-
monthly. Employer shall annually review the Annual Base Salary and, at its sole
discretion, may increase it from the level then in effect; in no event shall the
Annual Base Salary be reduced during the Agreement Term from the level specified
herein.
(c) Annual Incentive Bonus. Employee shall have the opportunity for
an Annual Incentive Bonus for each calendar year during the Agreement Term based
on Employee's attainment of pre-established goals, as follows:
(i) The goals for the first calendar year of the Agreement Term
have been mutually agreed-upon by the parties, and are attached hereto as
Exhibit A and are incorporated herein by reference. During the remainder of the
Agreement Term, the goals for each coming calendar year shall be determined
solely by the Board, and shall be communicated, in writing, to Employee at least
thirty (30) days prior to the start of each calendar year.
(ii) The Annual Incentive Bonus shall not exceed the lesser of
one and one-half million dollars ($1,500,000) or, following demutualization, ten
percent (10%) of the Employer's Net Income, determined in accordance with
generally accepted accounting practices by the Employer's regular outside
certified public accountants.
(iii) The amount of the Annual Incentive Bonus for each calendar
year shall be as determined by the Board, in its sole discretion, based on the
Board's evaluation of Employee's attainment of the pre-established goals. Prior
to payment of an Annual Incentive Bonus to Employee, the Board shall certify in
writing that the pre-established goals, and any other terms deemed material by
the Board, have been attained.
3
<PAGE>
(iv) Payment to Employee of any Annual Incentive Bonus determined
by the Board, shall be made in a single lump sum during the first calendar
quarter following the end of the calendar year.
(d) Non-Qualified Stock Option and Long Term Incentive Award. As of
the date of Employee's commencement of employment with Employer, Employer shall
grant to Employee a Non-Qualified Stock Option and Long-Term Incentive Award
("collectively referred to herein as the "Non-Qualified Stock Option") in
accordance with Supplement A attached hereto and incorporated herein by
reference.
(e) Benefits and Benefit Programs. Employee shall be eligible to, and
shall, participate in all benefits and benefit programs offered from time to
time to the senior executives of Employer. This shall include, without
limitation, all insurance programs (e.g., medical, dental, vision, life,
accidental death and dismemberment and disability), paid holidays and 5 weeks
annual vacation, and pension, savings, cash balance, 401(k) and other retirement
plan or plans, all as may be in effect from time to time. In addition, at
Employer's expense, Employee shall be entitled to: (1) an annual physical
examination; (2) parking space at the principal location of Employer, and (3)
the amount of legal fees expended by Employee in connection with the negotiation
and execution of this Agreement, not to exceed thirty-five thousand dollars
($35,000).
(f) CEO Perquisites. Employee shall be eligible for such other
perquisites, paid for or reimbursed by Employer, that are customary for the
chief executive officer of a major financial institution, such as club
memberships, automobile allowance and reimbursement for professional services.
All such perquisites are subject to the approval of the Board's Compensation
Committee, or its designate or successor, which approval shall not be
unreasonably
4
<PAGE>
withheld, and shall not exceed fifty thousand dollars ($50,000) for each
calendar year of the Agreement Term.
(g) Business Expenses. Employer agrees to pay or promptly reimburse
Employee for all reasonable expenses incurred by Employee in furtherance of, or
in connection with, the transaction of the business of Employer hereunder,
subject to proper accounting by Employee and approval by Employer.
4. Disability.
(a) In the event Employee is permanently disabled, as hereinafter
defined, for a continuous period of 6 months, Employer, in its sole discretion,
may terminate Employee's employment under the Agreement upon written notice to
Employee. In such event, Employee's Annual Base Salary shall continue as
provided in subparagraph (a) of paragraph 5.
(b) Employee, for the purposes hereof, shall be deemed to be
"permanently disabled" when a mutually selected physician determines that as a
result of bodily injury or disease or mental disorder, he is so disabled that he
is prevented from performing the principal duties of his employment with or
without reasonable accommodation.
5. Termination.
Employer may terminate the employment of Employee under the Agreement in
the event that Employee shall die, or become permanently disabled, or for
"Cause" or "without Cause" as hereinafter defined, or upon expiration of the
Agreement Term, as set forth in subparagraphs (b) and (c) of this paragraph, and
Employee may terminate employment under the Agreement with or without Good
Reason, as hereinafter defined, as set forth in subparagraph (d) of this
paragraph. Except as set forth in the last sentence of this Section, Employee's
and his dependents' health,
5
<PAGE>
dental and vision insurance shall be continued on the terms then in effect (or
as thereafter changed generally for the senior management of Employer) until the
earlier of (a) the end of the period of continuation of Employee's Annual Base
Salary, or (b) the date Employee obtains other employment and becomes eligible
for coverage under such employer's health insurance program. To the extent
applicable, continuation of group health insurance coverage for Employee and his
dependents pursuant to the provisions of Section 4980B of the Internal Revenue
Code of 1986, as amended, and Sections 6.02 through 6.07 of the Employee
Retirement Income Security Act of 1974, as amended ("COBRA") shall commence
after expiration of the health insurance coverage provided above. In the event
of termination of Employee for Cause, or termination by Employee other than for
Good Reason, or termination upon expiration of the Agreement, Employee's and his
dependents' sole right to continued health insurance coverage shall be pursuant
to COBRA.
(a) Death or Disability. In the event of termination of Employee's
employment hereunder due to death or Employee becoming permanently disabled,
Employer shall, for a period of six (6) months following such termination,
continue to pay Employee's Annual Base Salary, as then in effect. Payments
pursuant to this subparagraph (a) shall be made to Employee, or to his estate or
designated beneficiary in the event of his death.
Any portion of the Non-Qualified Stock Option that is not vested prior to
termination on account of Employee's death or permanent disability shall
immediately vest on such termination. In the event of permanent disability,
during the remainder of the ten year period following the Grant Date (defined in
Supplement A), Employee shall be permitted to exercise any unexercised portion
of the Non-Qualified Stock Option. Any portion of the Non-Qualified Stock Option
that has not been exercised on the ten year anniversary of the Grant Date shall
be forfeited. As soon
6
<PAGE>
as practicable following death, Employer shall pay to Employee's estate or
designated beneficiary cash equal to the excess of the fair market value of the
Covered Shares (referred to in Supplement A) subject to such exercise over the
aggregate exercise price for such Shares.
(b) Cause or Expiration of Agreement Term. If Employee's employment
hereunder is terminated by Employer for Cause, or upon expiration of the
Agreement Term, Employer shall pay to Employee in a single lump sum, as soon as
practicable after such termination or expiration, any and all accrued but unused
vacation pay and, accrued but unpaid Annual Base Salary, and other amounts that
have been earned but not paid to Employee as of the date of such termination or
expiration. If Employee is terminated for Cause, the entire Non-Qualified Stock
Option that has not been exercised by the date of notice of termination for
Cause shall be forfeited unless the Board, in its sole discretion, determines
otherwise. Upon expiration of the Agreement Term, Employee shall be permitted to
exercise any unexercised portion of the Non-Qualified Stock Option during the
ten year period following the Grant Date. Any portion of the Non-Qualified Stock
Option that has not been exercised by the ten year anniversary of the Grant Date
shall be forfeited.
For purposes of this Agreement, "Cause" shall be deemed to exist if, and
only if:
(i) Employee shall engage, during the performance of his duties
hereunder, in acts or omissions constituting dishonesty, intentional breach of
fiduciary obligation or intentional wrongdoing or malfeasance;
(ii) Employee shall intentionally disobey or disregard a lawful and
proper direction of the Board or Employer; or
7
<PAGE>
(iii) Employee shall materially breach the Agreement and such breach
by its nature is either incapable of being cured, or if capable of being cured,
remains uncured for more than thirty (30) days following receipt by Employee of
written notice from Employer specifying the nature of the breach and demanding
the cure thereof. For purposes of this clause (iii), a material breach of the
Agreement that involves inattention by Employee to his duties shall be deemed a
breach capable of cure.
Without limiting the generality of the foregoing, the following shall not
constitute Cause for termination of Employee or the modification or diminution
of any of his authority hereunder: (a) any personal or policy disagreement
between Employee and Employer or any member of Employer or its Board, or (b) any
action taken by Employee in connection with his duties hereunder or any failure
to act, if Employee acted, or failed to act, in good faith and in a manner
Employee reasonably believed to be in and not opposed to the best interest of
Employer and Employee has no reasonable cause to believe his conduct was
unlawful.
In the event of termination for Cause, Employer shall give Employee at
least thirty (30) days prior written notice, specifying in reasonable detail the
reason or reasons for Employee's termination.
(c) Without Cause. Employee's employment may be terminated by Employer at
any time during the Agreement Term, at Employer's discretion and without Cause,
upon ninety (90) days advance written notice of same to Employee. In this event,
Employee shall continue to receive (1) his Annual Base Salary for the remainder
of the Agreement Term, and (2) one-third (1/3) of the maximum Annual Incentive
Bonus, payable semi-monthly, for the remainder of the Agreement Term. Any
portion of the Non-Qualified Stock Option that is not vested prior to such
8
<PAGE>
termination shall immediately vest on termination. During the ten year period
following the Grant Date, Employee shall be permitted to exercise any
unexercised portion of the Non-Qualified Stock Option. Any portion of the Non-
Qualified Stock Option that has not been exercised by the ten year anniversary
of the Grant Date shall be forfeited.
(d) By Employee. Employee's employment with Employer may be terminated by
Employee at any time, after the first anniversary of this Agreement, by the
giving of ninety (90) days advance written notice of same to Employer. In the
event Employee terminates after the first anniversary of this Agreement,
Employer shall pay to Employee, as soon as practicable after such termination,
in a single lump sum, any and all Annual Base Salary, and accrued but unused
vacation pay, that have been earned but not paid to Employee as of the date of
termination. Employee shall forfeit the Annual Incentive Bonus for the year
during which he resigns, and he shall forfeit any portion of the Non-Qualified
Stock Option that is not vested prior to termination. During the one hundred
eighty (180) day period following such termination, Employee shall be permitted
to exercise any portion of the Non-Qualified Stock Option that was vested prior
to termination. Any portion of the Non-Qualified Stock Option that has not been
exercised by the one hundred eighty first (181st) day following termination
shall be forfeited. In the event Employee attempts to terminate his employment
prior to the first anniversary of the Agreement, such act shall be treated as a
material breach of the Agreement by Employee under paragraph 5(b)(iii).
In the event Employee terminates the Agreement pursuant to the above after
its first anniversary date with less than ninety (90) days advance written
notice of same to Employer, the parties acknowledge that Employer will be
damaged thereby, but that such damages will be
9
<PAGE>
difficult to calculate. Accordingly, Employee will promptly pay to Employer, or
allow Employer to set off against any monies it may then owe to Employee, as
liquidated damages a sum equal to Employee's Annual Base Salary, on the date of
termination divided by 260 for each day Employee's notice of termination
hereunder is less than ninety (90) days.
A termination by Employee for Good Reason shall entitle Employee to those
payments applicable to a termination without Cause, as set forth in subparagraph
(c) of this paragraph. For purposes of this paragraph, "Good Reason" shall be
deemed to exist if, and only if:
(i) The Employee's principal place of business is relocated outside
of the Chicago metropolitan area;
(ii) Employer fails to pay to Employee the agreed-upon compensation
or benefits;
(iii) There is a demotion or significant diminution in Employee's
responsibilities or authorities under the Agreement sufficient
to constitute a constructive termination as presently defined
by Illinois law.
The conditions set forth in (ii) and (iii) above shall constitute Good
Reason if such conditions remain uncured for more than thirty (30) days
following Employer's receipt of written notice from Employee advising of such
condition and demanding the cure thereof.
6. "Walkaway" Option.
In the event Employer has not demutualized by December 31, 2000, the
Agreement may, within thirty (30) days thereafter, be terminated by either
Employee, if such failure is not the result of an intentional act by Employee,
or by Employer, by written notice of same to the other; provided, however, that
if Employer certifies in writing to Employee on or before January 31,
10
<PAGE>
2001, that demutualization has been delayed solely because a necessary
government action or ruling has not been received, and that Employer believes in
good faith that it will be received within ninety (90) days of the date of
Employer's certification hereunder, Employee shall not terminate hereunder
unless demutualization is not completed within such ninety (90) day period. For
purposes of the Agreement, the "Walkaway Period" shall mean the foregoing period
of time prior to demutualization, including the specified extensions thereof,
during which either party may, pursuant to this paragraph 6, terminate the
Agreement.
In the event of termination of the Agreement under this paragraph, Employee
shall be paid the Annual Base Salary in effect prior to such termination plus
one-third (1/3) of the maximum Annual Incentive Bonus, payable semi-monthly, for
the remainder of the Agreement Term. Such payments shall cease if and when
Employee becomes employed by or becomes a consultant to any organization engaged
in trade execution and/or trade clearing. Notwithstanding the preceding
sentence, such payments shall not cease if Employee becomes a member of the
board of directors of any organization that is not in direct competition with
Employer. For purposes of this provision, all stock exchanges shall be deemed to
be in direct competition with Employer.
During the Walkaway Period, Employee shall not exercise any portion of the
Non-Qualified Stock Option that has vested. In the event of termination of the
Agreement under this paragraph by either Employer or Employee, the entirety of
the Non-Qualified Stock Option, regardless of whether otherwise vested or
unvested, shall be forfeited.
7. Change in Control. For purposes of the Agreement, the term "Change in
Control" means the occurrence, of the events described in any of subsections
(i), (ii), or (iii) below:
11
<PAGE>
(i) The acquisition by any individual, entity or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of any voting securities of
the Employer entitled to vote generally in the election of directors ("Voting
Securities") if, immediately after such acquisition, such Person beneficially
owns fifty percent (50%) or more of the combined voting power of the outstanding
Voting Securities (the "Outstanding Employer Voting Securities"). The foregoing
provisions of this subsection (i) shall be subject to the following:
(A) The following shall not constitute a "Change in Control": (I) any
acquisition by an employee benefit plan (or related trust) sponsored or
maintained by Employer or any entity controlled by Employer (an "Employer
Plan"); (II) any acquisition by an underwriter temporarily holding
securities pursuant to an offering of such securities; or (III) any
acquisition by any Person pursuant to a transaction which complies with
subsections (ii)(A) and (ii)(B) of this definition.
(B) For purposes of the foregoing provisions of this subsection (i), the
following shall not be deemed to constitute an "acquisition" by any Person:
(I) any acquisition directly from Employer (excluding any acquisition
resulting from the exercise of an exercise, conversion, or exchange
privilege unless the security being so exercised, converted, or exchanged
was acquired directly from Employer); and (II) any acquisition by Employer
of Voting Securities.
(ii) Consummation of (I) a reorganization, merger, consolidation, or other
business combination involving Employer or (II) the sale or other disposition of
more than fifty percent (50%) of the
12
<PAGE>
operating assets of Employer (determined on a consolidated basis), other than in
connection with a sale-leaseback or other arrangement resulting in the continued
utilization of such assets (or the operating products of such assets) by
Employer (any transaction described in part (I) or (II) being referred to as a
"Corporate Transaction"); excluding, however, a Corporate Transaction pursuant
to which each of subsections (A) and (B) below are applicable:
(A) All or substantially all of the individuals and entities who are the
beneficial owners, respectively, of the Outstanding Employer Voting
Securities immediately prior to such Corporate Transaction beneficially
own, directly or indirectly, more than fifty percent (50%) of the combined
voting power of the then Outstanding Employer Voting Securities entitled to
vote generally in the election of directors of the ultimate parent entity
resulting from such Corporate Transaction (including, without limitation,
an entity which, as a result of such transaction, owns Employer or all or
substantially all of the assets of Employer either directly or through one
or more subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Corporate Transaction, of the
Outstanding Employer Voting Securities, as the case may be.
(B) No Person (other than Employer, any Employer Plan or related trust, the
corporation resulting from such Corporate Transaction, and any Person which
beneficially owned, immediately prior to such Corporate Transaction,
directly or indirectly, fifty percent (50%) or more of the Outstanding
Employer Voting Securities) will beneficially own, directly or indirectly,
fifty percent (50%) or more of the then combined voting power of the then
outstanding voting securities of such entity.
13
<PAGE>
(iii) Approval by the shareholders of Employer of a plan of complete liquidation
or dissolution of the Employer.
If during the Agreement Term there is both a Change in Control, and
Employee's employment is terminated by Employer, or by Employee for Good Reason,
during the two (2) years following such Change in Control, Employee shall be
entitled to the following:
(a) A single lump sum severance payment to be paid by Employer equal to the
aggregate of (1) two (2) times the Annual Base Salary in effect prior to such
termination that would have been due Employee but for his termination pursuant
to this paragraph 7, plus (2) one and one-third (1 1/3) times the maximum Annual
Incentive Bonus that Employee would have been eligible to receive but for his
termination pursuant to this paragraph 7, for the remainder of the Agreement
Term; provided, however, that such severance payment shall not exceed eight
million dollars ($8,000,000), and may be reduced to a lesser amount to the
extent provided in subparagraph (b) next below. This severance payment shall be
made within ninety (90) days of the date of such termination pursuant to this
paragraph.
(b) If:
(i) any payment or benefit to which the Employee is entitled from Employer,
any affiliate, or trusts established by Employer or by any affiliate (the
"Payments," which shall include, without limitation, the vesting of an
option or other non-cash benefit or property) are more likely than not to
be subject to the tax imposed by Section 4999 of the Internal Revenue Code
of 1986, as amended ("Code") or any successor provision to that section;
and
14
<PAGE>
(ii) reduction of the Payments to the amount necessary to avoid the
application of such tax would result in Employee retaining an amount that
is greater than the amount he would retain if the Payments were made
without such reduction but after the application of such tax;
the Payments shall be reduced to the extent required to avoid application of
such tax. The Employee shall be entitled to select the order in which Payments
are to be reduced in accordance with the preceding sentence. Determination of
whether Payments would result in the application of the tax under Code Section
4999, and the amount of reduction that is necessary so that no such tax is
applied, shall be made by the mutual agreement of the parties or, in the absence
of such agreement, by a mutually selected independent certified public
accounting firm, retained at Employer's expense.
(c) Any portion of the Non-Qualified Stock Option that is not then vested
shall immediately vest. If the securities that Employee would receive upon the
exercise of the Non-Qualified Stock Option are of a class that is not registered
under Section 12 of the Securities Exchange Act of 1934, then the Non-Qualified
Stock Option shall be exercisable by Employee until the three-year anniversary
of Employee's termination of employment with Employer; provided that in no event
shall the Non-Qualified Stock Option be exercisable later than the ten-year
anniversary of the Grant Date. If the securities that Employee would receive
upon the exercise of the Non-Qualified Stock Option are of a class that is
registered under Section 12 of the Securities Exchange Act of 1934, then
Employer shall file a Securities Exchange Commission Form S-8 with respect to
the sale of all of the securities that would be deliverable to Employee upon the
exercise of the Non-Qualified Stock Option (in whole or in part) (the "Required
Form S-
15
<PAGE>
8") before, or as soon as practicable after the termination of Employee's
employment with Employer, and the Non-Qualified Stock Option shall be
exercisable by Employee until the latest to occur of:
(i) the one-year anniversary of Employee's termination of employment with
Employer;
(ii) the one-year anniversary of the date on which the Required Form S-8
becomes effective with respect to the exercise of the Non-Qualified Stock
Option; or
(iii) the one-year anniversary of the date on which counsel to Employer renders
an opinion to Employer and Employee that Employee is not an "affiliate"
(as that term is defined in Rule 144 under the Securities Act of 1933)
with respect to Employer or, if later, the date specified in such opinion
as the date on which Employee will cease to be an "affiliate";
provided that in no event shall the Non-Qualified Stock Option be exercisable
later than the ten-year anniversary of the Grant Date. Any portion of the
Non-Qualified Stock Option that has not been exercised prior to the end of the
period of exercisability set forth in this paragraph (c) shall be forfeited.
8. Nondisclosure of Confidential Information.
(a) Employee acknowledges that Employer may disclose certain confidential
information to Employee during the Agreement Term to enable him to perform his
duties hereunder, and Employee hereby covenants and agrees that, subject to
subparagraph (b) of this Section, he will not, without the prior written consent
of Employer, during the Agreement Term (except in connection with the proper
performance of his duties hereunder) or at any time thereafter, disclose or
permit to be disclosed to any third party by any method whatsoever any of the
confidential information of Employer. For purposes of the Agreement,
"confidential
16
<PAGE>
information" shall include, but not be limited to, any and all records, notes,
memoranda, data, writings, research, personnel information, customer
information, clearing members' information, Employer's financial information and
plans in the possession or control of Employer that have not been published or
disclosed to the general public or the commodities futures industry. If Employee
fails to comply with any provisions of this paragraph, which failure (i) is
inadvertent or unintentional, or (ii) occurs notwithstanding Employee's good
faith effort to comply with paragraph, or (iii) does not, and is not likely to,
result in material loss to Employer, then such failure shall not constitute a
violation of any provision, covenant or agreement of this paragraph, for any
purposes of this Agreement.
(b) Clause (a), above, shall not be applicable if and to the extent
Employee is required to testify in a legislative, judicial or regulatory
proceeding pursuant to an order of Congress, any state or local legislature, a
judge, or an administrative law judge issued after Employee and his legal
counsel have, by all legal means, resisted such order. Employee will promptly
notify Employer, so that Employer will have sufficient time to intervene or
otherwise protect its interests, of the commencement of a proceeding or action
which might result in an order requiring the disclosure of confidential
information by Employee.
9. Indemnity. Except as precluded by law or regulation, Employer shall
indemnify, protect, defend and save Employee harmless from and against any
threatened, pending or completed action, suit or proceeding whether civil,
criminal, administrative or investigative, in which Employee is made a party by
reason of the fact that Employee is an officer, employee or agent of Employer,
or any judgment, amount paid in settlement (with the consent of Employer), fine,
loss, expense, cost, damage and reasonable attorney's fees incurred by reason of
the fact that
17
<PAGE>
Employee is an officer, employee or agent of Employer, provided, however, that
Employee acted in good faith and in a manner he reasonably believed to be in the
best interests of Employer, and had no reasonable cause to believe his conduct
was unlawful. Employer, at its expense, shall have the right to purchase and
maintain insurance or fidelity bonds on behalf of Employee against any liability
asserted against him and incurred by him in his capacity as an officer, employee
or agent of Employer.
10. Arbitration; Equitable Remedies. Any controversy or claim arising out
of or relating to the Agreement or the validity, interpretation, enforceability
or breach thereof, which is not settled by agreement of the parties, shall be
settled by arbitration conducted in the City of Chicago, in accordance with the
Labor Rules and Procedures of the American Arbitration Association
("Association"), and judgment upon the award rendered in such arbitration may be
entered in any court having jurisdiction. The arbitration shall be conducted
before a single arbitrator selected by the parties. In the event the parties
cannot agree on any arbitrator, then the Association will supply both parties
with a list of seven (7) names. The parties will alternatively strike one name
until only one remains. First choice will be determined by a coin toss, the
winning party having the option of striking first or second. All expenses of
arbitration shall be borne equally by the parties, except that each party shall
bear its own attorney's fees. The arbitrator shall have no power to amend,
alter, add to or delete from the Agreement.
Employee acknowledges that Employer would be irreparably injured by a
violation of paragraph 8 and Employee agrees that Employer, in addition to any
other remedies available to it for such breach or threatened breach, shall be
entitled to a preliminary injunction, temporary restraining order, or other
equivalent relief, restraining Employee from any actual or threatened
18
<PAGE>
breach of paragraph 8 pending, and in aid of, arbitration of the dispute. If a
bond is required to be posted in order for Employer to secure an injunction or
other equitable remedy, the parties agree that such bond need not be more than a
nominal sum.
11. Return of Property. Upon Employee's last day of active work, Employee
hereby agrees to immediately turn over to Employer any keys, credit cards,
passes, and all notes, memoranda, records, documents, computer disks, and all
other information, no matter how produced or reproduced, kept by Employee or in
his possession or control, used in or pertaining to the business of Employer, it
being hereby acknowledged that all of said items are the sole and exclusive
property of Employer.
12. Defense of Claims. During the period of his employment by Employer,
and continuing after the termination of his employment for a period of three (3)
years, Employee shall reasonably cooperate with Employer at its request in the
defense or prosecution of any claim that may be made by or against Employer.
Such cooperation shall include, without limitation, serving as a witness at
trial or hearing, being deposed, and preparation for same or otherwise
cooperating with Employer as determined to be necessary by Employer at its sole
discretion, for the defense or prosecution of a claim. For the period after
Employee terminates his employment with Employer, Employer shall reimburse
Employee for all reasonable expenses in connection therewith, including travel
expenses, and shall compensate him at a daily rate equal to his Annual Base
Salary on the date his employment with Employer terminated, divided by 260, with
days used for preparation, travel and other related matters being included for
purposes of determining the compensation due to Employee. Less than full days
shall be paid for by the hour, determined by dividing the daily
19
<PAGE>
rate by eight. To the extent reasonably practicable, Employer shall provide
Employee with notice at least ten (10) days prior to the date on which any such
travel is required.
13. Waiver of Breach. No waiver of either party hereto of a breach of any
provision of the Agreement by the other party, or of compliance with any
condition or provision of the Agreement to be performed by such other party,
will operate or be construed as a waiver of any subsequent breach by such other
party or any similar or dissimilar provisions and conditions at the same or any
prior or subsequent time. The failure of either party to take any action by
reason of such breach will not deprive such party of the right to take action at
any time while such breach continues.
14. Entire Agreement. The Agreement constitutes the entire agreement
between the parties concerning the subject matter hereof and supersedes all
prior and contemporaneous agreements, if any, between the parties relating to
the subject matter hereof.
15. Counterparts. The Agreement may be signed in multiple counterparts,
each of which shall be deemed to be an original for all purposes.
16. Acknowledgment by Employee. Employee represents that he is
knowledgeable and sophisticated as to business matters, including the subject
matter of the Agreement, that he has read the Agreement and that he understands
its terms. Employee acknowledges that, prior to assenting to the terms of the
Agreement, he has been given reasonable time to review it, to consult with
counsel of his choice, and to negotiate at arm's length with Employer as to the
contents. Employee and Employer agree that the language used in the Agreement is
the language chosen by the parties to express their mutual intent, and that no
rule of strict construction is to be applied against either party hereto.
20
<PAGE>
17. Assignment, Survival of Agreement
---------------------------------
(a) This Agreement is personal to Employee and shall not be assigned.
(b) Employer may assign the Agreement without the consent of Employee
to any other entity who in connection with such assignment acquires all or
substantially all of the assets of Employer, or acquires a majority of the
voting rights of Employer, or into or with which Employer is merged or
consolidated. In the event of a merger, sale, reorganization or other Change in
Control (as defined in paragraph 7) of Employer, the Agreement shall be binding
upon, and inure to the benefit of, any successor to Employer.
(c) Except as otherwise expressly provided in this Agreement, the
rights and obligations of the parties to the Agreement shall survive the
termination of Employee's employment with Employer.
18. Notice. All notices and communications required hereunder shall be in
writing and shall be deemed to have been given on the day of delivery if
personally delivered or sent by facsimile, or two (2) days after mailing if
mailed, postage prepaid, certified or registered, return receipt requested, to
the following addresses:
If to Employee: James J. McNulty
6 Kent Road
Winnetka, Illinois 60093
With a copy to: John Adams
Schiff Hardin & Waite
233 S. Wacker Drive
Chicago, Illinois 60606
If to Employer: Chicago Mercantile Exchange
30 South Wacker Drive
Chicago, Illinois 60606
Attention: Craig Donohue
---------
21
<PAGE>
with a copy to Jerrold E. Salzman
Freeman, Freeman & Salzman
401 N. Michigan Avenue, Suite 3200
Chicago, Illinois 60611
or to such other addresses as the respective parties may hereafter designate.
19. Severability. If any clause, phrase, provision or portion of this
Agreement or the application thereof to any person or circumstance shall be
invalid or unenforceable under any applicable law, such event shall not affect
or render invalid or unenforceable the remainder of this Agreement, and shall
not affect the application to any clause, provision or portion hereof to other
persons or circumstances.
20. Benefit. The provisions of this Agreement shall be binding upon and
inure to the benefit of Employer, its successors and assigns and upon and to
Employee, his heirs, personal representatives and successors, including without
limitation, the estate of Employee and the executors, administrators or trustees
of such estate.
21. Relevant Law: This Agreement shall be construed and enforced in
accordance with the laws of the State of Illinois without regard to that State's
conflict of laws.
22
<PAGE>
IN WITNESS WHEREOF, the parties hereto have set their hands and seals the
day and date first above written.
EMPLOYER: EMPLOYEE:
CHICAGO MERCANTILE EXCHANGE,
an Illinois not for profit
corporation ____________________________________
[Name]
By:_______________________________
Its:______________________________
23
<PAGE>
SUPPLEMENT A
------------
As of the date of employment (the "Grant Date"), Employer grants to
Employee this Non-Qualified Stock Option ("Option") upon the terms and
conditions set forth in this Supplement A. The Option may only be exercised if
Employer converts from an Illinois not-for-profit corporation to a for-profit
corporation. If Employer does not convert, Employee shall be entitled to
appreciation rights in lieu of the Option. The Option rewards Employee for
helping to increase the Value of Employer. The Option allows Employee to
acquire a basket of up to 2.5% of all classes of the Employer's common stock, as
of the date that Employer converts, for an exercise price equal to 2.5% of the
Value of the Employer on the Grant Date and to acquire a basket of up to 2.5% of
all classes of the Employer's common stock, as of the date that Employer
converts, for an exercise price equal to 3.75% of the Value of the Employer on
the Grant Date. The number of shares of each class will be computed when the
conversion becomes final and a Rider showing the results of such computation
will be attached to and become a part of this Agreement. The number of shares
and exercise price of a class of common stock subject to the Option shall be
adjusted as a result of an equity restructuring to maintain the economic value
of the Option. For purposes of this Supplement A, an equity restructuring is
a nonreciprocal transaction between the Company and its shareholders, such as a
stock dividend, spin-off, stock split, reverse stock split, rights offering, or
recapitalization through a special, large nonrecurring dividend that causes the
market value per share of the stock underlying the Option to decrease or
increase.
The Option shall be a non-qualified stock option, not granted in accordance
with Section 422 of the Internal Revenue Code of 1986, as amended, to purchase
an indivisible package including each class of shares issued by the Employer
(the "Covered Shares").
<PAGE>
1. The Option provides that, upon exercise with respect to the Covered Shares
elected by Employee, Employee shall receive shares of Class A common stock,
Class B common stock, cash, or a combination thereof, as determined by
Employer in its sole discretion (except Employer shall not distribute more
class B common stock than the amount included in the indivisible package
comprising the Covered Shares elected by Employee), with an aggregate Fair
Market Value equal to the Fair Market Value of the Covered Shares to which
he would otherwise have been entitled upon exercise.
2. The Options will be divided into two tranches, referred to as Tranche A and
Tranche B. Each of Tranche A and Tranche B will include an equal number of
the Covered Shares granted hereunder, that is, each tranche shall include a
basket equal to 2.5% of each class of Employer's common stock.
3. The exercise price with respect to all of the Covered Shares under Tranche
A shall be 2.5% of the Value of Employer on the Grant Date. The exercise
price with respect to all of the Covered Shares under Tranche B shall be
3.75% of the Value of Employer on the Grant Date. If fewer than all the
Covered Shares in a Tranche are exercised, the exercise price will be
proportionately reduced.
4. The "Value of Employer on the Grant Date" shall be equal to the sum of the
prices for all memberships, with the price for any category of membership
to be determined based on the average price of all actual transactions for
that category of membership which took place during the six months prior to
the Grant Date.
5. Each Installment of Covered Shares of Tranche A and each installment of
Covered Shares of Tranche B shall be exercisable on and after the Vesting
Date for such Installment as
2
<PAGE>
described in the following schedule (but only if Employee's date of
termination with Employer has not occurred before the Vesting Date):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
INSTALLMENT VESTING DATE APPLICABLE TO
INSTALLMENT
- -----------------------------------------------------------------
<S> <C>
40% of Covered Shares One year anniversary of the Grant Date
- -----------------------------------------------------------------
20% of Covered Shares Two year anniversary of the Grant Date
- -----------------------------------------------------------------
20% of Covered Shares Three year anniversary of the Grant Date
- -----------------------------------------------------------------
20% of Covered Shares Four year anniversary of the Grant Date
- -----------------------------------------------------------------
</TABLE>
6. Notwithstanding the foregoing provisions of paragraph 5, the Option shall
become fully vested and exercisable under the following circumstances: (i)
the termination of Employee's employment with Employer by reason of the
Employee's death or permanent disability pursuant to subparagraph 5(a) of
the Agreement, (ii) termination by Employer without Cause pursuant to
subparagraph 5(c) of the Agreement, (iii) termination by Employee for Good
Reason pursuant to subparagraph 5(d) of the Agreement, and (iv) a Change in
Control and termination as defined in paragraph 7(a) of the Agreement.
3
<PAGE>
7. At any time that a portion of the Option is exercisable, Employee may
exercise such portion in whole or in part by filing a written notice with
Employer accompanied by payment of the exercise price in accordance with
Paragraph 13 of this Supplement A.
8. The Option may be exercised on or after Employee's date of termination with
Employer only as to those Covered Shares for which it was exercisable
immediately prior to Employee's date of termination with Employer, or
becomes exercisable on Employee's date of termination with Employer.
9. Upon exercise of the Option, Employer shall distribute to Employee the
Covered Shares subject to the exercise, or in lieu of the Covered Shares,
shares of Class A common stock, Class B common stock, cash, or a
combination thereof, as determined by Employer in its sole discretion
(except Employer shall not distribute more class B common stock than the
amount included in the indivisible package comprising the Covered Shares
elected by Employee). Such payment of cash and/or shares of common stock
shall be equal to the aggregate Fair Market Value of the Covered Shares
subject to the exercise notice on the date of exercise. The Fair Market
Value for the Class A and Class B Stock included in the Covered Shares, as
of any date, shall be determined in the following manner:
(i) If traded on an established exchange, Fair Market Value shall
be the closing prices of such Stock on such exchange as of such date;
(ii) If such Stock is not traded on an established exchange as of
such date, Fair Market Value shall be the average of the bid and ask
prices for such Stock, where quoted for such Stock, as of the
applicable date;
4
<PAGE>
(iii) If no applicable price is available pursuant to clauses (i)
or (ii) above, or if, in the mutual opinion of Employer and Employee,
either or both of Class A and Class B Stock are thinly traded, an
outside expert, mutually selected by Employer and Employee, shall
establish the Fair Market Value of either or both.
10. The Option shall not be exercisable after Employer's close of business on
the last business day that occurs prior to the Expiration Date. The
"Expiration Date" shall be the earlier to occur of: (i) the ten-year
anniversary of the Grant Date or (ii) the date on which Employee is
notified by Employer of Employee's termination for Cause; or (iii) the
applicable date following Employee's death, permanent disability or other
termination pursuant to paragraphs 5 or 7 of the Agreement.
11. The Options and all rights thereunder will be non-transferable except with
the written consent of the Compensation Committee of the Board.
12. Shares of Class A Stock of Employer distributed pursuant to the exercise of
the Option shall be transferable by Employee, subject to Employee being
required to hold shares of such Stock, with a Fair Market Value equal to
not less than three times Employee's Annual Base Salary, while employed by
Employer as its Chief Executive Officer, subject to any applicable legal
requirements, and subject to any lockup restrictions specified by
Employer's banker.
13. The Option may be exercised by Employee, by a legatee or legatees of the
Option under Employee's last will, or by his executors, personal
representatives or distributees, by delivering to the Secretary of Employer
written notice of the percentage of Covered Shares with respect to which
the Option is being exercised, accompanied by full payment
5
<PAGE>
to Employer of the exercise price of the Covered Shares being purchased
under the Option. The exercise price of the Covered Shares purchased shall
be paid in full by any of the following methods, or any combination
thereof, selected by Employee, or his legatee or legatees, executors,
personal representatives or distributees: (i) in cash, (ii) in Class A
Stock valued at its Fair Market Value on the date of exercise, (iii) in
Class B Stock valued at its Fair Market Value on the date of exercise, (iv)
in cash by a broker-dealer to whom the holder of the Option has submitted
an exercise notice consisting of a fully-endorsed Option (in such case,
Employer shall pay all brokerage fees in connection with the exercise), (v)
by agreeing to surrender a portion of the Option then exercisable, valued
at the Fair Market Value of the Covered Shares minus the exercise price for
such Covered Shares, or (vi) by directing Employer to withhold such number
of shares of Covered Shares otherwise issuable upon exercise of the Option
having an aggregate Fair Market Value on the date of exercise equal to the
exercise price of the Option. The election by Employee pursuant to the
preceding sentence must be made on or prior to the date of exercise of the
Option and shall be irrevocable.
14. As soon as reasonably practicable after exercise of the Option, and payment
of the exercise price as provided above, Employer shall issue, in the name
of Employee (or if applicable his legatees, executors, personal
representatives or distributees) stock certificates representing the total
number of Covered Shares or shares of common stock issuable pursuant to the
exercise of the Option, provided that any Stock purchased by Employee
through a broker-dealer shall be delivered to such broker-dealer in
accordance with applicable government regulations.
6
<PAGE>
15. If Employer has not demutualized at the date that Employee gives notice of
exercise, Employee shall receive appreciation rights in lieu of the Covered
Shares to which he would have been entitled. In such case, no payment of
the exercise price shall be due from Employee under paragraphs 7 and 13 of
this Supplement A, and no distribution shall be made to Employee in
accordance with paragraphs 1, 9 and 14 of this Supplement A or otherwise.
Instead, Employee shall be entitled to a cash payment equal to the excess
of (i) the Fair Market Value (determined in accordance with paragraph 4 as
of the date of exercise) of the percentage of Employer that would have been
represented by Covered Shares subject to the exercise over (ii) the
exercise price applicable to the Covered Shares that would have been
subject to the exercise notice. The amount of such cash distribution
(together with interest at the rate of LIBOR plus one) shall be made in
three substantially equal installments on each of the one-year anniversary,
the two-year anniversary, and the three-year anniversary of the exercise
date.
7
<PAGE>
Exhibit 99.1
Chicago Mercantile Exchange Inc.
Registration Statement on Form S-4
PROXY CHICAGO MERCANTILE EXCHANGE PROXY
30 South Wacker Drive
Chicago, Illinois 60606
This proxy is solicited on behalf of the Board of Directors of
Chicago Mercantile Exchange
for the Special Meeting of Members on May __, 2000
The undersigned appoints ____________, ____________ and ____________, or
any of them, as proxies each with the power to appoint his substitute, and
hereby authorizes them to represent and to vote, as designated on the reverse
side, all membership interests in the Chicago Mercantile Exchange held in the
undersigned's name at the special meeting of members to be held on May __, 2000,
or any adjournment thereof and, in the proxies' discretion, to vote upon such
other business as may properly come before the meeting, all as more fully set
forth in the Proxy Statement/Prospectus related to such meeting, receipt of
which is hereby acknowledged.
PLEASE SEE REVERSE SIDE
______________________________________________________________________________
<PAGE>
[Reverse side of proxy]
This proxy, when properly executed, will be voted in the manner directed herein.
If no direction is made, it will be voted for approval of the demutualization
proposal.
================================================================================
PROPOSAL
To approve the Agreement and Plan of Merger dated as of April 1, 2000, by which
the Chicago Mercantile Exchange will merge into a Delaware nonstock corporation
and thereafter demutualize by merging into a Delaware stock corporation.
================================================================================
FOR. [_]
I approve the proposal.
_____________________________________
AGAINST. [_]
I do not approve the proposal.
_____________________________________
ABSTAIN. [_]
I abstain from voting on the proposal.
SIGNATURE(S) ____________________DATE_______________
NOTE: Please sign exactly as name appears hereon.
When signing as attorney, executor,
administrator, trustee or guardian, please
give full title as such.
adjournment thereof.
The signer hereby revokes all proxies heretofore given by the signer to vote at
said meeting or any
2
