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Cbot Holdings Inc – ‘S-4/A’ on 2/14/05

On:  Monday, 2/14/05, at 11:01am ET   ·   Accession #:  1193125-5-28301   ·   File #:  333-72184

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 2/14/05  Cbot Holdings Inc                 S-4/A                  4:4.1M                                   RR Donnelley/FA

Pre-Effective Amendment to Registration of Securities Issued in a Business-Combination Transaction   —   Form S-4
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-4/A       Amendment No. 13 to Form S-4                        HTML   3.22M 
 2: EX-5        Opinion of Morris, Nichols, Arsht & Tunnell            3     19K 
 3: EX-23.1     Consent of Deloitte & Touche LLP                    HTML      8K 
 4: EX-23.4     Consent of Cbiz Valuation Group, Inc.               HTML      7K 


S-4/A   —   Amendment No. 13 to Form S-4
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Table of Contents
"Summary
"Risk Factors
"The Restructuring Transactions
"Capitalization
"Selected Consolidated Financial Data
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Our Business
"Management and Executive Compensation
"Description of Capital Stock of CBOT Holdings
"Description of Class B Memberships in the CBOT Subsidiary
"Comparison of the Rights of Members of the CBOT Prior to and After Completion of the Restructuring Transactions and After a Second Approval and Qualified Initial Public Offering
"Shares and Memberships Eligible for Future Sale
"Material U.S. Federal Income Tax Consequences of the Restructuring Transactions
"Special Meeting and Proxy Information
"Legal Matters
"Experts
"Additional Information
"Deadline for Inclusion in 2006 Proxy Statement
"Where You Can Find More Information
"Introduction
"Condensed Consolidated Statement of Members' Equity and Stockholders' Equity for the Nine Months Ended September 30, 2004
"Notes to Condensed Consolidated Financial Statements

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  Amendment No. 13 to Form S-4  
Table of Contents

As filed with the Securities and Exchange Commission on February 14, 2005

 

Registration No. 333-72184


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

AMENDMENT NO. 13

TO

FORM S-4

REGISTRATION STATEMENT

Under The Securities Act of 1933

 


 

CBOT Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of
incorporation or organization)

 

6231

(Primary Standard Industrial
Classification Code Number)

141 West Jackson Boulevard

Chicago, Illinois 60604

(312) 435-3500

 

        36-4468986

(I.R.S. Employer

Identification Number)

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 


 

Carol A. Burke

Executive Vice President and Chief of Staff

CBOT Holdings, Inc. and

Board of Trade of the City of Chicago, Inc.

141 West Jackson Boulevard

Chicago, Illinois 60604

(312) 435-3500

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

Joseph P. Gromacki

Michael T. Wolf

Jenner & Block LLP

One IBM Plaza

Chicago, Illinois 60611

(312) 222-9350

 


 

Approximate date of commencement of proposed sale to public: As promptly as practicable after this Registration Statement becomes effective and the satisfaction or waiver of certain other conditions 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.

 


 

 


Table of Contents

 

CALCULATION OF REGISTRATION FEE

 


Title of each class of

securities to be registered

   Amount to be
registered
    Maximum offering
price per share (1)
  Maximum aggregate
offering price (1)
  Amount of
registration fee (2)

Class A Common Stock, $0.001 par value, consisting of 16,457,138 shares of Series A-1 restricted Class A common stock, 16,451,412 shares of Series A-2 restricted Class A stock, and 16,451,412 shares of Series A-3 restricted Class A stock

   49,359,962                  

Combination of Interests, consisting of the Registrant’s Series A-1 Common Stock, Series A-2 Common Stock, Series A-3 Common Stock, a Series B-1 membership in the CBOT subsidiary and a CBOE exercise right privilege, as applicable

   1,402 (3)                

Combination of Interests, consisting of the Registrant’s Series A-1 Common Stock, Series A-2 Common Stock, Series A-3 Common Stock and a Series B-2 membership in the CBOT subsidiary

   867 (4)                

Combination of Interests, consisting of the Registrant’s Series A-1 Common Stock, Series A-2 Common Stock, Series A-3 Common Stock and a Series B-3 membership in the CBOT subsidiary

   126 (5)                

Combination of Interests, consisting of the Registrant’s Series A-1 Common Stock, Series A-2 Common Stock, Series A-3 Common Stock and a Series B-4 membership in the CBOT subsidiary

   641 (6)                

Combination of Interests, consisting of the Registrant’s Series A-1 Common Stock, Series A-2 Common Stock, Series A-3 Common Stock and a Series B-5 membership in the CBOT subsidiary

   643 (7)                

Total

             $ 588,839,950.00   $ 140,732.75

 

(1)   Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(f)(1). The securities to be registered are to be offered in connection with the restructuring transactions, a series of transactions in which such securities will be distributed to the members in respect of their existing memberships in the Board of Trade of the City of Chicago, Inc., a Delaware nonstock, not-for-profit corporation (the “CBOT” and, following the transactions contemplated hereby, the “CBOT subsidiary”). Such memberships have an aggregate market value equal to $588,839,950.00, determined as provided by Rule 457(c) based upon the average of the bid and asked prices of each class of membership as of October 19, 2001.
(2)   Pursuant to Rule 457(p), the registration fee of $140,732.75 is being offset by the filing fee of $140,650.33 previously paid by the CBOT, which is the parent of the Registrant, in connection with the filing of the CBOT’s Registration Statement on Form S-4 (No. 333-54370), initially filed on January 26, 2001 and subsequently withdrawn on Form RW on October 24, 2001, and the filing fee of $6,562.10 previously paid by the Registrant in connection with the initial filing on October 24, 2001.
(3)   Consists of 1,402 combinations of interests, each consisting of 9,114 shares of the Registrant’s Series A-1 Common Stock, 9,112 shares of the Registrant’s Series A-2 Common Stock, 9,112 shares of the Registrant’s Series A-3 Common Stock, one Series B-1 membership in the CBOT subsidiary and one CBOE exercise right privilege, as applicable.
(4)   Consists of 867 combinations of interests, each consisting of 3,334 shares of the Registrant’s Series A-1 Common Stock, 3,333 shares of the Registrant’s Series A-2 Common Stock, 3,333 shares of the Registrant’s Series A-3 Common Stock and one Series B-2 membership in the CBOT subsidiary. Up to six of such combinations of interests may consist of up to 16,456 additional shares of the Registrant’s Series A-1 Common Stock, 16,453 additional shares of the Registrant’s Series A-2 Common Stock and 16,452 additional shares of the Registrant’s Series A-3 Common Stock, to be issued to certain Associate Members, GIMs, IDEMs and COMs as plaintiff class representative compensation in connection with their involvement in the lawsuit brought by certain Associate Members, GIMs, IDEMs and COMs, as described in this Registration Statement.
(5)   Consists of 128 combinations of interests, each consisting of 1,668 shares of the Registrant’s Series A-1 Common Stock, 1,666 shares of the Registrant’s Series A-2 Common Stock, 1,666 shares of the Registrant’s Series A-3 Common Stock and one Series B-3 membership in the CBOT subsidiary. Up to six of such combinations of interests may consist of up to 16,456 additional shares of the Registrant’s Series A-1 Common Stock, 16,452 additional shares of the Registrant’s Series A-2 Common Stock and 16,452 additional shares of the Registrant’s Series A-3 Common Stock, to be issued to certain Associate Members, GIMs, IDEMs and COMs as plaintiff class representative compensation in connection with their involvement in the lawsuit brought by certain Associate Members, GIMs, IDEMs and COMs, as described in this Registration Statement.
(6)   Consists of 641 combinations of interests, each consisting of 368 shares of the Registrant’s Series A-1 Common Stock, 366 shares of the Registrant’s Series A-2 Common Stock, 366 shares of the Registrant’s Series A-3 Common Stock and one Series B-4 membership in the CBOT subsidiary. Up to six of such combinations of interests may consist of up to 16,456 additional shares of the Registrant’s Series A-1 Common Stock, 16,453 additional shares of the Registrant’s Series A-2 Common Stock and 16,452 additional shares of the Registrant’s Series A-3 Common Stock, to be issued to certain Associate Members, GIMs, IDEMs and COMs as plaintiff class representative compensation in connection with their involvement in the lawsuit brought by certain Associate Members, GIMs, IDEMs and COMs, as described in this Registration Statement.

 


Table of Contents
(7)   Consists of 643 combinations of interests, each consisting of 834 shares of the Registrant’s Series A-1 Common Stock, 833 shares of the Registrant’s Series A-2 Common Stock, 833 shares of the Registrant’s Series A-3 Common Stock and one Series B-5 membership in the CBOT subsidiary. Up to six of such combinations of interests may consist of up to 16,456 additional shares of the Registrant’s Series A-1 Common Stock, 16,452 additional shares of the Registrant’s Series A-2 Common Stock and 16,452 additional shares of the Registrant’s Series A-3 Common Stock, to be issued to certain Associate Members, GIMs, IDEMs and COMs as plaintiff class representative compensation in connection with their involvement in the lawsuit brought by Certain Associate Members, GIMs, IDEMs and COMs, as described in this Registration Statement.

 


 

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.

 


 


Table of Contents

The information contained in this document may change. We may not complete the transactions described in this document, and issue the securities described in this document, until the registration statement is filed with the Securities and Exchange Commission and is declared effective. This document is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

PROXY STATEMENT AND PROSPECTUS (SUBJECT TO CHANGE) DATED FEBRUARY 14, 2005

 

LOGO

BOARD OF TRADE OF THE CITY OF CHICAGO, INC.

141 WEST JACKSON BOULEVARD

CHICAGO, ILLINOIS 60604

 

Dear Members:

 

We are sending you this proxy statement and prospectus in connection with an important membership vote on a proposed restructuring of the Chicago Board of Trade. The proposed “restructuring transactions” result from an extensive evaluation process and are designed to convert our organization from a not-for-profit membership company into a for-profit stock company, modernize our corporate governance structure and enable us, following a further approval by our stockholders after the restructuring, to create a framework to facilitate public markets for our equity securities, capital-raising transactions and other securities issuances.

 

As a result of the completion of the restructuring transactions, you will receive shares of Class A common stock of a new holding company, “CBOT Holdings,” and one of the five series of memberships in a nonstock subsidiary, the “CBOT subsidiary,” that corresponds to the class of CBOT membership that you currently hold. Our members will receive a total of 49,359,836 shares of Class A common stock of CBOT Holdings and up to 3,616 combinations of interests, each consisting of Class A common stock of CBOT Holdings and a Class B membership in the CBOT subsidiary (including, in the case of the Series B-1 membership, the CBOE exercise right privilege, as applicable), as set forth in the following table:

 

Current Class

of CBOT

Membership


   Number
of Current
Members


   Shares of Class A
Common Stock of
CBOT Holdings
to be Received
for each Current
CBOT
Membership


   Relative Voting
Power at CBOT
Holdings of each
Current Class of
CBOT
Membership


    Number and
Series of Class B
Membership to be
Received by each
Current Class of
CBOT
Membership


   Relative Voting
Power at the
CBOT Subsidiary
of each Current
Class of CBOT
Membership


 

Full

   1,402    27,338    77.65 %   1,402 Series B-1    91.28 %

Associate

   804    10,000    16.29 %   804 Series B-2    8.72 %

GIM

   126    5,000    1.28 %   126 Series B-3    0.00 %

IDEM

   641    1,100    1.43 %   641 Series B-4    0.00 %

COM

   643    2,500    3.26 %   643 Series B-5    0.00 %

 

The Class A common stock of CBOT Holdings will represent an equity ownership interest in that company and will have some traditional features of common stock, including equal per share dividend, voting and liquidation rights. Each series of Class B membership in the CBOT subsidiary will represent trading rights and privileges in the restructured CBOT that correspond to the trading rights and privileges currently associated with one of the current classes of membership in the CBOT. We do not currently intend to list either the Class A common stock of CBOT Holdings or the memberships in the CBOT subsidiary on any stock exchange immediately following the completion of the restructuring transactions.

 

Shares of Class A common stock of CBOT Holdings will generally be subject to a complete restriction on transfer. However, stockholders may transfer all, but not less than all, of the shares of Class A common stock of CBOT Holdings if all such shares are transferred together with the Class B membership associated with such shares. Similarly, Class B memberships in the CBOT subsidiary will generally be subject to a complete restriction on transfer, but may be transferred together with the shares of Class A common stock of CBOT Holdings associated with such Class B membership.

 

Completion of the restructuring transactions will result in certain changes to our corporate governance structure and the rights of our members, including:

 

    the ability of CBOT Holdings to issue capital stock and pay dividends;

 

    new voting rights;

 

    new charter and bylaw amendment procedures;

 

    new board composition and terms; and

 

    new director nomination procedures.

 

We do not believe that completion of the restructuring transactions should impact the validity of the CBOE exercise right of Full Members. However, notwithstanding our agreements with CBOE (the effectiveness of key provisions of which remain conditioned upon SEC approval), we cannot assure you that the CBOE will not challenge or interfere with the CBOE exercise right as a result of completion of the restructuring transactions. No gain or loss will be recognized by a CBOT member with respect to the receipt of Class A common stock of CBOT Holdings or the Class B memberships of the CBOT subsidiary in the restructuring transactions.

 

We will hold a special meeting at which we will ask our Full and Associate Members to approve the restructuring transactions. Our board of directors has approved the restructuring transactions and recommends that Full and Associate Members approve each of the propositions relating to the restructuring transactions.

 

WE URGE YOU TO READ THIS DOCUMENT CAREFULLY, INCLUDING THE “ RISK FACTORS” SECTION THAT BEGINS ON PAGE 21.

 

Sincerely,

 

Charles P. Carey

Chairman of the Board

 

Neither the Securities and Exchange Commission nor any state securities regulator has 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 document is dated February     , 2005 and was first mailed, with the form of proxy, to members on or about February     , 2005.

 

 


Table of Contents

LOGO

 

BOARD OF TRADE OF THE CITY OF CHICAGO, INC.

141 WEST JACKSON BOULEVARD

CHICAGO, ILLINOIS 60604

 

NOTICE OF SPECIAL MEETING

 

To Our Voting Members:

 

A special membership meeting will be held at 2:30 p.m., Central Time, on              , 2005, in the Visitor Center Theater, Fifth Floor, at our offices at 141 West Jackson Boulevard, Chicago, Illinois 60604. The purpose of the meeting is for Full and Associate Members of the CBOT to vote on the following five propositions relating to the restructuring transactions: (1) the approval and adoption of the agreement and plan of merger that will facilitate the restructuring of the CBOT; (2) the approval and adoption of new bylaws of the CBOT, as well as technical amendments to the bylaws of the CBOT identifying the current members of the CBOT as “members” for corporate law purposes; (3) the approval and ratification of the equity allocation established by the settlement of the lawsuit brought by certain Associate Members, GIMs, IDEMs and COMs; (4) the approval and ratification of the agreements among the CBOT, CBOT Holdings and Chicago Board Options Exchange relating to the “CBOE exercise right” of Full Members to become members of the CBOE without having to purchase a membership; and (5) the approval and ratification of changes to our corporate governance structure.

 

At the special meeting, Full and Associate Members will be entitled to vote on these matters. Full Members will be entitled to one vote for each Full Membership owned, and Associate Members will be entitled to one-sixth of one vote for each Associate Membership owned. In accordance with our certificate of incorporation, bylaws, rules and regulations, no other class of membership will be entitled to vote on the restructuring transactions. Unless ALL FIVE of these propositions are approved, the restructuring transactions will not be completed.

 

We have enclosed a proxy ballot for your use in voting on the propositions. The special meeting of the membership and related proxy ballot solicitation will be conducted in accordance with our certificate of incorporation, bylaws, rules and regulations and applicable law.

 

In connection with the proxy ballot solicitation, please note the following:

 

    Please mark the enclosed proxy ballot with respect to each proposition and provide your signature, printed name and date where indicated, and enclose and seal the completed proxy ballot in the gold envelope addressed to the Secretary of the CBOT. Each proxy ballot must be signed in order to be effective.

 

    Print your name in the upper left-hand corner of the gold envelope and deliver or mail it to the Secretary’s Office. Alternatively, you may submit your completed proxy ballot to the Secretary’s Office by depositing the proxy ballot in the ballot box located in the fourth floor lobby of our offices between the hours of 8:00 a.m. and 2:15 p.m., Central Time, on              , 2005.

 

Proxy ballots that are duly executed and submitted with no voting direction as to a given proposition will be counted for purposes of constituting a quorum but will not be treated as votes cast with respect to such proposition. Proxies that are marked both “FOR” and “AGAINST” a given proposition will not be counted for purposes of constituting a quorum and will not be treated as votes cast with respect to such proposition. Proxy ballots must be received at the Board of Trade of the City of Chicago, Inc., Office of the Secretary, 141 West Jackson Boulevard, Chicago, Illinois 60604, prior to 2:15 p.m., Central Time, on              , 2005 in order to be counted.

 

Returning your completed proxy ballot will not prevent you from voting in person at the special meeting of the membership if you are present and wish to vote. Please note, however, that if you vote by proxy ballot, you will not need to attend the special meeting of the membership, or take any further action in connection with the special meeting, because you already will have directed the proxy how you wish to vote with respect to the propositions. You may revoke your proxy ballot any time before the special meeting of the membership by providing written notice to the Secretary or by submission of a later-dated proxy ballot.

 

Our board of directors has carefully considered and approved the restructuring transactions and recommends that Full and Associate Members of the CBOT vote “FOR” each of the five propositions relating to the restructuring transactions being submitted for their approval.

 

By Order of the Board of Directors,

 

Paul J. Draths

Vice President and Secretary

 

February     , 2005


Table of Contents

TABLE OF CONTENTS

 

     Page

Summary

   1

Risk Factors

   21

The Restructuring Transactions

   36

Capitalization

   82

Selected Consolidated Financial Data

   83

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   85

Our Business

   113

Management and Executive Compensation

   143

Description of Capital Stock of CBOT Holdings

   158

Description of Class B Memberships in the CBOT Subsidiary

   168

Comparison of the Rights of Members of the CBOT Prior to and After Completion of the Restructuring Transactions and After a Second Approval and Qualified Initial Public Offering

   175

Shares and Memberships Eligible for Future Sale

   187

Material U.S. Federal Income Tax Consequences of the Restructuring Transactions

   189

Special Meeting and Proxy Information

   191

Legal Matters

   198

Experts

   198

Additional Information

   198

Deadline for Inclusion in 2006 Proxy Statement

   199

Where You Can Find More Information

   199
      

Appendix A

    

Board of Trade of the City of Chicago, Inc. and Subsidiaries’ Financial Statements

   A-1

Appendix B

    

Pro Forma Financial Information of Board of Trade of the City of Chicago, Inc. and Subsidiaries

   B-1

Appendix C

    

Agreement and Plan of Merger

   C-1

Appendix D

    

Appendix D-1: August 7, 2001 Agreement between the Board of Trade of the City of Chicago, Inc. and Chicago Board Options Exchange Incorporated

   D-1

Appendix D-2: October 7, 2004 Letter Agreement among the Board of Trade of the City of Chicago, Inc., CBOT Holdings, Inc. and Chicago Board Options Exchange Incorporated

   D-2

Appendix D-3: February 11, 2005 Letter Agreement among the Board of Trade of the City of Chicago, Inc., CBOT Holdings, Inc. and Chicago Board Options Exchange Incorporated

   D-3

Appendix E

    

Form of Amended and Restated Certificate of Incorporation of CBOT Holdings, Inc.

   E-1

Appendix F

    

Form of Amended and Restated Bylaws of CBOT Holdings, Inc.

   F-1

Appendix G

    

Form of Amended and Restated Certificate of Incorporation of the Board of Trade of the City of Chicago, Inc.

   G-1

Appendix H

    

Form of Amended and Restated Bylaws of the Board of Trade of the City of Chicago, Inc.

   H-1

Appendix I

    

Form of Technical Amendments to the Amended and Restated Bylaws of the Board of Trade of the City of Chicago, Inc.

   I-1

Appendix J

    

Status of Certain Current CBOT Rules and Regulations as a Result of the Restructuring Transactions

   J-1

 

i


Table of Contents

SUMMARY

 

In this summary, we highlight selected information described in greater detail elsewhere in this document. This summary does not contain all of the information contained in this document that you should consider before voting on the propositions relating to the restructuring transactions and may not contain all of the information that is important to your individual situation. Consequently, you should read this entire document very carefully before voting on the propositions relating to the restructuring transactions.

 

Our Business (See page 113)

 

Established in 1848, we are a leading futures and options on futures exchange. Our more than 3,600 members trade over 50 different futures contracts and options on futures contracts on our markets through our open outcry markets and/or our electronic trading system. We are currently the third largest futures exchange in the world, based on contract volume for futures and options on futures contracts in 2004. The volume of contracts traded on our markets in 2004 was about 600 million contracts, which was a record number of contracts traded on our markets in any given year.

 

We offer markets in futures contracts and options on futures contracts in four broad product categories: agricultural products, interest rate products, stock market indices and metals. In particular, we offer markets in agricultural products such as wheat, corn, soybeans and rough rice, and interest rate products such as U.S. Treasury bonds and notes, Federal Funds Rate, interest rate swaps, and municipal bonds and notes, and German debt instruments, including Bunds, Bobls and Schatz. In addition, our stock market index markets include the Dow Jones Industrial Average and our metals markets include full-sized and mini-sized contracts for gold and silver.

 

We also engage in market surveillance and financial supervision activities designed to ensure market integrity and provide financial safeguards for users of our markets. Further, we market and distribute real-time and historical market data generated from trading activity in our markets to users of our products and related cash and derivative markets.

 

Our principal executive offices are located at 141 West Jackson Boulevard, Chicago, Illinois 60604, and our telephone number is (312) 435-3500.

 

Our Proposed Restructuring (See page 36)

 

The restructuring transactions will change our organization from a not-for-profit company with members to a for-profit company with stockholders. This type of transaction is sometimes called a demutualization. After the restructuring transactions, our members will become stockholders of CBOT Holdings, Inc. a stock, for-profit holding company, which we refer to as “CBOT Holdings,” that will initially hold as its principal asset an interest in the CBOT. Also, after the restructuring transactions, our members will become members, with the same trading rights and privileges they have at the CBOT, of a nonstock, for-profit subsidiary of CBOT Holdings which we refer to as the “CBOT subsidiary.” The CBOT subsidiary will continue to operate our futures exchange business. The restructuring transactions are designed to:

 

    demutualize our organization by creating a stock, for-profit holding company, CBOT Holdings, and distributing shares of common stock of CBOT Holdings to our members, while maintaining the CBOT as a nonstock subsidiary of CBOT Holdings;

 

    modernize our corporate governance structure by, among other things, adopting new mechanisms for initiating and voting on stockholder and member proposals, providing for a modest reduction in the size of our board and modifying the nomination and election process for directors as well as the terms of office and qualifications of directors; and

 

1


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    create a framework to facilitate public markets for equity securities of CBOT Holdings, capital-raising transactions and other securities issuances following a subsequent approval by the stockholders of CBOT Holdings.

 

We believe that the restructuring of our exchange will enable us to enhance our competitiveness within the futures industry, including within both the open outcry and electronic trading markets, while preserving our ability to provide trading benefits and opportunities to our members. We believe that the restructuring transactions will also allow us to:

 

    maximize the value of our business by adopting a for-profit approach to business with a view towards optimizing volume, efficiency and liquidity in the markets we provide;

 

    increase our ability to respond more efficiently to changes within the industry, markets and regulations that govern us by modernizing our corporate governance structure;

 

    continue to provide trading benefits and opportunities to our members;

 

    segregate more easily our different lines of business into separate subsidiaries through a holding company structure, which could provide greater flexibility in administration and allow these subsidiaries to focus more effectively on particular markets, products or services; and

 

    distribute profits from the operation of our business to our stockholders as permitted by applicable law.

 

As a result of the restructuring transactions, each CBOT member will receive:

 

    shares of Class A common stock of CBOT Holdings, designated in three series to be known as Series A-1, A-2 and A-3; and

 

    one of the five series of Class B memberships in the CBOT subsidiary that corresponds to the class of CBOT membership currently held (including, in the case of the Series B-1 membership, the CBOE exercise right privilege, as applicable).

 

The number of shares of Class A common stock of CBOT Holdings to be received by each member was determined in accordance with our settlement of the lawsuit brought by certain Associate Members, Government Investment Market Memberships, or “GIMs,” Index, Debt and Energy Market Memberships, or “IDEMs,” and Commodity Options Market Memberships, or “COMs,” regarding the allocation of equity ownership interests among the classes of CBOT members pursuant to the contemplated restructuring strategy. Of the total shares of Class A common stock of CBOT Holdings to be received by each member, about one-third will be issued as Series A-1, about one-third will be issued as Series A-2 and about one-third will be issued as Series A-3. The Class A common stock of CBOT Holdings is being issued in three series in order to implement certain transfer restrictions applicable to the shares. The three series of Class A common stock of CBOT Holdings will be identical except that the transfer restrictions associated with each series will be of a different duration.

 

We do not believe that the completion of the restructuring transactions will cause any interruption to the day-to-day operation of our businesses, including our electronic trading system.

 

Class A Common Stock of CBOT Holdings (See page 158)

 

The Class A common stock of CBOT Holdings will represent an equity ownership interest in that company and will have traditional features of common stock, including dividend, voting and liquidation rights. The Class A common stock of CBOT Holdings will provide the holder with the right to receive dividends as determined by the CBOT Holdings board of directors and the right to share in the proceeds of liquidation, in each case, ratably on the basis of the number of shares held. We do not currently anticipate that CBOT Holdings will pay dividends on its Class A common stock for the foreseeable future.

 

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The holders of the Class A common stock of CBOT Holdings will have the right to vote on all matters upon which the stockholders of CBOT Holdings will be entitled to vote generally, including the election of directors. On all such matters, the holders of Series A-1, A-2 and A-3 common stock will vote as a single class with equal per share voting rights. The holders of Class A common stock will also have the right to vote on any proposal for any transaction either involving the sale of a significant amount of CBOT Holdings’ assets to a third party or in which CBOT Holdings proposes to acquire, invest in or enter into a business in competition with the then existing business of the CBOT subsidiary. Further, it will require the approval of the holders of the Class A common stock of CBOT Holdings for CBOT Holdings, as the holder of the sole Class A membership in the CBOT subsidiary, to vote in favor of any of the following proposals:

 

    any merger of the CBOT subsidiary with a third party;

 

    any transaction involving the sale of a significant amount of the CBOT subsidiary’s assets to a third party;

 

    any transaction in which the CBOT subsidiary proposes to acquire, invest in or enter into a business in competition with the then existing business of the CBOT subsidiary; or

 

    any dissolution or liquidation of the CBOT subsidiary.

 

Amendments to the certificate of incorporation of CBOT Holdings will generally require the approval of the board of directors of CBOT Holdings and a majority of the outstanding shares of Class A common stock. In addition, the board of directors of CBOT Holdings will have the authority to adopt, amend or repeal the bylaws of CBOT Holdings without the approval of stockholders. However, the holders of Class A common stock of CBOT Holdings will also have the right to initiate, without the approval of the board of directors of CBOT Holdings, proposals to adopt, amend or repeal the bylaws of CBOT Holdings. The holders of Class A common stock of CBOT Holdings can also make non-binding recommendations that the board of directors of CBOT Holdings consider proposals that, as a matter of Delaware corporation law, require the approval of the board of directors of CBOT Holdings.

 

Allocation of CBOT Equity Ownership Interests Among CBOT Members in the Restructuring Transactions (See page 71)

 

The methodology for allocating equity ownership interests in CBOT Holdings among the five classes of CBOT members was established by the terms of the settlement of the lawsuit brought in 2000 by certain Associate Members, GIMs, IDEMs and COMs. This lawsuit challenged an allocation methodology previously recommended by the independent allocation committee of our board of directors and proposed in connection with the restructuring of the CBOT. In January 2004, the board of directors approved a binding memorandum of understanding between the CBOT and representatives of a certified class of plaintiffs consisting of the Associate Members, GIMs, IDEMs and COMs to settle such lawsuit with the understanding that a settlement agreement reflecting the terms of the binding memorandum of understanding would later be executed. In so approving the binding memorandum of understanding, the board of directors concluded that the proposed settlement was in the best interests of the CBOT and its members and fair to all classes of CBOT members. The settlement agreement, which was executed on February 6, 2004, was subsequently approved by the Circuit Court of Cook County, Illinois in a final judgment order entered on September 20, 2004 as fair, adequate and reasonable and in the best interest of all CBOT members.

 

Under the terms of the settlement agreement, Full Members are to receive 77.65%, in the aggregate, of the CBOT equity to be distributed to CBOT members in any restructuring of the CBOT, and Associate Members, GIMs, IDEMs and COMs are to receive 22.25%, in the aggregate, of the CBOT equity to be distributed to CBOT members, with the 22.25% to be allocated based on the following ratio: 1.00 : 0.50 : 0.11 : 0.25 to each Associate Member, GIM, IDEM and COM, respectively. We refer to this allocation of equity ownership interests in CBOT Holdings among the five classes of CBOT members as the “settlement allocation.”

 

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Under the terms of the settlement agreement, the six Associate Members, GIMs, IDEMs and COMs serving as plaintiff class representatives are to receive 0.10%, in the aggregate, of the CBOT equity ownership interests, to be distributed to CBOT members as plaintiff class representative compensation. In addition, the settlement agreement provides for certain contractual rights of Associate Members, GIMs, IDEMs and COMs.

 

The following table shows the number of shares of Class A common stock of CBOT Holdings that members are to receive in the restructuring transactions in respect of each current CBOT membership and each current class of CBOT membership. In addition, the table shows the relative voting power of the holders of the Class A common stock of CBOT Holdings (by class of current CBOT membership) immediately following the completion of the restructuring transactions.

 

CBOT Holdings Class A Common Stock of CBOT Holdings

to be Received for each Current CBOT Membership and each Class of Current CBOT Membership,

and the Relative Voting Power at CBOT Holdings

 

Current Class of CBOT

Membership


  

Number of

Current

Members1


  

Shares of Class A
Common Stock of CBOT
Holdings to be Received
for each Current

CBOT Membership


  

Shares of Class A
Common Stock of CBOT
Holdings to be Received
by each Current Class of

CBOT Membership1


  

Relative Voting Power
at CBOT Holdings

of each Current Class

of CBOT

Membership1


 

Full

   1,402         38,327,876    77.65 %

Series A-1

        9,114            

Series A-2

        9,112            

Series A-3

        9,112            
         
           

Total

        27,338            

Associate

   804         8,040,000    16.29 %

Series A-1

        3,334            

Series A-2

        3,333            

Series A-3

        3,333            
         
           

Total

        10,000            

GIM

   126         630,000    1.28 %

Series A-1

        1,668            

Series A-2

        1,666            

Series A-3

        1,666            
         
           

Total

        5,000            

IDEM

   641         705,100    1.43 %

Series A-1

        368            

Series A-2

        366            

Series A-3

        366            
         
           

Total

        1,100            

COM

   643         1,607,500    3.26 %

Series A-1

        834            

Series A-2

        833            

Series A-3

        833            
         
           

Total

        2,500            
    
  
  
  

Sub-Total

   3,616         49,310,476    99.90 %
    
                

Plaintiff Class Representative Compensation

             49,360    0.10 %
              
  

Grand Total

             49,359,836    100.00 %
              
  


1   Based upon the number of Full and Associate Members, GIMs, IDEMs and COMs on February 10, 2005. The sum of the percentages does not total exactly 100.00% as a result of rounding.

 

This table reflects the allocation of 49,360 additional shares of Class A common stock of CBOT Holdings that will be distributed in the restructuring transactions as plaintiff class representative compensation to the six

Associate Members, GIMs, IDEMs and COMs serving as plaintiff class representatives in connection with the lawsuit brought by certain Associate Members, GIMs, IDEMs and COMs.

 

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For purposes of the restructuring transactions, each holder of a one-half Associate Membership will be treated as a GIM. This means that, if you hold a one-half Associate Membership, you will receive what the table above indicates will be received by a GIM.

 

Class B Memberships in the CBOT Subsidiary (See page 168)

 

There will be five series of Class B memberships issued to our members, with each series corresponding to one of the five current classes of CBOT membership. The Class B membership will represent trading rights and privileges in the exchange operated by the CBOT subsidiary. The trading rights and privileges of each Class B membership in the CBOT subsidiary will be the same as those currently associated with the corresponding class of CBOT membership.

 

The Class B memberships will not entitle the holders to the right to receive any dividends or distributions, including proceeds from liquidation, from the CBOT subsidiary. Series B-1 and B-2 members of the CBOT subsidiary will have the exclusive right among members to vote on any proposals to amend the certificate of incorporation of the CBOT subsidiary approved by the board of directors and to initiate and vote on, whether or not approved by the board of directors, any proposals to amend the bylaws of the CBOT subsidiary. Under Delaware corporation law, proposals to amend the certificate of incorporation must be adopted and approved by the board of directors of the CBOT subsidiary prior to being submitted to Series B-1 and B-2 members of the CBOT subsidiary for their approval. However, Series B-1 and B-2 members can also make non-binding recommendations that the board of directors consider proposals that, as a matter of Delaware corporation law, require the approval of the board of directors of the CBOT subsidiary.

 

The board of directors of the CBOT subsidiary will also have the right to amend the bylaws of the CBOT subsidiary, which will include the rules and regulations. However, Series B-1 and B-2 members of the CBOT subsidiary will have the exclusive right among members to vote on proposals by the board of directors of the CBOT subsidiary to amend the bylaws of the CBOT subsidiary in a manner that would adversely affect the following “core rights”:

 

    the allocation of products that holders of any series of Class B membership may trade on the exchange operated by the CBOT subsidiary (that is, the elimination of any product from a holder’s trading rights and privileges);

 

    the requirement that, subject to certain limited exceptions, holders of Class B memberships will be charged transaction fees for trades of the CBOT subsidiary’s products that are lower than the transaction fees charged to someone who is not a holder of a Class B membership for the same products;

 

    the membership and eligibility requirements to become a holder of a Class B membership or to exercise the associated trading rights or privileges;

 

    the commitment to maintain current open outcry markets so long as each such market is deemed liquid; and

 

    the requirement that any proposal to offer electronic trading between 6:00 a.m., Central Time, and 6:00 p.m., Central Time, of agricultural products currently traded on our open outcry markets be approved by the holders of Series B-1 and B-2 memberships in the CBOT subsidiary.

 

On all such matters, each Series B-1 member of the CBOT subsidiary will be entitled to one vote per membership and each Series B-2 member of the CBOT subsidiary will be entitled to one-sixth of one vote per membership. These voting rights are based on the voting rights currently associated with Full and Associate Memberships in the CBOT.

 

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In addition, pursuant to the terms of the settlement agreement, unless and until a “change of control” of the CBOT subsidiary occurs, the CBOT subsidiary will be contractually prohibited from adopting any amendment to its certificate of incorporation, bylaws or rules and regulations, as in effect as of February 2, 2004, that would adversely affect the contract trading rights of Associate Members, GIMs, IDEMs and COMs.

 

The following table shows the number and type of Class B memberships to be received in respect of each current CBOT membership and each current class of CBOT membership. In addition, the table shows the relative voting power of the holders of the Class B memberships, by class of CBOT membership, immediately following the completion of the restructuring transactions on those matters on which Class B memberships are entitled to vote.

 

Class B Memberships in the CBOT Subsidiary

to be Received for each Current CBOT Membership and each Class of Current CBOT Membership,

and the Relative Voting Power at the CBOT Subsidiary

 

Current Class of CBOT

Membership


  

Number of Current

Members 1


  

Number and Series

of Class B Membership

to be Received for each

Current CBOT

Membership


  

Number and Series

of Class B Membership
to be Received by each

Current Class of

CBOT Membership1


   Relative Voting Power
at the CBOT
Subsidiary of
each Current Class
of CBOT Membership1


 

Full

   1,402    1 Series B-1    1,402 Series B-1    91.28 %

Associate

   804    1 Series B-2    804 Series B-2    8.72 %

GIM

   126    1 Series B-3    126 Series B-3    0.00 %

IDEM

   641    1 Series B-4    641 Series B-4    0.00 %

COM

   643    1 Series B-5    643 Series B-5    0.00 %
    
            

Total

   3,616              100.00 %
    
            


1   Based upon the number of Full and Associate Members, GIMs, IDEMs and COMs on February 10, 2005.

 

Each Series B-1 membership will include the CBOE exercise right privilege, as applicable.

 

Transfer Restrictions (See pages 160 and 171)

 

The shares of Series A-1, A-2 and A-3 common stock of CBOT Holdings will generally be subject to a complete restriction on transfer. However, stockholders may transfer all, but not less than all, of the shares of Series A-1, A-2 and A-3 common stock of CBOT Holdings if all such shares are transferred together with the Class B membership associated with such shares. For example, if you are a Full Member of the CBOT, you will receive as part of the restructuring transactions 9,114, 9,112 and 9,112 shares of Series A-1, A-2 and A-3 common stock of CBOT Holdings, respectively, and one Series B-1 membership in the CBOT subsidiary. In order to utilize this exception to the restriction on transfer, you will only be able to transfer your Series A-1, A-2 and A-3 common stock of CBOT Holdings if you transfer all 9,114, 9,112 and 9,112 shares of your Series A-1, A-2 and A-3 common stock of CBOT Holdings, respectively, together with your Series B-1 membership in the CBOT subsidiary. This restriction on transfer may be removed or reduced only with the approval of the board of directors and the approval of a majority of the holders of outstanding Class A common stock of CBOT Holdings.

 

Similarly, the Class B memberships in the CBOT subsidiary will also generally be subject to a complete restriction on transfer. However, holders of Class B memberships in the CBOT subsidiary may transfer a Class B membership if such Class B membership is transferred together with all of the shares of Series A-1, A-2 and A-3 common stock of CBOT Holdings associated with such Class B membership. For example, if you are an Associate Member of the CBOT, you will receive as part of the restructuring transactions 3,334, 3,333 and 3,333 shares of Series A-1, A-2 and A-3 common stock of CBOT Holdings, respectively, and one Series B-2 membership in the CBOT subsidiary. In order to utilize this exception to the restriction on transfer, you will only be able to transfer your Series B-2 membership in the CBOT subsidiary if you transfer all of your 3,334, 3,333

 

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and 3,333 shares of your Series A-1, A-2 and A-3 common stock of CBOT Holdings, respectively, together with your Series B-2 membership in the CBOT subsidiary. This restriction on transfer may be removed or reduced only with the approval of the board of directors of the CBOT subsidiary and a majority of the holders of outstanding Series B-1 and B-2 memberships in the CBOT subsidiary, voting together as a single class based on their respective voting rights.

 

Because the restrictions on transfer of the Class A common stock of CBOT Holdings and the Class B memberships in the CBOT subsidiary are in effect reciprocal and imposed pursuant to the certificates of incorporation of both entities, we expect that no amendment to either certificate of incorporation to remove or reduce applicable transfer restrictions would be made unless amendments to both certificates of incorporation are made. As described more fully below, upon a subsequent approval of the stockholders of CBOT Holdings, certain additional exceptions to the general restrictions on transfer applicable to the Class A common stock of CBOT Holdings and Class B memberships in the CBOT subsidiary will take effect.

 

Implementation of the Restructuring Transactions (See page 56)

 

The restructuring transactions will be implemented through two principal steps:

 

    a dividend to distribute shares of Class A common stock of CBOT Holdings to our members; and

 

    a merger of a newly formed merger subsidiary of the CBOT with and into the CBOT to convert our members’ existing memberships into new Class B memberships in the CBOT subsidiary.

 

The Dividend. The CBOT board of directors will declare a special dividend to the CBOT members consisting of shares of Class A common stock of CBOT Holdings then held by the CBOT. This dividend, which will not be paid until immediately after the effectiveness of the merger described below, will have the effect of distributing all of the outstanding shares of Class A common stock of CBOT Holdings to our members. Pursuant to this distribution of Class A common stock of CBOT Holdings, all of the CBOT equity will be distributed to our members in accordance with the settlement allocation.

 

Currently, the CBOT holds all of the outstanding shares of common stock of CBOT Holdings. Before the completion of the restructuring transactions, the shares held by the CBOT will be reclassified into the 49,310,476 shares of Class A common stock of CBOT Holdings that will be distributed to our members pursuant to the dividend described above and the 49,360 shares of Class A common stock of CBOT Holdings that will be distributed in the restructuring transactions as plaintiff class representative compensation to the six Associate Members, GIMs, IDEMs and COMs serving as plaintiff class representatives in connection with the lawsuit brought by certain Associate Members, GIMs, IDEMs and COMs.

 

The Merger. After the declaration of the dividend by the CBOT board of directors, but before the dividend is paid, a newly formed, nonstock, for-profit merger subsidiary of CBOT will merge into the CBOT. We sometimes refer to this merger subsidiary as the “CBOT merger sub.” After the merger, the CBOT will become a nonstock, for-profit corporation and a subsidiary of CBOT Holdings and, as such, will have a separate board of directors from that of CBOT Holdings. Pursuant to the merger, each current CBOT membership will be converted into and exchanged for a Class B membership of the applicable series in the CBOT subsidiary.

 

Also, as a result of the merger, CBOT Holdings will become the holder of the sole Class A membership in the CBOT subsidiary. Currently, CBOT Holdings holds the sole membership in the CBOT merger sub. Pursuant to the merger, this membership will be converted into and exchanged for the Class A membership in the CBOT subsidiary. This Class A membership will entitle CBOT Holdings to the exclusive right to receive all dividends and distributions, including proceeds upon liquidation, from the CBOT subsidiary and certain limited voting rights. The Class A membership held by CBOT Holdings may not be transferred by CBOT Holdings without an

 

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amendment to the certificate of incorporation of the CBOT subsidiary, which will require the approval of the board of directors of the CBOT subsidiary and the holders of Series B-1 and B-2 memberships in the CBOT subsidiary.

 

Our Corporate Structure Before and After the Restructuring

 

In order to help you understand the restructuring transactions and how they will affect our corporate organizational structure, the following charts show, in simplified form, the structure of our company before and immediately after the completion of the restructuring transactions:

 

BEFORE THE RESTRUCTURING TRANSACTIONS

 

LOGO

 

IMMEDIATELY AFTER THE RESTRUCTURING TRANSACTIONS

 

LOGO

 

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Changes in Rights and Obligations Resulting from the Restructuring Transactions (See page 175)

 

As a result of the restructuring transactions, you will become stockholders of CBOT Holdings, a Delaware stock, for-profit holding company, and members of the CBOT subsidiary, a Delaware nonstock, for-profit corporation that will be a subsidiary of CBOT Holdings. Certain of your rights and obligations will change as a result of this change in our organizational structure. In addition, certain of your rights and obligations will also change because of changes to our organizational documents, which are designed to modernize our corporate governance structure, to be implemented in connection with the completion of the restructuring transactions. Also, as described more fully below, certain of your rights and obligations will change if and when there is a subsequent approval by the CBOT Holdings stockholders after the restructuring transactions. The following is a summary of certain of the changes in your rights and obligations expected to occur in connection with the completion of the restructuring transactions, without giving effect to any changes that would occur if and when there is a second approval. You should consider carefully these differences in your rights and obligations before voting on the propositions relating to the restructuring transactions.

 

Ability to Issue Capital Stock and Pay Dividends. Currently, the CBOT does not have the ability to issue capital stock. Upon the completion of the restructuring transactions and subject in some cases to a subsequent approval of CBOT Holdings’ stockholders as described more fully below, CBOT Holdings will generally have the ability to issue 200,000,000 shares of Class A common stock, initially divided into unrestricted Class A common stock and three series of restricted Class A common stock, designated Series A-1, A-2 and A-3; one share of Class B common stock; and 20,000,000 shares of preferred stock. Upon the completion of the restructuring transactions, the CBOT subsidiary will not have the ability to issue capital stock.

 

As a Delaware nonstock, not-for-profit corporation, the CBOT is currently permitted to declare and pay dividends under Delaware law; however, in view of its not-for-profit status, the CBOT has not historically done so. CBOT Holdings will be for-profit and will generally have the ability to declare and pay dividends to its common stockholders out of its “surplus,” as defined by Delaware corporation law. The CBOT subsidiary will also have the ability to declare and pay dividends, but only to CBOT Holdings as the holder of the sole Class A membership in the CBOT subsidiary.

 

Voting Rights. Upon the completion of the restructuring transactions, as a holder of Class A common stock of CBOT Holdings, you will have the right to vote on all matters upon which stockholders will be entitled to vote generally, including the election of directors, and, if you are a Series B-1 or B-2 member of the CBOT subsidiary, you will have the right to vote on certain matters reserved for the Series B-1 and B-2 members of the CBOT subsidiary, including amendments to the certificate of incorporation, amendments to the bylaws, which will include the rules and regulations, that are proposed by the Series B-1 and B-2 members of the CBOT subsidiary and amendments to the bylaws that would adversely affect certain core rights associated with the members’ trading rights and privileges. Although the current “petition process” of members will not continue to exist following the completion of the restructuring transactions, CBOT Holdings, upon the written request of holders of 10% of the outstanding shares of Class A common stock, and the CBOT subsidiary, upon the written request of 10% of the voting power of all outstanding Series B-1 and B-2 memberships, will be required to call a special meeting of the holders of Class A common stock and Series B-1 and B-2 members of the CBOT subsidiary, respectively. Additionally, upon the completion of the restructuring transactions, the ability of CBOT members to take action by written consent will be eliminated.

 

Amendments to the Certificate of Incorporation and Bylaws. Currently, amendments to our certificate of incorporation must be adopted by the board of directors and approved by at least a majority of votes cast by Full and Associate Members at an annual or special meeting of the membership at which at least 300 votes are cast. Upon the completion of the restructuring transactions, amendments to the certificate of incorporation of CBOT Holdings must be adopted by the board of directors of CBOT Holdings and approved by a majority of the outstanding shares of Class A common stock of CBOT Holdings. Amendments to the certificate of incorporation of the CBOT subsidiary must be adopted by the board of directors and approved by a majority of the Series B-1

 

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and B-2 members of the CBOT subsidiary, voting together as a single class based upon their respective voting rights.

 

Currently, amendments to the CBOT’s bylaws, which include the rules, must be approved by at least a majority of votes cast by Full and Associate Members at an annual or special meeting of the membership at which at least 300 votes are cast, and amendments to the CBOT’s regulations, which are not part of the bylaws, must be approved by the board of directors. Upon the completion of the restructuring transactions, the board of directors of CBOT Holdings will have the authority to adopt, amend or repeal the bylaws of CBOT Holdings without the approval of the stockholders. However, the Class A common stockholders of CBOT Holdings will be entitled to initiate and vote on, without the approval of the board of directors, proposals to adopt, amend or repeal the bylaws, with such proposals to be approved by a majority of the votes cast. The board of directors of the CBOT subsidiary will have the authority to amend the bylaws, which will include both the rules and regulations, of the CBOT subsidiary without the approval of the members, except for amendments that would adversely affect the core rights described elsewhere in this document. In addition, Series B-1 and B-2 members of the CBOT subsidiary will also have the exclusive right among members to initiate and vote on proposals to amend the bylaws, which proposals will be approved by a majority of the votes cast.

 

Size, Composition and Classification of Board of Directors. The board of directors of the CBOT currently consists of 18 directors, including the Chairman, the Vice Chairman, the President and Chief Executive Officer (who serves as a non-voting director), nine directors who are Full Members, two directors who are Associate Members and four directors who are not members. Directors other than the President and Chief Executive Officer and the four non-member directors are elected for either two- or three-year terms. The four non-member directors are appointed to serve four-year terms.

 

Upon the completion of the restructuring transactions, rather than the single board of directors of the CBOT that exists today, there will be a board of directors for each of CBOT Holdings and the CBOT subsidiary, both of which will have the same size, composition and classification. However, the size, composition and classification of the boards of directors of CBOT Holdings and the CBOT subsidiary will not change until the 2006 annual meeting of the stockholders of CBOT Holdings, which is expected to occur in the first or second quarter of 2006. In connection with the 2006 annual meeting of the stockholders of CBOT Holdings, the boards of directors of CBOT Holdings and the CBOT subsidiary will be reduced in size to 16 directors, classified into two classes, consisting of seven and eight directors, respectively, each elected to serve for two-year terms, and the President and Chief Executive Officer. The boards of directors of CBOT Holdings and the CBOT subsidiary will then consist of the Chairman, the Vice Chairman, the President and Chief Executive Officer (who will serve as a non-voting director), eight directors who will be Series B-1 members of the CBOT subsidiary, two directors who will be Series B-2 members of the CBOT subsidiary and three directors who will be independent.

 

Director Nomination Process. Currently, Full and Associate Members elect five persons, four of whom must be Full Members and one of whom must be an Associate Member, to serve on the nominating committee. The nominating committee nominates candidates to stand for election to the board of directors. In addition, Full and Associate Members have the right to petition to nominate other candidates to stand for election to the board of directors, subject to the requirement that such petition be signed by at least 40 such members.

 

After the restructuring transactions, the holders of the Class A common stock of CBOT Holdings will elect five persons, four of whom must be Series B-1 members of the CBOT subsidiary and one of whom must be a Series B-2 member of the CBOT subsidiary, to serve on the nominating committee. The nominating committee will recommend to the board of directors of CBOT Holdings nominations of persons to stand for election as directors of CBOT Holdings. In addition, holders of Class A common stock of CBOT Holdings will also be entitled to nominate persons to stand for election as directors of CBOT Holdings if the nominee is qualified and the stockholder satisfies certain advance notice requirements. If a stockholder satisfies each of these conditions and delivers a petition executed by at least 40 persons, each of whom is both a holder of Class A common stock of CBOT Holdings and a Series B-1 member of the CBOT subsidiary, CBOT Holdings will, to the extent that it prepares and delivers a proxy statement and form of proxy, at its own expense, include the name of such nominee

 

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and all other information related to such nominee that is provided with respect to the board of directors’ nominees in such proxy statement and form of proxy.

 

Contractual Rights of Associate Members, GIMs, IDEMs and COMs Under the Settlement Agreement (See page 135)

 

As part of the settlement of the lawsuit brought by certain Associate Members, GIMs, IDEMs and COMs, we agreed, effective as of September 20, 2004, the date the Circuit Court entered a final judgment order approving the settlement agreement, to grant certain contractual rights to the Associate Members, GIMs, IDEMs, and COMs. These rights, which are set forth in the settlement agreement, provide that the CBOT or the CBOT subsidiary:

 

    will not amend its certificate of incorporation, bylaws or rules and regulations, as in effect as of February 2, 2004, in a manner that adversely affects the contract trading rights of any of the Associate Members, GIMs, IDEMs or COMs;

 

    will charge the same transaction fees, surcharges or other fees for transactions executed on the exchange in any given contract to each of the Full and Associate Members, GIMs, IDEMs and COMs; and

 

    will cause any membership dues, assessments or similar charges that are assessed against the membership to be made in accordance with, or in a ratio at least as favorable to the Associate Members, GIMs, IDEMs and COMs as the settlement equity allocation.

 

These rights, which may only be amended by the affirmative vote of a majority of votes cast by the members or membership interest holders of each of the affected classes, cease to be effective upon a change of control of the CBOT as provided in the settlement agreement. You should understand that these rights will not be affected if Full and Associate Members do not approve the restructuring transactions.

 

Changes in Our Corporate Governance and Capital Structure After a Second Approval (see pages 66 and 175)

 

The restructuring transactions are designed to create a framework to facilitate the creation of public markets for equity securities of CBOT Holdings, capital-raising transactions and other securities issuances following a subsequent approval of the stockholders of CBOT Holdings. In particular, certain changes to our corporate governance and capital structure will be implemented if and when the holders of at least a majority of the outstanding Class A common stock of CBOT Holdings approve a proposition to provide the board of directors of CBOT Holdings the authority to approve the issuance of additional authorized capital stock without further action by the stockholders. We refer to this approval as a “second approval.” These changes will be implemented either at the time of a second approval or in connection with a “qualified initial public offering” of CBOT Holdings, which is a public offering of Class A common stock of CBOT Holdings that has occurred after a second approval, that has been underwritten by one or more nationally recognized underwriting firms and following which shares of Class A common stock of CBOT Holdings are listed on a national securities exchange or the Nasdaq National Market. This could be an offering of newly-issued shares by CBOT Holdings, an offering of shares owned by CBOT Holdings stockholders or a combination of both, as determined by the board of directors of CBOT Holdings.

 

These changes are generally designed to:

 

    authorize the board of directors to approve the issuance of any additional authorized and unissued capital stock;

 

   

phase out the transfer restrictions applicable to the Series A-1, A-2 and A-3 common stock of CBOT Holdings 180, 360 and 540 days, respectively, following a qualified initial public offering, and provide

 

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for certain additional limited exceptions to the transfer restrictions applicable to the Series A-1, A-2 and A-3 common stock of CBOT Holdings for “permitted transfers” and board-approved exceptions;

 

    remove the transfer restrictions applicable to the Class B memberships in the CBOT subsidiary, which require that each Class B membership be transferred only in connection with a transfer of the related restricted Class A common stock of CBOT Holdings;

 

    restructure the boards of directors of CBOT Holdings and the CBOT subsidiary and implement new nomination procedures in connection with the election of directors to both boards of directors; and

 

    eliminate the right of stockholders of CBOT Holdings to cause CBOT Holdings to call a special meeting of stockholders.

 

You are not being asked to give a second approval at this time. We currently intend to solicit a second approval from the CBOT Holdings stockholders as soon as reasonably practicable following the completion of the restructuring transactions. However, you should understand that we are not obligated to seek a second approval, and thus we cannot assure you as to whether or when it will occur. Further, even if we were to seek a second approval in the future, we cannot assure you that it would be obtained. Therefore, it is possible that the changes described above may never take effect, and thus the objectives described above may never be realized. Even if these changes were to take effect after a second approval, we cannot assure you that we will be able to achieve the expected benefits, such as facilitating the creation of a public market for our equity securities or providing the financial flexibility to engage in capital-raising or other transactions.

 

We would only seek a second approval after the restructuring transactions are completed if we determine, as of that time, that to do so remains in the best interests of CBOT Holdings and its stockholders. Our decision with respect to whether and when we would seek a second approval will depend on a number of factors, including:

 

    our assessment of the feasibility of achieving the objectives of the changes to be implemented upon a second approval;

 

    then current market conditions, including their effect on our ability to facilitate public markets for our equity securities;

 

    our assessment of our need for the financial flexibility to engage in capital-raising or other transactions; and

 

    other conditions affecting the business of CBOT Holdings, including the business of the CBOT subsidiary.

 

Conditions to Completing the Restructuring Transactions (See page 80)

 

Although we are asking Full and Associate Members to vote to approve the propositions relating to the restructuring transactions at this time, we will not be obligated to complete the restructuring transactions unless and until each of the following conditions has been satisfied or waived:

 

    the Full and Associate Members, voting together as a single class based on their respective voting rights, shall have approved each of the five propositions being submitted for their approval in accordance with applicable law;

 

    we shall have received any approvals that we believe are required by, or desirable to receive from, the Commodity Futures Trading Commission, or “CFTC,” in connection with changes to our corporate governance structure, and that we have received any other governmental or regulatory approvals and authorizations determined by us to be necessary or desirable;

 

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    we shall have received each required material third party consent that the failure to obtain would, in the sole and absolute determination of the board of directors, have a material adverse effect on CBOT Holdings or the CBOT subsidiary;

 

    there shall be no court order or other regulation prohibiting or restricting the restructuring transactions; and

 

    our board of directors shall not have determined that the restructuring transactions are no longer in the best interests of the CBOT and its members or that the restructuring transactions are not fair to each class of CBOT membership.

 

We currently intend to complete the restructuring transactions as soon as reasonably practicable following the satisfaction of these conditions. However, if the restructuring transactions are approved but not all of these conditions are satisfied, it is possible that the restructuring transactions may not be completed for a significant period of time after the membership vote on the restructuring transactions. During any such time interval, it is possible that circumstances related to the business or financial condition of the CBOT, or financial, economic or other circumstances, could change significantly and in a manner not considered at the time our board of directors initially approved the restructuring transactions or at the time our members voted on the propositions relating to the restructuring transactions.

 

Impact of the Restructuring Transactions on the CBOE Exercise Right (See page 139)

 

CBOE Exercise Right. Since the CBOE was created in 1973, based on the certificate of incorporation of the CBOE, our Full Members have had a legal right, known as the CBOE exercise right, to become members of that exchange without having to purchase a membership on that exchange. Over the last several years, since we first announced our desire to pursue a strategic restructuring of the CBOT, the CBOE has stated publicly its view that, if completed, the restructuring transactions would extinguish the CBOE exercise right under certain circumstances. Because we believed that the CBOE’s position violated a 1992 agreement between us and the CBOE that addresses the CBOE exercise right, and because the CBOE exercise right is valuable to our Full Members, we, among other things, initiated litigation in the Circuit Court of Cook County, Illinois against the CBOE to protect the CBOE exercise right. Later, the parties entered into discussions in order to address the situation, including the effect of the restructuring transactions on the CBOE exercise right.

 

On August 7, 2001, the CBOT entered into an agreement with the CBOE for the stated purpose of resolving the dispute between the parties regarding the CBOE exercise right within the context of the restructuring transactions and electronic trading generally at the CBOT. Subject to satisfaction of certain conditions, including, among other things, approval of such agreement by the membership of the CBOE, approval of the agreement by the SEC as an interpretation of the certificate of incorporation of the CBOE and the effectiveness of the registration statement of which this document is part, the parties agreed, among other things, to clarify the nature and scope of the CBOE exercise right in the context of the CBOT’s proposed strategic restructuring and the expanded operation of the CBOT’s electronic trading system. In addition, the CBOT agreed to dismiss pending litigation and the CBOE agreed to withdraw its proposed interpretation and rule change that had been filed with the SEC and to take no further action to amend, modify, or otherwise limit, or terminate or cause to expire, the CBOE exercise right as a result of the completion of the restructuring transactions except as contemplated in the agreement. Both of these events occurred.

 

On October 7, 2004 and February 11, 2005, the CBOT, CBOT Holdings and the CBOE entered into letter agreements that, among other things, confirmed the parties’ understanding that the restructuring transactions referred to in the August 7, 2001 agreement shall be deemed to refer to the restructuring transactions as described in this document.

 

These agreements are designed to protect the CBOE exercise right from claims by the CBOE that the CBOE exercise right would be invalidated as a result of the CBOT having completed the restructuring transactions.

 

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However, as described above, the effectiveness of certain of the operative provisions of these agreements, including key provisions intended to prohibit the CBOE from challenging the validity of the CBOE exercise right based upon the completion of the proposed restructuring transactions, is conditioned upon, among other things, SEC approval of the interpretations set forth in the agreements, as requested by the CBOE. The SEC approval condition and certain other conditions have not yet been satisfied, and we cannot assure you that these conditions will be satisfied prior to the completion of the restructuring transactions, if at all. Thus, under circumstances where we complete the restructuring transactions but the operative provisions of these agreements do not become effective because not all of these conditions have been satisfied, we cannot assure you that the CBOE will not challenge or interfere with the CBOE exercise right as a result of the completion of the restructuring transactions. Further, we cannot assure you that the CBOE will not challenge the CBOE exercise right in the future on the basis of circumstances other than those arising as a result of the completion of the restructuring transactions.

 

Full and Associate Members are being asked to approve and ratify these agreements with the CBOE related to the CBOE exercise right. We have included as Appendices D-1, D-2 and D-3 to this document a copy of each of these agreements. We urge you to review carefully these agreements before voting on the propositions relating to the restructuring transactions.

 

CBOE Exercise Right Privileges. A CBOE exercise right privilege is a CBOE exercise right that has been unbundled from the other rights and privileges associated with a Full Membership, which may be bought, sold or leased separate and apart from such Full Membership. If a holder of a CBOE exercise right privilege is also in possession, either as an owner or a delegate, of all of the other rights and privileges represented by a Full Membership, such holder may utilize the CBOE exercise right to exercise and become a member of the CBOE without having to purchase a membership on such exchange. As of February 10, 2005, the CBOT has not issued any CBOE exercise right privileges.

 

If you hold a Full Membership immediately prior to the completion of the restructuring transactions and have not previously requested that the CBOT issue to you the CBOE exercise right privilege associated with your Full Membership, you will continue to have the right to request that the CBOT issue to you the CBOE exercise right privilege that will be associated with the Series B-1 membership in the CBOT subsidiary received in exchange for your Full Membership upon the completion of the restructuring transactions. CBOE exercise right privileges that have been issued and are outstanding immediately prior to the completion of the restructuring transactions, if any, will remain outstanding following the completion of the restructuring transactions.

 

CBOE Offer to Purchase. The CBOE has publicly announced that it intends to make an offer to our Full Members to purchase, for cash, CBOE exercise right privileges through a modified “dutch auction” process at a purchase price of $60,000 to $100,000 per CBOE exercise right privilege. Although the CBOE announced an intention to make such offer to purchase in the fourth quarter of 2004, we understand from the CBOE that their offer to purchase has been delayed pending completion of a regulatory process. We further understand that the CBOE had intended to fund this offer to purchase and related fees and expenses with available working capital and an underwritten financing in the amount of $50 million through Bank of America. We cannot assure you that the CBOE will actually make this offer to purchase or, if the CBOE does make this offer to purchase, that it will be made on these terms. We are not making or otherwise endorsing this offer to purchase, and we make no recommendation whatsoever regarding whether Full Members should participate in this offer to purchase if it is made.

 

Members Will Not be Taxed by the Federal Government Upon Receipt of Shares or Memberships in the Restructuring Transactions (See pages 79 and 189)

 

We have received a ruling from the Internal Revenue Service that, for U.S. federal income tax purposes, you will not recognize any gain or loss strictly as a result of receiving shares of Class A common stock of CBOT

 

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Holdings and Class B memberships in the CBOT subsidiary and that CBOT Holdings will not recognize any gain or loss strictly as a result of CBOT Holdings receiving the Class A membership in the CBOT subsidiary in connection with the restructuring transactions as proposed in 2002. We have received a supplemental ruling from the IRS confirming that certain aspects of the proposed restructuring transactions, which have been modified following the receipt of the initial ruling and, as a result, are not covered by such ruling, will not affect the validity of the initial ruling that CBOT members will not recognize gain with respect to the receipt of Class B memberships of the CBOT subsidiary, including any associated right to trade on the CBOT or the CBOE. These modifications include modifications to the proposed voting rights, procedures to amend the bylaws and rules and regulations, procedures to nominate directors, rights to call special meetings, board composition and transfer restrictions. Assuming this non-recognition treatment, the tax basis in your membership will carry over to your Class A common stock of CBOT Holdings and Class B memberships in the CBOT subsidiary.

 

We have received an opinion of Kirkland & Ellis LLP, special tax counsel to CBOT Holdings and the CBOT in connection with the restructuring transactions, to the effect that the discussion set forth at “Material U.S. Federal Income Tax Consequences of the Restructuring Transactions” represents its opinion as to the material U.S. federal income tax consequences of the restructuring transactions, subject to the qualifications set forth therein, and are based on reasonable interpretation of existing law. The tax consequences discussed in the opinion are consistent with the IRS rulings.

 

In particular, as described more fully at “Material U.S. Federal Income Tax Consequences of the Restructuring Transactions,” it is the opinion of Kirkland & Ellis that:

 

    No gain or loss will be recognized by a CBOT member with respect to the receipt of shares of Class A common stock of CBOT Holdings or the Class B memberships in the CBOT subsidiary, including any associated right to trade on the CBOT or CBOE.

 

    The aggregate basis in a member’s current membership will carry over to the property received and must be allocated to the various components. If the equity rights and the trading rights and other non-equity rights are treated as separate property for tax purposes, the basis in the equity rights will be allocated to the shares of Class A common stock of CBOT Holdings received, and the basis in the existing trading rights and other non-equity rights will carry over to the basis of the Class B memberships in the CBOT subsidiary received.

 

    The holding period of the shares of Class A common stock of CBOT Holdings or the Class B memberships in the CBOT subsidiary will include the period for which such person’s current membership has been held, provided that such membership is held as a capital asset or property described in Code Section 1231 on the date of the distribution of the stock or memberships, as the case may be.

 

    The CBOT will not recognize any gain or loss upon its demutualization and creation of the holding company structure.

 

No Gain or Loss for Accounting Purposes will be Recognized by the CBOT as a Result of the Restructuring Transactions (See page 79)

 

Certain aspects of the restructuring transactions will be treated in a manner similar to a reorganization of entities under common control. Under this method of accounting, no gain or loss for accounting purposes will be recognized, and the assets and liabilities of the CBOT will each appear on the books of CBOT Holdings at the same recorded amounts as on the books of the CBOT.

 

Regulatory Matters Relating to the Restructuring Transactions (See page 80)

 

In addition, the restructuring transactions may be subject to certain regulatory requirements of other state, federal and foreign governmental agencies and authorities. We are currently working to evaluate and comply, as

 

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applicable, in all material respects with these requirements and do not currently anticipate that they will delay the completion of the restructuring transactions.

 

No Stock Exchange Listing; Markets for Shares and Memberships (See page 78)

 

We have no current plans to seek the listing of the shares of Class A common stock of CBOT Holdings or the Class B memberships of the CBOT subsidiary on any stock exchange upon the completion of the restructuring transactions. However, we would seek the listing of our shares of Class A common stock in connection with any qualified initial public offering after a second approval.

 

No market presently exists for the shares of Class A common stock of CBOT Holdings. While we cannot provide any assurances in this regard, we currently believe that markets for the shares of Class A common stock of CBOT Holdings and the Class B memberships in the CBOT subsidiary may develop that are similar to the current markets for CBOT memberships. We believe that the current markets for memberships in the CBOT should facilitate the development of new markets for the shares of Class A common stock of CBOT Holdings and the Class B memberships in the CBOT subsidiary.

 

Risk Factors (See page 21)

 

There are significant risks associated with the restructuring transactions that you should consider very carefully before voting on the matters being submitted for your consideration. These risks include risks associated with our lack of internal experience in operating as a for-profit futures exchange and the risk that the CBOE exercise right could be challenged further by the CBOE as a result of the completion of the restructuring transactions or otherwise.

 

Absence of Appraisal Rights (See page 79)

 

Members who object to the restructuring transactions will not have appraisal rights under Delaware corporation law. If the restructuring transactions are completed and regardless of whether you voted for or against the restructuring transactions, your membership in the CBOT will be eliminated and you will receive shares of Class A common stock of CBOT Holdings and a Class B membership in the CBOT subsidiary, in each case, as described in this document.

 

CBOT Members Entitled To Vote (See page 192)

 

Although this document will be mailed to all CBOT members for informational purposes, you are eligible to vote at the special meeting only if you are a Full or Associate Member in good standing at the time of the special meeting at which a vote on the restructuring transactions will be taken. With regard to each of the propositions described below, each Full Member will be entitled to one vote per Full Membership and each Associate Member will be entitled to one-sixth of one vote per Associate Membership. GIMs, IDEMs and COMs are not eligible to vote on the restructuring transactions because they do not currently have any voting rights.

 

Propositions to be Voted Upon by Full and Associate Members (See page 191)

 

Full and Associate Members are being asked to approve the restructuring transactions by voting on the following five propositions:

 

  (1)   the approval of the agreement and plan of merger relating to the merger of the CBOT merger sub with and into the CBOT that will facilitate the demutualization of the CBOT;

 

  (2)   the approval of new bylaws of the CBOT, which will become the bylaws of the CBOT subsidiary, and certain technical amendments to the current CBOT bylaws identifying the CBOT members as “members” for purposes of Delaware corporation law;

 

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  (3)   the approval and ratification of the settlement allocation established by the terms of the settlement agreement;

 

  (4)   the approval and ratification of the agreements among the CBOT, CBOT Holdings and the CBOE relating to the CBOE exercise right; and

 

  (5)   the approval and ratification of changes to our corporate governance structure, including:

 

    the ability to issue capital stock and pay dividends;

 

    new voting rights;

 

    new charter and bylaw amendment procedures;

 

    new board composition and terms; and

 

    new director nomination procedures.

 

Proposition (1) will be approved if a majority of the voting power of Full and Associate Members, voting together as a single class based upon their respective voting rights, vote in favor of the approval of proposition (1). Propositions (2), (3), (4) and (5) will be approved if Full and Associate Members, voting together as a single class based upon their respective voting rights, cast at least 300 votes at the special meeting, in person or by proxy ballot, and at least a majority of the votes cast are in favor of propositions (2), (3), (4) and (5). The higher approval requirement for proposition (1) results from the application of Delaware corporation law.

 

Our directors and officers hold memberships entitling them to cast an aggregate of 13 3/6 votes on the propositions, representing about 0.9% of the total votes that may be cast.

 

Each of these propositions is a separate matter to be voted upon, but each proposition is expressly conditioned upon the approval of each of the other propositions. This means that ALL FIVE propositions must be approved or ratified, as applicable, in order for us to be able to complete the restructuring transactions. The restructuring transactions will not be completed if the Full and Associate Members do not approve or ratify, as applicable, each of these five propositions.

 

As part of the vote on the restructuring transactions, Full and Associate Members are being asked to “ratify” certain matters. Ratification in this context refers to the approval by members of matters for which their approval is not necessarily legally required. Although we are not aware of case law addressing the effect of ratification by members of a Delaware nonstock corporation, we believe, based on certain cases addressing ratification by stockholders, that ratification may under certain circumstances be effective to approve actions taken by a corporation and its board of directors, even if the actions are challenged by some of the members, provided that such actions are not against public policy (such as actions involving waste, fraud or similar egregious misconduct). We thus believe that ratification by Full and Associate Members of the matters relating to the restructuring transactions should extinguish any claim by such members (other than for waste, fraud or similar egregious misconduct or based on lack of proper disclosure) against the CBOT and its directors based on these transactions, including a claim alleging unfairness of these transactions to one or more classes of membership or alleging any deficiency in the process of developing the terms of these transactions or the CBOT board of directors’ consideration or approval of these transactions.

 

Recommendation of the CBOT Board of Directors (See page 81)

 

Our board of directors has determined that the restructuring transactions, taken as a whole, including the allocation of equity among the five classes of CBOT members in accordance with the settlement allocation, are in the best interests of the CBOT and its members and that the restructuring transactions are fair to all classes of CBOT members. Our board of directors has approved the restructuring transactions and recommends that

 

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Full and Associate Members vote “FOR” each of the five propositions being submitted for their approval in connection with the restructuring transactions.

 

Additional Information Regarding the Restructuring Transactions (See page 198)

 

If you have any questions about the restructuring transactions, including how to submit your proxy ballot if you are a Full or Associate Member, or if you would like to request additional copies of this document or the proxy ballot, please contact the CBOT as indicated below:

 

Board of Trade of the City of Chicago, Inc.

141 West Jackson Boulevard

Chicago, Illinois 60604

Attention: Secretary

 

You may also obtain free copies of this document (and certain other documents publicly filed by CBOT Holdings) at the website of the Securities and Exchange Commission at www.sec.gov, and you may obtain certain of these documents at the CBOT’s website at www.cbot.com. We are not incorporating the contents of the websites of the SEC or the CBOT or any other person into this document, but we are providing this information for your convenience.

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

 

The following table sets forth a summary of consolidated financial and other information for the CBOT. The balance sheet data as of December 31, 2003 and 2002 and operating data for the years ended December 31, 2003, 2002 and 2001 have been derived from the audited consolidated financial statements and related notes included in Appendix A of this document. The balance sheet data as of September 30, 2004 and operating data for the nine months ended September 30, 2004 and 2003 have been derived from the unaudited condensed consolidated financial statements and related notes included in Appendix A of this document. The balance sheet data as of December 31, 2001, 2000 and 1999 and operating data for the years ended December 31, 2000 and 1999 have been derived from audited financial statements and related notes and the balance sheet data as of September 30, 2003 have been derived from unaudited condensed consolidated financial statements and related notes not included in this document. The balance sheet and operating data as of and for the nine months ended September 30, 2004 and 2003 include, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of such data. The results of operations for the nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the entire year. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the consolidated financial statements and the related notes, the unaudited pro forma condensed consolidated financial statements and other financial information included elsewhere in this document.

 

     Nine Months Ended
September 30,


    Year Ended December 31,

 
     2004

   2003

    2003

    2002

   2001

     2000

     1999

 
     (dollars in thousands, except per share data)  

Operating Data

                                                        

Total revenues

   $ 296,556    $ 282,394     $ 381,302     $ 308,273    $ 251,731      $ 214,753      $ 207,869  

Operating expenses

     221,984      187,184       265,581       249,952      240,174        225,556        225,885  
    

  


 


 

  


  


  


Income (loss) from operations

     74,572      95,210       115,721       58,321      11,557        (10,803 )      (18,016 )

Income taxes (credit)

     30,966      22,491       22,074       24,010      5,297        952        (3,091 )
    

  


 


 

  


  


  


Income (loss) before cumulative effect of change in accounting principle and minority interest

     43,606      72,719       93,647       34,311      6,260        (11,755 )      (14,925 )

Cumulative effect of change in accounting principle—net of tax of $36(1) and $2,026(2), respectively

     —        —         —         —        (51 )      —          (2,920 )
    

  


 


 

  


  


  


Income (loss) before minority interest

     43,606      72,719       93,647       34,311      6,209        (11,755 )      (17,845 )

Minority interest in (income) loss of subsidiary

     1,100      (41,162 )     (62,940 )     —        —          —          6,933  
    

  


 


 

  


  


  


Net income (loss)

   $ 44,706    $ 31,557     $ 30,707     $ 34,311    $ 6,209      $ (11,755 )    $ (10,912 )
    

  


 


 

  


  


  


Balance Sheet Data

                                                        

Total assets

   $ 447,640    $ 438,696     $ 483,981     $ 354,197    $ 341,891      $ 359,074      $ 358,736  

Total liabilities

     149,887      146,579       169,758       135,161      156,419        180,151        168,512  

Short-term borrowings

     19,831      18,070       19,665       10,714      18,398        27,083        6,500  

Long-term borrowings

     31,671      48,473       50,045       42,857      58,324        64,286        87,500  

Minority interest

     1,540      41,162       62,940       —        —          —          —    

Total equity

     296,213      250,955       251,283       219,036      185,472        178,923        190,224  

Pro forma Data(3)

                                                        

Total assets

   $ 447,640    $ 438,696     $ 483,981     $ 354,197    $ 341,891      $ 359,074      $ 358,736  

Total liabilities

     149,887      146,579       169,758       135,161      156,419        180,151        168,512  

Short-term borrowings

     19,831      18,070       19,665       10,714      18,398        27,083        6,500  

Long-term borrowings

     31,671      48,473       50,045       42,857      58,324        64,286        87,500  

Minority interest

     1,540      41,162       62,940       —        —          —          —    

Total equity

     296,213      250,955       251,283       219,036      185,472        178,923        190,224  

Net income (loss)

     44,706      31,557       30,707       34,311      6,209        (11,755 )      (10,912 )

Net income (loss) per share(4)

     0.91      0.64       0.62       0.70      0.13        (0.24 )      (0.22 )

Other Data

                                                        

Current ratio(5)

     2.10      2.35       2.37       1.86      1.12        0.69        1.01  

Working capital (deficit)

   $ 89,158    $ 95,653     $ 115,622     $ 53,406    $ 8,883      $ (24,305 )    $ 351  

Capital expenditures

     28,608      24,506       46,062       22,675      16,358        38,497        25,165  

Interest coverage ratio(6)

     21.41      33.04       30.11       13.27      2.72        N/A        N/A  

Number of full time employees at end of period

     718      682       694       657      661        711        846  

Sales price per full CBOT membership—High

   $ 950    $ 450     $ 555     $ 453    $ 415      $ 642      $ 633  

Low

     413      310       310       240      290        255        400  

 

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(1)   In 2001, the CBOT adopted Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted, requiring recognition of all derivative instruments in the Consolidated Statements of Financial Condition as either assets or liabilities and the measurement of those instruments at fair value. SFAS No. 133 also requires changes in the fair value of derivative instruments to be recorded each period in current earnings or other comprehensive income depending on the intended use of the derivatives.
(2)   In 1999, the CBOT adopted Statement of Position (“SOP”) 98-5, “Reporting on the Costs of Start-Up Activities.” SOP 98-5 requires that start-up activities be expensed as incurred. Previously, start-up activities were capitalized and amortized.
(3)   Reflects the conversion of members’ equity to Class A common stock of CBOT Holdings.
(4)   Based on 49,359,836 shares issued and outstanding immediately following the completion of the restructuring transactions.
(5)   Equals current assets divided by current liabilities.
(6)   Equals the sum of income from operations plus interest expense, divided by interest expense.

 

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RISK FACTORS

 

If we complete the restructuring transactions, each CBOT member will become a stockholder of CBOT Holdings and a member of the CBOT subsidiary. Therefore, you should carefully consider each of the following risks and uncertainties, and all other information set forth in this document, before deciding whether to vote for or against the five propositions relating to the restructuring transactions. The following risks relate to:

 

    the restructuring transactions, particularly the demutualization of the CBOT;

 

    our business in general and the industry in which we operate;

 

    regulations applicable to our business and litigation in which we are, or may be, involved;

 

    changes in our corporate governance structure that will be implemented as part of the restructuring transactions; and

 

    additional changes in our corporate governance and capital structure that will be implemented if and when a second approval would occur.

 

In this section, we describe all of the material risks and uncertainties that are presently known to us.

 

Risks Relating to the Restructuring Transactions

 

We are subject to the following risks in connection with the restructuring transactions, particularly our demutualization. Certain other risks relating to changes in our governing documents in connection with the restructuring transactions are described below at “—Risks Relating to Changes in Our Corporate Governance Structure.”

 

We Have No Internal Experience in Operating as a For-Profit Futures Exchange

 

Since our formation over 150 years ago, we have operated as a mutual (or member-owned) organization for the benefit of our members, focused on delivering member benefits and enhancing member opportunity at reasonable cost. After the restructuring transactions, our business will also be operated for the long-term benefit of our stockholders rather than solely for the purpose of delivering member benefits and enhancing member opportunity. Our management has limited experience operating a for-profit business. Consequently, our transition to for-profit operations will be subject to risks, expenses and difficulties that we cannot predict and may not be capable of handling in an efficient manner.

 

The CBOE Exercise Right Could be Challenged Further by the CBOE

 

We do not believe that the completion of the restructuring transactions should impact the validity of the CBOE exercise right of Full Members. However, in recognition of claims made by the CBOE to the contrary and the history of disputes between the CBOT and CBOE concerning the nature and scope of the CBOE exercise right, we have entered into the August 7, 2001 agreement and related October 7, 2004 and February 11, 2005 letter agreements with the CBOE. These agreements are designed to protect the CBOE exercise right from claims by the CBOE that the CBOE exercise right would be invalidated as a result of the CBOT having completed the restructuring transactions. However, as described above, the effectiveness of certain of the operative provisions of these agreements, including key provisions intended to prohibit the CBOE from challenging the validity of the CBOE exercise right based upon the completion of the proposed restructuring transactions, is conditioned upon, among other things, SEC approval of the interpretation set forth in the agreements, as requested by the CBOE. The SEC approval condition and certain other conditions have not yet been satisfied, and we cannot assure you that these conditions will be satisfied prior to the completion of the restructuring transactions, if at all. Thus, under circumstances where we complete the restructuring transactions but the operative provisions of these agreements do not become effective because not all of these conditions have been satisfied, we cannot assure you that the CBOE will not challenge or interfere with the CBOE exercise right as a result of the completion of the restructuring transactions. Further, we cannot assure you that the CBOE will not challenge the CBOE exercise right in the future on the basis of circumstances other than those arising as a result of the completion of the restructuring transactions.

 

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In addition, notwithstanding our entry into these agreements with the CBOE, in light of issues raised by the CBOE from time to time in the past regarding the CBOE exercise right, we cannot assure you that the CBOE will not take other actions in the future to challenge or interfere with the CBOE exercise right on the basis of circumstances other than those arising as a result of the completion of the restructuring transactions in reliance upon its interpretation of these agreements, the 1992 agreement or article fifth (b) of the CBOE’s certificate of incorporation, which created the CBOE exercise right in 1973. Also, we cannot assure you that the CBOE will not otherwise be successful in terminating the CBOE exercise right or preventing Full Members from exercising such right in the future in response to future actions taken by CBOT Holdings or the CBOT subsidiary in implementing their business strategies, especially in the area of electronic trading. For more information on the CBOE exercise right and the CBOE’s recent attempts to restrict the scope of the CBOE exercise right, see “Our Business—Legal Proceedings—Chicago Board Options Exchange Dispute.”

 

Our Holding Company Structure May Not Achieve its Intended Benefits

 

We believe that the proposed holding company structure contemplated by the restructuring transactions will provide us increased flexibility to operate in a manner that will allow us to pursue our strategic goals while preserving for our exchange subsidiary certain desirable attributes of nonstock membership corporations. We may not realize the expected benefits of the holding company structure if market conditions, the regulatory environment or other circumstances limit us from pursuing our strategic goals. As a result, we could incur the costs of maintaining a holding company structure without realizing all of the intended benefits.

 

CBOT Holdings Will be Dependent Upon Distributions and Dividends from its Operating Subsidiaries to Meet its Obligations

 

Upon the completion of the restructuring transactions, CBOT Holdings will have no business operations of its own. CBOT Holdings will be a holding company and its only significant asset initially will consist of the Class A membership in the CBOT subsidiary. This Class A membership will entitle CBOT Holdings to all dividends and distributions, including proceeds upon liquidation, from the CBOT subsidiary. As a result, after the restructuring transactions CBOT Holdings will rely exclusively upon distributions from the CBOT subsidiary in order to meet its obligations. We currently expect that most of the earnings and cash flow of the CBOT subsidiary will initially be retained and used by it in its operations, including for purposes of servicing debt obligations it may have now or incur in the future.

 

We Have Not Determined or Received Any Opinion Regarding the Value of the CBOT Before or After the Restructuring Transactions or the Value of the Securities and/or Memberships You Will Receive in the Restructuring Transactions Compared to the Value of the Memberships You Currently Own

 

We have not determined the value of the CBOT in its current form as a nonstock, not-for-profit corporation or its value as a stock, for-profit holding company after the restructuring transactions. In addition, we have not determined the value of the Class A common stock of CBOT Holdings, including shares of Class A common stock of CBOT Holdings to be paid to the plaintiff class representatives pursuant to the settlement agreement, and Class B memberships in the CBOT subsidiary that will be issued in respect of the existing CBOT memberships in connection with the restructuring transactions. We have neither sought nor received any professional opinions from financial advisors or other third parties regarding any such potential value differential. Thus, we can give you no assurance that the value of CBOT Holdings and/or the CBOT subsidiary will be at least equal to the value of the CBOT or that the value of the Class A common stock of CBOT Holdings and/or the Class B memberships in the CBOT subsidiary will be at least equal to the value of the corresponding memberships in the CBOT that you currently own.

 

Full Members Will Experience Dilution of Their Relative Overall Voting Power

 

As a result of the allocation of Class A common stock of CBOT Holdings among the five classes of our members, stockholders of CBOT Holdings who are Full Members of the CBOT will hold about 77.65% of the

 

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voting power of CBOT Holdings (compared to 91.28% of the voting power of the CBOT held prior to the completion of the restructuring transactions). In this regard, by virtue of their receipt of Class A common stock of CBOT Holdings as a result of the completion of the restructuring transactions, stockholders of CBOT Holdings who are, at the time of the completion of the restructuring transactions, GIMs, IDEMs and COMs of the CBOT (who, pursuant to our current certificate of incorporation and bylaws, do not have the right to vote on any matter) will be entitled to vote on all matters submitted to the stockholders of CBOT Holdings for a vote.

 

Also, although Series B-1 members of the CBOT subsidiary will have the right to vote on certain matters reserved for the Series B-1 and B-2 members of the CBOT subsidiary, these voting rights are generally more limited than the voting rights of Full Members of the CBOT under our current certificate of incorporation and bylaws. In particular, CBOT Holdings, as the holder of the sole Class A membership in the CBOT subsidiary, will have the right to vote on proposals for the CBOT subsidiary to engage in certain significant corporate transactions as well as all other matters not reserved to the Series B-1 and B-2 members of the CBOT subsidiary.

 

As a result, in connection with the restructuring transaction Full Members will experience dilution in their overall voting power relative to the voting power of Associate Members, GIMs, IDEMs and COMs on such matters. Accordingly, there will be a reduction in the ability of Full Members to control the business and activities of both CBOT Holdings and the CBOT subsidiary following the completion of the restructuring transactions. See “The Restructuring Transactions—Allocation of CBOT Equity Ownership Interests Among CBOT Members in the Restructuring Transactions” and “Description of Capital Stock of CBOT Holdings.”

 

Full Members and GIMs Will Experience Dilution of Their Relative Liquidation Rights

 

As a result of the allocation of Class A common stock of CBOT Holdings among the five classes of our members and the exclusive right of CBOT Holdings as the sole Class A member of the CBOT subsidiary to share in the proceeds of liquidation of the CBOT subsidiary resulting from the completion of the restructuring transactions, Full Members and GIMs will experience dilution of their liquidation rights in CBOT Holdings relative to the liquidation rights of Associate Members, IDEMs and COMs.

 

Our current certificate of incorporation and bylaws provide that our members would share in the proceeds upon liquidation in a ratio of 1.000 : 0.167 : 0.111 : 0.005 : 0.005 for each Full Member, Associate Member, GIM, IDEM and COM, respectively. This represents an implied allocation of liquidation proceeds among Full and Associate Members, GIMs, IDEMs and COMs as follows: 6.00 : 1.00 : 0.67 : 0.03 : 0.03. Upon the completion of the restructuring transactions, the holders of Class A common stock of CBOT Holdings will have the right to share in the proceeds of liquidation of CBOT Holdings pro rata on the basis of the number of shares of Class A common stock owned, and CBOT Holdings, as the holder of the sole Class A membership in the CBOT subsidiary, will have the exclusive right to the proceeds of the CBOT subsidiary upon liquidation.

 

Accordingly, upon the completion of the restructuring transactions, the proceeds upon liquidation will be shared among the holders of Class A common stock of CBOT Holdings in accordance with the settlement allocation used to allocate equity in the CBOT pursuant to the restructuring transactions, which, after giving effect to the plaintiff class representative compensation but before allocating the plaintiff class representative compensation among the six plaintiff class representatives, is 2.73 : 1.00 : 0.50 : 0.11 : 0.25 to each Full Member, Associate Member, GIM, IDEM and COM, respectively. This will increase the liquidation rights of stockholders who are currently Associate Members, IDEMs and COMs and will reduce in a corresponding manner the relative liquidation rights of stockholders who are now Full Members and GIMs. See “The Restructuring Transactions—Allocation of CBOT Equity Ownership Interests Among CBOT Members in the Restructuring Transactions” and “Description of Capital Stock of CBOT Holdings.”

 

We May Incur Material, Unanticipated Costs in Connection with the Restructuring Transactions

 

Because we have been pursuing our proposed restructuring for such a long time, we have already incurred substantial expenses in connection with the restructuring transactions. Moreover, we have planned for additional

 

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expenditures that will be necessary for the completion of these transactions. Further, we may incur additional significant costs and expenses greater than those we have planned for in connection with the restructuring transactions. We cannot assure you that these additional costs will not be material to our business.

 

We Will Be Unable to Complete the Restructuring Transactions Unless We Can Obtain Necessary Regulatory Approvals, Including from the CFTC

 

The completion of the restructuring transactions is subject to our receipt of any approvals we believe are required by, or desirable to receive from, the CFTC in connection with the proposed changes to our certificate of incorporation, bylaws and rules and regulations that would be made in connection with the restructuring transactions. We are currently in the process of reviewing such proposed changes with the CFTC. While we believe that soon after the membership vote on the restructuring transactions we will be in a position to make any filings with, and/or receive any approvals from, the CFTC that we believe are required or desirable, there can be no assurance that this will occur. Moreover, under certain circumstances, this process could take much longer. If these CFTC approvals and any other necessary regulatory approvals or authorizations cannot be obtained, we may not be able to complete the restructuring transactions and any delay in the implementation of the restructuring transactions caused by the CFTC or other regulators may jeopardize the expected benefits of the restructuring transactions. We cannot assure you that the CFTC and other regulatory approvals will be obtained in connection with the restructuring transactions or, if obtained, that the approvals will be timely received.

 

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

 

There is currently no public market for the shares of Class A common stock of CBOT Holdings as such common stock will be newly issued securities and subject to significant transfer restrictions. The transfer restrictions applicable to the Series A-1, A-2 and A-3 common stock of CBOT Holdings will cause such common stock to generally be linked together with the Class B memberships in the CBOT subsidiary for an indefinite period of time, unless and until there occurs a second approval. Although we currently expect that the boards of directors of CBOT Holdings and the CBOT subsidiary will not, for the foreseeable future, consider seeking the removal and/or reduction of these transfer restrictions in the absence of a second approval, it is possible that such transfer restrictions could be removed and/or reduced at some point in the future. If this occurs, we cannot assure you that a market will develop for such common stock. Moreover, even if the Series A-1, A-2 and A-3 common stock of CBOT Holdings were to convert into unrestricted Class A common stock and become freely tradable, we do not know whether third parties would find the shares of unrestricted Class A common stock of CBOT Holdings to be an attractive investment or whether firms would be interested in making a market for such common stock. Consequently, we cannot at this time assure you that any trading market for any shares of our capital stock will develop or, if any market develops, how strong it may be.

 

There is Uncertainty as to the Effect the Restructuring Transactions Will Have on the Application of Our Rule Concerning Claims Against the Proceeds of a Transfer of a Membership After the Restructuring Transactions

 

Under our current rules and regulations, proceeds from the transfer of a membership are subject to certain prior claims of other members against the seller of that membership. The rules and regulations of the CBOT subsidiary will provide that the proceeds of any transfer of a combination of Class A common stock of CBOT Holdings and Class B membership in the CBOT subsidiary will be subject to the priority of payments provisions that are currently applicable to the transfer of CBOT memberships. However, as a result of the restructuring transactions and the unique relationship of the Class A common stock of CBOT Holdings with the Class B memberships in the CBOT subsidiary, there is substantial uncertainty as to whether the priority of payments provisions would be enforceable with respect to the Class A common stock in CBOT Holdings to the same extent

 

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as memberships in the CBOT today. Moreover, as a result of the stapling of Class A common stock of CBOT Holdings and Class B memberships in the CBOT subsidiary and the lack of a readily available mechanism for valuing these interests separately, there is also uncertainty as to whether the priority of payments provisions will be enforceable with respect to the Class B memberships in the CBOT subsidiary to the same extent as memberships in the CBOT today.

 

Risks Relating to Our Business

 

Our business, and thus the value of the Class A common stock to be issued by CBOT Holdings and the Class B memberships to be issued by the CBOT subsidiary, are subject to the following risks, which include risks relating to the industry in which we operate.

 

Intense Competition Could Materially Adversely Affect Our Market Share and Financial Performance

 

The futures industry is highly competitive. Many of our competitors and potential competitors are more established or have greater financial resources than we do. Many of our competitors also have greater access to capital markets as well as more substantial marketing capabilities and technological and personnel resources. We expect that competition will intensify in the future. For example, on February 8, 2004, Eurex, the world’s largest derivatives exchange, launched a registered U.S. exchange initially offering futures and options on futures contracts on U.S. Treasury notes and bonds. Eurex has stated its intention to offer a full range of derivatives on U.S. interest rates, indexes and equities, many of which are products currently offered by us.

 

Competitive pressures may cause us to re-evaluate our current business model and strategy. For example, in an industry where substantially all derivatives are traded electronically, the concept of an open outcry exchange, including the services we provide and our sources of revenue, may change swiftly and substantially. Increased development of the electronic trading markets could substantially increase competition for some or all of the products and services we currently provide.

 

In addition, our competitors may:

 

    respond more quickly to competitive pressures due to their corporate governance structures, which may be more flexible and efficient than our corporate governance structure;

 

    develop similar products that are preferred by our customers;

 

    develop non-traditional alternative risk transfer products that compete with our products;

 

    price their products and services more competitively;

 

    develop and expand their network infrastructures and service offerings more efficiently;

 

    adapt more swiftly to new or emerging technologies and changes in client requirements;

 

    utilize better, more user-friendly and more reliable technology;

 

    take greater advantage of acquisitions, alliances and other opportunities;

 

    more effectively market, promote and sell their products and services;

 

    better leverage existing relationships with clients and strategic partners or exploit better recognized brand names to market, distribute and sell their services; or

 

    exploit regulatory disparities between traditional, regulated exchanges and alternative markets that benefit from a reduced regulatory burden and a lower-cost business model.

 

Our current and prospective competitors are numerous and include securities exchanges, futures and options 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

 

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firms. We may also face competition from computer software companies and media and technology companies. The number of businesses providing internet-related financial services, or “e-commerce” businesses, has grown rapidly, and other companies have entered into, or are forming, joint ventures or consortia to provide services similar to those provided by us. Further, many of our competitors, including Eurex, the Chicago Mercantile Exchange, or the “CME”, and the New York Mercantile Exchange are already for-profit companies with more modern corporate governance structures that enable them to make decisions more quickly and efficiently and enhance their overall competitiveness. Moreover, the CME has the ability to raise capital through the issuance of equity securities and has already engaged in such capital-raising activity. For more information concerning the competitive nature of our industry and the challenges we face, see “Our Business—Competition.”

 

As a result of this intense competition, we cannot assure you that we will be able to retain our current customers or attract new customers to our markets, products and services. In addition, we cannot assure you that we will not lose customers because of more economical alternatives offered from competitors with comparable or possibly superior products, services or trade execution services. Our business could be materially adversely affected if we fail to attract new customers or lose a substantial number of our current customers to competitors.

 

We Depend on Our Executive Officers and Other Key Personnel

 

Our future success depends in large part upon the continued service of our executive officers, as well as various key management, technical and trading operations personnel. We believe that it is difficult to hire and retain executive management with the skills and abilities desirable for managing and operating a futures exchange. The loss of key management such as our President and Chief Executive Officer, Bernard W. Dan, our Executive Vice President and Chief of Staff, Carol A. Burke, our Executive Vice President, William M. Farrow III, our Executive Vice President and Chief Operating Officer, Bryan T. Durkin, or our Senior Vice President and Chief Financial Officer, Glen M. Johnson, could have a material adverse effect on our business, financial condition and operating results. We cannot assure you that any of our key personnel will not voluntarily terminate his or her employment with us. However, we have entered into employment agreements, each of which contains certain non-compete provisions, with each of Mr. Dan and Ms. Burke in an attempt to ensure the continuation of their employment.

 

Our future success also depends, in significant part, upon our ability to recruit and retain highly skilled and often specialized individuals as employees, particularly in light of the rapid pace of technological advances. The level of competition in our industry for people with these skills is intense, and from time to time we have experienced losses of key employees. Significant losses of key personnel, particularly to other employers with which we compete, could have a material adverse effect on our business, financial condition and operating results.

 

We May Not Effectively Manage Our Growth

 

We intend to develop and expand our business, including both our open outcry and electronic trading systems. This growth may place a significant strain on our management, personnel, systems and other resources. We must continue to improve our operational and financial systems and managerial controls and procedures, and we will need to continue to expand, train and manage our technology workforce. We must also maintain close coordination among our technology, compliance, accounting, finance, marketing and sales organizations. We cannot assure you that we will manage our growth effectively, and our failure to do so could have a material adverse effect on our business, financial condition and operating results.

 

Our Decision to Operate Both Open Outcry Trading and Electronic Trading Systems, Including Our Commitment to Maintain Open Outcry Markets, May Materially Adversely Affect Our Operating Costs, Markets and Profitability

 

It is expensive in terms of costs and management and other resources to continue operating two trading systems for the same products. Our current business strategy involves the operation of both pit-based, open

 

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outcry trading and electronic trading systems for many of our products. In addition, the certificate of incorporation of the CBOT subsidiary will contain a provision generally requiring the CBOT subsidiary to maintain current open outcry markets so long as each such market is deemed liquid under the terms of the certificate of incorporation unless the discontinuance of any such market is approved by Series B-1 and B-2 members of the CBOT subsidiary in accordance with the certificate of incorporation of the CBOT subsidiary. As a result, the CBOT subsidiary will be obligated under the terms of its certificate of incorporation to provide financial and other support to these markets. We may not have sufficient resources to adequately fund or manage both trading systems. This may result in resource allocation decisions that adversely impact one or both systems. Also, if we continue to operate both trading systems, liquidity on each may be less than the liquidity on a competitive unified trading system, making our trading systems less attractive and less competitive. As a result, our total revenues may be lower than if we offered only open outcry trading systems or only electronic trading systems. Moreover, to the extent that we continue to operate two trading systems, our boards and management may make decisions that are designed to enhance the continued viability of two separate trading systems, but that may have a negative impact on the overall competitiveness of each trading system.

 

We are Subject to Certain Risks Associated with the Globalization of Our Business

 

We expect that the expansion of our electronic markets will continue to increase the portion of our business that is generated from outside the United States. The globalization of our business presents a number of inherent risks, including the following:

 

    potential difficulty of enforcing agreements and collecting receivables through certain foreign legal systems;

 

    the evolving global tax treatment of electronic commerce, and the possibility that foreign governments could adopt onerous or inconsistent tax policies with respect to taxation of products traded on our markets or of the services that we provide;

 

    tax rates in certain foreign countries may exceed those of the United States and foreign earnings may be subject to withholding requirements or the imposition of tariffs, exchange controls or other restrictions;

 

    listed derivatives markets are regulated in most developed nations, and it may be impractical for us to secure or maintain the regulatory approvals necessary for our markets to be accessible from one or more nations;

 

    certain of our expenses are denominated in foreign currencies, which exposes us to the risk of fluctuating exchange rates, and we may not fully eliminate this risk through our hedging activities;

 

    general economic and political conditions in the countries from which our markets are accessed may have an adverse effect on our trading from those countries; and

 

    it may be difficult to enforce our intellectual property rights in certain foreign countries.

 

As we expand our business globally, our success will be dependent, in part, upon our ability to anticipate and manage these and other risks effectively. We cannot assure you that these and other factors will not have a material adverse effect on our business as a whole.

 

We May Not Be Successful in Executing Our Electronic Trading Strategy

 

We have committed substantial resources to develop our electronic trading capabilities. We began to offer our products electronically over the a/c/e system in August 2000 and, upon the termination of our contractual arrangements relating to that system on December 31, 2003, we transferred our electronic trading operations to the LIFFE CONNECT® system provided by LIFFE Administration and Management, which we refer to as “LIFFE.” In implementing the a/c/e system and in transitioning from the a/c/e system to LIFFE CONNECT®, we have balanced the desire to maximize system functionality against the associated costs, in both capital

 

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expenditure and time to market. While we believe these decisions will benefit our electronic trading capabilities, we cannot assure you these initiatives will be successful. The failure to successfully execute our electronic trading strategy could have a material adverse impact on our operations.

 

We Are Subject to Certain Risks Relating to the Operation of an Electronic Trading Market

 

In January 2004, LIFFE became the supplier of our electronic trading system. We cannot assure you that our decision to transition to the LIFFE CONNECT® system will achieve the functionality and cost benefits that we currently expect. In addition, we are subject to risks relating generally to the provision of electronic transaction services which include our failure or inability to:

 

    acquire, develop or implement new, enhanced or updated versions of electronic trading software;

 

    attract independent software vendors to write front-end software that effectively accesses our electronic trading system;

 

    increase the number of devices, such as trading and order routing terminals, capable of sending orders to our floor and to our electronic trading system; and

 

    respond effectively to technological developments or service offerings by competitors.

 

If our electronic trading operations are not successful, our business or future financial condition or operating results could be materially adversely affected.

 

We May Be Unable to Keep Up With Rapid Technological Changes

 

To remain competitive, we must continue to enhance and improve the responsiveness, functionality, accessibility and features of our proprietary software, network distribution systems and other technologies. The financial services and e-commerce industries are characterized by rapid technological change, changes in use and customer requirements and preferences, frequent product and service introductions embodying new technologies and the emergence of new industry standards and practices that could render obsolete our existing proprietary technology and systems. 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 be able to 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 so respond could have a material adverse effect on our business, financial condition and operating results.

 

Computer and Communications Systems Failures and Capacity Constraints Could Harm Our Reputation and Our Business

 

Our failure to operate, monitor or maintain our computer systems and network services, including those systems and services related to our electronic trading system, or, if necessary, to find replacements for our technology in a timely and cost-effective manner, could have a material adverse effect on our reputation, business, financial condition and operating results. We rely and expect to continue to rely on third parties for various computer and communications systems, such as telephone companies, on-line service providers, data processors, clearance organizations and software and hardware vendors. Our systems or those of our third party providers may fail, causing one or more of the following effects:

 

    unanticipated disruptions in service to customers;

 

    slower response times;

 

 

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    delays in trade execution;

 

    decreased customer satisfaction;

 

    incomplete or inaccurate accounting, recording or processing of trades;

 

    financial losses;

 

    security breaches;

 

    litigation or other customer claims; and

 

    regulatory sanctions.

 

Our status as a CFTC registrant requires that our trade execution and communications systems be able to handle anticipated present and future peak trading volume. Heavy use of our computer systems during peak trading times or at times of unusual market volatility could cause our systems to operate slowly or even to fail for periods of time. We monitor system loads and performance and regularly implement system upgrades to handle estimated increases in trading volume. However, we cannot assure you that our estimates of future trading volume will be accurate or that our systems will always be able to accommodate actual trading volume without failure or degradation of performance. System failure or degradation could lead our customers to file formal complaints with industry regulatory organizations, file lawsuits against us or cease doing business with us or could lead the CFTC or other regulators to initiate inquiries or proceedings for failure to comply with applicable laws and regulations.

 

In addition, we cannot assure you that we will not experience system failures, outages or interruptions that will materially adversely affect our business. Any failures that cause an interruption in service or decrease our responsiveness, including failures caused by customer error or misuse of our systems, could impair our reputation, damage our brand name and have a material adverse effect on our business, financial condition and operating results.

 

We Depend on Third Party Suppliers for Services That Are Important to Our Business

 

We depend on a number of suppliers, such as banking, clearing and settlement organizations, telephone companies, online service providers, data processors and software and hardware vendors for elements of our trading, clearing and other systems, as well as communications and networking equipment, computer hardware and software and related support and maintenance. In particular, we rely upon the CME to provide certain clearing services as part of the CME/CBOT Common Clearing Link and LIFFE as part of the LIFFE CONNECT® system. Thus, CME and LIFFE are two of our critical third party suppliers. We cannot assure you that any of these providers will be able to continue to provide these services in an efficient, cost-effective manner or that they will be able to adequately expand their services to meet our needs. An interruption in, or the cessation of, service by any service provider and our inability to make alternative arrangements in a timely manner, or at all, could have a material adverse effect on our business, financial condition and operating results.

 

Our Networks and Those of Our Third Party Service Providers May be Vulnerable to Security Risks

 

We expect the secure transmission of confidential information over public networks to continue to be a critical element of our operations. Our networks and those of our third party service providers, our member firms and our customers may be vulnerable to unauthorized access, computer viruses and other security problems. Persons who circumvent security measures could wrongfully use our information or cause interruptions or malfunctions in our operations, any of which could have a material adverse effect on our business, financial condition and operating results. We may be required to expend significant resources to protect against the threat of security breaches or to alleviate problems, including reputational harm and litigation, caused by any breaches. Although we intend to continue to implement industry-standard security measures, these measures may prove to be inadequate and result in system failures and delays that could lower trading volume and have an adverse effect on our business, financial condition and operating results.

 

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Declines in the Global Financial Markets May Materially Adversely Affect Our Business

 

Adverse economic and political conditions may cause declines in global financial markets and may 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 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;

 

    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.

 

Strategic Alliances May Not Produce the Results We Expect

 

We currently believe that strategic alliances could play an important role in our long-term success. In this regard, we may seek to enter into alliances or other arrangements with other parties. However, we cannot assure you that we will be successful in either developing, or fulfilling the objectives of, any such alliance. Further, our participation in these alliances may strain our resources and may limit our ability to pursue other strategic and business initiatives, which could materially adversely affect our business.

 

Our Business is Subject to Risks Related to Our Real Estate Holdings

 

Revenue from our real estate operations represented about 5% of our operating revenue for the nine months ended September 30, 2004. Lower occupancy rates, market rental rates and non-renewal of leases by tenants could have a material adverse effect on revenue from building operations. Any decrease in leased space could also affect future building service revenue if there is no corresponding demand for the vacated office space. Furthermore, most of our tenants are engaged in businesses that are directly or indirectly related to the brokerage/trading industry or related areas of financial services and adverse business conditions affecting those businesses could have a material adverse effect on our occupancy rates and building services revenues.

 

Our Market Data Fees May be Reduced or Eliminated Due to Industry Consolidation Among Market Data Vendors

 

We license our market data to vendors who distribute such data to persons or entities that use or monitor our markets. For the nine months ended September 30, 2004, our revenue from the sale of market data represented about 16% of our total revenue. Due to industry consolidation among our market data vendors, our year-end subscription levels decreased 8% and 11% during 2003 and 2002, respectively. As a result, our market data revenues decreased $2.4 million and $8.3 million during 2003 and 2002, respectively. If we continue to experience declining subscription levels, we can expect to continue to lose market data fee revenue if we are unable to recover that lost revenue through terminal usage fees, transaction fees or the development of alternative market data products.

 

Risks Relating to Regulation and Litigation

 

We are subject to the following risks in connection with the regulation of, and litigation relating to, our business.

 

We May Not Be Able to Maintain Our Self-Regulatory Responsibilities

 

Some financial services regulators have publicly stated their concerns about the ability of a financial exchange, organized as a for-profit corporation, to adequately discharge its self-regulatory responsibilities. Our

 

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regulatory programs and capabilities contribute significantly to our brand name and reputation. Although we believe that we will be permitted to maintain these responsibilities, we cannot assure you that we will not be required to modify or restructure our regulatory functions in order to address these or other concerns. Any such modifications or restructuring of our regulatory functions could entail material costs for which we have not currently planned.

 

We Are Subject to Significant Risks of Litigation

 

Many aspects of our business involve substantial risks of liability. For example, dissatisfied customers frequently make claims regarding quality of trade execution, improperly settled trades, mismanagement or even fraud against their service providers. We may become subject to these claims as the result of failures or malfunctions of systems and services provided by us. We could incur significant legal expenses defending claims, even those without merit. Although the Commodity Exchange Act and our CFTC-approved disclaimer and limitation of liability rules offer us some protections, an adverse resolution of any lawsuits or claims against us could have a material adverse effect on our reputation, business, financial condition and/or operating results.

 

We are currently subject to various litigation matters. We cannot assure you that we will be successful in defending any of these matters, and resulting adverse judgments could have a material adverse effect on our financial condition. In addition, we have been subject to legal proceedings and claims as a result of the restructuring transactions in the past, and it is possible that other claims could be brought in the future. For example, while we have entered into a settlement agreement relating to the lawsuit brought by certain Associate Members, GIMs, IDEMs and COMs such that we can move forward with our proposed restructuring at this time, this dispute has resulted in a substantial delay in our progress to complete the restructuring transactions. See “Our Business—Legal Proceedings.”

 

Any Infringement by Us on Patent Rights of Others Could Result in Litigation and Could Materially Adversely 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, services or technologies. Claims of infringement are not uncommon in our industry. For example, in August 2004, Trading Technologies International, Inc. filed a lawsuit against eSpeed, Inc., alleging infringement of certain patents relating to Trading Technologies’ trading software. Although we do not believe that Trading Technologies has sued other exchanges and related entities, Trading Technologies has indicated that it intends to protect its intellectual property, and we cannot assure you that Trading Technologies will not take such actions in the future.

 

In general, if one or more of our products, services or technologies were to infringe patents held by others, we may be required to stop developing or marketing the products, services or technologies to obtain licenses to develop and market the services from the holders of the patents or to redesign the products, services or technologies in such a way as to avoid infringing the patent. If we were unable to obtain these licenses, we may not be able to redesign our products, services or technologies to avoid infringement, which could materially adversely affect our business, financial condition and operating results.

 

We May Not Be Able to Protect Our Intellectual Property Rights

 

We rely primarily on trade secret, copyright, service mark, trademark law and contractual protections to protect our proprietary technology and other proprietary rights. Notwithstanding that we take precautions to protect our intellectual property rights, it is possible that third parties may copy or otherwise obtain and use our proprietary technology without authorization or otherwise infringe on our rights. We also seek to protect our software and databases as trade secrets and under copyright law. We have copyright registrations for certain of

 

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our software, user manuals and databases. The copyright protection accorded to databases, however, is fairly limited. While the arrangement and selection of data generally are protectable, the actual data are not, and others may be free to create databases that would perform the same function. In some cases, including for a number of our most important products, there may be no effective legal recourse against duplication by competitors. In addition, in the future, we may have to rely on litigation to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. Any such litigation, whether successful or unsuccessful, could result in substantial costs to us and diversions of our resources, either of which could materially adversely affect our business.

 

Member Misconduct Could Harm Us and is Difficult to Detect

 

Although we perform significant self-regulatory functions, there have been a number of highly publicized cases involving fraud or other misconduct in the futures industry in recent years. We run the risk that the holders of Class B memberships in the CBOT subsidiary, other persons who use our markets or our employees 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.

 

The Legal Framework for Our Industry Has Been Modified to Lower Barriers to Entry and Decrease Continuing Regulatory Costs for Competitors

 

Our industry has been subject to several fundamental regulatory changes, including changes in the statute under which we have operated since 1974. In the past, the Commodity Exchange Act generally required all futures contracts to be executed on an exchange that has been approved by the CFTC. The exchange trading requirement was modified by CFTC regulations to permit privately negotiated swap contracts to be transacted in the over-the-counter market. The CFTC exemption under which the over-the-counter derivative market operated precluded the over-the-counter market from avoiding CFTC regulation for exchange-like electronic transaction systems and clearing. These regulatory restrictions on the over-the-counter market were repealed by the Commodity Futures Modernization Act of 2000. It is possible that the chief beneficiaries of the Commodity Futures Modernization Act will be over-the-counter dealers and competitors that operate or intend to open electronic trading facilities or to conduct their futures business directly among themselves on a bilateral basis. The customers who may access such electronic exchanges or engage in such bilateral private transactions are the same customers who conduct the vast majority of their financial business on regulated exchanges. The Commodity Futures Modernization Act also permits banks, broker-dealers and some of their affiliates to engage in foreign exchange futures transactions for or with retail customers without being subjected to regulation under the Commodity Exchange Act.

 

In the future, our industry may become subject to new regulations or changes in the interpretation or enforcement of existing regulations. We cannot predict the extent to which any future regulatory changes may adversely affect our business. For more information about potential changes in our regulatory environment, see “Our Business—Regulation—Changes in Existing Laws and Rules.”

 

Risks Relating to Changes in Our Corporate Governance Structure

 

The following risks relate to the significant changes to our corporate governance structure that will occur as part of the restructuring transactions.

 

Certain of Our Proposed Changes to Our Corporate Governance Structure May Reduce the Influence of the Members in the Day-to-Day Management and Operation of Our Business

 

If we complete the restructuring transactions, our members will have a lesser ability to control the day-to-day management and operation of our business. After the restructuring transactions, the holders of the Class A

 

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common stock of CBOT Holdings will have the right to vote on all matters upon which the stockholders of CBOT Holdings are entitled to vote generally, including the election of directors. The holders of Class A common stock of CBOT Holdings will also have the right to vote on any proposal that would have CBOT Holdings sell a significant amount of its assets to a third party or acquire, invest in or enter into a business in competition with the CBOT subsidiary’s then existing business. Further, it will require the consent of the Class A common stockholders of CBOT Holdings for CBOT Holdings, as the holder of the sole Class A membership in the CBOT subsidiary, to vote in favor of any proposal to merge the CBOT subsidiary with a third party, to sell a significant amount of the CBOT subsidiary’s assets to a third party, to cause the CBOT subsidiary to acquire, invest in or enter into a business in competition with the then existing business of the CBOT subsidiary or to dissolve or liquidate the CBOT subsidiary.

 

In addition, the holders of the Class A common stock of CBOT Holdings will be entitled to initiate and vote on proposals to adopt, repeal, or amend the bylaws of CBOT Holdings and make non-binding recommendations that the board of directors consider proposals that, as a matter of Delaware corporation law, require the approval of the board of directors of CBOT Holdings. Any proposal by stockholders of CBOT Holdings may be brought to a vote at an annual meeting in accordance with the bylaws of CBOT Holdings, which will generally require advance notice of any proposal not less than 20, nor more than 60, days prior to the first anniversary of the date on which CBOT Holdings first mailed the proxy materials for the preceding year’s annual meeting of the stockholders of CBOT Holdings. Stockholders holding at least 10% of the outstanding Class A common stock of CBOT Holdings (that is, 4,935,984 shares) may also require that a special meeting be called. Any stockholder proposal will require the approval of a majority of the votes cast at such annual or special meeting. Stockholders will not have authority to take action by written consent of stockholders.

 

The Series B-1 and B-2 members of the CBOT subsidiary will have the exclusive right among members to vote on any proposals to amend the certificate of incorporation of the CBOT subsidiary approved by the board of directors and to initiate and vote on any proposals to amend the bylaws of the CBOT subsidiary whether or not approved by the board of directors. The board of directors of the CBOT subsidiary will also have the right to amend the bylaws of the CBOT subsidiary. However, Series B-1 and B-2 members of the CBOT subsidiary will have the exclusive right among members to vote on proposals by the board of directors of the CBOT subsidiary to amend the bylaws of the CBOT subsidiary in a manner that would adversely affect the core rights described elsewhere in this document. However, pursuant to the settlement agreement, until a change of control of the CBOT subsidiary, the CBOT subsidiary will be contractually prohibited from adopting an amendment to its certificate of incorporation, bylaws or rules and regulations, as in effect as of February 2, 2004, that adversely affects the contract trading rights of Associate Members, GIMs, IDEMs and COMs.

 

CBOT Holdings, as the holder of the sole Class A membership in the CBOT subsidiary, will have the right to vote on all matters not reserved for Series B-1 and B-2 members of the CBOT subsidiary. In addition, CBOT Holdings, as the holder of the sole Class A membership in the CBOT subsidiary, will have the right to vote on any proposal to merge the CBOT subsidiary with a third party, to sell a significant amount of the CBOT subsidiary’s assets to a third party, to cause the CBOT subsidiary to acquire, invest in or enter into a business in competition with the then existing business of the CBOT subsidiary or to dissolve or liquidate the CBOT subsidiary. However, it will require the consent of the Class A common stockholders of CBOT Holdings (who will, at least until a second approval, consist only of persons who are also members of the CBOT subsidiary) for CBOT Holdings, as the holder of the sole Class A membership in the CBOT subsidiary, to vote in favor of any such proposal.

 

In addition to these changes to voting rights and the manner of amending the certificate of incorporation and bylaws of CBOT Holdings and the CBOT subsidiary, we will be making changes to the size and classification of our board of directors and the manner in which directors are nominated. Also, we will eliminate the ability of our members to take action by written consent.

 

Collectively, these changes may reduce the influence of our members and may lead to decisions and outcomes that differ from those made under our current certificate of incorporation, bylaws and rules and regulations.

 

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Moreover, additional changes to our corporate governance and capital structure that would take effect upon the occurrence of a second approval and in connection with a qualified initial public offering of CBOT Holdings could reduce even further the influence of our members, as described more fully below.

 

Effects of Certain Provisions Could Enable the Board of Directors of CBOT Holdings to Prevent or Delay a Change of Control

 

Some of the provisions of the certificate of incorporation and bylaws of CBOT Holdings, could, together or separately:

 

    discourage potential acquisition proposals;

 

    delay or prevent a change in control; or

 

    limit the price that investors might be willing to pay in the future for shares of the Class A common stock of CBOT Holdings.

 

CBOT Holdings’ certificate of incorporation and bylaws will provide, among other things, that the Class A common stock of CBOT Holdings will be subject to significant transfer restrictions and that Class A common stockholders may not take action by written consent. In addition, the board of directors of CBOT Holdings will be classified into two separate classes with staggered terms. These provisions could prevent or delay a change of control or could limit the price some investors might be willing to pay in the future for shares of Class A common stock of CBOT Holdings.

 

Following the completion of the restructuring transactions, a change of control of the CBOT subsidiary could not occur without the consent of CBOT Holdings as the holder of the sole Class A membership. Moreover, as described in greater detail elsewhere in this document, the consent of the Class A common stockholders of CBOT Holdings (who will, at least until a second approval, consist only of persons who are also members of the CBOT subsidiary) must be obtained in order for CBOT Holdings to vote in favor of a change of control transaction involving the CBOT subsidiary.

 

Delaware Corporation Law May Protect Decisions of the Board of Directors That Have Differing Effects on the Holders of Class A and Class B Memberships in the CBOT Subsidiary

 

In the context of stock corporations, Delaware corporation law generally provides that a board of directors owes an equal duty to all stockholders, regardless of class or series, and does not provide separate or additional duties to any particular group of stockholders. As a nonstock corporation with multiple classes of memberships, the board of directors of the CBOT subsidiary may have similar obligations to the holders of each class of membership. Moreover, the certificate of incorporation of the CBOT subsidiary will include unique provisions, which are intended to protect the core rights, including a commitment to maintain current open outcry markets so long as each such market is deemed liquid under the terms of the certificate of incorporation unless the discontinuance of any such market is approved by Series B-1 and B-2 members of the CBOT subsidiary in accordance with the certificate of incorporation. Such provisions may have the effect of requiring the board of directors to make certain decisions that could benefit one or more series of Class B members in the CBOT subsidiary but not the Class A member, or which could affect the Class A member and one or more series of Class B members in the CBOT subsidiary differently.

 

More generally, the board of directors of the CBOT subsidiary may make decisions that may have the effect of benefiting one class of membership over the other, or which affect the holders of each class or series of membership differently. Delaware law will generally protect these decisions so long as the board of directors of the CBOT subsidiary 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 the corporation and its members generally.

 

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Risks Relating to a Second Approval

 

The following risks relate to significant changes to our corporate governance and capital structure that would be implemented if and when a second approval occurs.

 

If the restructuring transactions are completed, certain additional changes to our corporate governance and capital structure would take effect following the occurrence of a second approval. Generally speaking, these changes are designed to create a framework to facilitate the creation of public markets for equity securities of CBOT Holdings by enabling us to pursue a public offering that would result in the listing of our securities on a national securities exchange and capital-raising and other transactions involving the issuance of securities by providing us with additional authorized, but unissued, capital stock that would be available for issuance by our board without further stockholder approval.

 

We currently expect that CBOT Holdings will solicit a second approval as soon as reasonably practicable following the completion of the restructuring transactions. However, we cannot assure you that we will seek a second approval in the future or, if we seek a second approval, that it would be obtained. Therefore, you should understand that it is possible that these changes may never take effect and thus these objectives may never be realized. Even if these changes were to take effect after a second approval, we cannot assure you that we will be able to achieve the expected benefits, such as the creation of a public market for our equity securities or the financial flexibility to engage in capital-raising or other transactions.

 

Furthermore, from and after the time of a second approval, additional transfers of Class A common stock of CBOT Holdings would be permitted and these transfers as well as other permitted transactions (such as the issuance by CBOT Holdings of additional shares of capital stock) could result in CBOT Holdings being owned, in whole or in part, by persons who are not also members of the CBOT subsidiary. Under these circumstances, certain of the proposed changes to our corporate governance and capital structure, which are described in greater detail elsewhere in this document, could reduce even further the influence of the members in the day-to-day management and operation of our business, including the exchange business.

 

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THE RESTRUCTURING TRANSACTIONS

 

Overview

 

As a result of rapidly evolving changes in the futures industry, principally the increasing importance of electronic trading, we have determined that it is necessary to restructure our organization in order to enhance our competitiveness. Over the last several years, with the assistance of various outside advisors, we have conducted an ongoing and extensive evaluation process with respect to our need to restructure. Over time, this process evolved and we came to recognize not only the benefits of restructuring to improve our competitiveness and achieve structural flexibility but also the importance of preserving our ability to provide trading benefits and opportunity to our members. As a result of this process, we have developed, and are proposing for approval by our Full and Associate Members, a series of transactions designed to restructure the CBOT.

 

The restructuring transactions are designed to demutualize our organization by creating a stock, for-profit holding company, CBOT Holdings, and distributing shares of common stock of CBOT Holdings to our members while maintaining the CBOT as a nonstock, for-profit subsidiary of CBOT Holdings in which the CBOT members will hold memberships entitling them to certain trading rights and privileges on the exchange operated by such subsidiary. These restructuring transactions are also designed to modernize our corporate governance structure by, among other things, adopting new mechanisms for initiating and voting on stockholder and member proposals, providing for a modest reduction in the size of our board and modifying the nomination and election process for directors as well as the terms of office and qualifications of directors, as described in greater detail elsewhere in this document. Finally, the restructuring transactions are designed to permit CBOT Holdings to create a framework to facilitate public markets for its equity securities, capital-raising transactions and other securities issuances following a second approval. We believe that the restructuring transactions will enable us to enhance our competitiveness within the futures industry, including both the open outcry and electronic trading markets, while preserving our ability to provide member benefits and opportunity.

 

We currently anticipate that we will complete the restructuring transactions as soon as reasonably practicable following membership approval of the restructuring transactions, subject to receiving any required regulatory approvals from the CFTC. However, our obligation to complete the restructuring transactions is subject to satisfaction or waiver of a number of conditions, including, among others, a condition that our board of directors shall not have determined that the restructuring transactions are no longer in the best interests of the CBOT and its members or are not fair to all classes of CBOT members. For more information about CFTC approvals and other conditions to our obligation to complete the restructuring transactions, see “—Regulatory Matters,” and “—Conditions to Completing the Restructuring Transactions.”

 

Background of the Restructuring Transactions

 

Development of the Restructuring Strategy

 

Competitive conditions in the futures industry have changed significantly in the last decade or more due to innovations in the computer and communications industries. As a result, maintaining our competitive position has become increasingly challenging. To meet the challenges and opportunities associated with the increasing importance of electronic trading, we began to make our products available for electronic trading in 1992.

 

Notwithstanding the success of our electronic trading initiatives, the strategy committee of our board of directors concluded in early 1999 that changes to our organizational structure were desirable in order to respond more effectively to the increasingly competitive challenges presented by electronic trading as well as other exchanges. This conclusion was adopted in a strategic plan approved by our board of directors in August 1999.

 

In July 1999, our board of directors established a restructuring task force, composed of directors and non-director members of the CBOT. The restructuring task force was charged with developing a restructuring strategy designed to modernize our organizational and corporate governance structure in order to position us to compete more effectively in the evolving marketplace.

 

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Over the following six months, the restructuring task force conducted an extensive strategic analysis, assisted by the management of the CBOT, A.T. Kearney, Inc., a management consulting firm, Merrill Lynch & Co., an investment banking firm, Kirkland & Ellis LLP as legal counsel to the CBOT and the board of directors, and Piper Marbury Rudnick & Wolfe L.L.P., as special legal counsel to the restructuring task force.

 

As part of this strategic analysis, the restructuring task force, together with its advisors, reviewed our business, including our organizational and corporate governance structures, and current industry trends and practices. The findings of the restructuring task force formed the basis for a recommendation to our board of directors, which included objectives for a restructuring strategy and a detailed business outline, including alternative organizational structures.

 

January 2000 Board Meeting. In January 2000, our board of directors approved a general restructuring strategy recommended by the restructuring task force, subject to the board of directors’ further review, consideration and approval of the definitive terms and structure of the transactions designed to implement the strategy, which had not yet been formulated. The restructuring strategy generally contemplated the restructuring of the CBOT into two separate stock, for-profit companies, one conducting the CBOT’s open outcry business and the other conducting the CBOT’s electronic trading business, and the distribution of shares of stock in both companies to the current CBOT members. The restructuring strategy also contemplated the possibility that the then proposed electronic trading company might conduct an offering of shares of its stock to the public at or around the time of its separation from the open outcry company.

 

In addition, our board of directors at such time appointed two special committees of the board. One committee, the implementation committee, initially consisted of nine members of the board of directors and was chaired by the then current Chairman of the Board, David P. Brennan. The other members of the implementation committee were Charles P. Carey, Andrew J. Filipowski, Harold W. Lavender, Peter C. Lee, Veda Kaufman Levin, James P. McMillin, Joseph Niciforo and Michael P. Ryan. The implementation committee was directed to develop and recommend for the board’s further review, consideration and approval the definitive terms and structure of the transactions designed to implement the restructuring strategy.

 

The other special committee of the board of directors, the independent allocation committee, was composed solely of outside or non-member directors of the board and was chaired by former Illinois Governor James R. Thompson, the Chairman of the law firm, Winston & Strawn LLP. The other members of the independent allocation committee were Dr. Robert S. Hamada, the Dean and Edward Eagle Branch Distinguished Service Professor of Finance at the University of Chicago Graduate School of Business, Robert H. Michel, a former Republican leader of the U.S. House of Representatives and Senior Advisor at the law firm of Hogan & Hartson L.L.P., and Ralph H. Weems, an independent farmer and former president of the American Soybean Association. Since no mechanism existed in our certificate of incorporation, bylaws or rules and regulations for allocating ownership in our organization among members in connection with a restructuring such as that contemplated by the restructuring strategy, the independent allocation committee was directed to develop and recommend for the board’s further review, consideration and approval an appropriate and fair allocation of value among the members of the CBOT in connection with the transactions to implement the restructuring strategy, including the allocation to CBOT members of shares of stock of the then proposed open outcry trading and electronic trading companies.

 

The implementation committee continued the work of the restructuring task force with assistance from the management of the CBOT and its outside advisors as of such time, including A.T. Kearney, Merrill Lynch, Kirkland & Ellis and Piper Marbury Rudnick & Wolfe. In particular, the implementation committee worked to develop the definitive terms and structure of transactions designed to effectuate the restructuring strategy,

 

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including a preliminary step necessary in order to proceed with the implementation of the restructuring strategy. This step involved the reincorporation of the CBOT from an Illinois special charter organization to a Delaware nonstock, not-for-profit corporation and was designed to cause the CBOT to be governed under a more modern and well developed legal framework so that the CBOT could more effectively accomplish its purposes. Among other things, unlike the law of Illinois then applicable to the CBOT, Delaware law provided the CBOT a more direct procedure pursuant to which it could change its status from that of a nonstock, not-for-profit corporation to that of a stock, for-profit corporation.

 

In addition to developing the terms and structure of the transactions required to implement the reincorporation of the CBOT in Delaware, the implementation committee further refined and developed the original restructuring strategy. Concurrently, the independent allocation committee, together with its advisors, the law firm of Winston & Strawn, as its sole special counsel, and the investment banking firm of William Blair & Company, L.L.C., as its sole financial advisor, worked to develop a recommended methodology for an appropriate and fair allocation of shares of common stock in both companies among the members in connection with implementation of the original restructuring strategy. The independent allocation committee developed an allocation for recommendation as fair to the full board based on such methodology and requested that William Blair give an opinion as to whether the proposed allocation was fair, from a financial point of view, to the various classes of members. In addition, because our electronic trading business was then conducted by Ceres and the restructuring strategy at that time contemplated reorganizing our electronic trading into a separate company and eliminating Ceres, as described below, Arthur Andersen LLP was retained by us to prepare a valuation analysis of Ceres and the limited partnership interests.

 

In early May 2000, the independent allocation committee submitted to our board of directors its initial report, which summarized the allocation methodology recommended as appropriate by the independent allocation committee and recommended as fair an allocation of shares of common stock in both companies among the classes of members in the ratio of 5.0 : 1.0 : 0.5 : 0.06 : 0.07 to each Full Member, Associate Member, GIM, IDEM and COM, respectively, which we refer to as the “allocation ratio,” in respect of their memberships in connection with the implementation of the original restructuring strategy. In reaching this conclusion, the independent allocation committee received and considered an opinion of William Blair that the proposed allocation ratio was fair, from a financial point of view, to each of the five classes of members.

 

You should be aware that, as described below, this allocation ratio will not be used to determine the allocation of equity in CBOT Holdings. Such allocation will be made in accordance with the settlement allocation established by the settlement agreement, which settlement was approved on January 21, 2004 by our board of directors as fair, reasonable and in the best interests of all CBOT members and approved on September 20, 2004, by the Circuit Court of Cook County, Illinois as fair, adequate and reasonable and in the best interest of all CBOT members. For more information about the settlement allocation, see “—Allocation of CBOT Equity Ownership Interests Among CBOT Members in the Restructuring Transactions.” Neither the independent allocation committee nor William Blair has expressed any view on the settlement allocation.

 

Also in May 2000, our board of directors received a report prepared by the implementation committee, which provided additional information regarding, and refined certain aspects of, the original restructuring strategy. This report also contained a detailed description of the transactions required in order to implement the Delaware reincorporation and recommended that the Delaware reincorporation be approved and submitted to the CBOT membership for its approval.

 

May 2000 Board Meeting. At its May 16, 2000 meeting, our board of directors approved the transactions necessary to effect the Delaware reincorporation and directed that such transactions be submitted to the CBOT membership for a ballot vote. Following member approval, the reincorporation of the CBOT in Delaware as a nonstock, not-for-profit corporation was completed in August 2000. Shortly thereafter, we formed eCBOT as a wholly owned subsidiary of the CBOT for the purpose of later reorganizing our electronic trading business. The CBOT assigned its general and limited partnership interests in Ceres to eCBOT in September 2000.

 

At the same May 2000 meeting, our board of directors also approved and adopted the report of the independent allocation committee, including its recommendation regarding the methodology to be used with

 

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respect to the allocation of shares of common stock of the then proposed open outcry trading and electronic trading companies among Full and Associate Members, GIMs, IDEMs and COMs in respect of their memberships and the allocation of such shares in accordance with the allocation ratio, subject to any changes in the factors underlying the assumptions that were used or reviewed in the preparation of the independent allocation committee report and taking into account any adjustments to such allocation resulting from the terms of the reorganization of our electronic trading business, and further subject to the board’s further review, consideration and approval of transactions necessary to implement the restructuring strategy. At this time, William Blair, as financial advisor to the independent allocation committee, delivered its opinion to the independent allocation committee and the board of directors that, based upon and subject to the matters set forth in the opinion, the proposed allocation ratio of shares of common stock in the then proposed open outcry trading and electronic trading companies to each Full and Associate Member, GIM, IDEM and COM, respectively, was fair, from a financial point of view, to each of the five classes of members. At this time, Arthur Andersen provided a report to the board regarding its preliminary valuation analysis of Ceres as of May 16, 2000.

 

The board of directors also approved at this meeting the report of the implementation committee as a description of the restructuring strategy as it was then envisioned by the board of directors, subject to any changes in the factors underlying the assumptions that were used or reviewed in the preparation of the report, and subject to the board’s further review, consideration and approval of the transactions necessary to implement the restructuring strategy.

 

Following the May board meeting, the management of the CBOT, with the assistance of its outside advisors, then primarily consisting of Merrill Lynch, Kirkland & Ellis and Cap Gemini Ernst & Young, a management consulting firm, conducted an evaluation process with respect to the implementation of the original restructuring strategy and worked to develop detailed business plans for the then proposed open outcry trading and electronic trading companies envisioned by the original restructuring strategy.

 

Based upon this evaluation process and further analysis, management of the CBOT and the executive committee of our board of directors concluded that the original restructuring strategy should be substantially revised in light of a number of factors, including increasing competitive pressures in the industry, the adverse changes in the capital markets, further review and analysis regarding the implementation and execution of the separate business plans of the then proposed open outcry trading and electronic trading companies, the overall financial status of the CBOT and the need for the CBOT to demutualize as quickly as possible so that it could enhance its competitive posture and improve its decision-making capability.

 

August 2000 Board Meeting. On August 31, 2000, management of the CBOT and the executive committee recommended to the board of directors that the original restructuring strategy be abandoned in favor of a substantially revised restructuring strategy. After careful consideration of the matters discussed and presented, the board of directors approved a revised restructuring strategy, which involved demutualizing the CBOT but not restructuring the CBOT into two separate, competing companies. Specifically, the revised strategy contemplated the following:

 

  Ÿ converting the CBOT into a single Delaware stock, for-profit corporation, which would be focused on updated open outcry trading with enhanced technology, and distributing shares of common stock in such stock, for-profit company, representing both trading rights and privileges and equity ownership, to the current members;

 

  Ÿ adopting a revised corporate governance structure, which would include substantially eliminating the membership petition process, streamlining the board of directors and making certain other changes to implement a more efficient decision-making process for the company; and

 

  Ÿ reorganizing and consolidating the CBOT’s electronic trading business, part of which was then operated by Ceres, into eCBOT, which would be operated as a wholly owned subsidiary of the for-profit company.

 

At that time, the board of directors determined that the original two-company strategy should be abandoned and that a simple demutualization plan involving the conversion of the CBOT into a single stock, for-profit company should be pursued instead. The board concluded that the revised strategy would enable each of the two

 

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businesses to be operated independently and in a more competitive manner but under a common ownership structure that would allow substantial sharing of resources and infrastructure.

 

The board’s approval of the revised restructuring strategy was subject to its further review, consideration and approval of the definitive terms and structure of transactions designed to implement the revised restructuring strategy, including an appropriate and fair allocation of common stock of the then proposed stock, for-profit company among the members. On August 31, 2000, our board directed the executive committee and the management of the CBOT to develop and recommend for its further review and consideration the definitive terms and structure of transactions designed to implement this revised restructuring strategy.

 

Following the August board meeting, management and the executive committee, with the assistance of the CBOT’s advisors, then primarily consisting of Merrill Lynch and Kirkland & Ellis, worked to develop the terms and structure of transactions designed to implement the revised restructuring strategy. In addition, Arthur Andersen was retained by us and our eCBOT subsidiary to prepare a valuation analysis of Ceres and its limited partnership interests in connection with the reorganization and consolidation of our electronic trading business, part of which was then operated by Ceres, into eCBOT. Shortly thereafter, Arthur Andersen was also engaged to evaluate the fairness, from a financial point of view, to Ceres and each class of its limited partners of the consideration to be received by each limited partner in exchange for their respective limited partnership interests pursuant to a then contemplated merger involving Ceres that would have reorganized and consolidated the electronic trading business into eCBOT, which we sometimes refer to as the “Ceres merger.” Concurrently, the independent allocation committee consulted with its legal and financial advisors and updated its recommendation as fair of an allocation in accordance with the allocation ratio of shares of common stock of the single company among the members in respect of their memberships in the context of the transactions to implement the revised restructuring strategy. The independent allocation committee requested that its financial advisor give an opinion as to whether the proposed allocation was fair, from a financial point of view, to the various classes of members.

 

November 2000 Board Meeting. On November 21, 2000, the independent allocation committee reported on and provided to our board of directors its updated recommendation regarding the allocation of shares of common stock of the then proposed stock, for-profit company among the members in respect of their memberships in connection with the restructuring transactions. The independent allocation committee recommended as fair an allocation in accordance with the allocation ratio of shares of common stock of the proposed stock, for-profit company among the members in respect of their memberships in connection with the restructuring transactions. The independent allocation committee indicated that, in reaching this recommendation, it received and considered an updated opinion of William Blair that the proposed allocation ratio was fair, from a financial point of view, to each of the five classes of CBOT members.

 

At the same meeting, Arthur Andersen reported to our board regarding its valuation of Ceres and its limited partnership interests as of October 31, 2000. Arthur Andersen also reported that, subject to a review of the final terms of the restructuring transactions, it was prepared to deliver its opinion that the consideration to be received by each limited partner of Ceres in exchange for their respective limited partnership interests pursuant to the Ceres merger was fair, from a financial point of view, to Ceres and to each class of the Ceres limited partners.

 

December 2000 Board Meeting. At the December 12, 2000 meeting of the board of directors, the then current status of the restructuring transactions was reviewed and discussed. At this meeting, management and the executive committee presented to the board of directors a detailed update regarding the restructuring transactions. At this meeting, the board received a report from management regarding the restructuring transactions and the CBOT’s business strategy. The board also received a report from Kirkland & Ellis concerning certain legal matters relating to the restructuring transactions.

 

In early January 2001, the executive committee met to consider certain refinements to the restructuring transactions proposed by the new Chairman of the Board, who had been elected in December 2000 and assumed office in January 2001. These refinements primarily related to the composition of the board of directors of the then proposed stock, for-profit company, the provisions to be included in the certificate of incorporation

 

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concerning certain core rights associated with the trading rights and privileges of certain common stockholders and clarifications regarding the importance of considering the expected effects, if any, of the restructuring transactions on the exercise right in making any determination that the restructuring transactions remain in the best interests of the CBOT and its members.

 

At its briefing meeting on January 9, 2001, the board of directors received a further update concerning the status of the restructuring transactions, including the refinements recommended by the executive committee and management. These matters were reviewed and discussed. Kirkland & Ellis answered questions with respect to certain aspects of the restructuring transactions.

 

On January 16, 2001, the independent allocation committee, which, following the expiration of the terms of Dr. Hamada and Mr. Michel as directors as of January 1, 2001, was then composed of Governor Thompson and Mr. Weems, held a meeting for the purpose of considering the refinements to the restructuring transactions recommended by the executive committee and management. William Blair and Winston & Strawn, as advisors to the independent allocation committee, participated in this meeting. The independent allocation committee updated its recommendation as fair of an allocation in accordance with the allocation ratio of shares of common stock among the members in respect of their memberships and requested that William Blair give an opinion as to whether the proposed allocation ratio was fair, from a financial point of view, to the various classes of members.

 

January 2001 Board Meeting. On January 16, 2001, immediately following the meeting of the independent allocation committee, a meeting of the board of directors was held for the purpose of considering the restructuring transactions. At this meeting, management and the executive committee presented to the board of directors for its review and consideration the proposed restructuring transactions. The board also received a report from the executive committee and management regarding the restructuring transactions and the CBOT’s business strategy, including the business purposes of the restructuring transactions. The independent allocation committee reported to the board of directors that it had reviewed the refinements to the restructuring transactions recommended by the executive committee and management and confirmed its updated recommendation as fair of an allocation in accordance with the allocation ratio of shares of common stock of the then proposed stock, for-profit company among the members in respect of their memberships in connection with the restructuring transactions, as provided to the board at the November 21, 2000 meeting. The independent allocation committee indicated that, in reaching this recommendation, it received and considered an updated opinion of William Blair that the proposed allocation ratio was fair, from a financial point of view, to each of the five classes of CBOT members.

 

The board also received a report from Kirkland & Ellis concerning certain legal matters relating to the restructuring transactions as well as an overview of the terms and structure of the restructuring transactions. Kirkland & Ellis answered questions with respect to certain aspects of the restructuring transactions and provided an update regarding the then current status of various litigation and other matters relating to the restructuring transactions.

 

In addition, the board received an update from Arthur Andersen regarding its valuation of Ceres and the limited partnership interests as of November 30, 2000. Merrill Lynch, then the financial advisor to the CBOT in connection with the restructuring transactions, answered questions with respect to certain aspects of the restructuring transactions, the capital markets generally, industry trends and the competitive challenges currently facing the CBOT.

 

At this time, our board of directors approved and adopted the recommendation of the independent allocation committee regarding the allocation in accordance with the allocation ratio of shares of common stock of the then proposed stock, for-profit company among the Full and Associate Members, GIMs, IDEMs and COMs in respect of their memberships in connection with the restructuring transactions, subject to any changes in the factors underlying the assumptions that were used or reviewed in the preparation of the independent allocation committee updated report. In connection therewith, William Blair, as financial advisor to the independent allocation committee, delivered its opinion to the independent allocation committee and the board of directors that, based upon and subject to the matters set forth in the opinion, the proposed allocation ratio was fair, from a financial point of view, to each of the five classes of CBOT members.

 

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Also at this time, Arthur Andersen delivered its opinion to the board of directors that, based on and subject to the matters set forth in the opinion, the consideration to be received by each limited partner in exchange for their respective limited partnership interests pursuant to the Ceres merger was fair, from a financial point of view, to Ceres and each class of its limited partners.

 

After careful consideration of the matters discussed and presented at this meeting, our board of directors determined that the restructuring transactions, taken as a whole, including the allocation methodology to be utilized in the demutualization for the allocation of shares of common stock of the then proposed stock, for-profit company among Full and Associate Members, GIMs, IDEMs and COMs in respect of their memberships and the allocation of such shares in accordance with the allocation ratio, and the terms of the Ceres merger, were in the best interests of CBOT and its members and fair to all classes of CBOT members. Accordingly, our board approved and authorized the restructuring transactions and determined to recommend to the membership of the CBOT that they vote to approve the restructuring transactions.

 

The board’s approval of the restructuring transactions was subject to its determination, at the time of the mailing of the proxy statement and prospectus relating to the restructuring transactions, that the restructuring transactions remain in the best interests of the CBOT and its members and remain fair to all classes of CBOT members.

 

Following the January 2001 board meeting, management and the executive committee, with the assistance of Kirkland & Ellis, worked to refine the terms and structure of the transactions designed to implement the revised restructuring strategy. Throughout this process, management and the executive committee continued to review the restructuring transactions to determine whether such transactions continued to achieve, in the best possible way, the organization’s objectives with respect to the revised restructuring strategy, and whether the restructuring transactions offered the optimal organizational structure in light of further changes in competitive pressures in the industry, the continued adverse condition of the capital markets and the refinement of the CBOT’s long-term strategic objectives.

 

During the summer of 2001, representatives of the CBOT and the CBOE met from time to time to discuss matters pertaining to the impact of the proposed restructuring on the CBOE exercise right.

 

As a result of the ongoing review of the proposed restructuring transactions, management of the CBOT and the executive committee of our board of directors determined that the board of directors should consider certain refinements to the restructuring transactions, designed, in part, to provide the CBOT additional structural flexibility while retaining certain benefits associated with nonstock membership corporations in a manner that is consistent with the objectives of the revised restructuring strategy, including refinements designed to demutualize the CBOT by creating a stock, for-profit holding company, CBOT Holdings, and distributing shares of common stock of CBOT Holdings to the current CBOT members, while maintaining the CBOT as a nonstock, for-profit subsidiary of CBOT Holdings in which the CBOT members would hold memberships entitling them to certain trading rights and privileges on the exchange operated by such subsidiary.

 

On September 13, 2001, the independent allocation committee held a meeting for the purpose of reviewing the proposed refinements to the restructuring transactions recommended by management and the executive committee. William Blair and Winston & Strawn, as advisors to the independent allocation committee, participated in the meeting. Kirkland & Ellis, as counsel to the CBOT, attended a portion of the meeting at the invitation of the independent allocation committee to review these refinements to the restructuring transactions and developments with respect to the lawsuit brought by certain Associate Members, GIMs, IDEMs and COMs challenging the allocation ratio. For more information on this lawsuit, see “Our Business—Legal Proceedings—Lawsuit Brought by Certain Associate Members, GIMs, IDEMs, and COMs.”

 

On September 24, 2001, the independent allocation committee held another meeting for the purpose of considering the proposed refinements to the restructuring transactions. William Blair and Winston & Strawn, as

 

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advisors to the independent allocation committee, participated in the meeting. The independent allocation committee updated its recommendation as fair of an allocation in accordance with the allocation ratio of shares of common stock of the proposed holding company among the CBOT members in respect of their memberships and requested that William Blair give an opinion as to whether the proposed allocation ratio was fair, from a financial point of view, to the various classes of members.

 

September 2001 Board Meeting. On September 24, 2001, at a special meeting of the board of directors, management of the CBOT and the executive committee recommended that the board of directors adopt and approve the proposed refinements to the restructuring transactions, which were designed, in part, to implement a holding company structure. Specifically as modified by the proposed refinements, the restructuring transactions contemplated the following:

 

  Ÿ demutualizing the CBOT by creating a stock, for-profit holding company, CBOT Holdings, and distributing shares of common stock of CBOT Holdings to our members, while maintaining the CBOT as a nonstock, for-profit subsidiary of CBOT Holdings;

 

  Ÿ adopting a revised corporate governance structure, which would include substantially eliminating the membership petition process, adopting a more modern mechanism for initiating and voting on stockholder proposals and making certain other changes designed to improve the CBOT’s corporate decision-making process; and

 

  Ÿ reorganizing and consolidating the CBOT’s electronic trading business, part of which was then operated by Ceres, into eCBOT, which would be operated as a wholly owned subsidiary of the CBOT subsidiary.

 

In connection with this recommendation, the board of directors received a report from Kirkland & Ellis concerning certain legal matters relating to the refinements to the restructuring transactions as well as an overview of the terms and structure of the restructuring transactions, as modified by the refinements recommended by management and the executive committee and a preliminary draft of an amendment to the registration statement indicating changes necessary to implement such refinements. In addition, Kirkland & Ellis made a presentation to the board of directors regarding certain legal issues relating to the proposed refinements to the restructuring transactions. These matters were reviewed and discussed. Kirkland & Ellis answered questions with respect to certain aspects of the restructuring transactions.

 

After careful consideration of the matters discussed and presented at this meeting, our board of directors determined that it was appropriate to defer further consideration of the proposed refinements to the restructuring transactions in order to provide the directors with additional time to more carefully review and evaluate the proposed refinements. Accordingly, a special meeting of the board was scheduled for October 2, 2001.

 

October 2001 Board Meeting. On October 2, 2001, at the special meeting of the board of directors, the independent allocation committee of the board reported on its resolution confirming its recommendation as fair of an allocation in accordance with the allocation ratio of shares of common stock of CBOT Holdings among the CBOT members in respect of their memberships in connection with the restructuring transactions as modified by the proposed refinements. The independent allocation committee indicated that, in reaching this recommendation, it received and considered an updated opinion of William Blair that the proposed allocation ratio was fair, from a financial point of view, to each of the five classes of CBOT members.

 

At the same meeting of the board of directors, Arthur Andersen reported regarding, and delivered to the board of directors of the CBOT, a valuation of Ceres and the limited partnership interests of Ceres as of June 30, 2001, and its opinion, dated as of October 2, 2001, to the effect that the distributions of cash payments to each of the limited partners of Ceres in exchange for their respective limited partnership interest as merger consideration pursuant to the Ceres merger, as proposed in connection with the restructuring transactions, as modified by the proposed refinements, was fair, from a financial point of view, to Ceres and each class of the limited partners of Ceres.

 

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In addition, the board of directors reviewed and discussed the proposed refinements to the restructuring transactions as set forth in a then current draft registration statement and in a report prepared by Kirkland & Ellis, which had previously been distributed to the board in connection with the special meeting of the board of directors on September 24, 2001, concerning certain legal matters relating to the restructuring transactions as well as an overview of the terms and structure of the restructuring transactions as modified by the proposed refinements. Kirkland & Ellis answered questions with respect to certain aspects of the proposed refinements and with respect to the restructuring transactions generally.

 

After careful consideration of the matters discussed and presented, the board of directors determined that the refinements to the restructuring transactions, taken as a whole, were advisable, desirable and in the best interests of the CBOT and its members and fair to all classes of CBOT members, and approved and authorized the refinements to the restructuring transactions, including refinements designed to demutualize the CBOT by creating a stock, for-profit holding company, CBOT Holdings, and distributing shares of common stock of CBOT Holdings to the current CBOT members, while maintaining the CBOT subsidiary as a for-profit, nonstock subsidiary of CBOT Holdings.

 

The board’s approval of the refinements to the restructuring transactions was subject to its determination, at the time of the mailing of the proxy statement and prospectus relating to the restructuring transactions, that the restructuring transactions remain in the best interests of the CBOT and its members and remain fair to all classes of CBOT members.

 

On December 18, 2001, the independent allocation committee held a meeting for the purpose of considering the restructuring transactions as then proposed. William Blair and Winston & Strawn, as advisors to the independent allocation committee, participated in this meeting. The independent allocation committee updated its recommendation as fair of an allocation in accordance with the allocation ratio of shares of common stock of CBOT Holdings among the members in respect of their memberships and requested that William Blair give an opinion as to whether the proposed allocation ratio was fair, from a financial point of view, to the various classes of members.

 

December 2001 Board Meeting. On December 18, 2001, at a regular meeting of the board of directors, the board of directors of the CBOT reviewed and considered the restructuring transactions to be proposed to the CBOT membership and considered whether to approve the mailing of a proxy statement and prospectus relating to the restructuring transactions to the CBOT membership in connection with their consideration of the restructuring transactions. At this meeting, management and the executive committee addressed the board of directors concerning the proposed restructuring transactions.

 

The independent allocation committee reported to the board of directors that it had held a meeting immediately prior to this board meeting to consider the restructuring transactions, including its earlier recommendation regarding the allocation of shares of common stock of CBOT Holdings among the members in respect of their memberships in connection with the restructuring transactions as presented to the board at the October 2, 2001 meeting. The independent allocation committee confirmed at this time its prior recommendation as fair of an allocation in accordance with the allocation ratio of shares of common stock of CBOT Holdings among the members in respect of their memberships in connection with the restructuring transactions. The independent allocation committee indicated that, in reaching this recommendation, it received and considered William Blair’s letter, dated December 18, 2001, updating its opinion, dated September 24, 2001, that the proposed allocation ratio was fair, from a financial point of view, to each of the five classes of members.

 

The board also received a report from Kirkland & Ellis concerning the proposed restructuring transactions, including certain legal matters relating to the restructuring transactions. Kirkland & Ellis answered questions with respect to certain aspects of the restructuring transactions and provided a report regarding the then current status of various litigation and other matters relating to the restructuring transactions.

 

In addition, the board received a report from Arthur Andersen regarding its valuation of Ceres and the limited partnership interests as of November 30, 2001 and its opinion, dated as of October 2, 2001, to the effect

 

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that the distributions of cash payments to each of the limited partners of Ceres in exchange for their respective limited partnership interest as merger consideration pursuant to the Ceres merger, as proposed in connection with the restructuring transactions was fair, from a financial point of view, to each of the classes of Ceres partnership interests.

 

After careful consideration of the matters discussed and presented at this and previous meetings, the CBOT board of directors determined that the restructuring transactions, taken as a whole, including the allocation methodology to be utilized in the demutualization for the allocation of shares of common stock of CBOT Holdings among the Full and Associate Members, GIMs, IDEMs and COMs in respect of their memberships and the allocation of such shares in accordance with the allocation ratio and the terms of the Ceres merger, were in the best interests of the CBOT and its members and were fair to all classes of CBOT members and approved the mailing of the proxy statement and prospectus relating to the restructuring transactions. However, no proxy statement and prospectus relating to the restructuring transactions was mailed to CBOT members at that time in view of, among other things, ongoing litigation in the lawsuit brought by certain Associate Members, GIMs, IDEMs and COMs.

 

Following the December 2001 board meeting, management and the executive committee, with the assistance of the CBOT’s advisors, considered an additional refinement to the restructuring transactions that was designed to ensure that in the immediate future only CBOT members would be holders of the common stock of CBOT Holdings. After careful consideration of this matter, management and the executive committee determined to recommend that the board of directors approve transfer restrictions designed to link CBOT Holdings common stock with the CBOT subsidiary memberships until such time as the board of directors would determine to remove such transfer restrictions.

 

January 2002 Board Meeting. On January 17, 2002, at a special meeting of the board of directors of the CBOT, the CBOT board considered and, subject to confirmation by the independent allocation committee of its recommendation regarding the proposed allocation of CBOT Holdings common stock among the CBOT members, approved certain modifications to the transfer restrictions that would be applicable to the CBOT Holdings common stock and the Class B memberships in the CBOT subsidiary.

 

Following the January 2002 board meeting, management and the executive committee continued to review the restructuring transactions to determine whether the transactions as then contemplated would best achieve the organization’s objectives with respect to the restructuring strategy. In connection with this review, management and the executive committee determined that the objectives of the organization would be best achieved by proposing further refinements to the corporate governance structure that were generally designed to provide members of the CBOT subsidiary and stockholders of CBOT Holdings greater rights than had been previously contemplated as part of the restructuring transactions. In addition, as a result of recent revisions to the CBOT’s relationship with the Eurex Group and certain tax and other financial considerations, management and the executive committee determined that a reorganization of the electronic trading business at the time the restructuring transactions would be completed would no longer best serve to achieve the organization’s objectives. Accordingly, management and the executive committee determined to recommend that the board of directors approve refinements to the proposed restructuring transactions to cause the reorganization of the electronic trading business to occur in connection with the termination of the CBOT’s arrangements with the Eurex Group, which occurred in December 2003.

 

In the spring of 2002, in connection with the preparation of materials relating to the lawsuit brought by certain Associate Members, GIMs, IDEMs and COMs, management determined that certain data relating to historical contract volume attributable to each membership class, which had previously been provided by the CBOT to the independent allocation committee and William Blair, was inaccurate. In particular, the inaccurate data overstated the amount of historical contract volume attributable to Full Members and IDEMs of the CBOT. As a result of this discovery, management conducted a thorough review of the process previously utilized to generate such data, corrected this process and delivered revised data to the independent allocation committee and its financial advisor. On March 9, 2002, the independent allocation committee held a meeting for the purpose of

 

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discussing the inaccuracies in the historical contract volume data and the impact, if any, of such revised information on the fairness of the allocation ratio.

 

During the summer of 2002, management and the executive committee, with the assistance of the CBOT’s advisors, continued to work to develop and refine the terms and structure of the restructuring transactions.

 

On September 13, 2002, the independent allocation committee held a meeting for the purpose of reviewing the proposed refinements to the restructuring transactions proposed to or adopted by the board of directors subsequent to the committee’s meeting in March 2002 and the circumstances related to the CBOT’s discovery of inaccuracies in the historical contract volume data provided to the committee. William Blair and Winston & Strawn participated in the meeting. In addition, Kirkland & Ellis attended a portion of the meeting at the invitation of the independent allocation committee to provide an update on the lawsuit brought by certain Associate Members, GIMs, IDEMs and COMs.

 

On September 17, 2002, the independent allocation committee held another meeting for the purpose of considering the proposed refinements to the restructuring transactions, and the revised historical volume data. William Blair and Winston & Strawn, as advisors to the independent allocation committee, participated in this meeting. The independent allocation committee updated its recommendation as fair of an allocation in accordance with the allocation ratio of shares of common stock of CBOT Holdings among the CBOT members in respect of their memberships and requested that William Blair give an opinion as to whether the proposed allocation was fair from a financial point of view to the various classes of members.

 

September 2002 Board Meeting. On September 17, 2002, at a regular meeting of the board of directors, the executive committee recommended that the board of directors adopt the proposed refinements to the restructuring transactions, including refinements to the proposed corporate governance structure generally designed to provide members of the CBOT subsidiary and stockholders of CBOT Holdings greater rights than had been previously contemplated as part of the restructuring transactions, and cause the reorganization of the electronic trading business to occur in connection with the termination of the CBOT’s contractual arrangements with the Eurex Group, which occurred in December 2003.

 

The independent allocation committee reported to the board of directors that it had held a meeting immediately prior to this board meeting to consider, among other things, the proposed refinements to the restructuring transactions. The independent allocation committee confirmed at this time its prior recommendation as fair of an allocation in accordance with the allocation ratio of shares of common stock of CBOT Holdings among the CBOT members in respect of their memberships. The independent allocation committee indicated that, in reaching this recommendation, it received and considered William Blair’s opinion, dated September 17, 2002, that the proposed allocation ratio was fair, from a financial point of view, to each of the five classes of CBOT members.

 

The board also received a report from Kirkland & Ellis concerning the proposed restructuring transactions, including certain legal matters relating to the restructuring transactions. Kirkland & Ellis answered questions with respect to certain aspects of the restructuring transactions and provided a report regarding matters relating to the restructuring transactions.

 

At the meeting, David Vitale, the then President and Chief Executive Officer of the CBOT and a non-voting director, noted to the CBOT board of directors that he disagreed with the determinations made by the CBOT with regard to certain terms of the restructuring transactions. In particular, Mr. Vitale expressed his disagreement with the refinements to the corporate governance structure designed to provide members of the CBOT subsidiary and stockholders of CBOT Holdings greater rights than previously contemplated. Mr. Vitale voluntarily resigned from his positions with the CBOT in November 2002.

 

After careful discussion of the matters discussed and presented at this and previous meetings, the board of directors determined that the restructuring transactions, taken as a whole, including the allocation methodology to be utilized in the demutualization for the allocation of shares of common stock of CBOT Holdings among the Full and Associate Members, GIMs, IDEMs, and COMs in respect of their memberships and the allocation of

 

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such shares in accordance with the allocation ratio, were in the best interests of the CBOT and its members and were fair to all classes of CBOT members.

 

The board’s approval of the restructuring transactions was subject to its determination, at the time of the mailing of the proxy statement and prospectus relating to the restructuring transactions, that the restructuring transactions remain in the best interests of the CBOT and its members and remain fair to all classes of CBOT members.

 

During the remainder of 2002 and into 2003, the lawsuit brought by certain Associate Members, GIMs, IDEMs and COMs challenging the allocation ratio continued. As a result, there was a delay in moving forward with the proposed restructuring of the CBOT.

 

In August 2003, the CBOT retained Kevin M. Forde, Ltd, and Charles P. Carey, the Chairman of the Board, retained the Law Offices of Peter B. Carey, as legal counsel in connection with the lawsuit brought by certain Associate Members, GIMs, IDEMs and COMs, including a possible settlement of the lawsuit. Mr. Peter B. Carey, of the Law Offices of Peter B. Carey, is Charles P. Carey’s cousin.

 

Beginning in early September 2003, Kevin M. Forde, Ltd. and the Law Offices of Peter B. Carey, on behalf of the CBOT, commenced settlement discussions with counsel for the plaintiff class, on behalf of the plaintiff class. These settlement discussions, which extended for over a four-month period, focused on numerous factors, including the discussion of the Illinois Appellate Court in its decision reversing the Circuit Court’s decision concerning the fairness of the allocation ratio and the value of the CBOT’s memberships. In particular, statements in the Appellate Court’s opinion to the effect that seat market values encompass membership rights with respect to trading, voting, liquidation and CBOE exercise rights were reviewed and discussed. In addition, the settlement negotiations included discussion of such quantitative measures as the volume traded by the various membership classes, the relative member liquidation rights and voting rights, the previous distributions from Ceres to the various membership classes and the terms of other exchange demutualizations with multiple membership classes. The settlement negotiations also included discussion of such qualitative measures as the length and expense of further litigation and the overwhelming support of the members for a settlement of the lawsuit.

 

During the course of these settlement discussions, numerous updates were provided to our Chairman of the Board, our executive committee of the board of directors and our board of directors at various meetings from time to time regarding the status of such settlement discussions as well as the status of the underlying litigation.

 

In particular, the board of directors received and reviewed, among other things, the decision of the Illinois Appellate Court. In this regard, the board of directors considered the statements in the Illinois Appellate Court’s opinion to the effect that seat market values encompass membership rights with respect to trading, voting, liquidation and CBOE exercise rights. It was noted that the use of seat value ratios as an allocation methodology would suggest an allocation among the five classes of members that is more favorable to Associate Members, GIMs, IDEMs and COMs than the allocation ratio recommended by the independent allocation committee.

 

In addition, the board of directors reviewed the previous report of William Blair to the independent allocation committee, together with all supporting data and analysis, regarding the independent allocation committee’s recommended allocation ratio, deposition testimony from certain representatives of William Blair, legal advice from the Law Offices of Peter B. Carey and Kevin M. Forde, Ltd regarding various settlement issues under negotiation, legal advice from Jenner & Block LLP, counsel to the CBOT and its board of directors in connection with the restructuring transactions, regarding various settlement issues under negotiation and their impact on the proposed restructuring of the CBOT, seat value records for Full and Associate Members, GIMs, IDEMs and COMs from 1991 through 2003, financial information provided by management of the CBOT concerning the liquidation of Ceres and information related to membership trading rights, fees, dues and assessments provided by CBOT management.

 

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The board of directors also received various reports on the status of the settlement negotiations, including updates and summaries of each aspect of the proposed settlement, including the proposed equity allocation, certain contractual rights proposed to be granted to Associate Members, GIMs, IDEMs and COMs, the proposed treatment of attorneys’ fees, proposed releases, the expected effect of dismissal with prejudice as well as the proposed sunset and further assurances obligations.

 

This process culminated in a proposed settlement of the lawsuit in January 2004, as discussed in greater detail below.

 

January 2004 Board Meeting. On January 21, 2004, the board of directors held a special meeting for the purpose of considering the terms of a proposed settlement of the lawsuit brought by certain Associate Members, GIMs, IDEMs and COMs. The Law Offices of Peter B. Carey participated in the meeting. In addition, Jenner & Block and Kevin M. Forde, Ltd. participated in the meeting.

 

At the request of the Chairman of the Board, Carol A. Burke, Executive Vice President and Chief of Staff of the CBOT, outlined the matters to be addressed at the meeting and outside counsel addressed the board of directors regarding the status of the litigation and summarized the terms and conditions of the proposed settlement as set forth in a form of binding memorandum of understanding, a draft of which had been provided to directors in advance of the meeting. Counsel began by noting the prior reports that had been presented to the board at numerous prior board meetings. Counsel then summarized the terms of the proposed settlement, calling out in particular any differences from the terms as described to the board at prior meetings. Counsel described the terms of the proposed settlement and the obligations of the CBOT with regard to the restructuring transactions and the proposed settlement allocation.

 

Counsel explained that, under the terms of the proposed settlement, among other things, the CBOT would intervene in the litigation and the plaintiffs would move for voluntary dismissal of the lawsuit. It was further explained that the CBOT would be obligated to present, as soon as reasonably practicable following court approval of the settlement, a restructuring proposal to the CBOT membership, which included a new settlement allocation of equity ownership interests in the restructured CBOT among the classes of CBOT members in accordance with the settlement agreement. Under the settlement allocation, 77.65%, in the aggregate of the equity ownership interests in the CBOT to be distributed to CBOT members in any restructuring would be allocated to the Full Members of the CBOT and 22.35%, in the aggregate would be allocated to the Associate Members and GIMs, COMs and IDEMs, with the 22.35% to be allocated, on an individual basis, in accordance with an allocation ratio as follows: Associate Member - 1.0: GIM - 0.50: COM - 0.25: IDEM - 0.11.

 

In connection with consideration of the settlement allocation as part of the proposed settlement, the statements in the Illinois Appellate Court’s decision to the effect that seat market values encompass membership rights with respect to trading, voting, liquidation and CBOE exercise rights were noted. It was further noted that the use of seat value ratios as an allocation methodology would suggest an allocation among the five classes of memberships that is more favorable to Associate Members, GIMs, IDEMs and COMs than the allocation ratio recommended by the independent allocation committee. This was an important factor in the board’s consideration of the settlement allocation as part of the proposed settlement and its conclusion, as described below, that the proposed settlement was fair, reasonable and in the best interests of all CBOT members.

 

It was also noted that the proposed settlement contemplated certain compensation for the plaintiff class representatives in the form of 0.10% of the equity ownership interests in the CBOT that would come from the 22.35% to be allocated to the minority members. Counsel explained that the obligations of the CBOT with regard to the proposed restructuring and the new allocation of equity ownership interests would be subject to a “sunset date” after which time they would no longer apply.

 

Other terms of the proposed settlement, including certain contractual rights designed to protect the interests of Associate Members, GIMs, IDEMs and COMs, were discussed. It was noted that the CBOT would be obligated, upon the occurrence of certain events, to pay counsel for the plaintiffs in the litigation $7.5 million plus interest. Counsel also described certain releases and indemnification contemplated by the proposed

 

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settlement and explained that the proposed settlement would be submitted for court approval and that its implementation would be dependent upon such approval. It was noted that the binding memorandum of understanding would form the basis of a settlement agreement to be entered into by the CBOT and the plaintiff class representatives within a reasonable period of time following the execution of the memorandum of understanding.

 

The board also received a report from Jenner & Block concerning certain aspects of the proposed settlement, including the impact of the proposed settlement on the contemplated restructuring transactions and various other restructurings that might be considered by the CBOT. The fiduciary duties of the members of the board in consideration of the proposed settlement were reviewed and discussed. The prior consideration of the allocation ratio by the independent allocation committee and by the board as a whole in the context of the contemplated restructuring, as well as other restructurings previously contemplated by the CBOT, was also reviewed and discussed. In addition, the board reviewed its prior deliberations relating to the proposed settlement of the lawsuit brought by certain Associate Members, GIMs, IDEMs and COMs.

 

Ms. Burke then commented on the position of Kirkland & Ellis, counsel to the defendant class in the litigation, with regard to the proposed settlement. It was noted that such counsel, on behalf of its client, did not support the proposed settlement. Certain procedural aspects of the litigation were then reviewed and discussed.

 

The terms and conditions of the proposed settlement were then reviewed and discussed among the directors. Various questions were asked and answered. In addition, certain provisions of the draft memorandum of understanding were reviewed and commented on by the directors. It was noted by certain directors that the binding memorandum of understanding might be unclear with respect to whether additional equity ownership interests that could be awarded to the plaintiff class representatives by the court as plaintiff class representative compensation would be “stapled” to common stock and memberships, as contemplated by the proposed restructuring. The directors then engaged in a discussion of this point. It was agreed that the binding memorandum of understanding should be revised to make clear that any such additional equity ownership interests to be awarded to the plaintiff class representatives by the court as compensation shall be held in the same form and manner as the equity ownership interests held by other CBOT members, i.e., “stapled” if the equity ownership interests held by other CBOT members were “stapled.”

 

After careful consideration of these matters, and further discussion, the board voted by unanimous vote of all those directors present at the meeting to approve and authorize the binding memorandum of understanding as fair, reasonable and in the best interests of all CBOT members, subject to the requirement that the memorandum of understanding be clarified with regard to the plaintiff class representative compensation and with the understanding that a settlement agreement reflecting the terms of the binding memorandum of understanding would later be executed. In so approving the binding memorandum of understanding, the board of directors had concluded that the proposed settlement was in the best interests of the CBOT and its members and fair to all classes of CBOT members and that, by resolving this lawsuit, the CBOT would be in a position to move forward with its contemplated restructuring.

 

In approving and authorizing the memorandum of understanding, the board of directors considered that that effectiveness of most of the obligations of the settlement agreement, including the settlement allocation, would be conditioned upon approval of the settlement agreement as fair, adequate and reasonable and in the best interest of all CBOT members by the Circuit Court, which could only occur after the Circuit Court conducted a hearing to consider the fairness of the settlement agreement, including the settlement allocation, at which Full and Associate Members, GIMs, IDEMs and COMs would have the ability to voice their opinions as to the merits of the settlement agreement (after appropriate notice and disclosure to the members as directed by the Circuit Court).

 

In addition, the board of directors considered that, if the Circuit Court were to approve the settlement agreement as fair, adequate and reasonable and in the best interest of all CBOT members, the principal effect of the settlement agreement, that is, the settlement allocation, would not be implemented until such time as the

 

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board of directors would approve a restructuring of the CBOT pursuant to which the equity ownership interests of the CBOT would be proposed to be allocated among the Full and Associate Members, GIMs, IDEMs and COMs. Thus, the board of directors contemplated that it would, to the extent appropriate, make a further determination that the settlement allocation, in the context of the restructuring transactions, is in the best interests of the CBOT and its members and fair to all classes of CBOT members, as part of its final approval of the restructuring transactions prior to the mailing of the proxy statement and prospectus relating to the restructuring transactions to the CBOT members. Such a determination would be made after the board of directors had determined the definitive terms and structure of the restructuring transactions to be proposed to the CBOT membership and would essentially confirm the prior fairness determination with regard to the proposed settlement, but this time in the context of the restructuring transactions as then contemplated and proposed to be submitted to the members.

 

Shortly following this meeting, the CBOT and the plaintiff class representatives entered into the binding memorandum of understanding, which had been revised to reflect the clarification requested by the board.

 

On February 5, 2004, the members of the board of directors received for their review the draft settlement agreement contemplated by the binding memorandum of understanding, as well as the CBOT counsel’s representation that the settlement agreement was consistent with the binding memorandum of understanding previously approved by the board. On February 6, 2004, the CBOT and plaintiff class representatives entered into the settlement agreement, as contemplated by the binding memorandum of understanding.

 

As a result of the CBOT entering into the settlement agreement, the allocation ratio recommended as fair by the independent allocation committee and opined on by William Blair will not be used to determine the allocation of equity in CBOT Holdings. Such allocation will be made in accordance with the settlement allocation established by the settlement agreement. Furthermore, you should understand that the independent allocation committee has not been asked to make, and has not made, a recommendation, and William Blair has not been asked to render, and has not rendered, an opinion, with respect to the settlement allocation.

 

February 2004 Board Meeting. On February 10, 2004, the board of directors held a special meeting for the purpose of considering certain matters relating to the CBOT’s entry into the settlement agreement. Ms. Burke addressed the board regarding the actions proposed to be taken, which consisted of the board’s withdrawal and revocation of its prior offer to engage Kirkland & Ellis as counsel to the defendant class in the litigation and withdrawal of its prior authorization for payment of certain legal fees and expenses of defendant class counsel in connection with the lawsuit. After careful consideration of these matters, the board voted by unanimous vote of all those directors present at the meeting to approve and authorize the proposed actions.

 

Over the following several months, management of the CBOT and the executive committee of our board of directors continued to evaluate the proposed restructuring transactions. The CBOT engaged Credit Suisse First Boston to provide financial advice in connection with the restructuring transactions, including with respect to the conditions that would be necessary or appropriate in order for the CBOT to facilitate public markets for the equity securities of the restructured CBOT, capital-raising transactions and other securities issuances, subject to the further approval of the CBOT members.

 

August 2004 Board Meeting. At its August 17, 2004 meeting, the board of directors considered certain proposed modifications to the restructuring transactions, which were designed to permit CBOT Holdings to create a framework to facilitate public markets for its equity securities, capital-raising transactions and other securities issuances following a subsequent approval by the stockholders of CBOT Holdings. Generally speaking, these modifications included authorizing additional shares of common stock and preferred stock, which shares would not be available for issuance by the board of directors until after a second approval; implementing a new system of transfer restrictions such that the Class A common stock of CBOT Holdings would automatically become transferable at staggered dates following the completion of a qualified initial public offering of CBOT Holdings; and creating a corporate governance structure in connection with a qualified initial public offering that would be more consistent with those of other public companies. At this meeting, the board of directors received a

 

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report from Jenner & Block concerning certain legal matters relating to the proposed modifications to the restructuring transactions. After careful consideration of the matters discussed and presented at this and previous meetings, the CBOT board of directors determined that the proposed modifications to the restructuring transactions were in the best interests of the CBOT and its members and approved proceeding with the implementation of such modifications. As noted above, the board’s approval of the proposed modifications remained subject to its further determination, at the time of the mailing of the proxy statement and prospectus relating to the restructuring transactions, that the restructuring transactions remain in the best interests of the CBOT and its members and remain fair to all classes of CBOT members.

 

As described in greater detail elsewhere in this document, the Circuit Court held a hearing on September 10, 2004 to determine the fairness of the settlement agreement. On September 20, 2004, the Circuit Court entered a final order approving the settlement agreement and all of its terms, including the settlement allocation, plaintiff class counsels’ fees and the compensation award to the plaintiff class representatives, as fair, adequate and reasonable and in the best interest of all CBOT members. The statutory period for filing a notice of appeal of the court’s order expired, and the court’s order became final and non-appealable, on October 20, 2004. For more information, see “The Restructuring Transactions—Allocation of CBOT Equity Ownership Interests Among CBOT Members in the Restructuring Transactions” and “Our Business—Legal Proceedings—Lawsuit Brought By Certain Associate Members, GIMs, IDEMs and COMs.”

 

December 14, 2004 Board Meeting. On December 14, 2004, at a regular meeting of the board of directors, the board of directors reviewed and considered the restructuring transactions to be proposed to the CBOT membership and considered whether to approve the restructuring transactions, as currently contemplated, and certain other matters relating to the restructuring transactions, including the mailing of a proxy statement and prospectus relating to the restructuring transactions to the CBOT membership in connection with their consideration of the restructuring transactions.

 

At the request of the Chairman of the Board, Ms. Burke addressed the board of directors concerning the proposed restructuring transactions, including the status of the SEC review of the registration statement relating to the restructuring transactions and the matters to be considered by the board of directors at this meeting. It was noted that this meeting was expected to be the final meeting of the full board of directors prior to the mailing of the proxy statement and prospectus relating to the restructuring transactions to the CBOT membership and the membership vote on the restructuring transactions. The membership vote process was reviewed and discussed. Matters relating to the implementation of the restructuring transactions following membership approval were also reviewed and discussed. It was noted that several outside counsel were present at the meeting to assist in the review of the matters to be considered by the board of directors at this time.

 

The board of directors received a presentation from Jenner & Block concerning the proposed restructuring transactions, including certain legal matters relating to the restructuring transactions. Jenner & Block reviewed the fiduciary duties of the board of directors in connection with its consideration of the restructuring transactions and the actions proposed to be taken by the board of directors at this meeting. Counsel also addressed the board of directors’ responsibilities under the federal securities laws in connection with the restructuring transactions, which involve a public offering of securities to the CBOT members.

 

The background of the board of directors’ prior consideration of the CBOT’s restructuring strategy and the development of transactions designed to implement that strategy, including certain actions taken by the board of directors from time to time in the past with respect to the proposed restructuring, were reviewed and discussed. Various refinements and modifications to the terms and structure of the restructuring transactions over the last several years, as described above, were reviewed and discussed.

 

The terms, conditions and structure of the restructuring transactions described in this document were then reviewed and discussed. It was noted that a draft of the registration statement relating to the restructuring transactions, which describes the restructuring transactions, had been distributed to the directors in advance of this meeting. The directors discussed various aspects of the restructuring transactions.

 

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The Law Offices of Peter B. Carey and Kevin M. Forde, Ltd. then briefly reviewed the status of the settlement of the lawsuit brought by certain Associate Members, GIMs, IDEMs and COMs challenging the methodology for allocating equity among the CBOT members in the proposed restructuring that had previously been recommended by the independent allocation committee. It was noted that the board of directors had, earlier in the year, approved the proposed settlement of the lawsuit and that at such time the board of directors had recognized that the effectiveness of most of the obligations of the settlement agreement, including the settlement allocation, was conditioned upon approval of the settlement agreement as fair, adequate and reasonable and in the best interest of all CBOT members by the Circuit Court, which could only occur after the Circuit Court conducted a hearing to consider the fairness of the settlement agreement at which the Full and Associate Members, GIMs, IDEMs and COMs would have the ability to voice their opinions as to the merits of the settlement agreement (after appropriate notice and disclosure to the members as directed by the Circuit Court).

 

It was reported that, on September 20, 2004, the Circuit Court entered a final order approving the settlement agreement and all of its terms, including the settlement allocation, plaintiff class counsel’s attorneys’ fees and the compensation award to the plaintiff class representatives, as fair, adequate and reasonable and in the best interest of all CBOT members. It was explained that the Circuit Court entered the final judgment order following a settlement hearing conducted by the court following notice to all members of the plaintiff and defendant classes, which included all Full and Associate Members, GIMs, IDEMs and COMs, at which such members had the opportunity to be heard with respect to the settlement agreement. The notice provided to members, which was reviewed and approved by the Circuit Court, included disclosure regarding the material provisions of the settlement agreement in plain terms and was accompanied by a copy of the settlement agreement. It was then noted that a copy of the final judgment order of the court had been distributed to the directors prior to this meeting.

 

The final order of the court was then reviewed and discussed. It was noted that, in reviewing the history of the lawsuit and the proceedings that led to the Circuit Court’s consideration of the proposed settlement agreement, the Circuit Court believed that the Illinois Appellate Court had determined that the market value of the memberships was the most significant factor to be used in determining the allocation of CBOT equity and that this was an important factor underlying the Illinois Appellate Court’s decision with regard to the allocation methodology developed and recommended by the independent allocation committee. It was noted that the use of the market value of memberships as an allocation methodology would suggest an allocation among the five classes of memberships that is more favorable to Associate Members, GIMs, IDEMs and COMs than the allocation ratio recommended by the independent allocation committee. It was also noted that this had been an important factor in the board’s consideration of the settlement allocation as part of the proposed settlement and that this would be an important factor in the board’s consideration of the fairness of the settlement allocation in the context of the restructuring transactions being considered at this meeting.

 

The factors considered by the Circuit Court in reaching its conclusions with regard to the settlement agreement were then reviewed and discussed. It was noted that the statutory period for the filing of a notice of appeal of the Circuit Court’s order had expired and the order was now final and non-appealable. For more information regarding the settlement of the lawsuit and the Circuit Court’s final judgment order, see “Our Business–Legal Proceedings.”

 

It was explained that among the actions proposed to be taken by the board of directors at the meeting would be a determination that the restructuring transactions, taken as a whole, including the allocation of equity among the five classes of CBOT members in accordance with the settlement allocation, are advisable, desirable and in the best interests of the CBOT and its members and are fair to all classes of CBOT members. It was further explained that, consistent with the board’s prior deliberations, in making this determination, the board of directors would be asked to determine whether, in the context of the restructuring transactions, the settlement allocation contemplated by the settlement agreement is fair to all classes of CBOT members. Noting that the board of directors had previously approved the proposed settlement as fair, reasonable and in the best interests of the CBOT members, it was explained that this additional fairness determination would be a confirmation of the

 

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prior fairness determination made by the board of directors, but this time in the context of the restructuring transactions as they are proposed to be submitted to the members for their consideration at the special meeting to be held for this purpose.

 

After careful consideration of the matters discussed and presented at this and previous meetings, the board of directors determined by unanimous vote of all those directors present at the meeting that, in the context of the restructuring transactions, the settlement allocation is fair to the CBOT and all classes of CBOT members. The board of directors also determined that the restructuring transactions, taken as a whole, including the settlement allocation to be utilized in the restructuring transactions for the allocation of shares of Class A common stock of CBOT Holdings among Full and Associate Members, GIMs, IDEMs and COMs in respect of their memberships, are advisable, desirable and in the best interests of the CBOT and its members and are fair to all classes of CBOT members. The board of directors also approved certain other matters relating to the restructuring transactions, including the mailing of the proxy statement and prospectus relating to the restructuring transactions to the CBOT membership in connection with their consideration of the restructuring transactions and the recommendation of the board of directors with regard to the propositions relating to the restructuring transactions. Finally, the board of directors designated the members of the executive committee of the board of directors as a special committee of the board of directors, to be known as the restructuring committee, with the full power and authority of the board to take any further action with respect to the restructuring transactions and any matters relating thereto. It was noted that the restructuring committee would have the authority to establish the date and time for the special meeting of the CBOT membership for the purpose of voting on the propositions relating to the restructuring transactions and take all other board actions required in order to complete the restructuring transactions.

 

Mailing of Proxy Statement and Prospectus to Members. Shortly thereafter, in February 2005, the restructuring committee established the date and time for the special meeting of the CBOT membership for the purpose of voting on the propositions relating to the restructuring transactions and took certain other actions with regard to the restructuring transactions, this document was finalized, the registration statement containing this proxy statement and prospectus was declared effective by the SEC and this proxy statement and prospectus was mailed to CBOT members in connection with the membership vote on the propositions relating to the restructuring transactions.

 

Reasons for the Restructuring Strategy

 

Our restructuring strategy is designed to respond to significant competitive challenges currently faced by the CBOT and to enhance the long-term value of the CBOT for its members. Current industry trends, including increased electronic trading of derivative securities, may threaten the long-term viability of traditional open outcry exchanges, including the CBOT. In fact, as reported by Futures Industry Magazine, in 1999, Eurex, an electronic derivatives exchange, overtook the CBOT to become the world’s largest derivatives exchange based on contract volume. We believe that these industry trends are related, in large part, to shifting priorities of investors and members of exchanges, new entrants in the market place, rapid advances in technology and electronic trading and the realignment of key industry participants.

 

Shifting Priorities of Investors and Members. We believe that institutional investors are demanding greater liquidity, lower cost and more efficient trade execution, enhanced access and a sophisticated supporting infrastructure. In addition, traditional open outcry exchanges are competing with new electronic markets, which are generally lower cost, more accessible, very focused, faster in trade execution and, increasingly, more liquid, and the over-the-counter derivatives markets. These pressures are forcing traditional open outcry exchanges, such as the CBOT, to modernize and restructure in order to remain competitive.

 

New Entrants in the Marketplace. Members of exchanges are also under increasing pressure from clients and new entrants in the marketplace. For example, on February 8, 2004, Eurex launched a registered U.S. exchange operated under U.S. regulation, initially offering futures and options on future contracts on U.S. Treasury notes and bonds. As a result of these competitive pressures, we believe that members of exchanges are generally concerned about the long-term value of their memberships.

 

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Advances in Technology and Electronic Trading. Technological innovations are creating new competitors and encouraging the development of electronic trading systems that are challenging traditional open outcry exchanges. Based on industry trends outside the United States, we expect that electronic trading will account for virtually all overseas trading in the near future.

 

Some leading exchanges are already fully electronic and other leading exchanges are aggressively pursuing an electronic trading model. We believe that major securities exchanges and quotation systems, such as the New York Stock Exchange and the Nasdaq Stock Market, are under pressure from electronic communications networks. About one dozen electronic communications networks have been established in the United States by leading investment banks, broker-dealers and market markers, which are aligning themselves with multiple alternative systems. For example, according to Internet Trading Magazine, Goldman Sachs has made investments in four electronic communications networks. In addition, according to a special study prepared by the SEC’s Division of Market Regulation, electronic communications networks have already captured about one-third of Nasdaq’s trading volume.

 

The CBOT is facing increasing competition from electronic competitors. For example, Cantor/eSpeed has introduced an electronic trading system for cash bonds, futures on Treasury bonds and block over-the-counter derivatives trades for large derivatives dealers. In addition, BrokerTec, which is owned by several of the largest United States and European investment banks, currently provides electronic, inter-dealer brokerage for Treasury bonds and euro-denominated sovereign debt and introduced an electronic trading system for futures and other derivatives during the fourth quarter of 2001. While we have taken steps to enhance our competitiveness relative to electronic competitors, including our entry into an arrangement that grants eSpeed a license to distribute CBOT products on its electronic marketplaces, we believe that we will continue to be subject to intense competition from electronic competitors.

 

Industry Realignment. Some exchanges that have restructured in response to industry pressures have demutualized and have become for-profit entities. Through demutualization, exchanges are streamlining their corporate governance structure, quickening their organizational decision-making, improving their access to capital and technology and enhancing their ability to quickly enter into strategic alliances. The CME, the New York Mercantile Exchange and the Hong Kong Futures Exchange, among others, have already demutualized. Some exchanges have announced that they are planning initial public offerings to raise capital necessary for strategic endeavors. The CME, Deutsche Börse, Toronto Stock Exchange, Euronext.liffe, the Australian Stock Exchange and OM Grüppen AB are already publicly-held corporations. The New York Stock Exchange and Nasdaq have also each indicated at various times in the past that they have considered initial public offerings.

 

In addition to demutualization, we believe that the futures industry will consolidate pursuant to mergers and alliances of exchanges in order to achieve the economies of scale and expanded geographic reach necessary to remain competitive in a rapidly changing marketplace.

 

Objectives of the Restructuring Strategy

 

As described more fully above, we have determined that it is desirable for the CBOT to restructure in response to the shifting priorities of investors and members, advances in technology and electronic trading and industry realignment. In response, we are proposing for your approval the restructuring transactions described in this document, which are intended to better position us to achieve the following objectives:

 

    maximize the value of our business by demutualizing and adopting a for-profit approach to business with a view towards optimizing volume, efficiency and liquidity in the markets we provide;

 

    increase our ability to respond more efficiently to changes within the industry, markets and regulations that govern us by modernizing our corporate governance structure;

 

    preserve our ability to provide member benefits and opportunity;

 

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  Ÿ enable us to segregate more easily our different lines of business into separate subsidiaries through a holding company structure, which could provide greater flexibility in administration and allow these subsidiaries to focus more effectively on particular markets, products or services;

 

  Ÿ provide us the ability to distribute profits from the operation of our business to our stockholders as permitted by applicable law; and

 

  Ÿ create a framework to facilitate public markets for the equity securities of CBOT Holdings, capital-raising transactions and other securities issuances following a second approval.

 

With these objectives in mind, as part of the process that led to the development of the restructuring transactions, we evaluated a number of restructuring alternatives as described below at “—Strategic Alternatives Considered.”

 

Strategic Alternatives Considered

 

We initially considered four principal restructuring strategies, taking into account the relevant associated business, legal, tax and regulatory issues. Each alternative strategy incorporated a variation of the corporate structure and equity ownership of the entities. The principal restructuring strategies we considered include the following:

 

  Ÿ maintaining the CBOT in its current from as a parent company and creating a separate electronic trading company as a subsidiary;

 

  Ÿ restructuring the CBOT into two separate and independent for-profit, stock companies, one to conduct the open outcry trading business and the other to conduct the electronic trading business;

 

  Ÿ organizing a single demutualized holding company with an open outcry subsidiary and an electronic trading company subsidiary; and

 

  Ÿ operating the electronic trading business through the parent company and creating a subsidiary to operate our open outcry markets.

 

For some time, we considered pursuing a strategy of restructuring the CBOT into two separate for-profit, stock companies. As autonomous entities, each with a separate business focus, we initially believed that each of the companies would be well positioned to make independent strategic business decisions and pursue appropriate business opportunities. We believed that, as for-profit, stock companies, each would have the financial and decision-making flexibility to pursue alliances and joint ventures, as well as the resources to make necessary technology investments.

 

In late August 2000, we concluded that such a strategy was no longer appropriate in light of a number of factors, including increasing competitive pressures in the industry, adverse changes in the capital markets, further review and analysis regarding the implementation and execution of separate business plans for the two independent companies, the overall financial status of the CBOT and the need for the CBOT to demutualize as quickly as possible so that it could enhance its competitive posture and improve its decision-making capability. Accordingly, we ultimately rejected the two-company strategy and determined to adopt a strategy of demutualizing the CBOT and operating the electronic trading company as a wholly owned subsidiary.

 

Following further evaluation and analysis, we concluded that, under then existing conditions, the revised restructuring strategy would achieve benefits similar to those associated with the creation of two separate companies, while preserving our flexibility to consider pursuing one or more value-enhancing transactions in the future, as described above at “—Overview.” Among other things, the revised strategy was designed to encourage independent operation of the electronic trading business in a competitive manner, but under a common ownership structure that will allow substantial sharing of resources and infrastructure. We believe that the restructuring transactions, as most recently refined and as presented in this document, will enable us to successfully implement this strategy.

 

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We reconsidered the holding company structure as a strategic alternative as a result of further changes in competitive pressures in the industry, the continued adverse condition of the capital markets and the refinement of our long-term strategic objectives. We believe the holding company structure represents a refinement of the previously approved restructuring transactions that is consistent with the revised restructuring strategy adopted in August 2000 in that it encourages independent operation of the electronic trading business under a common ownership structure while providing us additional structural flexibility to organize our business in a manner that will allow us to achieve our long-term strategic objectives. In addition, we believe that the holding company structure will allow us to maintain the CBOT as a nonstock membership corporation, which will provide us with certain benefits associated with such form of organization.

 

Most recently, we considered the advantages to the restructured CBOT and its stockholder/members of the availability of public markets for the equity securities of the corporation and the financial flexibility provided by the ability to engage in capital-raising transactions and other securities issuances. We then modified our restructuring strategy to reflect these advantages, subject to receiving a subsequent approval of the CBOT members following the completion of the restructuring transactions. Finally, from time to time over the past several years, we have considered various other refinements and modifications to the terms and structure of our proposed restructuring transactions, as described in greater detail elsewhere in this document.

 

Description of the Restructuring Transactions

 

The restructuring transactions are designed to:

 

  Ÿ demutualize our organization by creating a stock, for-profit holding company, CBOT Holdings, and distributing shares of common stock of CBOT Holdings to our members, while maintaining the CBOT as a nonstock, for-profit subsidiary of CBOT Holdings in which the CBOT members will hold memberships representing the trading rights and privileges on the exchange operated by such subsidiary;

 

  Ÿ modernize our corporate governance structure by, among other things, adopting new mechanisms for initiating and voting on stockholder and member proposals, providing for a modest reduction in the size of our board and modifying the nomination and election process for directors as well as the terms of office and qualifications of directors; and

 

  Ÿ create a framework to facilitate public markets for the equity securities of CBOT Holdings, capital-raising transactions and other securities issuances following a second approval.

 

We believe that the completion of the restructuring transactions and demutualization of our exchange will provide us with an opportunity to enhance our competitiveness within the futures industry, including within both the open outcry and electronic trading markets, while preserving our ability to provide member benefits and opportunity. As a demutualized exchange, we plan to adopt a for-profit approach to our business, with a view towards optimizing volume, efficiency and liquidity in the markets we provide, which is intended to maximize the value of our business and at the same time provide member benefits and opportunity. In particular, we expect that the proposed changes to our corporate governance structure will increase our ability to respond more efficiently to changes within the industry, markets and the regulations that govern us, while preserving important rights for our members. Also, to the extent that we expand our business in the future, we believe that our proposed holding company structure will enable us to segregate more easily our different lines of business into separate subsidiaries, which we believe could provide greater flexibility in administration and allow these entities to focus more effectively on particular markets, products or services. In addition, our transformation to a for-profit enterprise will provide us with the ability to distribute profits from the operation of our business to our stockholders as permitted by applicable law. Finally, our new capital structure and the revisions to our corporate governance structure that may be implemented upon a second approval would create a framework to facilitate public markets for equity securities of CBOT Holdings, capital-raising transactions and other securities issuances.

 

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The Demutualization

 

We will demutualize our organization by establishing a stock, for-profit holding company, CBOT Holdings, which will become the parent company of the CBOT subsidiary. As a result, the CBOT, which will continue to operate the exchange, will exist as a subsidiary of CBOT Holdings. After the demutualization, our members will hold interests in both companies: shares of Class A common stock of CBOT Holdings and one of the five series of Class B memberships in the CBOT subsidiary. However, as described in greater detail elsewhere in this document, transfer restrictions will apply to these interests and will have the effect of creating combinations of interests. In addition, after the demutualization, CBOT Holdings will hold the sole Class A membership in the CBOT subsidiary, which will entitle CBOT Holdings to the right to all dividends and distributions, including proceeds upon liquidation, from the CBOT subsidiary. As a result, any dividends or other distributions would be paid to you in respect of your Class A common stock of CBOT Holdings and not in respect of your Class B membership in the CBOT subsidiary.

 

The demutualization will be accomplished in two separate steps:

 

  Ÿ a dividend to distribute shares of Class A common stock of CBOT Holdings to our members; and

 

  Ÿ a merger of a newly formed merger subsidiary with and into the CBOT to convert our members’ existing memberships into new memberships in the CBOT subsidiary.

 

The Dividend of Class A Common Stock of CBOT Holdings.

 

The reorganization of the CBOT and the implementation of the proposed holding company structure will be accomplished by the merger, which, as described below, will result in the CBOT becoming a subsidiary of CBOT Holdings. The merger will not, however, result in the distribution of shares of Class A common stock of CBOT Holdings to the CBOT members. Consequently, a separate mechanism will be utilized to effect the distribution of shares of Class A common stock of CBOT Holdings to the CBOT members.

 

Currently, the CBOT holds all of the outstanding shares of common stock of CBOT Holdings. Prior to the completion of the restructuring transactions, the board of directors of CBOT Holdings, and the CBOT as sole stockholder, will approve the reclassification of CBOT Holdings’ current capital stock into 200,000,000 shares of Class A common stock, initially divided into unrestricted Class A common stock and three series of restricted Class A common stock, designated Series A-1, A-2 and A-3 and one share of Class B common stock.

Immediately prior to the completion of the restructuring transactions, the board of directors of the CBOT will declare a special dividend to the CBOT members consisting of 49,310,476 shares of Class A common stock of CBOT Holdings, then held by the CBOT, allocated among the member classes in accordance with the settlement allocation. This dividend will not be paid until immediately following the effectiveness of the merger described below. The dividend will specify the exact number of shares of each of the applicable series of Class A common stock of CBOT Holdings to be distributed to each CBOT member in connection with the restructuring transactions, based on the settlement allocation as described in greater detail elsewhere in this document. In addition, 49,360 shares of Class A common stock of CBOT Holdings will be distributed in the restructuring transactions as plaintiff class representative compensation to the six Associate Members, GIMs, IDEMs and COMs serving as plaintiff class representatives in connection with the lawsuit brought by certain Associate Members, GIMs, IDEMs and COMs. All of the equity interests of the CBOT will be distributed among the CBOT members in the restructuring transactions.

 

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The following table indicates the number of shares of Class A common stock of CBOT Holdings to be paid to CBOT members in respect of each current CBOT membership and in respect of each current class of CBOT membership in the restructuring transactions. In addition, the table indicates the relative voting power of the holders of the common stock of CBOT Holdings (by class of current CBOT membership) immediately following the completion of the restructuring transactions.

 

CBOT Holdings Class A Common Stock

to Be Received for each Current CBOT Membership and each Class of Current CBOT Membership,

and the Relative Voting Power at CBOT Holdings

 

Current Class of CBOT

Membership


   Number of Current
Members1


   Shares of
Common Stock to be
Received for each
Current CBOT
Membership


   Shares of
Common Stock to be
Received by each
Current Class of
CBOT Membership1


   Relative Voting Power
at CBOT Holdings of
each Current Class of
CBOT Membership1


 

Full

   1,402         38,327,876    77.65 %

Series A-1

        9,114            

Series A-2

        9,112            

Series A-3

        9,112            
         
           

Total

        27,338            

Associate

   804         8,040,000    16.29 %

Series A-1

        3,334            

Series A-2

        3,333            

Series A-3

        3,333            
         
           

Total

        10,000            

GIM

   126         630,000    1.28 %

Series A-1

        1,668            

Series A-2

        1,666            

Series A-3

        1,666            
         
           

Total

        5,000            

IDEM

   641         705,100    1.43 %

Series A-1

        368            

Series A-2

        366            

Series A-3

        366            
         
           

Total

        1,100            

COM

   643         1,607,500    3.26 %

Series A-1

        834            

Series A-2

        833            

Series A-3

        833            
         
           

Total

        2,500            
    
       
  

Sub-Total

   3,616         49,310,476    99.90 %
    
                

Plaintiff Class Representative Compensation

             49,360    0.10 %
              
  

Grand Total

             49,359,836    100.00 %
              
  


1   Based upon the number of Full and Associate Members, GIMS, IDEMs and COMs on February 10, 2005. The sum of the percentages identified above does not aggregate to 100.00% as a result of rounding.

 

This table reflects the allocation of 49,360 additional shares of Class A common stock of CBOT Holdings that will be distributed in the restructuring transactions as plaintiff class representative compensation to the six Associate Members, GIMs, IDEMs and COMs serving as plaintiff class representatives in connection with the lawsuit brought by certain Associate Members, GIMs, IDEMs and COMs.

 

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Immediately following the restructuring transactions, our members will be the only common stockholders of CBOT Holdings.

 

For more information regarding the common stock of CBOT Holdings, and the respective rights and privileges of such stock, see “Description of Capital Stock of CBOT Holdings.” For more information regarding the determination of the methodology for allocating shares of Class A common stock of CBOT Holdings among the CBOT members, see “—Allocation of CBOT Equity Ownership Interests Among CBOT Members in the Restructuring Transactions.”

 

The Merger. After the declaration of the dividend by the CBOT board of directors as described above, but before such dividend is paid, the merger will be completed. The merger will effect the reorganization of the CBOT into a holding company structure and the conversion of the existing CBOT memberships into Class B memberships in the CBOT subsidiary. The merger also results in CBOT Holdings being the holder of the sole Class A membership in the CBOT subsidiary.

 

We have formed two subsidiaries, CBOT Holdings, Inc. and CBOT Merger Sub, Inc., for the purpose of effecting the merger. CBOT Holdings, a Delaware stock, for-profit corporation, is currently a direct and wholly owned subsidiary of the CBOT. CBOT merger sub, a Delaware nonstock, for-profit membership corporation, is currently a direct and wholly owned subsidiary of CBOT Holdings.

 

Pursuant to an agreement and plan of merger, CBOT merger sub will merge with and into the CBOT, which will result in the CBOT being the surviving entity. Upon the effectiveness of the merger, the CBOT will become a nonstock, for-profit corporation and a subsidiary of CBOT Holdings. As a result of completing the merger, the CBOT subsidiary will have two new classes of membership, consisting of a single Class A membership and Class B memberships (which will be issued in five separate series).

 

Class A Membership. CBOT Holdings will hold the sole Class A membership in the CBOT subsidiary, which will entitle CBOT Holdings to the exclusive right to receive all distributions, dividends and proceeds upon liquidation from the CBOT subsidiary and certain limited voting rights. The Class A membership held by CBOT Holdings may not be transferred by CBOT Holdings without an amendment to the certificate of incorporation of the CBOT subsidiary, which will require the approval of the board of directors of the CBOT subsidiary and the Series B-1 and B-2 members of the CBOT subsidiary.

 

CBOT Holdings, as the holder of the sole Class A membership in the CBOT subsidiary, will have the right to vote on any of the following proposals:

 

    any merger of the CBOT subsidiary with a third party;

 

    any transaction (or series of related transactions) involving the sale of a significant amount of the CBOT subsidiary’s assets to a third party;

 

    any transaction (or series of related transactions) in which the CBOT subsidiary proposes to acquire, invest in or enter into a business in competition with the CBOT subsidiary’s then existing business; or

 

    any dissolution or liquidation of the CBOT subsidiary.

 

However, it will require the consent of the holders of the Class A common stock of CBOT Holdings (who will, at least until a second approval, consist only of persons who are also members of the CBOT subsidiary) for CBOT Holdings, as the holder of the sole Class A membership in the CBOT subsidiary, to vote in favor of any such proposals.

 

Class B Memberships. The Class B memberships will consist of five separate series: Series B-1, B-2, B-3, B-4 and B-5. Subject to certain restrictions that currently apply, including, in the case of Series B-3

 

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memberships, that such memberships may not be sold or otherwise transferred without eliminating the associated trading rights and privileges, and satisfaction of the application and approval process applicable to CBOT membership candidates, each such series will represent the trading rights and privileges that correspond to one of the current classes of membership of the CBOT, as described below:

 

  Ÿ Series B-1 Members. Series B-1 members of the CBOT subsidiary will generally be entitled to execute trades in all futures and options contracts listed on the exchange operated by the CBOT subsidiary. These trading rights and privileges correspond to the trading rights and privileges of Full Members of the CBOT. Each Series B-1 membership will include the CBOE exercise right privilege, as applicable. Series B-1 members who also possess 27,338 shares of Class A common stock of CBOT Holdings and either a Series B-1 membership that retains the right to have issued the CBOE exercise right privilege associated with it or an issued and outstanding CBOE exercise right privilege may, subject to certain requirements, exercise and become a member of the CBOE without having to purchase a membership in such exchange.

 

  Ÿ Series B-2 Members. Series B-2 members of the CBOT subsidiary will generally be entitled to execute trades in all futures and options contracts listed in the CBOT subsidiary’s Government Instrument Market, Index, Debt and Energy Market and Commodity Options Market. These trading rights and privileges correspond to the trading rights and privileges of Associate Members of the CBOT.

 

  Ÿ Series B-3 Members. With certain exceptions described in greater detail elsewhere in this document, Series B-3 members of the CBOT subsidiary will generally be entitled to execute trades in all futures contracts listed in the CBOT subsidiary’s Government Instrument Market. These trading rights and privileges correspond to the trading rights and privileges of GIMs. Following the completion of the restructuring transactions, two Series B-3 memberships in the CBOT subsidiary will be convertible into one Series B-2 membership in the CBOT subsidiary, which may result in fewer members having the trading rights and privileges of GIMs and more members having the trading rights and privileges of Associate Members.

 

  Ÿ Series B-4 Members. Series B-4 members of the CBOT subsidiary will generally be entitled to execute trades in all futures contracts listed in the CBOT subsidiary’s Index, Debt and Energy Market. These trading rights and privileges correspond to the trading rights and privileges of IDEMs.

 

  Ÿ Series B-5 Members. Series B-5 members of the CBOT subsidiary will generally be entitled to execute trades in all options contracts listed in the CBOT subsidiary’s Commodity Options Market. These trading rights and privileges correspond to the trading rights and privileges of COMs.

 

The specific trading rights and privileges associated with each series of Class B membership in the CBOT subsidiary will generally be governed by the rules and regulations of the CBOT subsidiary. These rules and regulations will constitute a part of the bylaws of the CBOT subsidiary.

 

Series B-1 and B-2 members of the CBOT subsidiary will have the exclusive right among members to vote on any proposals to amend the certificate of incorporation of the CBOT subsidiary approved by the board of directors and to initiate and vote on any proposals to amend the bylaws, which will include the rules and regulations of the CBOT subsidiary, whether or not approved by the board of directors. Under Delaware corporation law, proposals to amend the certificate of incorporation must be adopted and approved by the board of directors of the CBOT subsidiary prior to being submitted to Series B-1 and B-2 members of the CBOT subsidiary for their approval. However, Series B-1 and B-2 members of the CBOT subsidiary can also make non-binding recommendations that the board of directors consider proposals that, as a matter of Delaware corporation law, require the approval of the board of directors of the CBOT subsidiary. You should understand, however, that the board of directors of the CBOT subsidiary will consider such non-binding recommendations in accordance with its fiduciary duties under applicable law and, accordingly, there can be no assurance that the board of directors of the CBOT subsidiary will approve any such proposal. Pursuant to the terms of the settlement agreement, until a change of control of the CBOT subsidiary, the CBOT subsidiary will be contractually prohibited from adopting an amendment to its certificate of incorporation, bylaws or rules and regulations, as in effect as of February 2, 2004, that adversely affects the contract trading rights of Associate Members, GIMs, IDEMs and COMs.

 

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The board of directors of the CBOT subsidiary will also have the right to amend the bylaws of the CBOT subsidiary. However, the holders of Series B-1 and B-2 memberships in the CBOT subsidiary will have exclusive right among members to vote on proposals by the board of directors of the CBOT subsidiary to amend the bylaws of the CBOT subsidiary in a manner that would adversely affect the core rights described elsewhere in this document. The holders of Series B-3, B-4 and B-5 memberships in the CBOT subsidiary will not have any voting rights with respect to the CBOT subsidiary.

 

Pursuant to the merger, members of the CBOT will receive one of the five series of Class B memberships in the CBOT subsidiary in respect of each membership held by such member. The following table indicates the number and series of Class B membership in the CBOT subsidiary to be received for each current CBOT membership and by each class of current CBOT membership. In addition, the table indicates the relative voting power of the holders of the Class B memberships in the CBOT subsidiary (by class of CBOT membership) immediately following the completion of the restructuring transactions on matters on which Class B memberships in the CBOT subsidiary are entitled to vote.

 

Class B Memberships in the CBOT Subsidiary

to be Received for each Current CBOT Membership, and by each Class of Current CBOT Membership

and the Relative Voting Power at the CBOT Subsidiary of each Class of Current CBOT Membership

 

Current Class of CBOT

Membership


   Number of Current
Members1


   Number and Series
of Class B Membership
to be Received for each
Current CBOT
Membership


   Number and Series
of Class B
Membership to be
Received by each
Current Class of
CBOT Membership1


   Relative Voting
Power at the
CBOT Subsidiary
of each Current
Class of CBOT
Membership1


 

Full

   1,402    1 Series B-1    1,402 Series B-1    91.28 %

Associate

   804    1 Series B-2    804 Series B-2    8.72 %

GIM

   126    1 Series B-3    126 Series B-3    0.00 %

IDEM

   641    1 Series B-4    641 Series B-4    0.00 %

COM

   643    1 Series B-5    643 Series B-5    0.00 %
    
            

Total

   3,616              100.00 %
    
            


1   Based upon the number of Full and Associate Members, GIMs, IDEMs and COMs on February 10, 2005.

 

Each Series B-1 membership will include the CBOE exercise right privilege, as applicable.

 

Modernization of Our Corporate Governance Structure

 

An objective of the restructuring transactions is the modernization of the corporate governance structure of the CBOT. Accordingly, the restructuring transactions will involve certain changes, which will largely occur as a result of the creation of a holding company structure and the adoption of a new certificate of incorporation and bylaws for CBOT Holdings and a new certificate of incorporation, bylaws and rules and regulations of the CBOT subsidiary. These changes are designed to modernize our corporate governance structure by:

 

    adopting new mechanisms for initiating and voting on stockholder and member proposals;

 

    providing for a modest reduction in the size of our board of directors; and

 

    modifying the nomination and election process for our directors as well as the terms of office and qualifications of our directors.

 

Because you will receive interests in both CBOT Holdings and the CBOT subsidiary as a result of the completion of the restructuring transactions, you will have different rights and obligations in these two separate, but affiliated organizations based on the applicable corporate governance documents. Upon the completion of the restructuring transactions, you will be a stockholder of CBOT Holdings and a member of the CBOT subsidiary. Your rights as a stockholder of CBOT Holdings will resemble those of a stockholder of a public company, and

 

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your rights as a member of the CBOT subsidiary will more closely resemble your current trading rights and privileges as CBOT members.

 

Voting Rights

 

As a result of the restructuring transactions, you will hold interests in two companies rather than one: CBOT Holdings and the CBOT subsidiary. Your interests will entitle you to different rights with respect to voting on matters pertaining to the two companies, as described below.

 

CBOT Holdings. As compared to our current corporate governance structure as a not-for-profit, nonstock corporation, CBOT Holdings will have a corporate governance structure more customary for a for-profit, stock corporation. The holders of the Class A common stock of CBOT Holdings will have the right to vote on all matters upon which the stockholders of CBOT Holdings will be entitled to vote generally, including the election of directors to the board of directors of CBOT Holdings. On all such matters, the holders of Series A-1, A-2 and A-3 common stock of CBOT Holdings will vote as a single class, with equal per share voting rights.

 

In addition, the holders of Class A common stock of CBOT Holdings will have the right to vote on any proposal for a transaction (or a series of related transactions) either involving the sale of a significant amount of CBOT Holdings’ assets to a third party or in which CBOT Holdings proposes to acquire, invest in or enter into a business in competition with the then existing business of the CBOT subsidiary. Further, it will require the consent of the Class A common stockholders of CBOT Holdings for CBOT Holdings, as the holder of the sole Class A membership in the CBOT subsidiary, to vote in favor of any merger of the CBOT subsidiary with a third party, any transaction (or series of related transactions) involving the sale of a significant amount of the CBOT subsidiary’s assets to a third party, any transaction (or series of related transactions) in which the CBOT subsidiary proposes to acquire, invest in or enter into a business in competition with the then existing business of the CBOT subsidiary or any dissolution or liquidation of the CBOT subsidiary.

 

For these purposes, a significant amount of the CBOT subsidiary’s assets means 10% of the fair market value of the assets, both tangible and intangible, of the CBOT subsidiary as of the time of the board approval of the proposed sale, as determined by the board of directors of the CBOT subsidiary, in its sole and absolute discretion. The board of directors of the CBOT subsidiary will determine, in its sole and absolute discretion, whether any business is in competition with the then existing business of the CBOT subsidiary (which will also include any businesses proposed as of such time).

 

The board of directors of CBOT Holdings will have the authority to, among other things, adopt and recommend for approval by the holders of the Class A common stock of CBOT Holdings amendments to the certificate of incorporation of CBOT Holdings. Any amendment to the certificate of incorporation of CBOT Holdings will require the approval of the board of directors of CBOT Holdings and the approval of a majority of the outstanding shares of Class A common stock of CBOT Holdings, voting together as a single class. In addition, the board of directors of CBOT Holdings will have the authority to adopt, amend or repeal the bylaws of CBOT Holdings without the approval of stockholders. However, the holders of the Class A common stock of CBOT Holdings will also have the right to initiate, without the approval of the board of directors of CBOT Holdings, proposals to adopt, repeal or amend the bylaws of CBOT Holdings. They can also make non-binding recommendations that the board of directors of CBOT Holdings consider proposals that, as a matter of Delaware corporation law, require the approval of the board of directors of CBOT Holdings. You should understand, however, that the board of directors of CBOT Holdings will consider such non-binding recommendations in accordance with its fiduciary duties under applicable law and, accordingly, there can be no assurance that the board of directors of CBOT Holdings will approve any such proposal.

 

Proposals by the holders of the Class A common stock of CBOT Holdings may be initiated at an annual or special meeting of the stockholders of CBOT Holdings after satisfying certain advance notice requirements and, subject to applicable law, will require the approval of a majority of the votes cast at such annual or special meeting. The bylaws of CBOT Holdings will provide that one-third of the common stock of CBOT Holdings entitled to vote on a matter must be present in person or by proxy to constitute a quorum.

 

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CBOT Subsidiary. The CBOT subsidiary will have a corporate governance structure that is designed to vest control of corporate governance matters generally with the holders of Series B-1 and B-2 memberships in the CBOT subsidiary, including with regard to amendments to the certificate of incorporation and bylaws of the CBOT subsidiary, but provides CBOT Holdings, as the holder of the Class A membership in the CBOT subsidiary, with certain limited voting rights.

 

In particular, Series B-1 and B-2 members of the CBOT subsidiary will have the exclusive right among members to vote on any proposals to amend the certificate of incorporation of the CBOT subsidiary approved by the board of directors and to initiate and vote on any proposals to amend the bylaws of the CBOT subsidiary whether or not approved by the board of directors. In addition, Series B-1 and B-2 members of the CBOT subsidiary will have the exclusive right among members to vote on proposals by the board of directors of the CBOT subsidiary to amend the bylaws of the CBOT subsidiary in a manner that would adversely affect the core rights described below. Under Delaware corporation law, proposals to amend the certificate of incorporation must be adopted and approved by the board of directors of the CBOT subsidiary prior to being submitted to Series B-1 and B-2 members of the CBOT subsidiary for their approval. However, Series B-1 and B-2 members of the CBOT subsidiary can also make non-binding recommendations that the board of directors consider proposals that, as a matter of Delaware corporation law, require the approval of the board of directors of the CBOT subsidiary. You should understand, however, that the board of directors of the CBOT subsidiary will consider such non-binding recommendations in accordance with its fiduciary duties under applicable law and, accordingly, there can be no assurance that the board of directors of the CBOT subsidiary will approve any such proposal.

 

The board of directors of the CBOT subsidiary will also have the right to amend the bylaws of the CBOT subsidiary. However, the approval of the Series B-1 and B-2 members of the CBOT subsidiary will be required to amend the bylaws of the CBOT subsidiary in a manner that would adversely affect the following core rights:

 

  Ÿ the allocation of products that a holder of a specific series of Class B membership is permitted to trade on the exchange facilities of the CBOT subsidiary, e.g., the elimination of any product from a holder’s trading rights and privileges;

 

  Ÿ the requirement that, subject to certain limited exceptions agreed to by the CBOT and the CBOE, holders of Class B memberships will be charged transaction fees for trades of the CBOT subsidiary’s products for their accounts that are lower than the transaction fees charged to any participant who is not a holder of a Class B membership for the same products;

 

  Ÿ the membership and eligibility requirements to become a holder of a Class B membership or to exercise the associated trading rights or privileges;

 

  Ÿ the commitment to maintain current open outcry markets so long as each such market is deemed liquid under the terms of the certificate of incorporation of the CBOT subsidiary (this commitment to maintain current open outcry markets is described further below at “—Commitment to Maintain Open Outcry Markets”); and

 

  Ÿ   the requirement that any proposal to offer electronic trading between the hours of 6:00 a.m., Central Time, and 6:00 p.m., Central Time, of agricultural contracts or agricultural products currently traded on our open outcry markets be approved by the Series B-1 and B-2 members of the CBOT subsidiary.

 

Member proposals may be initiated at an annual meeting of the members of the CBOT subsidiary or, after satisfying certain advance notice requirements, a special meeting of the members of the CBOT subsidiary and, subject to applicable law, will require the approval of a majority of votes cast at such special or annual meeting.

 

On such matters, Series B-1 members of the CBOT subsidiary will be entitled to one vote per membership and Series B-2 members of the CBOT subsidiary will be entitled to one-sixth of one vote per membership. These voting rights are based on the current voting rights of Full Members and Associate Members of the CBOT. The Series B-3, B-4 and B-5 members of the CBOT subsidiary will not have the right to vote on any matters or to initiate any proposals. Subject to applicable law and subject to the right of the Series B-1 and B-2 members of the

 

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CBOT subsidiary to vote to discontinue a market, which shall require a vote of a majority of the voting power of the then outstanding Series B-1 and B-2 members of the CBOT subsidiary, the affirmative vote of a majority of the votes cast at any annual or special meeting called for such purpose shall be sufficient to constitute approval of all matters upon which the Series B-1 and B-2 members of the CBOT subsidiary are entitled to vote, provided that quorum requirements have been met.

 

The bylaws of the CBOT subsidiary will provide that the holder of the sole Class A membership in the CBOT subsidiary must be present in person or by proxy to constitute a quorum on matters upon which the holder of the Class A membership is entitled to vote and that one-third of the voting power of the Class B members entitled to vote must be present in person or by proxy in order to constitute a quorum on matters upon which Series B-1 and B-2 members of the CBOT subsidiary are entitled to vote. Based on the respective voting power of these two series of Class B memberships in the CBOT subsidiary, any matter voted upon by the holders of such series could be approved by the Series B-1 members of the CBOT subsidiary even though the Series B-2 members of the CBOT subsidiary voted against the amendment. This result is consistent with the result that would be obtained under the CBOT’s existing certificate of incorporation, bylaws and rules and regulations with respect to matters voted on by Full Members and Associate Members as a single class based on their respective voting rights.

 

CBOT Holdings, as the holder of the sole Class A membership in the CBOT subsidiary, will have the right to vote on all matters not reserved to the Series B-1 and B-2 members of the CBOT subsidiary. In addition, CBOT Holdings, as the holder of the sole Class A membership in the CBOT subsidiary, will have the right to vote on any proposal to merge the CBOT subsidiary with a third party, to sell a significant amount of the CBOT subsidiary’s assets to a third party, to cause the CBOT subsidiary to acquire, invest in or enter into a business in competition with the then existing business of the CBOT subsidiary or to dissolve or liquidate the CBOT subsidiary. For these purposes, a “significant amount” of assets means 10% of the fair market value of the assets of CBOT Holdings, both tangible and intangible, as of the time of the board approval of the proposed sale, as determined by the board of directors in its sole and absolute discretion. The board of directors of the CBOT subsidiary will determine, in its sole and absolute discretion, whether any business is in competition with the then existing business of the CBOT subsidiary (which will also include any businesses proposed as of such time). It will require the consent of the holders of a majority of the outstanding shares of Class A common stock of CBOT Holdings (who will, at least until a second approval, consist only of persons who are also members of the CBOT subsidiary) for CBOT Holdings, as the holder of the sole Class A membership in the CBOT subsidiary, to vote in favor of any such proposal.

 

As described in greater detail elsewhere in this document, pursuant to the terms of the settlement agreement, until a change of control of the CBOT subsidiary, the CBOT subsidiary will be contractually prohibited from adopting an amendment to its certificate of incorporation, bylaws or rules and regulations, as in effect as of February 2, 2004, that adversely affects the contract trading rights of Associate Members, GIMs, IDEMs and COMs.

 

Commitment to Maintain Open Outcry Markets.    The certificate of incorporation of the CBOT subsidiary will provide that, subject to the following terms and conditions, the CBOT subsidiary will be obligated to maintain current open outcry markets and provide financial support to each such market for technology, marketing and research, which the board of directors determines, in its sole and absolute discretion, is reasonably necessary to maintain each such open outcry market.

 

Notwithstanding the foregoing, the board of directors of the CBOT subsidiary may discontinue any current open outcry market at such time and in such manner as it may determine, if it determines, in its sole and absolute discretion, that a market is no longer “liquid” in accordance with the criteria described below or the holders of a majority of the voting power of the then outstanding Series B-1 and B-2 memberships in the CBOT subsidiary, voting together as a single class based upon their respective voting rights, approve the discontinuance of such open outcry market. A market is “liquid” for this purpose if, as measured on a quarterly basis:

 

  Ÿ a comparable exchange-traded product exists, the open outcry market has maintained at least 30 percent (30%) 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

 

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  Ÿ no comparable exchange-traded product exists, the open outcry market has maintained at least 40 percent (40%) of the average quarterly volume in that market as maintained by the CBOT in 2001 (including, for calculation purposes, volume from exchange-for-physicals transactions in such open outcry market).

 

The commitment to maintain open outcry markets will not apply to markets introduced following the completion of the restructuring transactions.

 

Board of Directors.    After the completion of the restructuring transactions, there will be two boards of directors, one for CBOT Holdings and one for the CBOT subsidiary, rather than the single board of directors of the CBOT that exists today. However, as explained in greater detail below, we currently expect that the same persons will serve on both of these boards.

 

The directors serving on the board of directors of the CBOT immediately prior to the completion of the restructuring transactions will continue as directors on both the boards of directors of CBOT Holdings and the CBOT subsidiary immediately following the completion of the restructuring transactions. The size, composition and classification of the boards of directors of CBOT Holdings and the CBOT subsidiary will not change until the 2006 annual meeting of the stockholders of CBOT Holdings, which is expected to occur in the first or second quarter of 2006. The continuing directors will serve for the duration of their current terms with the exception of the public directors, whose terms will end in connection with the 2006 annual meeting of the stockholders of CBOT Holdings.

 

The size of the board of directors of CBOT Holdings will be reduced from 18 directors to 16 directors in connection with the 2006 annual meeting of the stockholders of CBOT Holdings. The board of directors of CBOT Holdings will then consist of the Chairman of the Board, who will be a Series B-1 member of the CBOT subsidiary; a Vice Chairman of the Board, who will be a Series B-1 member of the CBOT subsidiary; eight directors, who will be Series B-1 members of the CBOT subsidiary; two directors, who will be Series B-2 members of the CBOT subsidiary; three directors, who will be “independent” within the meaning of the certificate of incorporation and bylaws of CBOT Holdings; and the President and Chief Executive Officer of CBOT Holdings, who will be a non-voting director.

 

Except as described below, each director of CBOT Holdings will be elected to serve as a director until the second annual meeting following his or her election and will not be subject to term limits. Directors shall be entitled to serve only so long as they retain the qualifications of the directorship for which they were nominated and elected. For information regarding the executive officers of CBOT Holdings, see “Management and Executive Compensation—Directors and Executive Officers.”

 

In connection with the 2006 annual meeting of the stockholders of CBOT Holdings, the elected directors of CBOT Holdings will be classified into two classes of directors consisting of eight directors and seven directors, respectively. The first class of directors will consist of the Chairman of the Board; four directors, who will be Series B-1 members of the CBOT subsidiary; one director, who will be a Series B-2 member of the CBOT subsidiary; and two independent directors. The second class of directors will then consist of the Vice Chairman of the Board; four directors, who will be Series B-1 members of the CBOT subsidiary; one director, who will be a Series B-2 member of the CBOT subsidiary; and one independent director. The President and Chief Executive Officer will, upon appointment to such position, automatically become a non-voting director.

 

The members of the board of directors of CBOT Holdings will be automatically designated as members of the board of directors of the CBOT subsidiary upon their election to the board of directors of CBOT Holdings. In addition, it will be a qualification for service as a director of the CBOT subsidiary that such director also serve at the same time on the board of directors of CBOT Holdings.

 

Nomination Procedures for Directors. The members of the nominating committee of the CBOT immediately prior to the completion of the restructuring transactions will continue as members of the nominating committee of CBOT Holdings immediately following the completion of the restructuring transactions. The continuing members of the nominating committee will serve for the duration of their current terms.

 

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Beginning with the 2006 annual meeting of the stockholders of CBOT Holdings, the holders of Class A common stock of CBOT Holdings will have the right to elect a nominating committee to recommend to the board of directors nominations of persons to stand for election as directors of CBOT Holdings. The nominating committee will be composed of five holders of Class A common stock of CBOT Holdings, four of whom will be Series B-1 members of the CBOT subsidiary and the fifth of whom will be a Series B-2 member of the CBOT subsidiary. Except as described below, each member of the nominating committee of CBOT Holdings will be elected to serve as a member of the nominating committee until the third annual meeting following his or her election. No member of the nominating committee may be elected or appointed to serve again as a member of the nominating committee until the third annual meeting following the annual meeting at which his or her term ended. However, there is no other limit to the number of terms a member of the nominating committee may serve.

 

Although the nominating committee will provide nominations to the board of directors of CBOT Holdings, the board of directors of CBOT Holdings will make an independent determination, in accordance with its fiduciary duties, to nominate individuals to serve as directors. The nominating committee will also be responsible for nominating individuals to serve as members on the nominating committee. In addition to nominations recommended by this committee, the holders of Class A common stock of CBOT Holdings will also be entitled to nominate persons to stand for election as directors of CBOT Holdings if the nominee is qualified and the stockholder satisfies certain advance notice requirements. If the stockholder satisfies each of these conditions and delivers a petition executed by at least 40 persons, each of whom is both a Class A common stockholders of CBOT Holdings and a Series B-1 member of the CBOT subsidiary, CBOT Holdings will, to the extent it prepares and delivers a proxy statement and form of proxy, at its own expense, include the name of such nominee and all other information related to such nominee, that is provided with respect to the board of directors’ nominees in such proxy statement and form of proxy.

 

Change of Control Provisions. CBOT Holdings’ certificate of incorporation and bylaws will contain certain provisions that may have the effect of encouraging persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with the board of directors rather than pursue non-negotiated takeover attempts. The provisions include:

 

  Ÿ   a classified board of directors with staggered terms of office;

 

  Ÿ advance notice requirements for Class A common stockholder proposals;

 

  Ÿ application of the Delaware anti-takeover statute; and

 

  Ÿ a prohibition on the ability of Class A common stockholders to take action by written consent.

 

Changes in Corporate Governance and Capital Structure After a Second Approval

 

General. The restructuring transactions are designed to create a framework to facilitate public markets for the equity securities of CBOT Holdings, capital-raising transactions and other securities issuances following a second approval. In particular, certain changes to our corporate governance and capital structure will be implemented, either at that time or in connection with a qualified initial public offering of CBOT Holdings, if and when the holders of a majority of the outstanding Class A common stock approve a proposition to provide the board of directors of CBOT Holdings the authority to approve the issuance of additional authorized capital stock without further action by the stockholders.

 

For these purposes, a qualified initial public offering of CBOT Holdings means a public offering of Class A common stock, which has occurred following a second approval, that has been underwritten by one or more nationally recognized underwriting firms, following which shares of Class A common stock are listed on a national securities exchange. A qualified initial public offering of CBOT Holdings could be an offering of newly-issued shares by CBOT Holdings, an offering of shares owned by CBOT Holdings stockholders or a combination of both, as determined by the board of directors of CBOT Holdings.

 

Although the completion of the restructuring transactions will establish the framework for the further changes to our corporate governance and capital structure that will become effective upon a second approval, you

 

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are not being asked to give a second approval at this time. We currently intend to solicit a second approval from the CBOT Holdings stockholders as soon as reasonably practicable following the completion of the restructuring transactions. However, you should understand that we are not obligated to seek a second approval and thus we cannot assure you as to whether or when it will occur. Further, even if we were to seek a second approval in the future, we cannot assure you that it would be obtained. Therefore, it is possible that the changes described above may never take effect and thus the objectives described above may never be realized. Even if these changes were to take effect after a second approval, we cannot assure you that we will be able to achieve the expected benefits, such as the creation of public markets for our equity securities or the financial flexibility to engage in capital-raising or other transactions.

 

We would only seek a second approval after the restructuring transactions are completed if we determine, as of that time, that to do so remains in the best interests of CBOT Holdings and its stockholders. Our decision with respect to whether and when we would seek a second approval will depend on a number of factors, including:

 

    our assessment of the feasibility of achieving the objectives of the changes to be implemented upon a second approval;

 

    then current market conditions, including their effect on our ability to facilitate public markets for our equity securities;

 

    our assessment of our need for the financial flexibility to engage in capital-raising or other transactions;

 

    other conditions affecting the business of CBOT Holdings, including the business of the CBOT subsidiary.

 

Finally, we note that certain of the changes to our corporate governance and capital structure that would occur upon a second approval could reduce even further the influence of the members in the day-to-day management and operations of our business. See “Risk Factors—Risks Relating to a Second Approval.”

 

Authorized Capital Stock. Under its certificate of incorporation, immediately following the completion of the restructuring transactions, the authorized capital stock of CBOT Holdings will consist of:

 

  Ÿ   200,000,000 shares of Class A common stock, initially divided into unrestricted Class A common stock and three series of restricted Class A common stock, designated Series A-1, A-2 and A-3;

 

  Ÿ   one share of Class B common stock; and

 

  Ÿ   20,000,000 shares of preferred stock.

 

Immediately following the completion of the restructuring transactions, there will be 150,640,164 authorized and unissued shares of Class A common stock, one authorized and unissued share of Class B common stock and 20,000,000 authorized and unissued shares of preferred stock of CBOT Holdings. However, the board of directors of CBOT Holding will not have the ability to approve the issuance of any such additional authorized and unissued capital stock unless and until a second approval has occurred. Upon the occurrence of a second approval, CBOT Holdings would have the ability to issue additional shares of capital stock, including in connection with a public offering of shares of capital stock to investors who are not also members in the CBOT subsidiary, which could result in the ownership of CBOT Holdings being shared with persons who are not also members of the CBOT subsidiary.

 

In the event that a second approval has occurred, it is anticipated that the board of directors of CBOT Holdings would approve the issuance of the share of Class B common stock of CBOT Holdings to the subsidiary voting trust only in connection with the completion of a qualified initial public offering. The “subsidiary voting trust” will be a voting trust formed solely for the purpose of holding the share of Class B common stock of CBOT Holdings and exercising the limited voting rights associated with the Class B common stock of CBOT Holdings described below at “—Board of Directors.”

 

Transfer Restrictions. If and when a second approval has occurred, additional exceptions to the transfer restrictions applicable to the Class A common stock of CBOT Holdings will become effective. In particular,

 

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subject to the right of CBOT Holdings to organize sales of Class A common stock, as described more fully below at “—Organized Sales,” the transfer restrictions applicable to the Series A-1, A-2 and A-3 common stock of CBOT Holdings will effectively terminate following the completion of a qualified initial public offering, with the transfer restrictions on Series A-1, A-2 and A-3 common stock of CBOT Holdings expiring 180, 360 and 540 days, respectively, following such qualified initial public offering and such shares converting into unrestricted Class A common stock of CBOT Holdings. If, after a second approval has occurred, a qualified initial public offering has not occurred within three years of a second approval, the transfer restrictions discussed above will expire and all outstanding Series A-1, A-2 and A-3 common stock of CBOT Holdings will automatically convert into unrestricted Class A common stock of CBOT Holdings 180, 360 and 540 days, respectively, following the date that is three years after a second approval.

 

In addition, if and when a second approval occurs, certain additional exceptions to the general transfer restrictions discussed above, which we refer to as “permitted transfers,” will take effect:

 

  Ÿ   “conversion transfers,” in which Series A-1, A-2 and A-3 common stock of CBOT Holdings is converted into unrestricted Class A common stock of CBOT Holdings in connection with transfers to CBOT Holdings, transfers in a qualified initial public offering or an organized sale of Class A common stock, transfers to satisfy claims by the CBOT subsidiary or Class B Members of the CBOT, and other conversion transfers approved by the board of directors of CBOT Holdings; and

 

  Ÿ   “non-conversion transfers,” in which Series A-1, A-2 and A-3 common stock of CBOT Holdings is not converted into unrestricted Class A common stock of CBOT Holdings and remains subject to transfer restrictions in connection with transfers of the related Class B membership in the CBOT subsidiary, transfers to certain family members for estate planning or education purposes, bona fide pledges to lending institutions to secure trading right purchases, pledges to clearing members and other non-conversion transfers approved by the board of directors of CBOT Holdings.

 

After a second approval, the board of directors of CBOT Holdings will have the ability to reduce or eliminate the general transfer restrictions applicable to the Series A-1, A-2 and A-3 common stock of CBOT Holdings. Also, if and when a second approval occurs, the reciprocal restrictions on transfer applicable to Class B memberships in the CBOT subsidiary will terminate and Class B memberships in the CBOT subsidiary will thereafter be freely transferable without the applicable Series A-1, A-2 and A-3 common stock of CBOT Holdings, subject to satisfaction of any applicable membership requirements of the CBOT subsidiary.

 

Organized Sales. After the completion of a qualified initial public offering, CBOT Holdings will have the right to conduct organized sales of Class A common stock of CBOT Holdings received immediately following, and as a result of, the restructuring transactions when the transfer restriction period applicable to the Series A-1, A-2 and A-3 common stock of CBOT Holdings is scheduled to expire. The purpose of this right is to enable CBOT Holdings to facilitate a more orderly distribution of Class A common stock of CBOT Holdings into the public marketplace. If CBOT Holdings elects to conduct an organized sale, no shares of the Series A-1, A-2 or A-3 common stock of CBOT Holdings for which transfer restrictions are scheduled to lapse or of any other series that is subject to transfer restrictions may be sold during the applicable transfer restriction period, except as part of the organized sale or in a permitted transfer.

 

In order for CBOT Holdings to elect to conduct an organized sale, it must provide the holders of Series A-1, A-2 and A-3 common stock of CBOT Holdings with a written notice of election to conduct an organized sale of the applicable series of Class A common stock for which transfer restrictions are scheduled to expire at least 60 days prior to the scheduled expiration of the applicable transfer restriction period. Holders of such series of Class A common stock of CBOT Holdings will have 20 days following receipt of that notice to provide CBOT Holdings with written notice of intent to participate in the organized sale with respect to such series, any other series that remain subject to transfer restrictions and any unrestricted Class A common stock of CBOT Holdings. The written notice must specify the series of Class A common stock of CBOT Holdings and the number of shares thereof and the number of shares of unrestricted Class A common stock of CBOT Holdings that the holder has elected to include in the applicable organized sale. If such holders do not provide written notice to CBOT

 

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Holdings during that 20-day period, they will be deemed to have elected not to include any shares in the organized sale.

 

The actual number of shares that may be sold in an organized sale will depend on, among other things, the number of primary shares the board of directors of CBOT Holdings determines that CBOT Holdings will offer for its own account, market conditions, investor demand and the requirements of any underwriters or placement agents, and may be fewer than the aggregate number requested by stockholders to be included in the organized sale. In such event, there will be a reduction in the number of shares that individual holders may sell based on a cut-back formula to be adopted by the board of directors of CBOT Holdings. In the event of a “cut-back,” priority will be given first to shares of the series then scheduled to be released, second to shares of a series scheduled to be released from transfer restrictions at a later date and finally to unrestricted Class A common stock of CBOT Holdings. The organized sale may take the form of an underwritten secondary offering, a private placement of Class A common stock to one or more purchasers, a repurchase of Class A common stock by CBOT Holdings or a similar process selected by the board of directors of CBOT Holdings. The stockholders’ right to participate in an organized sale will be contingent upon the execution of all agreements, documents and instruments required to effect such sale, including, if applicable, an underwriting agreement.

 

CBOT Holdings may proceed with the sale of fewer than all of the shares that have been requested to be included in an organized sale, including less than all of the shares of the series scheduled for release at the expiration of the related transfer restriction period. Additionally, CBOT Holdings will be under no obligation to complete the organized sale.

 

If less than all of the shares of the series scheduled to be released that a stockholder requests be sold in the related organized sale are sold in such organized sale, or the stockholder elects not to include all of the shares of the series scheduled for release in the applicable organized sale, the stockholder will be able to sell, on the 91st day after the later of the expiration of the related transfer restriction period and the completion of the organized sale, any of those shares that were not sold or included.

 

If CBOT Holdings elects to conduct an organized sale and does not complete such organized sale before 60 days after the expiration date of the related transfer restriction period, the shares of the series then scheduled to be released will convert into unrestricted Class A common stock and the stockholders will be able to sell such shares on the 61st day after the expiration date of the related transfer restriction period. However, if CBOT Holdings elects to conduct an organized sale undertaken in conjunction with the scheduled expiration of transfer restrictions applicable to the Series A-3 common stock of CBOT Holdings and does not complete such organized sale before 540 days following a qualified initial public offering, the Series A-3 common stock will convert into unrestricted Class A common stock and the stockholders will be able to sell such shares on the expiration date of the transfer restriction period applicable to the Series A-3 common stock.

 

If CBOT Holdings elects not to conduct an organized sale at the time of any scheduled expiration of transfer restriction applicable to a series of Class A common stock of CBOT Holdings, the shares of that series for which transfer restrictions are scheduled to expire will automatically convert into unrestricted Class A common stock of CBOT Holdings and the stockholders will be able to sell such shares at the expiration of the applicable transfer restriction period.

 

Boards of Directors. In connection with a qualified initial public offering, the boards of directors of CBOT Holdings and the CBOT subsidiary will be reconstituted such that each is composed of 17 directors and classified into two classes of nine and eight directors, respectively, each elected to serve for two-year terms. On each board of directors, there will be 11 directors designated as “parent directors” and six directors designated as “subsidiary directors.” The six subsidiary directors will consist of four Series B-1 members of the CBOT subsidiary and two Series B-2 members of the CBOT subsidiary. Of the 17 directors, at least nine will be independent within the meaning of the certificate of incorporation and bylaws of CBOT Holdings. The board of directors of CBOT Holdings will be elected exclusively by the holders of the Class A common stock and the holder of the Class B common stock beginning with the first annual election following completion of a qualified initial public offering. The subsidiary voting trust, which will hold the sole share of Class B common stock, will, in accordance with its terms, vote to elect the subsidiary directors (who, as described below, will be elected as directors of the CBOT

 

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subsidiary by the Series B-1 and B-2 members of the CBOT subsidiary). The holders of Class A common stock will not have the right to vote in the election of the subsidiary directors.

 

The board of directors of the CBOT subsidiary will be designated or elected as follows: the 11 parent directors will be directors that are not elected but rather automatically designated as members of the board of directors of the CBOT subsidiary upon their election to the board of directors of CBOT Holdings and the six subsidiary directors will be elected, for two year terms, exclusively by the Series B-1 and B-2 members of the CBOT subsidiary beginning with the first annual election following the completion of a qualified initial public offering.

 

Upon the completion of a qualified initial public offering, the Chairman of the Board and Vice Chairman of the Board of both CBOT Holdings and the CBOT subsidiary will be appointed by their respective boards of directors. It is anticipated that the President and Chief Executive Officer of CBOT Holdings will be nominated and elected to serve as one of the parent directors. If nominated and elected, the President and Chief Executive Officer will be a voting member of the boards of directors of CBOT Holdings and the CBOT subsidiary, with the same rights and privileges as other members of the boards of directors.

 

Board Nomination Procedures. In connection with a qualified initial public offering, the nominating committee of CBOT Holdings will be reconstituted and shall thereafter be a committee of the board of directors of CBOT Holdings, composed entirely of at least three independent members of the board of directors of CBOT Holdings who have been appointed by the board of directors of CBOT Holdings. In addition, upon the completion of a qualified initial public offering, the Series B-1 and B-2 members of the CBOT subsidiary will have the right to elect a nominating committee of the CBOT subsidiary to recommend to the board of directors of the CBOT subsidiary nominations of persons to stand for election as subsidiary directors. The nominating committee will be composed of four Series B-1 members of the CBOT subsidiary and one Series B-2 member of the CBOT subsidiary.

 

Voting Rights—Right to Call Special Meetings. Upon the completion of a qualified initial public offering, the stockholders of CBOT Holdings will no longer have the right to require CBOT Holdings to call special meetings of the stockholders.

 

Governing Documents Upon the Completion of Restructuring Transactions

 

You are being asked to approve the amended and restated bylaws of the CBOT, which will become the bylaws of the CBOT subsidiary; technical amendments to the current bylaws of the CBOT identifying the holders of Full and Associate Memberships, GIMs, IDEMs and COMs and clarifying the status of holders of GIM, IDEM and COM membership interests as members of the CBOT for purposes of Delaware corporation law; and the proposed changes to our corporate governance structure as set forth in a new certificate of incorporation and bylaws of CBOT Holdings and the CBOT subsidiary as part of the restructuring transactions. We have included the form of the certificate of incorporation and bylaws of CBOT Holdings as Appendices E and F, respectively, to this document. In addition, we have included the form of the certificate of incorporation and bylaws of the CBOT subsidiary as Appendices G and H, respectively, to this document. Last, we have included the text of the proposed technical amendments to the current bylaws of the CBOT as Appendix I to this document.

 

The certificate of incorporation and bylaws of CBOT Holdings will become effective prior to the time the merger becomes effective, and the certificate of incorporation and bylaws of the CBOT subsidiary will become effective at the time the merger becomes effective. The technical amendments to the CBOT’s current bylaws will become effective immediately following membership approval of the restructuring transactions. By voting in favor of the propositions relating to the restructuring transactions, you will be voting to approve and adopt, among other things, this amendment to the CBOT bylaws in advance of the completion of the restructuring transactions. We urge you to review carefully all of the terms and conditions of the certificate of incorporation and bylaws of each of CBOT Holdings and the CBOT subsidiary before voting on the propositions relating to the restructuring transactions.

 

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In addition, you are being asked to approve certain changes to the rules and regulations of the CBOT. We currently expect that these changes to our rules and regulations will take effect at the time that the certificate of incorporation of the CBOT subsidiary becomes effective. The form of the rules and regulations of the CBOT subsidiary as we currently expect such rules and regulations to be implemented immediately after the restructuring transactions (subject to other changes to the rules and regulations occurring after the date of this document), as well as the current rules and regulations of the CBOT, have been filed as exhibits to the registration statement of which this document is a part. We have included as Appendix J to this document a summary entitled “Status of Certain Current CBOT Rules and Regulations as a Result of the Restructuring Transactions,” which summarizes the changes to certain of the current rules and regulations that will occur as a result of the restructuring transactions. We urge you to review carefully the summary of the changes to the rules and regulations as well as the above-referenced exhibits before voting on the propositions relating to the restructuring transactions.

 

For more information about these changes to our corporate governance structure, and how such changes will affect your rights and obligations, see “Comparison of the Rights of Members of the CBOT Prior to and After Completion of the Restructuring Transactions and After a Second Approval and Initial Public Offering.”

 

Allocation of CBOT Equity Ownership Interests Among CBOT Members in the Restructuring Transactions

 

General. The methodology for allocating the equity of CBOT Holdings among the five classes of CBOT memberships in the restructuring transactions was established by the terms of the settlement agreement. All of the equity ownership interests of the CBOT will be allocated among the CBOT members as Class A common stock of CBOT Holdings in the restructuring transactions in accordance with the settlement allocation established by the settlement agreement.

 

Independent Allocation Committee and its Recommended Allocation. Since no mechanism exists in our certificate of incorporation, bylaws or rules and regulations for allocating ownership in our organization among our members in connection with a restructuring such as that contemplated by the restructuring transactions, our board of directors in 2000 appointed a special committee of the board of directors, composed solely of public or independent directors of the board, to develop and recommend for adoption by the full board an appropriate and fair allocation among the CBOT members of shares of common stock in the restructured organization. This committee, designated as the independent allocation committee, recommended to the board of directors as fair the allocation ratio, which provided for an allocation of shares of common stock of CBOT Holdings among the CBOT members in respect of their memberships in connection with the restructuring transactions in the ratio of 5.0 : 1.0 : 0.5 : 0.06 : 0.07 to each Full Member, Associate Member, GIM, IDEM and COM, respectively. An initial report regarding such allocation ratio was made by the independent allocation committee to the full board in May 2000. In addition, several updated reports and recommendations were made by the independent allocation committee to the full board at various times during 2000, 2001 and 2002. Our board of directors previously adopted this recommendation of the independent allocation committee regarding an allocation methodology in connection with earlier contemplated restructuring proposals that were not submitted to CBOT members and have been abandoned, as described in greater detail elsewhere in this document.

 

In reaching its conclusion regarding the allocation ratio, the independent allocation committee received and considered an opinion of William Blair & Company, L.L.C. generally to the effect that such allocation ratio was fair from a financial point of view to each of the five classes of CBOT members. William Blair was retained by the independent allocation committee as the committee’s financial advisor to assist it in developing a recommendation with respect to the allocation and to deliver its written opinion as to the fairness, from a financial point of view, of the allocation of shares of common stock in the restructured organization among the CBOT members in respect of their memberships in connection with the restructuring transactions. As described more fully below, however, the allocation ratio will not be used in the restructuring transactions. Instead, the allocation of Class A common stock of CBOT Holdings will be made in accordance with the settlement allocation established by the settlement agreement. William Blair has not been asked to render, nor has it

 

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rendered, an opinion with respect to the settlement allocation. Similarly, the independent allocation committee has not been asked to make, nor has it made, a recommendation with respect to the settlement allocation.

 

Lawsuit Brought by Certain Associate Members, GIMs, IDEMs and COMs. In August 2000, certain Associate Members, GIMs, IDEMs and COMs initiated a lawsuit against certain Full Members, alleging that the allocation developed and recommended by our independent allocation committee was unfair and the allocation methodology used by the independent allocation committee improperly weighted members’ voting and liquidation rights as well as the historical distribution of market values of memberships. The plaintiffs sought a declaratory judgment that the allocation ratio was unfair to Associate Members, GIMs, IDEMs and COMs, and that the vote of Full Members in favor of the allocation ratio in connection with the restructuring transactions would constitute a breach of fiduciary duties allegedly owed by Full Members to Associate Members, GIMs, IDEMs and COMs. The complaint requested that the court enjoin Full Members from voting in favor of the allocation ratio and declare that the allocation ratio was unfair.

 

For more information about this lawsuit, see “Our Business—Legal Proceedings—Lawsuit Brought By Certain Associate Members, GIMs, IDEMs and COMs.”

 

Settlement of the Lawsuit Brought by Certain Associate Members, GIMs, IDEMs and COMs. In January 2004, the board of directors approved a binding memorandum of understanding between the CBOT and representatives of a certified class of plaintiffs consisting of the Associate Members, GIMs, IDEMs and COMs, which was executed on January 21, 2004, to settle such lawsuit with the understanding that a settlement agreement reflecting the terms of the binding memorandum of understanding would later be executed. In so approving the binding memorandum of understanding, the board of directors had concluded that the proposed settlement was in the best interests of the CBOT and its members and fair to all classes of CBOT members. The settlement agreement, which was executed on February 6, 2004, was subsequently approved by the Circuit Court of Cook County, Illinois in a final judgment order entered on September 20, 2004 as fair, adequate and reasonable and in the best interest of all CBOT members.

 

The Circuit Court entered the final judgment order following a settlement hearing conducted following notice to all members of the plaintiff and defendant classes, which included all Full and Associate Members, GIMs, IDEMs and COMs, at which such members had the opportunity to be heard with respect to the settlement agreement. The notice provided to members of the plaintiff and defendant classes (that is, all Full and Associate Members, GIMs, IDEMs and COMs), which was reviewed and approved by the Circuit Court, included disclosure regarding the material provisions of the settlement agreement in plain terms and was accompanied by a copy of the settlement agreement.

 

The final judgment order reviewed in detail the history of the lawsuit, including the proposed allocation of equity that became the subject of the lawsuit. In reviewing the history of the lawsuit and the proceedings that led to the Circuit Court’s consideration of the proposed settlement agreement, the Circuit Court believed that the Illinois Appellate Court had determined that the market value of the memberships was the most significant factor to be used in determining the allocation of CBOT equity and that this was an important factor underlying the Illinois Appellate Court’s decision with regard to the allocation methodology developed and recommended by the independent allocation committee of the board of directors.

 

In its order, the Circuit Court then analyzed the settlement agreement in accordance with the following factors: the strength of the plaintiff’s case balanced against the money or other relief offered in the settlement, defendant’s ability to pay, the complexity, length and expense of further litigation, amount of opposition to the settlement, presence of collusion in reaching the settlement, reaction of members of the class to the settlement, opinion of competent counsel and stage of the proceedings and the amount of discovery completed.

 

The statutory period for filing a notice of appeal of the Circuit Court’s order expired, and the Circuit Court’s order become final and non-appealable, on October 20, 2004.

 

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Settlement Agreement and Settlement Allocation. The settlement agreement provides, among other things, that any proposal approved by the CBOT board of directors that contemplates (a) a restructuring, recapitalization, consolidation, merger or sale of all or substantially all of the assets of the CBOT, or a sale, transfer or distribution by the CBOT of equity ownership interests (i.e., all common, preferred and other equity interests of any kind or nature) in the CBOT, and (b) an allocation by the CBOT of equity ownership interests in the CBOT among the classes of CBOT memberships will include a proposed allocation of equity ownership interests in the CBOT among the classes of CBOT memberships in accordance with an agreed settlement allocation.

 

The settlement allocation provides that, of the CBOT equity to be distributed to CBOT members in any such restructuring, Full Members would receive 77.65%, in the aggregate, and Associate Members, GIMs, IDEMs and COMs would receive 22.35%, in the aggregate, of the CBOT equity to be distributed to CBOT members in any such restructuring, with the 22.35% to be allocated based on the following ratio:

 

Associate Member

   1.00

GIM

   0.50

IDEM

   0.11

COM

   0.25

 

without giving effect to the plaintiff class representative compensation, as described below. Assuming 1,402 Full Members, 804 Associate Members, 126 GIMs, 641 IDEMs and 643 COMs, and after giving effect to the plaintiff class representative compensation but before allocating the plaintiff class representative compensation among the plaintiff class representatives, the settlement agreement provides for an overall allocation of CBOT equity among the CBOT members in the ratio of 2.73 : 1.00 : 0.50 : 0.11 : 0.25 to each Full Member, Associate Member, GIM, IDEM and COM, respectively.

 

The settlement agreement also provides for a compensation award to the plaintiff class representatives in the total amount of 0.10 percent of the total equity ownership interests in the CBOT allocable to the CBOT members in a restructuring for the services they rendered and risk they assumed in the prosecution of the lawsuit. Such compensation will be paid, pro rata, out of the 22.35% of CBOT equity ownership interests otherwise allocable to the Associate Members, GIMs, IDEMs and COMs upon the completion of any restructuring and will be held in the same form and manner as the CBOT equity ownership interests held by other CBOT members in connection with any restructuring contemplated by the settlement agreement.

 

The settlement agreement also provides that the CBOT will use commercially reasonable efforts to submit one or more proposals relating to a restructuring to a vote of the CBOT membership as soon as reasonably practicable following final approval of the settlement agreement by the Circuit Court of Cook County, Illinois and that the CBOT will include the settlement allocation among the proposals to be approved by the CBOT membership in connection with a restructuring. The settlement allocation is one of the propositions being submitted to Full and Associate Members for their approval pursuant to this document.

 

The CBOT’s obligations with regard to the settlement equity allocation are subject to a “sunset date,” which means that they will become null and void upon the earliest to occur of (a) completion of restructuring(s) pursuant to which all of the CBOT equity ownership interests have been allocated in accordance with the settlement equity allocation, (b) three years from the first vote by CBOT members to approve any restructuring and (c) five years from the final judgment order with respect to the settlement agreement. Because all of the equity interests of the CBOT will be distributed among the CBOT members pursuant to the settlement allocation in the restructuring transactions, the CBOT’s obligations with regard to the settlement allocation will become null and void upon the completion of the restructuring transactions. For purposes of the settlement agreement, the restructuring transactions will not be deemed to be “approved” unless and until the Full and Associate Members of the CBOT, voting together as a single class based upon their respective voting rights, approve all five of the propositions relating to the restructuring transactions.

 

For more information about the terms of the settlement agreement, see “Our Business—Legal Proceedings Lawsuit Brought By Certain Associate Members, GIMs, IDEMs and COMs.”

 

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Fairness Opinion Submitted to the Circuit Court in Support of the Settlement Allocation. In June 2004, the Law Offices of Peter B. Carey, counsel to the Chairman of the Board of the CBOT in connection with the lawsuit brought by certain Associate Members, GIMs, IDEMs and COMs challenging the allocation ratio, retained the financial advisory firm CBIZ Valuation Group, Inc. to evaluate the fairness, from a financial point of view, of the proposed allocation of equity among the five classes of memberships in a restructuring of the CBOT as contemplated by the negotiated settlement of such lawsuit. Specifically, CBIZ was engaged to provide an opinion as to the fairness of the settlement allocation for purposes of submitting such opinion to the Circuit Court on behalf of the CBOT in support of the proposed settlement of such lawsuit.

 

On August 12, 2004, CBIZ Valuation Group delivered to Mr. Peter B. Carey of the Law Offices of Peter B. Carey a written opinion as of such date that, based upon and subject to the conditions, scope of engagement, limitations and understanding set forth in such opinion, the settlement allocation is fair, from a financial point of view. On August 30, 2004, the CBIZ fairness opinion was submitted to the Circuit Court as an exhibit to that certain Memorandum of the Board of Trade of the City of Chicago, Inc. in support of Final Approval of the Class Action Settlement.

 

You should be aware that the CBIZ fairness opinion was issued after the board of directors considered and approved the settlement allocation as part of its approval of the proposed settlement of the lawsuit in January 2004 and therefore was not relied upon by the board of directors in any manner at such time. You should also be aware that the CBIZ fairness opinion was not delivered to, nor relied upon by, the board of directors in connection with its approval of the restructuring transactions, including in connection with the board of directors’ determination of the fairness of the settlement allocation to the CBOT and all classes of the membership in the context of the restructuring transactions in December 2004.

 

The full text of the CBIZ fairness opinion delivered on August 12, 2004, which sets forth the assumptions made, matters considered, and qualifications and limitations on the review undertaken, is included as an exhibit to the registration statement that includes this document. The summary of the CBIZ fairness opinion set forth in this document is qualified in its entirety by reference to the full text of the opinion.

 

As part of its financial advisory business, CBIZ Valuation Group is engaged in the business of valuing businesses and their securities in connection with mergers and acquisitions and strategic transactions and for other purposes. We understand that CBIZ Valuation Group was retained by the Law Offices of Peter B. Carey because CBIZ Valuation Group is a nationally recognized financial advisory firm with substantial experience in complex strategic transactions. Pursuant to an engagement letter, the Law Offices of Peter B. Carey agreed to pay CBIZ Valuation Group an aggregate fee of $350,000, of which $150,000 was paid on acceptance of the engagement and the balance of $200,000 was paid at the time CBIZ Valuation Group informed the Law Offices of Peter B. Carey that CBIZ Valuation Group was prepared to deliver the opinion or provide other services in support of the opinion. The Law Offices of Peter B. Carey also agreed to reimburse CBIZ Valuation Group for its reasonable out-of-pocket expenses incurred in connection with CBIZ Valuation Group’s activities under the engagement letter, including the reasonable fees and disbursements of its legal counsel, and to indemnify CBIZ Valuation Group and certain related persons and entities for certain liabilities, including liabilities under securities laws, related to or arising out of its engagement. We note that, in the opinion of the SEC, indemnification against liabilities under the U.S. federal securities laws is against public policy expressed in the Securities Act of 1933, as amended, or the “Securities Act,” and, therefore, this indemnification may be deemed unenforceable. The CBOT reimbursed the Law Offices of Peter B. Carey for all expenses incurred by it in connection with the engagement of CBIZ Valuation Group.

 

In connection with conducting its analysis and rendering its opinion, CBIZ Valuation Group, among other things:

 

  Ÿ reviewed and analyzed the settlement agreement, including its amendments;

 

  Ÿ evaluated the processes utilized by the board of directors and plaintiff class representatives in reaching the settlement agreement;

 

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  Ÿ reviewed Amendment No. 7 to the Registration Statement on Form S-4 (Reg. No. 333-72184) filed by CBOT Holdings on June 17, 2004;

 

  Ÿ analyzed business, operating and financial data of the CBOT;

 

  Ÿ analyzed voting and liquidation rights associated with each class of CBOT membership;

 

  Ÿ analyzed various trading volume statistics of the CBOT;

 

  Ÿ analyzed historical seat prices for the various membership classes;

 

  Ÿ analyzed trading rights associated with each class of CBOT membership;

 

  Ÿ analyzed the terms of other exchange demutualizations;

 

  Ÿ met with the Chairman of the Board, the CBOT’s executive management and staff, legal counsel for the Chairman of the Board, legal counsel for the board of directors, and certain members of the plaintiff class and legal counsel to the plaintiff class in the lawsuit brought by certain Associate Members, GIMs, IDEMs and COMs challenging the allocation ratio;

 

  Ÿ reviewed various court documents, the Appellate Court opinion, the fairness opinion provided by William Blair & Company in connection with the allocation ratio and the deposition of William Blair representatives in connection with the lawsuit brought by certain Associate Members, GIMs, IDEMs and COMs challenging the allocation ratio; and

 

  Ÿ conducted such other studies, analyses, inquiries and investigations as it deemed appropriate.

 

In preparing its opinion, CBIZ Valuation Group relied upon the accuracy and completeness of all publicly available information and information supplied or otherwise made available to it, discussed with or reviewed by or for it, and CBIZ Valuation Group did not assume any responsibility for independently verifying such information or undertake an independent evaluation or appraisal of any of the assets or liabilities of the CBOT, nor was it furnished with any such evaluation or appraisal.

 

Set forth below is a summary of the material financial analyses performed by CBIZ Valuation Group in connection with the preparation of the CBIZ fairness opinion. This summary does not purport to be a complete description of the analyses underlying the CBIZ fairness opinion.

 

In arriving at its opinion that the settlement allocation is fair, from a financial point of view, CBIZ Valuation Group considered various methodologies for allocating ownership among the CBOT members in respect of their memberships. In particular, CBIZ Valuation Group considered:

 

  Ÿ seat market values;

 

  Ÿ trading volume;

 

  Ÿ liquidation rights;

 

  Ÿ voting rights;

 

  Ÿ Ceres distributions; and

 

  Ÿ other exchange demutualizations.

 

In rendering this opinion, CBIZ Valuation Group observed that the relative market values of each of the classes of CBOT memberships were the most relevant indication of value because inherent in such market values were trading rights, voting rights, liquidation rights, the CBOE exercise right and trading volumes.

 

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Seat Market Values

 

Seat market values for each of the five classes of CBOT memberships were analyzed over various timeframes from July 1994 to June 2004. As part of this analysis, CBIZ Valuation Group developed median and average relative market capitalization data by each membership class, as follows:

 

Allocated Market Capitalization by Member Class

               Median

    

Current Class of CBOT

        Membership


   Seat Count(1)

   Spot
7/28/04


   2001-2004(2)

   1999-2004(3)

   1995-1999(4)

   Per
Settlement
Agreement(5)


Full

   1,402    79.5%    77.4%    79.1%    65.8%    77.7%

Associate

   802    15.6%    16.6%    15.0%    24.3%    16.3%

GIM

   128    1.5%    1.4%    1.4%    3.3%    1.4%

IDEM

   641    0.9%    1.7%    1.5%    1.4%    1.4%

COM

   643    2.5%    3.0%    3.0%    5.2%    3.2%
               Average

    

Current Class of CBOT

        Membership


   Seat Count(1)

        2001-2004(2)

   1999-2004(3)

   1995-1999(4)

   Per
Settlement
Agreement(5)


Full

   1,402         78.5%    79.9%    67.7%    77.7%

Associate

   802         15.7%    14.5%    22.4%    16.3%

GIM

   128         1.3%    1.3%    3.0%    1.4%

IDEM

   641         1.7%    1.6%    1.7%    1.4%

COM

   643         2.8%    2.7%    5.1%    3.2%

(1)   As of July 22, 2004
(2)   For period from January 1, 2001 to June 15, 2004
(3)   Five-year period from July 21, 1999 to July 21, 2004
(4)   Five-year period from July 21, 1994 to July 21, 1999
(5)   Date of Settlement Agreement, February 6, 2004

 

Trading Volume

 

Annual volume traded by CBOT membership class for various time frames from January 1994 to September 2003 were analyzed by CBIZ Valuation Group. The following table sets forth the median and average percentages of annual trading volume attributable to each membership class:

 

Percent Annual Trading Volume by Member Class(1)

          Median

       

Current Class of CBOT

        Membership


   Seat Count(2)

   2000-2003(3)

    1994-1999(4)

   

Per

Settlement
Agreement


 

Full

   1,402    31.1 %   43.5 %   77.7 %

Associate

   802    54.4 %   38.6 %   16.3 %

GIM

   128    4.1 %   8.6 %   1.4 %

IDEM

   641    4.8 %   1.7 %   1.4 %

COM

   643    5.6 %   7.6 %   3.2 %
          Average

       

Current Class of CBOT

        Membership


   Seat Count(2)

   2000-2003(3)

    1994-1999(4)

   

Per
Settlement

Agreement


 

Full

   1,402    31.7 %   42.9 %   77.7 %

Associate

   802    53.5 %   39.2 %   16.3 %

GIM

   128    4.7 %   8.6 %   1.4 %

IDEM

   641    4.5 %   1.8 %   1.4 %

COM

   643    5.6 %   7.5 %   3.2 %

 

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(1)   Volume analysis excludes “non-local” electronic volume that could not be allocated to a specific member type and executing members who did not have active memberships on the first day of the month.
(2)   As of July 22, 2004
(3)   From January 1, 2000 to September 30, 2003
(4)   From January 1, 1994 to December 31, 1999

 

Liquidation Rights

 

CBIZ Valuation Group analyzed the relative liquidation rights among each CBOT membership class. The following table sets forth the relative liquidation rights among each membership class, as set forth in the CBOT’s certificate of incorporation:

 

Liquidation Analysis by Member Class

 

 

Current Class of CBOT

        Membership


   Seat Count(1)

   Liquidation
Right per Seat


   Percent
Allocation


   Per
Settlement
Agreement


Full

   1,402    1.000    90.0%    77.7%

Associate

   802    0.167    8.6%    16.3%

GIM

   128    0.110    1.0%    1.4%

IDEM

   641    0.005    0.2%    1.4%

COM

   643    0.005    0.2%    3.2%

(1)   As of July 22, 2004

 

Voting Rights

 

The relative voting rights possessed by each CBOT membership class was analyzed by CBIZ Valuation Group. The following table sets forth the relative voting rights possessed by each membership class, as set forth in the CBOT’s certificate of incorporation and bylaws:

 

Voting Analysis by Member Class

 

Current Class of CBOT

        Membership


   Seat Count(1)

   Voting
Right per
Seat


   Percent Allocation

   Per
Settlement
Agreement


Full

   1,402    1.000    91.3%    77.7%

Associate

   802    0.167    8.7%    16.3%

GIM

   128    0.000    0.0%    1.4%

IDEM

   641    0.000    0.0%    1.4%

COM

   643    0.000    0.0%    3.2%

(1)   As of July 22, 2004

 

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Ceres Distributions

 

The distribution rights of the limited partners of Ceres were analyzed by CBIZ Valuation Group. The following table summarizes the liquidation distributions made by Ceres in 2003 to its limited partners (by CBOT membership class) in accordance with the terms of its partnership agreement:

 

Analysis of Ceres

 

Current Class of CBOT

        Membership


   Seat Count(1)

   Ceres
Allocation
Ratio


   Percent Allocation

   Per
Settlement
Agreement


Full

   1,402    1.000    90.3%    77.7%

Associate

   802    0.167    8.6%    16.3%

GIM

   128    0.083    0.7%    1.4%

IDEM

   641    0.005    0.2%    1.4%

COM

   643    0.005    0.2%    3.2%

(1)   As of July 22, 2004

 

Other Exchange Demutualizations

 

CBIZ Valuation Group considered the structures of four other exchange demutualizations in which more than one class of membership received equity:

 

  Ÿ the demutualization of Chicago Mercantile Exchange;

 

  Ÿ the demutualization of the International Securities Exchange;

 

  Ÿ the demutualization of the International Petroleum Exchange; and

 

  Ÿ the demutualization of the Sydney Futures Exchange.

 

However, as a result of the lack of comparability of these transactions to any proposed demutualization of the CBOT, no weight was placed by CBIZ Valuation Group on this analysis.

 

The foregoing description is only a summary of the material aspects of the financial analyses used by CBIZ Valuation Group in connection with rendering the CBIZ fairness opinion. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. It involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. Selecting portions of the analyses or of the summary set forth above, without considering the analyses as a whole, could create an incomplete view of the processes underlying the CBIZ fairness opinion.

 

Markets for Shares and Memberships

 

No market presently exists for the Class A common stock of CBOT Holdings. Although we cannot provide any assurances in this regard, we currently believe that markets for the Class A common stock of CBOT Holdings and the Class B memberships in the CBOT subsidiary may develop that are similar to the current markets for CBOT memberships. We believe that the current markets for memberships in the CBOT should facilitate the development of new markets for the Class A common stock of CBOT Holdings and the Class B memberships in the CBOT subsidiary.

 

U.S. Federal Income Tax Consequences

 

On September 30, 2002, we received a private letter ruling from the Internal Revenue Service that, for U.S. federal income tax purposes, you will not recognize any gain or loss strictly as a result of receiving shares of

 

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Class A common stock of CBOT Holdings and Class B memberships in the CBOT subsidiary and that CBOT Holdings will not recognize any gain or loss strictly as a result of CBOT Holdings receiving the Class A membership in the CBOT subsidiary in connection with the restructuring transactions as proposed in 2002. We have received a supplemental ruling from the IRS confirming that certain aspects of the proposed restructuring transactions, which have been modified following the receipt of the initial ruling and, as a result, are not covered by such ruling, will not affect the validity of the initial ruling to the effect that CBOT members will not recognize gain with respect to the receipt of Class B memberships in the CBOT subsidiary, including any associated right to trade on the CBOT or the CBOE. The modifications to the proposed restructuring transactions that necessitated the receipt of a supplemental ruling are unrelated to the conclusion that CBOT Holdings will not recognize any gain or loss strictly as a result of receiving the Class A membership of the CBOT subsidiary. Such modifications will consequently not affect the validity of the initial ruling in that regard, and a supplemental ruling to such effect was not, therefore, requested.

 

Based upon our understanding of the position of the IRS in the private letter ruling issued to the CBOT as well as rulings issued with respect to other exchanges involved in the process of demutualization and the opinion of our counsel as described elsewhere in this document:

 

  Ÿ you will not recognize gain or loss as a result of your receipt of shares of Class A common stock of CBOT Holdings and Class B memberships in the CBOT subsidiary or as a result of the receipt by CBOT Holdings of the Class A membership in the CBOT subsidiary;

 

  Ÿ assuming this non-recognition treatment, the aggregate basis in your current membership will carry over to your Class A common stock of CBOT Holdings and Class B memberships in the CBOT subsidiary;

 

  Ÿ the holding period of the Class A common stock of CBOT Holdings and Class B memberships in the CBOT subsidiary received by you will include the period for which you held your current membership, provided that such membership is held as a capital asset or property as described in Code Section 1231 on the date of the distribution of the Class A common stock of CBOT Holdings and Class B memberships in the CBOT subsidiary; and

 

  Ÿ we will not recognize any gain or loss upon our demutualization.

 

For more information, including the opinion of our counsel on these matters, see “Material U.S. Federal Income Tax Consequences of the Restructuring Transactions.”

 

Absence of Appraisal Rights

 

Members who object to the restructuring transactions will not have statutory appraisal or dissenters’ rights under Delaware corporation law. Appraisal or dissenters’ rights, if available, would have enabled members to demand payment of the fair value of their memberships in cash rather than accept the consideration to be received as a result of the restructuring transactions. Under Delaware corporation law, these rights generally apply to transactions involving mergers or consolidations of stock corporations but not similar transactions involving purely nonstock corporations. The demutualization will be accomplished by distribution of a dividend of shares of Class A common stock of CBOT Holdings to our members and a merger of two nonstock corporations. Because the demutualization will be accomplished through a merger of two non-stock corporations, the CBOT and the CBOT subsidiary, you will not be entitled to any appraisal rights. Instead, if the restructuring transactions are completed, notwithstanding the fact that you may vote against the propositions relating to the restructuring transactions, you will become entitled to shares of Class A common stock of CBOT Holdings and a Class B membership in the CBOT subsidiary.

 

Accounting Matters

 

Certain aspects of the restructuring transactions will be treated similar to a reorganization of entities under common control. Under this method of accounting, no gain or loss will be recognized by the CBOT, and the assets and liabilities of the CBOT will appear on the books of CBOT Holdings at their same recorded amounts.

 

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Regulatory Matters

 

In addition to those conditions described below at “—Conditions to Completing the Restructuring Transactions,” our obligation to complete the restructuring transactions is subject to receipt of any approvals that we believe are required by, or desirable to receive from, the CFTC in connection with the proposed changes to our certificate of incorporation, bylaws and rules and regulations that will be made in connection with the restructuring transactions.

 

We are currently in the process of reviewing such proposed changes with the CFTC. While we believe that soon after the membership vote on the restructuring transactions we will be in a position to make any filings with, and/or receive any approvals from, the CFTC that we believe are required or desirable, there can be no assurance that this will occur. Moreover, under certain circumstances, this process could take much longer. If these CFTC approvals and any other necessary regulatory approvals or authorizations cannot be obtained, we may not be able to complete the restructuring transactions and any delay in the implementation of the restructuring transactions caused by the CFTC or other regulators may jeopardize the expected benefits of the restructuring transactions. We cannot assure you that the CFTC and other regulatory approvals will be obtained in connection with the restructuring transactions or, if obtained, that the approvals will be timely received.

 

Also, the restructuring transactions may be subject to certain regulatory requirements of other state, federal and foreign governmental agencies and authorities, including those relating to the regulation of securities. We are currently working to evaluate and comply, as applicable, in all material respects with these requirements and do not anticipate that they will hinder, delay or restrict completion of the restructuring transactions.

 

In connection with our compliance with these regulatory requirements, we have engaged ABN AMRO to serve as a registered broker-dealer or dealer, as applicable, in certain jurisdictions to assist us with certain aspects of the membership vote relating to, and other matters regarding, the restructuring transactions. We agreed to pay ABN AMRO $50,000 plus reasonable expenses for its services and to indemnify it against potential liabilities arising out of its engagement. We note that, in the opinion of the SEC, indemnification against liabilities under the U.S. federal securities laws is against public policy expressed in the Securities Act, and, therefore, this indemnification may be deemed unenforceable. We may adopt other special procedures in connection with these compliance efforts.

 

No filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, are required in connection with the restructuring transactions generally. However, if any CBOT member acquires enough securities in connection with the restructuring transactions to exceed any threshold stated in the regulations under this act, and if an exemption under those regulations does not apply, such member and the CBOT and CBOT Holdings, as applicable, could be required to make filings under this act, and the waiting period under the act would have to expire or be terminated before any issuance of shares to such member could be effected. A filing requirement could delay the distribution of shares to such member for several months or more.

 

Following effectiveness of the registration statement of which this proxy statement and prospectus forms are part, we will be required to file periodic reports, including current reports on Form 8-K, quarterly reports on Form 10-Q and annual reports on Form 10-K, and other information with the SEC. We also intend to register the securities offered pursuant to this document under the Securities Exchange Act of 1934, as and when required. Thereafter, we will be subject to certain additional obligations, including the obligation to file proxy solicitation materials with the SEC and the obligation to provide stockholders annual reports in connection with proxy solicitations. In the event that we are not registered under the Securities Exchange Act of 1934 by the end of 2005, we intend to send an annual report, including audited financial statements, to members in the first quarter of 2006 in accordance with past practices.

 

Conditions to Completing the Restructuring Transactions

 

We will not be obligated to complete the restructuring transactions unless and until each of the following conditions has been satisfied or waived:

 

  Ÿ

the Full and Associate Members, voting together as a single class based upon their respective voting rights, shall have approved each of the five propositions being submitted for their approval in connection with

 

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the restructuring transactions in accordance with our certificate of incorporation, bylaws and rules and regulations and applicable law;

 

  Ÿ we shall have received any approvals that we believe are required by, or desirable to receive from, the CFTC in connection with the changes to our certificate of incorporation, bylaws and rules and regulations that will be made in connection with the restructuring transactions, and we shall have received any other governmental or regulatory approvals and authorizations determined by us to be necessary or desirable;

 

  Ÿ we shall have received each required material third party consent, which the failure to obtain would, in the sole and absolute determination of the board of directors, have a material adverse effect on CBOT Holdings or the CBOT subsidiary;

 

  Ÿ there shall be no court order or administrative or other regulation or similar decree prohibiting or restricting the completion of the restructuring transactions; and

 

  Ÿ our board of directors shall not have determined that the restructuring transactions are no longer in the best interests of the CBOT and its members or that the restructuring transactions are not fair to each class of CBOT membership.

 

We currently intend to complete the restructuring transactions as soon as reasonably practicable following the satisfaction of these conditions. However, if the restructuring transactions are approved but not all of these conditions are satisfied or waived, it is possible that the restructuring transactions may not be completed for a significant period of time after the membership vote on the restructuring transactions. During any such time interval, it is possible that circumstances related to the business or financial condition of the CBOT, or financial, economic or other circumstances could change significantly and in a manner not considered at the time our board of directors initially approved the restructuring transactions or at the time our members voted on the propositions relating to the restructuring transactions.

 

Recommendation of the CBOT Board of Directors

 

Our board of directors has determined that the restructuring transactions, taken as a whole, including the allocation of equity among the five classes of members in accordance with the settlement allocation, are in the best interests of the CBOT and its members and that the restructuring transactions are fair to all classes of CBOT members. The board of directors has approved the restructuring transactions and recommends that Full and Associate Members vote “FOR” each of the propositions relating to the restructuring transactions.

 

Each of the five propositions relating to the restructuring transactions being submitted for your approval is expressly conditioned upon approval of each of the other propositions. This means that, unless ALL FIVE of these propositions are approved, the restructuring transactions will not have been approved by the members and, accordingly, will not be completed.

 

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CAPITALIZATION

 

We set forth below the historical capitalization of the CBOT and a pro forma capitalization of CBOT Holdings giving effect to the restructuring transactions. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the historical consolidated unaudited financial statements of the CBOT and the unaudited pro forma condensed consolidated financial statements of CBOT Holdings included elsewhere in this document.

 

     As of September 30, 2004

     Actual

   Pro Forma
After Effects of
Issuance of
Common
Stock(1)


     (in thousands)

Long-term debt

   $ 31,671      31,671

Members’ equity

     296,213      —  

Stockholders’ equity:

             

Class A common stock, $0.001 par value, 200,000,000 shares authorized, 49,359,836 shares issued and outstanding

     —        49

Class B common stock, $0.001 par value, 1 share authorized, none issued and outstanding

     —        —  

Preferred stock, $0.001 par value, 20,000,000 shares authorized, none issued and outstanding

     —        —  

Additional paid-in capital

     —        296,164
    

  

Total stockholders’ equity

     —        296,213
    

  

Total capitalization

   $ 327,884    $ 327,884
    

  


(1)   Pro forma data reflects such adjustments as necessary, in the opinion of management, to reflect the conversion of members’ equity to Class A common stock of CBOT Holdings.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

The following table sets forth selected consolidated financial and other data for the CBOT. The balance sheet data as of December 31, 2003 and 2002 and operating data for the years ended December 31, 2003, 2002 and 2001 have been derived from the audited consolidated financial statements and related notes included in Appendix A of this document. The balance sheet data as of September 30, 2004 and operating data for the nine months ended September 30, 2004 and 2003 have been derived from the unaudited condensed consolidated financial statements and related notes included in Appendix A of this document. The balance sheet data as of December 31, 2001, 2000 and 1999 and operating data for the years ended December 31, 2000 and 1999 have been derived from audited financial statements and related notes and the balance sheet data as of September 30, 2003 have been derived from unaudited condensed consolidated financial statements and related notes not included in this document. The balance sheet and operating data as of and for the nine months ended September 30, 2004 and 2003 include, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of such data. The results of operations for the nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the entire year. The information set forth below 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, the unaudited pro forma condensed consolidated financial statements and other financial information included elsewhere in this document.

 

     Nine Months Ended
September 30,


    Year Ended December 31,

 
     2004

   2003

    2003

    2002

   2001

    2000

    1999

 
     (in thousands)  

Operating Data

                                                      

Revenues:

                                                      

Exchange fees

   $ 156,731    $ 211,789     $ 285,815     $ 204,963    $ 134,968     $ 102,180     $ 104,759  

Clearing fees

     54,832      —         1,158       —        —         —         —    

Market data(1)

     48,118      42,115       55,850       58,258      66,509       61,060       54,028  

Building(2)

     16,089      14,870       20,061       25,239      24,828       24,530       22,653  

Services(3)

     9,465      12,546       16,059       16,554      14,262       18,829       21,688  

Other(4)

     11,321      1,074       2,359       3,259      11,164       8,154       4,741  
    

  


 


 

  


 


 


Total revenues

     296,556      282,394       381,302       308,273      251,731       214,753       207,869  

Expenses:

                                                      

Salaries and benefits

     52,820      47,517       64,122       59,315      59,141       56,973       64,600  

Depreciation and amortization

     33,757      22,473       32,869       37,438      44,228       40,704       36,831  

Professional services

     19,115      20,421       28,155       30,716      20,013       32,459       45,717  

General and administrative expenses

     14,638      11,383       18,455       11,171      12,618       14,537       21,084  

Building operating costs

     17,813      18,998       25,042       24,579      22,961       22,584       23,171  

Information technology services

     26,378      38,725       56,116       42,807      42,537       37,723       18,086  

Contracted license fees

     4,586      20,179       27,601       13,999      2,010       2,003       2,015  

Programs(5)

     8,053      3,090       5,891       3,449      1,847       3,539       7,280  

Clearing services

     40,162      —         972       —        —         —         —    

Loss on impairment of long-lived assets

     —        —         —         6,244      15,210       —         —    

Interest

     3,654      2,972       3,975       4,754      6,734       6,773       6,774  

Litigation

     —        —         —         10,735      3,000       —         —    

Equity in loss of One Chicago

     621      786       1,093       712      —         —         —    

Severance and related costs

     387      640       1,290       4,033      9,875       8,261       327  
    

  


 


 

  


 


 


Operating expenses

     221,984      187,184       265,581       249,952      240,174       225,556       225,885  
    

  


 


 

  


 


 


Income (loss) from operations

     74,572      95,210       115,721       58,321      11,557       (10,803 )     (18,016 )

Income taxes (credit)

     30,966      22,491       22,074       24,010      5,297       952       (3,091 )
    

  


 


 

  


 


 


Income (loss) before cumulative effect of change in
accounting principle and minority interest

     43,606      72,719       93,647       34,311      6,260       (11,755 )     (14,925 )

Cumulative effect of change in accounting principle—net of tax of $36(6) and $2,026(7), respectively

     —        —         —         —        (51 )     —         (2,920 )
    

  


 


 

  


 


 


Income (loss) before minority interest

     43,606      72,719       93,647       34,311      6,209       (11,755 )     (17,845 )

Minority interest in (income) loss of subsidiary

     1,100      (41,162 )     (62,940 )     —        —         —         6,933  
    

  


 


 

  


 


 


Net income (loss)

   $ 44,706    $ 31,557     $ 30,707     $ 34,311    $ 6,209     $ (11,755 )   $ (10,912 )
    

  


 


 

  


 


 


 

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     Nine Months Ended
September 30,


   Year Ended December 31,

 
     2004

   2003

   2003

   2002

   2001

   2000

    1999

 
     (dollars in thousands, except per share data)  

Balance Sheet Data

                                                   

Total assets

   $ 447,640    $ 438,696    $ 483,981    $ 354,197    $ 341,891    $ 359,074     $ 358,736  

Total liabilities

     149,887      146,579      169,758      135,161      156,419      180,151       168,512  

Short-term borrowings

     19,831      18,070      19,665      10,714      18,398      27,083       6,500  

Long-term borrowings

     31,671      48,473      50,045      42,857      58,324      64,286       87,500  

Minority interest

     1,540      41,162      62,940      —        —        —         —    

Total equity

     296,213      250,955      251,283      219,036      185,472      178,923       190,224  

Pro forma Data(8)

                                                   

Total assets

   $ 447,640    $ 438,696    $ 483,981    $ 354,197    $ 341,891    $ 359,074     $ 358,736  

Total liabilities

     149,887      146,579      169,758      135,161      156,419      180,151       168,512  

Short-term borrowings

     19,831      18,070      19,665      10,714      18,398      27,083       6,500  

Long-term borrowings

     31,671      48,473      50,045      42,857      58,324      64,286       87,500  

Minority interest

     1,540      41,162      62,940      —        —        —         —    

Total equity

     296,213      250,955      251,283      219,036      185,472      178,923       190,224  

Net income (loss)

     44,706      31,557      30,707      34,311      6,209      (11,755 )     (10,912 )

Net income (loss) per share(9)

     0.91      0.64      0.62      0.70      0.13      (0.24 )     (0.22 )

Other Data

                                                   

Current ratio(10)

     2.10      2.35      2.37      1.86      1.12      0.69       1.01  

Working capital (deficit)

   $ 89,158    $ 95,653    $ 115,622    $ 53,406    $ 8,883    $ (24,305 )   $ 351   

Capital expenditures

     28,608      24,506      46,062      22,675      16,358      38,497       25,165  

Interest coverage ratio(11)

     21.41      33.04      30.11      13.27      2.72      N/A       N/A  

Number of full time employees at end of period

     718      682      694      657      661      711       846  

Sales price per CBOT Full Membership—High

   $ 950    $ 450    $ 555    $ 453    $ 415    $ 642     $ 633  

                                                        —Low

     413      310      310      240      290      255       400  

  (1)   Beginning in 2000, the CBOT repriced the distribution of market data. At the same time, the CBOT introduced a rebate to member firms for fees paid for market data. This rebate is offset against market data revenue and was discontinued in 2003.
  (2)   Building revenue consists of rental payments received by the CBOT from tenants for leased space in buildings owned by the CBOT.
  (3)   Services revenue consists of member services-related fees, workstation fees and charges to members for telecommunications, exchange floor and other services.
  (4)   Other revenues consist of members’ dues, interest income, fines and other miscellaneous items. Members’ dues consist of dues on both CBOT and MidAmerica Commodity Exchange memberships. Dues on CBOT memberships were waived from 1989 through May 2000, and again from January 2002 to December 2003.
  (5)   Program expenses include costs primarily related to marketing and communication programs.
  (6)   In 2001, the CBOT adopted Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted, requiring recognition of all derivative instruments in the Consolidated Statements of Financial Condition as either assets or liabilities and the measurement of those instruments at fair value. SFAS No. 133 also requires changes in the fair value of derivative instruments to be recorded each period in current earnings or other comprehensive income depending on the intended use of the derivatives.
  (7)   In 1999, the CBOT adopted Statement of Position (“SOP”) 98-5, “Reporting on the Costs of Start-Up Activities.” SOP 98-5 requires that start-up activities be expensed as incurred. Previously, start-up activities were capitalized and amortized.
  (8)   Reflects the conversion of members’ equity to Class A common stock of CBOT Holdings.
  (9)   Based on 49,359,836 shares issued and outstanding immediately following the completion of the restructuring transactions.
(10)   Equals current assets divided by current liabilities.
(11)   Equals the sum of income from operations plus interest expense divided by interest expense.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

This document contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of several factors, including the risks and uncertainties faced by us as described below and elsewhere in this document, including at “Risk Factors” above.

 

Overview

 

The primary business of the CBOT is the operation of markets for the trading of listed futures contracts and options on futures contracts for four broad product categories: agricultural products, interest rate products, stock market indices and metals. In addition to traditional open outcry markets, we offer electronic trading through the LIFFE CONNECT® system that was developed and implemented, beginning in November 2003. Until December 2003, electronic trading was offered through the a/c/e system, which was based on a modified form of technology used at Eurex. We derive a substantial portion of our revenue from exchange fees relating to the trading in our markets, which accounted for 53% of our total revenues in the nine months ended September 30, 2004. In addition, we derive revenue from clearing fees, the sale of market data generated by trading in our markets and our real estate operations, which accounted for 18%, 16% and 5%, respectively, of our total revenue in the nine months ended September 30, 2004. In order to increase the volume of contracts traded on our markets and resulting revenues, we seek to develop and promote contracts designed to satisfy the trading, hedging and risk-management needs of our market participants.

 

Exchange Fees

 

The largest source of the CBOT’s operating revenues is exchange fee revenue. Exchange fee revenue is a function of three variables: (1) exchange fee rates, determined for the most part by contract type, trading mechanism and membership/customer status; (2) trading volume; and (3) transaction mix between contract type, trading mechanism and membership customer status. Because our trading fees are assessed on a per transaction basis, our exchange fee revenues are directly correlated to the volume of contracts traded on our markets. While exchange fee rates are established by the CBOT, trading volume and transaction mix are primarily influenced by factors outside the CBOT’s control. These external factors include: price volatility in the underlying commodities, interest rate or inflation volatility, changes in the U.S. Government monetary policy, weather conditions in relation to agricultural commodities, and national and international economic and political conditions.

 

Recent years have seen a steady increase in the total trading volume on futures exchanges. According to industry sources, total global volume on futures and options on futures was 2.1 billion, 2.6 billion and 3.3 billion contracts traded in 2001, 2002 and 2003, respectively, representing year over year growth of 27% during 2003 and 23% during 2002. Global trading volume continues to increase with volume levels in the first nine months of 2004 outpacing 2003 levels by 16% according to industry sources. The CBOT has also experienced consistent increases in trading volumes over the last several years. Total volume at the CBOT was 260.3 million, 343.9 million and 454.6 million contracts traded in 2001, 2002 and 2003, respectively, representing annual growth of 32% in both 2002 and 2003. Contract trading volume levels in 2002 and 2003 were consecutive CBOT record highs and our contract trading level in the first nine months of 2004 increased 32% over the same period of 2003.

 

The following chart illustrates trading volume across the different categories of products traded at the CBOT (in thousands):

 

Trading Volume
By Product Category
  2003

    2002

    Volume
Change


  Percent of
Change


 
  Volume

  % of Total

    Volume

  % of Total

     

Interest Rate

  365,839   80 %   268,021   78 %   97,818   88 %

Agricultural

  72,983   16 %   66,669   19 %   6,314   6 %

Stock Market Indices and Metals

  15,769   4 %   9,193   3 %   6,576   6 %
   
 

 
 

 
 

Total

  454,591   100 %   343,883   100 %   110,708   100 %
   
 

 
 

 
 

 

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The growth in trading volume at the CBOT is largely attributable to growth in trading volume of our interest rate products. Within our interest rate products, 97% of the volume, and 85% of the increase in volume from 2002 to 2003 is attributable to contracts on U.S. Treasury securities, which are composed of contracts on 30-year U.S. Treasury bonds, as well as 10, 5 and 2-year Treasury notes. We believe that the recent growth in trading volume relating to contracts on U.S. Treasury securities is due to macro-economic factors as well as CBOT-specific factors.

 

Macro-economic factors that we believe affect trading volume attributable to contracts on U.S. Treasury securities include the volatility in the underlying cash markets for such securities, the tightening of credit markets and the level of deficit spending by the U.S. government. Volatility in the underlying cash markets related to U.S. Treasury securities has increased in recent years, which we believe has led to increased trading volume relating to contracts on U.S. Treasury securities traded at the CBOT. Also, we believe that recent corporate scandals and associated credit problems have led companies to become more conservative in the management of their credit risk and, therefore, that such companies have increased their use of derivative instruments on regulated exchanges such as the CBOT, which is regulated by the CFTC. Finally, we believe that recent deficit spending by the U.S. government has necessitated additional issuances of U.S. Treasury securities by the U.S. government which, in turn, increases trading volume relating to contracts on U.S. Treasury securities.

 

Some CBOT-specific factors that we believe affect trading volume relating to contracts on U.S. Treasury securities include expanded distribution, lower pricing and the shift from open outcry traded volume to electronic traded volume. During 2003, we expanded the distribution of our products to large European institutional trading firms to attract new trading volume. Also, we lowered the pricing on exchange fees at the beginning of 2003. Our management believes that trading volume may be more price elastic than previously thought, particularly for trading volume associated with customers from Europe. Finally, as discussed below, electronic trading is becoming a more significant source of our trading volume each year. In our experience, products historically offered for trading on our open outcry markets that are offered for trading on the electronic trading system generally tend to experience significant volume growth following their initial offering for trading on the electronic trading system.

 

While not certain, we expect that the macro-economic and CBOT-specific factors that contributed to past volume increases will continue to contribute to future volume levels. Therefore, if these same factors continue to exist, we may experience similar increases in contract trading volume. However, additional factors may arise that could offset future increases in contract trading volume or result in a decline in contract trading volume, such as new or existing competition or other events. Accordingly, you should understand that our recent contract trading volume history may not be an indicator of future contract trading volume results.

 

Historically, we have classified our trading volume as either electronic or open outcry. Beginning in 2004, we began to recognize a third category of volume that had previously been attributed to open outcry volume. This new category relates to transactions that are simultaneously executed in both a cash market and a futures market that are privately negotiated and do not occur in either our open outcry markets or electronic trading system.

 

Electronic trading volume has become the largest source of total trading volume, and represents a substantial portion of the total increase in volume. Open outcry trading volume was relatively flat from 2002 to 2003. The following chart provides contract trading volume on our electronic trading system and open outcry markets (in thousands):

 

Trading Volume By
Platform
   2003

    2002

   

Volume
Change
Variance


  

% of
Change


   

%
Change


 
   Volume

   % of Total

    Volume

   % of Total

        

Electronic

   235,718    52 %   129,326    38 %   106,392    96 %   82 %

Open outcry

   218,873    48 %   214,557    62 %   4,316    4 %   2 %
    
  

 
  

 
  

 

Total

   454,591    100 %   343,883    100 %   110,708    100 %   32 %
    
  

 
  

 
  

 

 

 

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In February 2004, Eurex launched Eurex US, which offers futures and options on futures contracts in the U.S. that are similar to the contracts on U.S. Treasury securities currently traded at the CBOT. These contracts accounted for approximately 78% of total volume at the CBOT during 2003. If Eurex US is successful in attracting significant volume away from us in these contracts, our financial and operating results could be materially adversely affected. We view this possibility to be a significant competitive threat. Accordingly, we devised a strategy to combat this threat that consisted of, among other things, lowering trading fees on selected futures contracts, developing a new electronic trading system, changing our clearing house provider to the CME and easing the restrictions on obtaining a membership classification which allows reduced trading fees. We believe that our electronic trading system is superior to that used by Eurex and that market customers prefer the transparency and liquidity that our trading model offers. However, due to this new competitive threat and other unforeseen developments, you should understand that our historical financial and operating results may not be indicative of future financial and operating results.

 

To date, the ability of Eurex US to capture a significant portion of volume in U.S. Treasury contracts has been limited. Even though Eurex US did not charge any trading fees from July of 2004 to December of 2004, they have failed to garner more than 5% of volume in any period. Eurex US has announced its desire to establish a clearing link that would allow cross-margining between Eurex’s contracts at their German-based operation and contracts at their U.S. operation. On October 21, 2004, the CFTC approved one phase of the proposed clearing link, which allows contracts that originate on Eurex’s exchange in Germany to be cleared through Eurex US’s clearing house. Approval for clearing US-originated contracts on Eurex’s clearing house in Germany has not been sought yet. Eurex believes that the clearing link is paramount to the success of Eurex US. With the approval of part of the clearing link and the potential for the second phase of the link to be approved, it is possible our customers will prefer Eurex US’s contracts for these or other reasons and we may experience a future decline in trading volume from this competition.

 

Clearing Fees

 

In November 2003, we began to transition clearing services for certain products to the CME. This transition was completed by January 2004. Under the terms of our arrangement with the CME, we receive clearing fees in respect to each side of a trade made in our open outcry markets and electronic trading system that is cleared through the CME/CBOT Common Clearing Link. We received no clearing fees under our arrangement for clearing services provided by our former clearing house provider. In the first nine months of 2004, we received $54.8 million of clearing fees. The aggregate amount of clearing fees received by us is based upon contract trading volume in our products and, therefore, will fluctuate based on the same factors that affect our trading volume.

 

Market Data

 

We derive additional revenue from the sale of market data generated by trading in our markets. Because we are the primary market for our products, our price information has value as a key indicator of the financial and agricultural markets. To some extent, revenues from the sales of our market data are also dependent upon volume, as well as our ability to remain a primary market and to respond to innovations in technology that may affect the availability and price of market data. These revenues may also be subject to legislative and regulatory changes. Sales of market data accounted for 15% of our total revenues in 2003 and 16% in the first nine months of 2004.

 

Building Revenues

 

We rent commercial space in the buildings that we own. These revenues are generally affected by market rental rates, lease renewals and business conditions in the financial services industry in which most of our tenants operate. Building expenses are dependent on variable utility costs, cleaning expenses, real estate taxes and other general operating costs.

 

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The current commercial real estate market in Chicago is very competitive due to overall excesses in available business space. During 2002, a significant tenant vacated over 200,000 square feet of office space. Due to the competitive real estate market, we were not able to obtain new tenants for all the space or at the same lease rates, which led to reduced building revenues in 2003 of $5.2 million. Also, in December 2004, another tenant, who leased approximately 50,000 square feet of office space, vacated their space for which we have not found a new tenant. If we continue to have difficulty finding new tenants at historical lease rates, the revenues from real estate operations will continue to be adversely affected.

 

Membership Dues

 

Our board of directors currently possesses the authority to levy assessments on our memberships. These assessments are levied on an as-needed basis and are generally nonrecurring in nature. The memberships in the CBOT subsidiary existing after the completion of the restructuring transactions will be subject to assessment on substantially the same terms.

 

Operating Expenses

 

Our expenses generally support our open outcry markets and electronic trading systems, and are mainly fixed in nature, meaning that the overall expense structure is generally independent of trading volume. Salaries and benefits represent our largest expense category and are mostly dependent upon our staffing requirements and the overall employment market. Other significant operating expenses in recent years are expenses associated with enhancements to our trading systems, license fees to our electronic trading system providers, litigation expenses and development of the restructuring transactions.

 

Alliances

 

Due to increasing competitive pressures in the futures industry, we review our competitive position on an ongoing basis and from time to time consider, and engage in discussions with other parties regarding, various strategic alliances, acquisitions, divestitures and other arrangements in order to continue to compete effectively, improve our financial results, increase our business and allocate our resources efficiently. For example, in April 2003, we entered into an agreement with the CME to establish the CME/CBOT Common Clearing Link pursuant to which clearing and related services are provided to the CBOT. In addition, in December 2002, the CBOT and eSpeed, Inc. entered into an arrangement that grants eSpeed a license to distribute CBOT products on its multiple buyer/multiple seller real-time electronic marketplaces. We have also entered into memoranda of understanding with several international exchanges, such as the Tokyo International Financial Futures Exchange, the Taiwan Exchange, the Dalian Exchange and the Sydney Futures Exchange in order to exchange various information and cooperate on issues such as development of new products, changes to existing contract specifications and trading methods and other areas of mutual interest. Further, we entered into agreements with the Minneapolis Grain Exchange, the Kansas City Board of Trade and the Winnipeg Commodity Exchange to provide them access to our electronic trading platform beginning in December of 2004. Also, we now act as the three exchanges’ sole distributor of market data. It is important for us to form strategic partnerships to bring together the necessary expertise and resources to address competitive pressures and meet new market demands.

 

Segments

 

We have identified two reportable operating segments: exchange trading and real estate operations. The exchange trading segment primarily consists of revenue and expenses from both traditional open outcry trading activities and electronic trading platform activities, as well as from the sale of related market data to vendors and from clearing services. The real estate operations segment consists of revenue and expenses from renting and managing our real estate. The CBOT allocates indirect expenses to each operating segment.

 

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Results of Operations

 

Nine months ended September 30, 2004 compared to nine months ended September 30, 2003

 

Revenues. Consolidated operating revenues for the nine months ended September 30, 2004 were $296.6 million, an increase of 5% from $282.4 million in the corresponding period of 2003. The following chart provides revenues by source and by percent of total revenues for the nine months ended September 30:

 

     2004

    2003

    Variance

 
     in thousands

   % of
Total


    in thousands

   % of
Total


    in thousands

    %
Change


 

Exchange fees

   $ 156,731    53 %   $ 211,789    75 %   $ (55,058 )   -26 %

Clearing fees

     54,832    18 %     —      0 %     54,832     —    

Market data

     48,118    16 %     42,115    15 %     6,003     14 %

Building

     16,089    5 %     14,870    5 %     1,219     8 %

Services

     9,465    3 %     12,546    4 %     (3,081 )   -25 %

Dues

     9,315    3 %     —      0 %     9,315     —    

Other

     2,006    1 %     1,074    0 %     932     87 %
    

  

 

  

 


 

Total revenues

   $ 296,556    100 %   $ 282,394    100 %   $ 14,162     5 %
    

  

 

  

 


 

 

Trading volume during the first nine months of 2004 was 446.6 million contracts, a 32% increase from the 339.3 million contracts in the first nine months of 2003. The increase in trading volume we experienced compares favorably with the 16% volume increase experienced in the global futures markets as a whole in the first nine months of 2004. Open outcry trading volume for the current period increased 16% to 174.0 million contracts compared to 150.2 million contracts in the first nine months of 2003. Electronic trading volume increased 45% to 253.2 million contracts in 2004 versus 174.9 million contracts in 2003. The percentage of electronic trading to total trading volume increased from 52% in the first nine months of 2003 to 57% in the first nine months of 2004. Other trading volume was 19.4 million contracts and 14.2 million contracts in the first nine months of 2004 and 2003, respectively. Other contract trading volume represents transactions that do not occur in either our open outcry markets or electronic trading system.

 

Despite the increased contract trading volume described above, revenues from exchange fees decreased 26%, or $55.1 million, from $211.8 million in the first nine months of 2003 to $156.7 million in the first nine months of 2004. In February 2004, the CBOT decreased trading fees on selected contracts traded in our electronic trading system in response to market conditions. Due to this fee reduction, the average fee per contract traded fell to $0.35 in the first nine months of 2004 versus $0.62 in the first nine months of 2003. The decision to reduce trading fees made in February was revisited in July. Based upon current operating results and ongoing competitive threats, as well as other factors, we determined to maintain our current fee structure. We continuously evaluate the fees that we charge on all types of trades and may decide to adjust fees in the future.

 

Open outcry trading fees were $67.8 million for the nine months ended September 30, 2004, a 31% increase compared to $51.8 million in the prior year period. The increase primarily related to a 30% increase in volume during 2004 on agricultural products such as corn, wheat and soybeans; contracts which are almost entirely traded in our open outcry pits. We believe we experienced increased trading of agricultural products due to several factors that create market uncertainty or volatility. We believe there are relatively tight supplies of the major agricultural commodities due to increased international demand and poor growing conditions in the first part of 2004. Also, there is increased market uncertainty due to the emergence of multiple crop years. The U.S. is no longer the primary producer of certain agricultural commodities. For instance, Brazil and Argentina’s combined soybean production is now estimated to be greater than the U.S.’s total production. Finally, we believe that there is an overall increase in the awareness and knowledge of price risk management strategies, that producers locked in record level prices early in 2004 and that investors are recognizing new opportunities within the agricultural futures industry. The average open outcry fee per contract traded was $0.39 for the nine months

 

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ended September 30, 2004, compared to $0.35 for the same period of the prior year due to a pricing increase for certain trades made at the end of 2003. Volume discounts reduced open outcry trading fees by $0.6 million and $0.9 million in the first nine months of 2004 and 2003, respectively.

 

Electronic trading fees were $60.7 million in the first nine months of 2004, 57% less than the $141.2 million in the prior year period. The trading fee reductions introduced in February 2004 in response to market conditions were for selected contracts traded on the electronic trading system. Such contracts represented about 92% of total electronic trading volume, which led to the decreased electronic trading fee revenue despite increased electronic trading volume. The average electronic trading fee per contract traded was $0.24 for the nine months ended September 30, 2004, compared to $0.81 for the prior year period. Additionally, volume discounts reduced electronic trading fees by $1.8 million and $13.5 million in the first nine months of 2004 and 2003, respectively. We expect to maintain our current pricing structure in the immediate future and therefore expect that we will continue to experience lower electronic trading fees relative to prior periods.

 

Other contract trading volume fees were $28.2 million in the first nine months of 2004 versus $18.8 million in the same period of 2003. Other contract trading volume represents transactions, such as non-trade allocations and exchange for physical transactions, that do not occur in either our open outcry markets or electronic trading system.

 

Beginning in November 2003, we began to receive clearing fees in respect of each side of a trade made in our open outcry markets and electronic trading system that is cleared through the CME/CBOT Common Clearing Link. Clearing fee revenues in the first nine months of 2004 were $54.8 million. We paid $40.2 million of this fee to the CME, which payment is recorded as clearing services expense. Prior to the establishment of the CME/CBOT Common Clearing Link, our members cleared transactions executed in our open outcry markets and electronic trading system through another third-party provider of clearing services who billed our members directly for clearing services, so no clearing fee revenue or expense was recorded in the first nine months of 2003.

 

Market data revenues were $48.1 million in the first nine months of 2004, a 14% increase from $42.1 million in the first nine months of 2003. The main component of market data revenues, quote fees, increased by $5.2 million, or 13%, due to a pricing increase for real time quote feeds instituted in January 2004. Other market data revenues increased $0.8 million from the previous year. The increase in quote fee pricing was offset to a degree by a reduction in the average number of market data subscriptions in the first nine months of 2004 versus the same prior year period which is consistent with recent trends as industry consolidation has reduced the total subscription demand for market data. This trend is expected to continue in the future. However, subscription levels during the first nine months of 2004 were relatively flat in comparison with levels at year end 2003. It is possible that this stabilization is a result of reaching a sustainable level for market data subscriptions; nevertheless, we may continue to see subscription levels decrease in the future. However, we expect that the new market data products we have offered, or may offer in the future, will help to alleviate any future reduction in revenues we may experience from decreased market data subscriptions. For instance, in May 2003, we introduced a web-based quote and charting application called CBOT Advantage. Revenues from this new offering were $0.6 million in the first nine months of 2004. We also introduced DataExchange in June 2004, which provides web-based access to 30 years of historical CBOT market data. While DataExchange revenues were not significant in the current period, we expect both new products to provide future growth in our market data revenues.

 

Building revenues from leased office space were $16.1 million for the nine months ended September 30, 2004, an 8% increase from $14.9 million for the same period of 2003. The increase in the first nine months of 2004 primarily resulted from an increase in the occupancy rate in the buildings owned by the CBOT due to the procurement of new tenants to occupy some of the space vacated by a significant tenant in 2002.

 

Member dues of $9.3 million were recognized in the first half of 2004 related to a six month dues assessment made in January 2004. The dues were levied by our board of directors in order to provide us with

 

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adequate funds to meet increased financial demands associated with competitive pressures such as the launch of Eurex US. The need for an additional dues levy was reviewed by the board of directors in July 2004, at which time it was decided that an additional dues levy was unnecessary. The board of directors reevaluated this decision in October 2004 and decided to rescind the original dues assessment as a result of a perceived reduced threat of competition. No dues were assessed during 2003.

 

Operating Income. Income from operations decreased 22% to $74.6 million in the first nine months of 2004. Operating income from the exchange trading segment decreased $23.7 million, or 24%, to $73.2 million in the first nine months of 2004. Operating income from the real estate operations segment increased $3.1 million from an operating loss of $1.7 million in the first nine months of 2003.

 

The exchange trading segment decrease is largely the result of a $36.6 million, or 21%, increase in segment expenses offset to a degree by a $12.9 million, or 5%, improvement in segment revenues. The significant contributors to the variance in segment expenses related to increased expenses for clearing services and depreciation in the amounts of $40.2 million and $11.3 million, respectively, offset to a degree by reduced license fees of $15.6 million. Depreciation increased from the first nine months of 2003 due to the LIFFE CONNECT® system that was capitalized at the end of 2003. As discussed above, no clearing service expenses were recorded in the first nine months of 2003 due to the arrangement with the clearing house utilized at that time to bill customers directly for clearing services. License fees decreased in the first nine months of 2004 due to the change in our provider of electronic trading software. Exchange trading segment revenues increased due to the clearing fees and dues recognized in the first nine months of 2004 of $54.8 million and $9.3 million, respectively, neither of which generated revenue in the first nine months of 2003. These increases to segment revenues were offset by decreased exchange fee revenue of $55.1 million due to the fee reductions discussed above.

 

The real estate operations segment increased by $3.1 million from a loss of $1.7 million in the first nine months of 2003, primarily as a result of increased building revenue of $1.5 million as building vacancy was reduced from 2003 levels due to the procurement of new tenants. Building segment results were also favorably affected by reduced building operating costs and interest expense of $1.2 million and $0.5 million, respectively.

 

Expenses. Operating expenses totaled $222.0 million for the nine months ended September 30, 2004, compared to $187.2 million for the nine months ended September 30, 2003, a 19% increase. Operating expenses as a percent of total revenues increased from 66% in the first nine months of 2003, to 75% in the first nine months of 2004, thereby lowering the operating margin to 25% in the first nine months of 2004 from 34% in the first nine months of 2003. In the first nine months of 2004, we experienced significant operating expense increases in clearing services and depreciation due to our new clearing arrangement and enhanced electronic trading software. However, we experienced sizable decreases in our technology costs and license fees due to more favorable licensing and operating agreements with the provider of our new electronic trading software as compared to those with our previous provider. We believe that our current level of operating expenses is commensurate with the new business model we created in the last year and that our future operating expenses will be comparable to the current period.

 

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The following chart illustrates operating expenses and income from operations in total and as a percent of total revenues for the nine months ended September 30:

 

     2004

    2003

    Variance

 
     in
thousands


   % of
Total


    in
thousands


   % of
Total


    in
thousands


    %
Change


 

Total revenues

   $ 296,556    100 %   $ 282,394    100 %   $ 14,162     5 %

Expenses:

                                        

Salaries and benefits

     52,820    18 %     47,517    17 %     5,303     11 %

Depreciation and amortization

     33,757    11 %     22,473    8 %     11,284     50 %

Professional services

     19,115    6 %     20,421    7 %     (1,306 )   -6 %

General and administrative expenses

     14,638    5 %     11,383    4 %     3,255     29 %

Building operating costs

     17,813    6 %     18,998    7 %     (1,185 )   -6 %

Information technology services

     26,378    9 %     38,725    14 %     (12,347 )   -32 %

Contracted license fees

     4,586    2 %     20,179    7 %     (15,593 )   -77 %

Programs

     8,053    3 %     3,090    1 %     4,963     161 %

Clearing services

     40,162    14 %     —      0 %     40,162     —    

Interest

     3,654    1 %     2,972    1 %     682     23 %

Equity in loss of One Chicago

     621    0 %     786    0 %     (165 )   -21 %

Severance and related costs

     387    0 %     640    0 %     (253 )   -40 %
    

  

 

  

 


 

Operating expenses

     221,984    75 %     187,184    66 %     34,800     19 %
    

  

 

  

 


 

Income from operations

   $ 74,572    25 %   $ 95,210    34 %   $ (20,638 )   -22 %
    

  

 

  

 


 

 

Salaries and benefits were $52.8 million in the first nine months of 2004, an 11% increase from $47.5 million for the same period of 2003. Salaries, incentive pay and payroll taxes increased $3.1 million in 2004 due to higher staffing levels as well as merit increases. We employed 5% more full time employees at the end of September 2004 as compared with September 2003. Also, medical insurance and pension costs increased $1.6 million and $0.8 million, respectively, in the first nine months of 2004.

 

Depreciation and amortization charges increased $11.3 million from $22.5 million in the first nine months of 2003 to $33.8 million in the first nine month
s of 2004. This increase relates to depreciation of $11.0 million recorded on new software and equipment placed into service after the third quarter of 2003 related to the LIFFE CONNECT
® electronic trading system and the CME/CBOT Common Clearing Link.

 

Professional service expenses decreased $1.3 million to $19.1 million in the first nine months of 2004. The largest variance in profession services was in consultant expenses which decreased $2.0 million compared to the prior year. This decrease was offset to a degree by increased expenses related to the current restructuring process in the amount of $0.6 million. We anticipate similar usage levels of professional resources in the next few years as we continue to enhance and maintain the technology supporting both our electronic and open outcry trading venues.

 

General and administrative expenses increased $3.3 million to $14.6 million in the nine months ended September 30, 2004. Expenses for leased computers and computer hardware increased $2.3 million in the first nine months of 2004 primarily due to increased needs for computers and servers to facilitate our increasing reliance on technology to support our electronic and open outcry trading venues. Losses on foreign currency transactions were $0.8 million in 2004 versus $0.3 million in 2003. The other significant fluctuation in general and administrative expenses was travel expenses, which increased $0.5 million. General and administrative expenses, other than foreign currency gains and losses, tend to be relatively fixed and, therefore, do not vary significantly from period to period. Gains and losses on foreign currency transactions, however, are based upon

 

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the spot rate between the U.S. dollar and the British pound sterling, the currency in which we have liabilities with our electronic trading software provider. Our general policy to mitigate the potential change in the value of the dollar versus the pound is to utilize foreign currency forward contracts when the future payment time and amount is known, such as for scheduled debt payments or fixed support payments. We do not utilize foreign currency forward contracts when the payment timing or amount is uncertain and therefore we will continue to have potential fluctuations in foreign currency gains and losses in the future. As of September 30, 2004, we had forward contracts related to approximately 42.0 million pounds sterling ($72.7 million) which relate to scheduled payments on existing debt and firm commitments through 2008.

 

Information technology services were $26.4 million in the first nine months of 2004, a 32% decrease from $38.7 million in the first nine months of 2003. The decrease is mostly the result of the change in the fourth quarter of 2003 to the new electronic trading system LIFFE CONNECT®. The operating costs paid to maintain the LIFFE CONNECT® system were approximately $11.8 million less than those paid to operate the previous a/c/e system due to more favorable operating agreements on the new electronic trading system.

 

Contracted license fees in the first nine months of 2004 were $4.6 million, a 77% decrease from $20.2 million in the prior year. The decrease primarily relates to the licensing arrangements in place for the electronic trading system being used in each period. Such fees were $1.5 million and $18.0 million in 2004 and 2003, respectively. The license for the LIFFE CONNECT® system is fixed for the term of the license agreement. The a/c/e system software license was composed of a fixed fee as well as a variable quarterly fee based on daily a/c/e system volume. Other license fees were $3.0 million and $2.2 million in the first nine months of 2004 and 2003, respectively.

 

Program costs increased $5.0 million to $8.1 million in the first nine months of 2004. The increase relates to efforts to increase our presence in new markets, specifically in Europe and Asia. In the first nine months of 2004, we spent $1.6 million on a program to connect new users in Europe to our electronic trading system. We also experienced increases in advertising and trade relation expenses of $1.7 million and $0.6 million, respectively, in our active pursuit of new interest in our exchange products, both in the United States and abroad. Also, market maker program expenses increased $0.6 million during the first nine months of 2004 as we strive to generate increased liquidity in specific exchange contracts.

 

Building operating costs in the first nine months of 2004 decreased 6%, to $17.8 million, largely the result of lower real estate tax expense of $1.8 million in the current period related to decreasing tax rates imposed on commercial property by the county in which we are located. Interest expense increased $0.7 million primarily due to new debt acquired after the first half of 2003 related to the new electronic trading platform. As discussed above, clearing service expense was $40.2 million in the first nine months of 2004 with no such expense recorded in the prior year.

 

Finally, minority interest in the loss of a subsidiary was $1.1 million in the nine months ended September 30, 2004 versus $41.2 million of minority interest in the income of a subsidiary in the first nine months of 2003. Ceres, the subsidiary in which we recognize a minority interest, was dissolved as of December 31, 2003. The loss in the current year related to Ceres represents wind up activities as the assets of Ceres are being liquidated, which is expected to be completed in the fourth quarter of 2004. We do not anticipate that we will incur future substantial losses as the liquidation progresses through the remainder of 2004.

 

The provision for income taxes was $31.0 million for the nine months ended September 30, 2004, compared to $22.5 million a year earlier. The effective tax rate was 42% and 24% for 2004 and 2003, respectively. The prior period rate was lower than the 2004 period largely because of the minority interest recorded in each period. Excluding the effects of the recorded minority interest, the effective tax rate would have been 41% and 42% for the first nine months of 2004 and 2003, respectively. These rates were higher than the corporate federal and state combined rate of 40% due to expenses that are non-deductible for tax purposes, such as those related to the restructuring transactions.

 

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Year ended December 31, 2003 compared to year ended December 31, 2002

 

Revenues. Consolidated operating revenues for the year ended December 31, 2003 were $381.3 million, an increase of 24%, from $308.3 million in the corresponding period of 2002. The following chart illustrates revenues by source and by percent of total revenues:

 

     2003

    2002

    Variance

 
     in
thousands


   % of
Total


    in
thousands


   % of
Total


    in
thousands


    %
Change


 

Exchange fees

   $ 285,815    75 %   $ 204,963    66 %   $ 80,852     39 %

Market data

     55,850    15 %     58,258    19 %     (2,408 )   -4 %

Building

     20,061    5 %     25,239    8 %     (5,178 )   -21 %

Services

     16,059    4 %     16,554    5 %     (495 )   -3 %

Clearing fees

     1,158    0 %     —      0 %     1,158     —    

Other

     2,359    1 %     3,259    1 %     (900 )   -28 %
    

  

 

  

 


 

Total revenues

   $ 381,302    100 %   $ 308,273    100 %   $ 73,029     24 %
    

  

 

  

 


 

 

Trading volume during 2003 was 454.6 million contracts, a 32% increase from 343.9 million contracts in 2002. The increase in trading volume experienced at the CBOT is comparable to the 27% increase experienced globally on futures markets in 2003 as customers utilize our products to mitigate risks they face in their businesses. Open outcry trading volume for the current period increased slightly to 218.9 million contracts compared to 214.6 million contracts in the prior year. Trading volume for electronic trading increased 82% to 235.7 million contracts in 2003 versus 129.3 million contracts in 2002. The percentage of electronic trading to total trading volume increased from 38% in 2002 to 52% in 2003.

 

Due to the increased trading volume described above, revenues from exchange fees increased 39%, or $80.8 million, from $205.0 million in 2002 to $285.8 million in 2003. The average fee per contract traded was $0.63 and $0.60 for the year ended December 31, 2003 and December 31, 2002, respectively.

 

Open outcry fees were $96.9 million for the year ended December 31, 2003, a 2% decrease compared to $98.7 million in the prior year period. In January 2003, management decreased the individual member fees on open outcry trades by three cents at all volume levels. This fee reduction primarily accounted for the $1.8 million decrease in open outcry fees. The average open outcry fee per contract traded was $0.44 for the year ended December 31, 2003, compared to $0.46 for the same period of the prior year. Volume discounts reduced open outcry trading fees by $1.3 million and $2.4 million in 2003 and 2002, respectively.

 

Electronic trading fees were $188.9 million in 2003, 78% higher than the $106.3 million in the prior year. In October 2002, management decreased the individual member fees on electronic trades by five cents at all volume levels. The increased electronic trading volume described above, offset to a degree by this fee reduction, largely accounted for the higher electronic trading fees. The average electronic trading fee per contract traded was $0.80 for the year ended December 31, 2003, compared to $0.82 for the prior year. Volume discounts reduced electronic trading fees by $18.4 million and $7.4 million in 2003 and 2002, respectively.

 

Market data revenues were $55.9 million in 2003, a 4% decrease from $58.3 million in 2002. The main component of market data revenues, quote fees, decreased by $6.7 million, or 11%, due to a reduction in the average number of terminal subscriptions in the current period. This was offset to a degree by a $3.6 million reduction in rebates to member firms for terminal subscription fees, as the rebate program was discontinued at the end of 2002. The reduction in terminal subscriptions is consistent with recent trends as industry consolidation has reduced the total subscription demand for market data. This trend is expected to continue in the future.

 

Building revenues from leased office space were $20.1 million for the year ended December 31, 2003, a 21% decrease from $25.2 million for the same period of 2002. One of our more significant tenants paid a $0.8

 

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million lease termination penalty in the first quarter of 2002. The building revenues attributable to this tenant in 2002 were about $4.5 million, excluding the early termination penalty. If the space occupied by the tenant cannot be leased at similar lease rates or in a timely manner, building revenues could continue to be significantly affected in the future.

 

Beginning in November 2003, we began to receive clearing fees in respect of each side of a trade made in our open outcry markets and electronic trading system that is cleared through the CME/CBOT Common Clearing Link. Prior to the CME/CBOT Common Clearing Link, our members cleared transactions executed in our open outcry markets and electronic trading system through another third-party provider of clearing services who billed our members directly for clearing services, so no clearing fee revenue or expense was record in 2003 prior to November 2003. Clearing fee revenues in 2003 of $1.2 million represent fees charged to customers for the clearing of trades. The CBOT paid $1.0 million of this fee to the CME, which payment is recorded as clearing services expense. Both clearing fee revenue and clearing services expense are recognized in the period the clearing is performed.

 

Service revenues decreased in 2003 to $16.1 million from $16.6 million a year earlier. A trading floor efficiency fee of $2.5 million was charged in 2002. No such fee was charged in 2003. Trading floor efficiency fees may be assessed when determined necessary based upon management’s review of operational funding requirements. Service revenues in 2003 included $2.6 million of one-time charges to member firms to offset costs incurred by the CBOT to install data lines between member firms and the trading host database for the LIFFE CONNECT® system that was developed and implemented in November 2003.

 

Operating Income. Income from operations increased 98%, or $57.4 million, to $115.7 million in 2003. Operating income from the exchange trading segment increased 74% to $117.5 million in 2003. This increase is mainly the result of higher segment revenues of $78.2 million coupled with lower depreciation of $4.2 million and the absence of a $10.7 million and a $6.2 million charge for a litigation settlement and an asset impairment charge, respectively, that were recorded in 2002. These improvements to operating income were offset to a degree by an increase in license fees of $13.6 million, as well as increased technology expenses of $13.3 million. The real estate operations segment increased by $7.4 million to a loss of $1.8 million in the current year, primarily as a result of higher segment revenues of $3.2 million and lower corporate overhead allocation of $2.0 million. This segment’s revenues were higher due to increased charges of $8.4 million for space used by the CBOT within the building. Building rent for third party customers decreased by $5.2 million.

 

 

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Expenses. Operating expenses totaled $265.6 million for the year ended December 31, 2003, compared to $250.0 million for the year ended December 31, 2002, a 6% increase. Operating expenses as a percent of total revenues decreased from 81% in 2002, to 70% in 2003, thereby raising the operating margin to 30% in 2003 from 19% in the prior year. The following chart illustrates operating expenses and income from operations in total and as a percent of total revenues:

 

     2003

    2002

    Variance

 
     in
thousands


   % of
Total


    in
thousands


   % of
Total


    in
thousands


    %
Change


 

Total revenues

   $ 381,302    100 %   $ 308,273    100 %   $ 73,029     24 %

Expenses:

                                        

Salaries and benefits

     64,122    17