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 #1 to Form S-4 213 1.10M
2: EX-3.1 Amended & Restated Certificate of Incorporation 13 51K
3: EX-3.3 Amended & Restated Bylaws 12 49K
4: EX-4.4 Rules & Regulations of the Board of Trade 648 2.79M
5: EX-4.5 Form of Rules and Regulations 639 2.77M
6: EX-8 Form of Opinion of Kirkland & Ellis 2 13K
7: EX-10.1 Agreement, Dated 4/14/00 Between Cbot & Donovan 11 39K
16: EX-10.10 Security Agreement, Dated 8/11/00 10 38K
17: EX-10.11 2nd Amend. & Restated Ltd. Partnership Agreement 46 186K
18: EX-10.12 Exec. Employment Agreement (David J. Vitale) 20 77K
19: EX-10.13 License Agreement Dated 6/5/97 36 123K
20: EX-10.14 Amendment to License Agreement 4 18K
21: EX-10.15 2nd Amendment to License Agreement 7 27K
22: EX-10.16 3rd Amendment to License Agreement 4 18K
23: EX-10.17 Alliance Agreement Dated 10/01/99 49 163K
24: EX-10.18 Software License Agreement Dated 10/01/99 21 84K
25: EX-10.19 Master Software Development Agreement Dated 71 224K
7/20/99
8: EX-10.2 Agreement, Dated 4/18/00 Between Cbot & Dutterer 3 22K
26: EX-10.20 Confirmation of Rights Agreement Dated 7/27/00 14 105K
27: EX-10.21 Systems Operations Agreement Dated 7/20/99 77 220K
28: EX-10.22 2nd Amendment & Restated License Agreement 11 40K
29: EX-10.23 Isda Master Agreement 63 272K
9: EX-10.3 Agreement, Dated 4/18/00 Between Cbot & Botcc 2 18K
10: EX-10.4 Exec. Employment Agreement (Patrick J. Catania) 13 39K
11: EX-10.5 Amend. to Employment Agreement(Patrick J. Catania) 4 21K
12: EX-10.6 Exec. Employment Agreement (Carol A. Burk) 13 39K
13: EX-10.7 Amend. Employment Agreement (Carol A. Burke) 4 21K
14: EX-10.8 Note Purchase Agreement Dated 3/01/97 77 282K
15: EX-10.9 Credit Agreement, Dated 8/11/00 64 235K
30: EX-21 Subsidiaries of For-Profit Cbot 1 10K
31: EX-23.1 Consent of Deloitte & Touche, LLP 1 11K
32: EX-23.4 Consent of William Blair & Co., L.L.C. 1 11K
33: EX-23.5 Consent of Arthur Andersen LLP 1 12K
34: EX-99.1 Form of Proxy Card 2± 13K
Page | (sequential) | | | | (alphabetic) | Top |
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- Alternative Formats (Word, et al.)
- Absence of Appraisal Rights
- Accounting Matters
- Advance Notice Procedures
- Allocation of the Equity in For-Profit CBOT Contains an Element of Uncertainty, The
- Appendix B Pro Forma Financial Information of For-Profit CBOT
- Appendix E Board of Trade of the City of Chicago, Inc. Bylaws
- Appendix F Status of Certain Current CBOT Rules and Regulations After the Restructuring Transactions
- Authorized Capital
- Available Votes; Required Vote
- Background of the Restructuring Transactions
- Board of Directors
- Building Services
- Bylaws
- Capitalization
- Carol A. Burke
- Ceres Valuation Analysis of Arthur Andersen
- Certain Members Have Filed a Complaint in Illinois State Court Challenging the Proposed Allocation of Shares in For-Profit CBOT
- Changes in Existing Laws and Rules
- Chicago Board of Trade
- Class A Common Stock
- Class B Common Stock
- Commitment to Maintain Open Outcry Markets
- Committees of the Board of Directors
- Comparison of the Rights of Members of the CBOT and Stockholders of For-Profit CBOT
- Competition
- Conditions to Completing the Restructuring Transactions
- Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998
- Consolidated Statements of Income for the Years Ended December 31, 2000, 1999 and 1998
- Consolidated Statements of Members' Equity for the Years Ended December 31, 2000, 1999 and 1998
- Conversion Rights of Series B-3 Shares
- Current assets
- Current liabilities
- Demutualization
- Description of Additional Provisions of Class B Common Stock
- Description of Capital Stock
- Description of Common Stock
- Description of the Restructuring Transactions
- Development of the Restructuring Strategy
- Directors and Executive Officers
- Dividends
- Electronic Trading
- Executive Compensation
- Exhibits and Financial Statement Schedules
- Experts
- For-Profit CBOT Common Stock
- Indemnification of Directors and Officers
- Independent Allocation Committee of the Board
- Independent Auditors' Report
- Intense Competition Could Materially Adversely Affect Our Market Share and Financial Performance
- Legal Matters
- Legal Proceedings
- Liquidity and Capital Resources
- Management and Executive Compensation
- Management's Discussion and Analysis of Financial Condition and Results of Operations
- Material U.S. Federal Income Tax Consequences of the Restructuring Transactions
- Minority Member Litigation
- Modernization of Our Corporate Governance Structure
- Net loss
- Nickolas J. Neubauer
- Notes to Consolidated Financial Statements
- Opinion of Arthur Andersen to the Board of Directors Regarding Fairness of the Ceres Merger
- Opinion of the Financial Advisor to the Independent Allocation Committee of the Board
- Other Provisions
- Our Business
- Overview
- Patent Rights Litigation
- Preferred Stock
- Reasons for the Restructuring Strategy
- Regulation
- Regulatory Matters
- Reorganization of Our Electronic Trading Business
- Restructuring Transactions, The
- Revenues
- Risk Factors
- Risks Relating to Changes in Our Corporate Governance
- Risks Relating to Our Business
- Risks Relating to the Restructuring Transactions
- Selected Consolidated Financial Data
- Series A Convertible Preferred Stock
- Shares Eligible for Future Sale
- Soybean Antitrust Litigation
- Special Class and Series Voting Rights
- Special Meeting and Proxy Information
- Special Meetings
- Status of Certain Current CBOT Rules and Regulations After the Restructuring Transactions
- Strategic Alternatives Considered
- Summary
- The Allocation of the Equity in For-Profit CBOT Contains an Element of Uncertainty
- The Restructuring Transactions
- U.S. Federal Income Tax Consequences
- Voting
- Voting on Core Rights
- Voting Rights
- We May Be Unable to Meet Our Future Capital and Liquidity Requirements
- Where You Can Find More Information
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1 | 1st Page - Filing Submission
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" | Carol A. Burke
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5 | Summary
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" | Our Business
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6 | For-Profit CBOT Common Stock
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" | Class A Common Stock
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" | Class B Common Stock
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7 | Voting
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" | The Restructuring Transactions
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10 | Series A Convertible Preferred Stock
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15 | U.S. Federal Income Tax Consequences
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" | Accounting Matters
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" | Regulatory Matters
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16 | Conditions to Completing the Restructuring Transactions
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" | Risk Factors
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17 | Absence of Appraisal Rights
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19 | Risks Relating to the Restructuring Transactions
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21 | Certain Members Have Filed a Complaint in Illinois State Court Challenging the Proposed Allocation of Shares in For-Profit CBOT
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" | The Allocation of the Equity in For-Profit CBOT Contains an Element of Uncertainty
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25 | Risks Relating to Our Business
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" | We May Be Unable to Meet Our Future Capital and Liquidity Requirements
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28 | Intense Competition Could Materially Adversely Affect Our Market Share and Financial Performance
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33 | Risks Relating to Changes in Our Corporate Governance
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36 | Overview
|
" | Background of the Restructuring Transactions
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" | Development of the Restructuring Strategy
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42 | Reasons for the Restructuring Strategy
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43 | Strategic Alternatives Considered
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44 | Description of the Restructuring Transactions
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45 | Demutualization
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47 | Modernization of Our Corporate Governance Structure
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49 | Reorganization of Our Electronic Trading Business
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51 | Independent Allocation Committee of the Board
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53 | Opinion of the Financial Advisor to the Independent Allocation Committee of the Board
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58 | Opinion of Arthur Andersen to the Board of Directors Regarding Fairness of the Ceres Merger
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61 | Ceres Valuation Analysis of Arthur Andersen
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67 | Capitalization
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68 | Selected Consolidated Financial Data
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" | Revenues
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70 | Management's Discussion and Analysis of Financial Condition and Results of Operations
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" | Net loss
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74 | Liquidity and Capital Resources
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78 | Chicago Board of Trade
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84 | Electronic Trading
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86 | Building Services
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87 | Competition
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93 | Regulation
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94 | Changes in Existing Laws and Rules
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95 | Legal Proceedings
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" | Minority Member Litigation
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98 | Patent Rights Litigation
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" | Soybean Antitrust Litigation
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99 | Management and Executive Compensation
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" | Directors and Executive Officers
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103 | Committees of the Board of Directors
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105 | Executive Compensation
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112 | Description of Capital Stock
|
" | Description of Common Stock
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114 | Special Class and Series Voting Rights
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115 | Board of Directors
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" | Conversion Rights of Series B-3 Shares
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116 | Description of Additional Provisions of Class B Common Stock
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117 | Voting on Core Rights
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" | Commitment to Maintain Open Outcry Markets
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118 | Preferred Stock
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119 | Dividends
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122 | Other Provisions
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" | Advance Notice Procedures
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125 | Shares Eligible for Future Sale
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127 | Comparison of the Rights of Members of the CBOT and Stockholders of For-Profit CBOT
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128 | Authorized Capital
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130 | Voting Rights
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134 | Special Meetings
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137 | Material U.S. Federal Income Tax Consequences of the Restructuring Transactions
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138 | Special Meeting and Proxy Information
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139 | Available Votes; Required Vote
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140 | Legal Matters
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" | Experts
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" | Where You Can Find More Information
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142 | Independent Auditors' Report
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143 | Current assets
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" | Current liabilities
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144 | Consolidated Statements of Income for the Years Ended December 31, 2000, 1999 and 1998
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145 | Consolidated Statements of Members' Equity for the Years Ended December 31, 2000, 1999 and 1998
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146 | Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998
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147 | Notes to Consolidated Financial Statements
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159 | Appendix B Pro Forma Financial Information of For-Profit CBOT
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186 | Appendix E Board of Trade of the City of Chicago, Inc. Bylaws
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" | Bylaws
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198 | Appendix F Status of Certain Current CBOT Rules and Regulations After the Restructuring Transactions
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" | Status of Certain Current CBOT Rules and Regulations After the Restructuring Transactions
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203 | Item 20. Indemnification of Directors and Officers
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206 | Item 21. Exhibits and Financial Statement Schedules
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211 | Nickolas J. Neubauer
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As filed with the Securities and Exchange Commission on March 6, 2001
Registration No. 333-54370
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1
to
FORM S-4
REGISTRATION STATEMENT
UnderThe Securities Act of 1933
----------------
Board of Trade of the City of Chicago, Inc.
(Exact name of registrant as specified in its charter)
Delaware 6231 36-0819800
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number)
incorporation or Code Number)
organization)
141 West Jackson
Boulevard
Chicago, Illinois 60604
(312) 435-3500
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Carol A. Burke
Executive Vice President and General Counsel
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:
John H. Stassen, P.C.
Joseph P. Gromacki
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
(312) 861-2000
----------------
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.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 MARCH 6, 2001
BOARD OF TRADE OF THE CITY OF CHICAGO, INC.
141 WEST JACKSON BOULEVARD
CHICAGO, ILLINOIS 60604
, 2001
Dear Member:
It is my privilege to present to you this proxy statement and prospectus in
connection with a historic membership vote on a proposed restructuring of the
Chicago Board of Trade, which is intended to enhance its competitiveness within
the futures industry. You are being asked to vote on the restructuring
transactions described in this document that are designed to:
. demutualize our organization;
. modernize our corporate governance structure; and
. reorganize and consolidate our electronic trading business.
Pursuant to the restructuring transactions, each member will receive shares
of Class A common stock in accordance with an allocation methodology described
in this document and a share of one of the five series of Class B common stock
in the for-profit corporation. The Class A common stock will represent solely
an equity interest in the for-profit corporation. The share of Class B common
stock will represent an equity interest in the for-profit corporation and a
membership in the demutualized exchange, which, subject to satisfaction of
applicable membership and eligibility requirements, will entitle you to trading
rights and privileges that correspond to the trading rights and privileges
associated with your current membership.
In connection with the restructuring transactions, we will substantially
eliminate the membership petition process and adopt a more modern mechanism for
initiating and voting on stockholder proposals, streamline our board of
directors and modernize other aspects of our corporate governance structure in
order to improve our corporate decision-making process.
In addition, our electronic trading business will be reorganized and
consolidated into our wholly owned subsidiary, Electronic Chicago Board of
Trade, Inc. As a result, members who are limited partners of Ceres Trading
Limited Partnership will receive shares of Series A convertible preferred stock
in the for-profit corporation in exchange for their limited partnership
interests and Ceres will be liquidated.
Our Full Members and Associate Members will be entitled to vote on the
restructuring transactions. 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. No other class of membership will
be entitled to vote on the restructuring transactions.
Please review carefully the attached document, which provides important
information regarding the restructuring transactions. In particular, you should
carefully consider the matters discussed under "Risk Factors" beginning on page
15.
Our board of directors has approved the restructuring transactions and
recommends that you vote "FOR" the restructuring transactions. We believe that
the restructuring transactions will better position us to compete in the
rapidly changing and consolidating futures industry and will give our
organization greater structural flexibility and easier access to equity
capital, if needed, to grow and continue to offer quality products and
services.
Sincerely,
/s/ Nickolas J. Neubauer
Nickolas J. Neubauer
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 , 2001 and was first mailed, with the form
of proxy, to members on or about , 2001.
BOARD OF TRADE OF THE CITY OF CHICAGO, INC.
141 WEST JACKSON BOULEVARD
CHICAGO, ILLINOIS 60604
NOTICE OF SPECIAL MEETING
To Our Voting Members:
The board of directors of the Board of Trade of the City of Chicago, Inc.
has called a special meeting of the membership, to be held at 2:30 p.m.,
Central time, on , 2001 in the Visitor Center Theater, Fifth Floor,
at our offices at 141 West Jackson Boulevard, Chicago, Illinois 60604. The
purpose of the meeting is to vote on the restructuring transactions described
in this document, including the approval and adoption of an amended and
restated certificate of incorporation, which will facilitate the
demutualization of the CBOT and modernize certain aspects of our corporate
governance structure, the approval and adoption of amended and restated bylaws,
which will modernize certain other aspects of our corporate governance
structure, and the approval of all other matters relating to the restructuring
transactions, including the reorganization of our electronic trading business.
Holders of record of Full Memberships and Associate Memberships as of the
close of business on , 2001 will be entitled to vote on these
matters at the special meeting of the membership. 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. No other
class of membership will be entitled to vote on the restructuring transactions.
A proxy ballot is enclosed for your use in voting on the propositions
described above and in this document. The special meeting of the membership and
related proxy ballot solicitation will be conducted in accordance with our
certificate of incorporation, bylaws and rules and regulations and applicable
law. In particular, the propositions described in this document are being
submitted to a vote of the membership pursuant to Sections 5 and 7 of Exhibit A
to our certificate of incorporation.
In connection with the proxy ballot solicitation, please note the following
instructions:
. 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 , 2001.
In the absence of specific direction, proxies will be voted "FOR" approval
of the propositions. Proxies that are marked both "FOR" and "AGAINST" will not
count and will not be treated as votes cast. 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 , 2001 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.
Your board of directors has carefully considered these matters and
recommends that you vote "FOR" approval of the proposed restructuring
transactions.
By Order of the Board of Directors,
/s/ Paul J. Draths
Paul J. Draths
Vice President and Secretary
, 2001
TABLE OF CONTENTS
[Download Table]
Page
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Summary................................................................... 1
Risk Factors.............................................................. 15
The Restructuring Transactions............................................ 32
Capitalization............................................................ 63
Selected Consolidated Financial Data...................................... 64
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 66
Our Business ............................................................. 73
Management and Executive Compensation..................................... 95
Description of Capital Stock.............................................. 108
Shares Eligible for Future Sale........................................... 121
Comparison of the Rights of Members of the CBOT and Stockholders of For-
Profit CBOT.............................................................. 123
Material U.S. Federal Income Tax Consequences of the Restructuring
Transactions ............................................................ 133
Special Meeting and Proxy Information..................................... 134
Legal Matters............................................................. 136
Experts................................................................... 136
Where You Can Find More Information....................................... 136
[Download Table]
Page
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Appendix A
Board of Trade of the City of Chicago, Inc. Subsidiaries and Affiliates
Financial Statements.................................................... A-1
Appendix B
Pro Forma Financial Information of For-Profit CBOT...................... B-1
Appendix C
Appendix C-1: William Blair Fairness Opinion............................ C-1
Appendix C-2: Arthur Andersen Fairness Opinion.......................... C-2
Appendix C-3: Preliminary Ceres Valuation Analysis...................... C-3
Appendix D
Amended and Restated Certificate of Incorporation of For-Profit CBOT.... D-1
Appendix E
Board of Trade of the City of Chicago, Inc. Bylaws..................... E-1
Appendix F
Status of Certain Current CBOT Rules and Regulations After the
Restructuring Transactions.............................................. F-1
References to "we," "us" or "our" refer to either the CBOT, in its current
form as a nonstock, not-for-profit corporation, or For-Profit CBOT, the stock,
for-profit corporation that will result from completion of the restructuring
transactions described in this document, as the context requires, together with
its consolidated subsidiaries.
Project A(R) is a registered trademark of Ceres, and a/c/esm is a registered
service mark of CBOT/Eurex Alliance, L.L.C. Certain other trademarks used
herein are the property of their respective owners.
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may be used only where it is legal
to issue these securities. The information contained in this document is
accurate only as of the date of this document, regardless of the date of
delivery of this document or of the sale of any securities.
i
SUMMARY
This summary highlights information contained elsewhere in this document. It
does not contain all of the information which you should consider before voting
on the 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 restructuring
transactions.
Overview of the Restructuring Transactions
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 its
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. As a result of this process, we have
developed, and are proposing for your approval, a series of transactions
designed to restructure the CBOT.
These transactions, which we sometimes refer to in this document as the
"restructuring transactions," are designed to:
. demutualize our organization by converting the CBOT from a nonstock, not-
for-profit corporation into a stock, for-profit corporation, which we
sometimes refer to in this document as "For-Profit CBOT," and
distributing shares of common stock of For-Profit CBOT to our members;
. modernize our corporate governance structure by substantially eliminating
the membership petition process, streamlining our board of directors and
making other changes to improve the efficiency of our corporate decision-
making process; and
. reorganize and consolidate our electronic trading business, part of which
is currently operated by Ceres Trading Limited Partnership, or "Ceres,"
into Electronic Chicago Board of Trade, Inc., or "eCBOT," our wholly
owned subsidiary formed for that purpose. In connection with this
reorganization of our electronic trading business, For-Profit CBOT will
issue shares of its Series A convertible preferred stock to the limited
partners of Ceres in exchange for their limited partnership interests,
and Ceres will be liquidated.
We believe that this restructuring will enable us to enhance our
competitiveness within the futures industry, including our competitiveness
within both the open outcry and electronic trading markets.
We currently anticipate that we will complete the restructuring transactions
as soon as reasonably practicable following membership approval, subject to
receiving a favorable ruling from the Internal Revenue Service and any required
regulatory approvals from the Commodity Futures Trading Commission. However,
our obligation to complete the restructuring transactions is subject to
satisfaction of a number of conditions, including, among other things, 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 that the restructuring transactions are not fair to each class
of CBOT membership. For more information about the IRS ruling, CFTC approvals
and other conditions to completing the restructuring transactions, see "The
Restructuring Transactions--Regulatory Matters" and "--Conditions to Completing
the Restructuring Transactions."
Our Business
Founded in 1848, we are one of the world's leading exchanges for the trading
of futures and options on futures contracts, with total volume traded in 2000
of about 234 million contracts, which represented about 15% of the total volume
of global listed futures and options on futures contracts traded. From our
origins in the nineteenth century as a market for trading grains, we have
evolved into a major financial center in the twenty-first century, offering a
diverse range of products based on interest rates, debt instruments,
agricultural commodities, equity indices and other underlying instruments.
1
We operate markets for the trading of commodity and financial futures
contracts, as well as options on futures contracts. Our products trade on
traditional open outcry auction markets on our trading floors in Chicago where
members trade among themselves for their own accounts and for the accounts of
their customers. We also make our products available for trading on the a/c/e
electronic trading system operated by our joint venture with the Eurex Group,
which includes Deutsche Borse AG, the Swiss Stock Exchange and Eurex Zurich AG.
The a/c/e system uses a modified form of the technology used at Eurex, the
largest derivatives exchange in the world.
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.
For-Profit CBOT Common Stock
In connection with the restructuring transactions, each CBOT member,
including each Full Member, Associate Member, GIM, IDEM and COM, as well as
each member holding a one-half Associate Membership, will receive an
appropriate number of shares of Class A common stock and a share of one of the
five series of Class B common stock in respect of each membership held by such
member. The number of shares of Class A common stock to be received by each
member will be based upon the allocation methodology developed and recommended
by our board's Independent Allocation Committee and approved by our board of
directors. For purposes of the restructuring transactions, including the
allocation of Class A common stock and Class B common stock of For-Profit CBOT,
each member holding a one-half Associate Membership will be treated as a GIM.
Class A Common Stock
The Class A common stock will represent solely an equity interest in For-
Profit CBOT and will generally have traditional features of common stock. The
Class B common stock will represent an equity interest and, subject to
satisfaction of applicable membership and eligibility requirements, a
membership in For-Profit CBOT, including all trading rights and privileges
associated with the applicable class of membership. As a result, the holder of
a share of Class B common stock who meets the applicable membership and
eligibility criteria will be a "member of a contract market" within the meaning
of the Commodity Exchange Act and a member of For-Profit CBOT for purposes of
For-Profit CBOT's rules and regulations.
Class B Common Stock
The Class B common stock will be issued in five series. Each series of Class
B common stock will represent a membership and afford the holder of such stock
the trading rights and privileges that correspond to the membership and trading
rights and privileges of one of the five current classes of CBOT membership, as
illustrated below:
[Download Table]
Current Class of Corresponding Series of
CBOT Membership Class B Common Stock
---------------- -----------------------
Full Series B-1
Associate Series B-2
GIM Series B-3
IDEM Series B-4
COM Series B-5
2
Dividends; Liquidation
Class A common stock and Class B common stock will provide the holder with
the right to receive dividends as determined by the 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.
Voting
With the exception of certain matters reserved to the holders of Class B
common stock, holders of Class A common stock will have the right to vote
generally on all matters submitted for a vote of stockholders, including, among
other things, the election of directors. Except as may otherwise be required by
Delaware law, the Class B common stock generally will not have voting rights,
except that holders of Series B-1 and Series B-2 shares of Class B common stock
will have the right to approve changes that would adversely affect specified
core rights associated with such shares. These Class B stockholders will have
the right to vote on any amendment to our certificate of incorporation, bylaws
or rules and regulations that would adversely affect the following core rights:
. the allocation of products that a holder of a specific series of Class B
common stock is permitted to trade on the exchange facilities of For-
Profit CBOT;
. the requirement that holders of shares of Class B common stock will be
charged transaction fees for trades of For-Profit CBOT's products for
their accounts that are lower than the transaction fees charged to any
participant who is not a holder of Class B common stock for the same
products;
. the number of authorized shares of any series of Class B common stock;
. the membership and eligibility requirements to hold shares of a series of
Class B common stock or to exercise the associated trading rights or
privileges; and
. the commitment to maintain current open outcry markets so long as each
such market is deemed liquid unless the discontinuance of any such market
is approved by the holders of Series B-1 and Series B-2 shares of Class B
common stock.
Holders of Series B-1 shares of Class B common stock will have one vote per
share and holders of Series B-2 shares of Class B common stock will have one-
sixth of one vote per share in any vote with respect to a proposed amendment to
our certificate of incorporation, bylaws or rules and regulations that would
adversely affect any of the above-described core rights. Except as may
otherwise be required by Delaware law, holders of Class A common stock and
holders of Series B-3, Series B-4 and Series B-5 shares of Class B common stock
will not have the right to vote on changes that would adversely affect core
rights. For more information on the Class A common stock and Class B common
stock, see "Description of Capital Stock."
The Restructuring Transactions
The restructuring transactions consist of a series of transactions designed
to demutualize our organization, modernize our corporate governance structure
and consolidate our electronic trading business into our wholly owned
subsidiary, eCBOT. Let us tell you more about the restructuring transactions:
Demutualizing Our Company
The demutualization of the CBOT into a stock, for-profit corporation will be
accomplished by amending our certificate of incorporation to remove the current
restriction on our ability to issue capital stock, which will permit us to
issue stock to our members and provide that the CBOT will become for-profit.
Prior to the amendment to our certificate of incorporation, each member will
receive a distribution of rights, which will entitle the holder to receive an
appropriate number of shares of Class A common stock based on the allocation
methodology developed and recommended by our Independent Allocation Committee
and adopted by our board and a share of the appropriate series of Class B
common stock with respect to each membership held by such member, as set forth
in the table below. The shares of Class A common stock and Class B common stock
will be issued pursuant to the rights following effectiveness of the amendment
to our certificate of incorporation.
3
Shares of Common Stock of For-Profit CBOT
to Be Received Per Membership
[Download Table]
Shares of Shares of
Membership Class A Common Stock Class B Common Stock
---------- -------------------- ---------------------
Full 25,000 1 share of Series B-1
Associate 5,000 1 share of Series B-2
GIM 2,500 1 share of Series B-3
IDEM 300 1 share of Series B-4
COM 350 1 share of Series B-5
Immediately after completion of the restructuring transactions, our members
will be the only common stockholders of For-Profit CBOT and the interests that
they held in the CBOT prior to the restructuring transactions will be
represented solely by their ownership of common stock of For-Profit CBOT.
For more information about our demutualization, including the allocation of
shares of Class A common stock among members, see "The Restructuring
Transactions--Description of the Restructuring Transactions--Demutualization,"
"--Independent Allocation Committee of the Board" and "--Opinion of Financial
Advisor to the Independent Allocation Committee of the Board."
Modernizing Our Corporate Governance Structure
In connection with the restructuring transactions, we will modernize certain
aspects of our corporate governance structure pursuant to changes in our
certificate of incorporation, bylaws and rules and regulations.
We will amend our certificate of incorporation to provide that voting
rights, including the right to elect directors, will generally be vested with
the holders of Class A common stock. The holders of Class B common stock will
generally not have voting rights, except that holders of Series B-1 and Series
B-2 shares of Class B common stock will have limited voting rights to approve
certain changes that would adversely affect certain core rights relating to
such shares. In addition, our certificate of incorporation will contain certain
change of control provisions designed to preserve the long-term value of For-
Profit CBOT for the benefit of its stockholders.
We will amend our bylaws to reduce the ability of our stockholders to
participate in the day-to-day management and operations of For-Profit CBOT. For
example, our board of directors will generally have the authority to adopt,
repeal and amend the bylaws without stockholder approval. Any proposal which is
initiated by stockholders to adopt, repeal or amend the bylaws may only be
brought to a vote at an annual meeting after satisfying certain advance notice
requirements and will require the approval of two-thirds of the voting power of
stockholders of For-Profit CBOT entitled to vote generally in the election of
directors. The so-called "petition process" of the current CBOT members, which
includes, among other things, the ability of members to petition the board of
directors to call special meetings of members and the requirement that members
approve all changes to the certificate of incorporation and bylaws, will be
substantially eliminated.
The certificate of incorporation and bylaws will also provide that the size
of our board of directors will be reduced from 18 directors to nine directors
shortly after completion of the restructuring transactions and that our board
will be divided into three classes of directors with staggered terms of office.
Further, certain board and other committees will be eliminated.
We will also make certain changes to our rules and regulations. Currently,
our rules are part of our bylaws and may only be adopted, repealed or amended
with membership approval. After completion of the restructuring transactions,
the rules and regulations will no longer be part of the bylaws and the
authority to adopt, repeal and amend our rules and regulations will be vested
solely and exclusively in the board of directors of For-Profit CBOT, except for
amendments which would adversely affect the core rights as described
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above, which will also require the approval of the holders of Series B-1 and
Series B-2 shares of Class B common stock. As a result, the stockholders of
For-Profit CBOT will not generally have the authority to adopt, repeal or amend
the rules and regulations.
The substantial elimination of the petition process and the elimination of
the requirement of membership approval to adopt, repeal or amend the rules are
designed to modernize the corporate governance of For-Profit CBOT in order to
improve the efficiency of our decision-making process. Since these changes will
materially affect your rights and obligations, we urge you to give careful
consideration to these aspects of the restructuring transactions before voting
on the restructuring transactions.
For more information about these changes to our corporate governance
structure, see "The Restructuring Transactions--Description of the
Restructuring Transactions--Modernization of Our Corporate Governance
Structure."
Reorganizing Our Electronic Trading Business
In connection with the restructuring transactions, our electronic trading
business will be reorganized and consolidated into eCBOT, so that, following
the restructuring transactions, eCBOT will conduct the electronic trading
business of For-Profit CBOT. This will be accomplished pursuant to certain
transactions described below involving Ceres, which currently operates part of
the electronic trading business of the CBOT.
As part of the reorganization of our electronic trading business, a newly-
formed corporate subsidiary of For-Profit CBOT will merge with and into Ceres,
with Ceres as the surviving entity. We sometimes refer to this merger in this
document as the "Ceres merger." As a result of the Ceres merger, eCBOT will
remain the general partner of Ceres and For-Profit CBOT will become a limited
partner of Ceres. Following the Ceres merger, Ceres will liquidate and its
assets will be distributed to For-Profit CBOT and eCBOT. For-Profit CBOT will
then transfer to eCBOT assets relating to the electronic trading business
received in such distribution. As a result, our wholly owned eCBOT subsidiary
will own and operate the electronic trading business of For-Profit CBOT.
Pursuant to the Ceres merger, the limited partners of Ceres will receive
shares of Series A convertible preferred stock of For-Profit CBOT in exchange
for their limited partnership interests. The number of shares of Series A
convertible preferred stock that will be issued in exchange for each limited
partnership interest will be determined by our board and the board of directors
of eCBOT by dividing:
. that partnership interest's allocable portion of the value of Ceres as
presented in the final valuation report of Arthur Andersen LLP regarding
the value of Ceres and the partnership interests in Ceres, to be
delivered as of a date reasonably proximate to the date of the
completion of the Ceres merger,
by
. the liquidation preference of $100 per share of Series A convertible
preferred stock.
As described further below, we engaged Arthur Andersen to determine the fair
market value of Ceres and the limited partnership interests and evaluate the
fairness, from a financial point of view, to Ceres and each class of limited
partners of the consideration to be issued in the Ceres merger to each class of
the Ceres limited partners.
In accordance with the exchange formula set forth above, the specific number
of shares of Series A convertible preferred stock that will be distributed to
each limited partner of Ceres will not be determined by our board and the board
of directors of eCBOT until shortly before the completion of the Ceres merger.
For purposes of illustration, the following chart indicates the number of
shares of Series A convertible preferred stock that would have been distributed
for each Class A limited partnership if the distribution had been made on the
basis of Arthur Andersen's valuation analysis of Ceres as of December 31, 2000
as described above:
5
Shares of Series A Convertible Preferred Stock
To Be Received Per Class A Limited Partnership Interest
[Download Table]
Series A
Limited Convertible
Partnership Preferred
Interest Stock
----------- -----------
Class A-1 132.5307
Class A-2 21.3460
Class A-3 14.6378
Class A-4 0.6406
Class B limited partnership interests, which are held only by our clearing
members, are valued, in part, based upon the CBOT trading volume of the member
holding such limited partnership interest. As a result, the value of each Class
B limited partnership interest and the number of shares of Series A convertible
preferred stock to be issued in exchange for that limited partnership interest
varies by holder. Based upon the December 31, 2000 valuation of Ceres, a total
of 58,800 shares of Series A convertible preferred stock would be distributed
to the 61 holders of Class B limited partnership interests in Ceres.
You should understand that the actual number of shares of Series A
convertible preferred stock to be issued to each Ceres limited partner will be
determined based on the value of each limited partnership interest as presented
in Arthur Andersen's final valuation report to be delivered to us as of a date
reasonably proximate to the date of the completion of the Ceres merger and is
not capable of determination at this time. Accordingly, the description above
is for illustrative purposes only.
For more information about the reorganization of our electronic trading
business, including the Ceres merger, the valuation of Ceres and the issuance
of shares of Series A convertible preferred stock to the Ceres limited
partners, see "The Restructuring Transactions--Description of the Restructuring
Transactions--Reorganization of Our Electronic Trading Business," "--Ceres
Valuation Analysis of Arthur Andersen" and""--Opinion of Arthur Andersen to the
Board of Directors Regarding Fairness of the Ceres Merger."
Series A Convertible Preferred Stock
Each share of Series A convertible preferred stock will have a liquidation
value of $100 and will accrue cumulative dividends at an annual rate of $8.00
per share. The holder of a share of Series A convertible preferred stock will
be entitled to receive, when, as and if declared by the board of directors of
For-Profit CBOT, cumulative dividends payable quarterly, in the form determined
by the board of directors of For-Profit CBOT. We currently anticipate that the
dividends will be paid in the form of additional shares of Series A convertible
preferred stock for the foreseeable future. The Series A convertible preferred
stock will rank prior to the common stock of For-Profit CBOT, including the
Class A common stock and the Class B common stock, with respect to dividends
and payments made upon liquidation of For-Profit CBOT.
Each share of Series A convertible preferred stock will be convertible, at
the holder's option, into shares of Class A common stock of For-Profit CBOT, at
any time following the first to occur of a qualified underwritten public
offering of Class A common stock or a qualified public offering of equity
interests in the company conducting our electronic trading business. Each share
of Series A convertible preferred stock will be convertible into a number of
shares of For-Profit CBOT's Class A common stock having a total value,
determined pursuant to the terms of the Series A convertible preferred stock,
as of the public offering equal to the liquidation value of such share of
Series A convertible preferred stock, plus accrued but unpaid dividends
thereon.
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The Series A convertible preferred stock will be redeemable by For-Profit
CBOT at any time, in whole or in part, for cash, property or securities,
including shares of Class A common stock or shares of capital stock eCBOT, as
determined by the board of directors of For-Profit CBOT. In addition, upon a
separation of all or substantially all of the electronic trading business from
For-Profit CBOT, whether by means of a spin-off, split-off or other
transaction, For-Profit CBOT will be required to redeem all of the shares of
Series A convertible preferred stock for cash, property or securities,
including shares of Class A common stock or shares of capital stock of eCBOT,
as determined by the board of directors of For-Profit CBOT.
For more information on the Series A convertible preferred stock, see
"Description of Capital Stock--Preferred Stock--Series A Convertible Preferred
Stock."
Fairness Opinions
Our board of directors has received two fairness opinions from our financial
advisors in connection with the restructuring transactions--one opinion
relating to the allocation of shares of Class A common stock among members in
connection with the demutualization and another opinion relating to the
allocation of shares of Series A convertible preferred stock among the Ceres
limited partners as merger consideration pursuant to the Ceres merger in
connection with the reorganization of our electronic trading business.
Neither of these two fairness opinions addresses the value of the CBOT or
the memberships before or after completion of the restructuring transactions,
or the fairness of the consideration to be received by CBOT members in respect
of their memberships in connection with the restructuring transactions. See
"Risk Factors--Risk Factors Relating to the Restructuring Transactions--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 You Will
Receive in the Restructuring Transactions Compared to the Value of the
Memberships You Currently Own."
William Blair Fairness Opinion
Since no mechanism currently exists in our certificate of incorporation,
bylaws or rules or regulations for allocating ownership in our organization
among the members in connection with a restructuring such as the restructuring
transactions, our board of directors appointed an Independent Allocation
Committee, composed solely of public or independent directors of the board, to
determine and recommend to the full board a fair allocation of equity in the
for-profit corporation among members.
William Blair & Company, L.L.C. was retained by the Independent Allocation
Committee and the board of directors to deliver a written opinion as to the
fairness, from a financial point of view, of the allocation of shares of Class
A common stock of For-Profit CBOT among the members in respect of their
memberships in connection with the restructuring transactions. The opinion,
dated January 16, 2001, states that, based upon and subject to the matters set
forth in the opinion, the allocation of shares of Class A common stock of For-
Profit CBOT among the 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, is
fair, from a financial point of view, to each of the five classes of members.
The full text of the William Blair fairness opinion is attached as Appendix C-1
to this document.
Arthur Andersen Fairness Opinion
Arthur Andersen was retained by our board of directors and the board of
directors of eCBOT to render a written opinion as to the fairness, from a
financial point of view, to Ceres and each class of the limited partners of
Ceres of the consideration to be received by each limited partner of Ceres in
exchange for their respective limited partnership interests pursuant to the
Ceres merger.
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The opinion, dated January 16, 2001, states that, based upon and subject to
the matters set forth in the opinion, the consideration to be received by each
limited partner of Ceres in exchange for their respective limited partnership
interests pursuant to the Ceres merger, is fair, from a financial point of
view, to Ceres and each class of the limited partners of Ceres. The full text
of the Arthur Andersen fairness opinion is attached as Appendix C-2 to this
document.
Ceres Valuation
Arthur Andersen was also retained to provide a valuation of Ceres and its
partnership interests. This valuation analysis will provide the basis for the
use of the Series A convertible preferred stock of For-Profit CBOT as merger
consideration and the allocation of the Series A convertible preferred stock
among the Ceres limited partners in the Ceres merger.
As described in greater detail elsewhere in this document, Arthur Andersen
has determined the value of Ceres to be $29,400,000 as of December 31, 2000.
The full text of the preliminary Ceres valuation analysis is attached as
Appendix C-3 to this document.
Arthur Andersen will provide us with its final valuation report, including
its valuation analysis of Ceres and the limited partnership interests as of
such date, on a date reasonably proximate to the date of the completion of the
Ceres merger. This report will be used to determine the actual number of shares
of Series A convertible preferred stock to be issued to the Ceres limited
partners pursuant to the Ceres merger.
Differences in Rights
Following the completion of the restructuring transactions, you will become
stockholders in, and members of, a stock, for-profit corporation and you will
no longer be members of a Delaware nonstock, not-for-profit corporation. You
should consider carefully the differences in your rights and obligations that
will result from this change in structure before voting on the restructuring
transactions.
Some of these differences arise from differences between the corporate law
applicable to the two different types of organizations. Other differences arise
from choices that we have made in designing the certificate of incorporation
and bylaws of For-Profit CBOT. We briefly summarize below some of the important
differences in your rights and obligations that will result from completion of
the restructuring transactions:
. Dividends. As a for-profit corporation, For-Profit CBOT will have the
ability to declare and pay dividends to its common stockholders based on
its surplus as defined under Delaware law. The board of directors of For-
Profit CBOT will be able to determine, in its sole and absolute
discretion, the time of declarations and payments, and the amounts, if
any, of dividends on the common stock. Class A and Class B common stock
will participate ratably in any dividend declared by the board of
directors. It is not currently anticipated that For-Profit CBOT will pay
cash dividends on its common stock in the foreseeable future. Dividends
will be payable on the Series A convertible preferred stock according to
the terms thereof.
. Class A Voting. With the exception of certain matters reserved to the
holders of Class B common stock as described below, holders of Class A
common stock will be entitled to one vote per share with respect to each
matter presented to the stockholders of For-Profit CBOT. Except as may
otherwise be required by the certificate of incorporation of For Profit
CBOT, the terms of any preferred stock or Delaware law, the Class A
common stock will be the only capital stock entitled to vote generally in
the election of directors and on all other matters presented to the
stockholders of For-Profit CBOT. As a result of the allocation of shares
of Class A common stock among members in connection with the
restructuring transactions, the voting rights of Full Members will be
diluted relative to the voting rights of Associate Members, GIMs, IDEMs
and COMs.
8
. Class B Voting. The holders of Class B common stock will generally have
no voting rights, except that holders of Series B-1 and Series B-2 shares
of Class B common stock will have the right to approve certain changes to
For-Profit CBOT's certificate of incorporation, bylaws and rules and
regulations that would adversely affect the core rights of Class B common
stockholders. Except as may otherwise be required by Delaware law,
holders of Series B-1 and Series B-2 shares of Class B common stock will
have the right to approve amendments to our certificate of incorporation,
bylaws and rules and regulations adversely affecting certain core rights
associated with the trading rights and privileges of Class B common
stockholders, as described above under "--For-Profit CBOT Common Stock."
In voting on these matters, holders of Series B-1 shares of Class B
common stock will be entitled to one vote per share and holders of Series
B-2 shares of Class B common stock will be entitled to one-sixth of one
vote per share. Except as may otherwise be required by Delaware law, no
other holders of Class B common stock or holders of Class A common stock
will be entitled to vote on such matters.
. Class and Series Voting Rights. Under Delaware law, the holders of the
outstanding shares of each class of For-Profit CBOT common stock,
including the Class A common stock and the Class B common stock, will be
entitled to vote as a class on certain proposed amendments to the
certificate of incorporation, including any proposed amendment that would
alter or change the powers, preferences or special rights of the shares
of such class so as to affect them adversely, as described elsewhere in
this document. In addition, if any proposed amendment would alter or
change the powers, preferences or special rights of one or more series of
any class so as to affect them adversely, but not so affect the entire
class, then only the shares of the series so affected will be considered
a separate class for purposes of these special class voting rights. These
special class and series voting rights will result from the application
of Delaware law as it applies to a stock, for-profit corporation.
. Board of Directors. The For-Profit CBOT certificate of incorporation will
provide that the current 18-director board will continue until a special
election, which we currently anticipate to be held as soon as reasonably
practicable following completion of the restructuring transactions. In
connection with this special election, the size of the board will be
reduced to nine directors, consisting of two independent directors, five
directors who are holders of Class B common stock and who meet the
membership and eligibility requirements of For-Profit CBOT, one at-large
director and the chairman of the board. In addition, the board will be
divided into three classes with staggered terms of office.
. Committees. The number of committees of For-Profit CBOT will be reduced
in order to further streamline its corporate governance structure. We
currently expect that For Profit CBOT will have a nominating committee of
the board, an executive committee of the board, an audit committee of the
board and a compensation committee of the board. In addition to these
committees, we currently anticipate that For-Profit CBOT will create or
maintain certain non-board advisory committees and other non-board
committees comprised of directors, officers and/or stockholders.
. Substantial Elimination of the Petition Process. Currently, voting
members of the CBOT have the right to vote on all amendments to the
certificate of incorporation and bylaws, which include the rules of the
CBOT. In addition, members have the right to petition the board to call a
special meeting of members for the purpose of voting on amendments to the
bylaws and rules. This process, together with certain other provisions,
including those relating to the nomination procedures for elective
officers and the annual election, constitute what is sometimes referred
to as the "petition process" of the CBOT membership.
In connection with the restructuring transactions, the petition process is
being substantially eliminated, with the principal exception consisting of
the preservation of certain core rights associated with the trading rights
and privileges of Class B common stockholders with respect to which
certain special voting rights will be vested with the holders of such
stock. As a result, the ability of the stockholders of For-Profit CBOT to
participate in the day-to-day management and operations of For-Profit CBOT
will
9
be significantly reduced. In sharp contrast to the substantial rights of
current CBOT members pursuant to the petition process, stockholders of
For-Profit CBOT will have rights more consistent with those of
stockholders of a publicly held corporation.
. Proceeds of Membership. Following completion of the restructuring
transactions, absent extenuating circumstances, proceeds from the
transfer of shares of Class A common stock will not be subject to the
prior claims of the holders of Class B common stock unless and to the
extent that such holders have otherwise perfected a security interest in
the transferred shares of Class A common stock. The rules and regulations
of For-Profit CBOT will provide that the proceeds of any transfer of
shares of Class B common stock will be subject to the same priority of
payments provision that is currently applicable to the transfer of CBOT
memberships. However, we are not aware of any court that has considered
the enforceability of such a provision in the context of a security
issued by a demutualized exchange. Accordingly, there is substantial
uncertainty as to whether the priority of payments provision would be
enforced in accordance with its terms.
. Capital Stock. For-Profit CBOT will be authorized to issue a significant
number of additional shares of Class A common stock and up to 10,000,000
shares of preferred stock, in each case without stockholder approval. The
certificate of incorporation will authorize the board of directors of
For-Profit CBOT, without approval of the stockholders, to issue shares of
preferred stock from time to time in one or more series, to establish the
number of shares to be included in each series and to fix the rights,
preferences and privileges of the shares of each wholly unissued series
as well as any qualifications, limitations or restrictions.
. Change of Control Provisions. For-Profit CBOT's certificate of
incorporation and bylaws will contain a number of 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 will include, among other things:
. a classified or staggered board;
. advance notice requirements for stockholder proposals;
. application of the Delaware anti-takeover statute;
. a requirement that special meetings of the stockholders of For-Profit
CBOT be called by only the chairman of the board, the president or the
board of directors;
. a prohibition on the ability of stockholders to take action by written
consent; and
. a requirement that any stockholder proposal to amend the bylaws be
approved by at least two-thirds of the voting power of all outstanding
shares of capital stock entitled to vote generally in the election of
directors.
In addition, we currently anticipate that For-Profit CBOT would be asked
to consider, and would likely adopt, a stockholder rights plan or "poison
pill" in connection with any underwritten public offering of its common
stock. We have no current plan or intention to conduct such an offering.
For more information about the differences in the rights and obligations of
CBOT members and For-Profit CBOT stockholders, see "Comparison of the Rights of
Members of the CBOT and Stockholders of For-Profit CBOT."
Transfer Restrictions
The shares of Class A common stock will be subject to a complete restriction
on transfer for the first 180 days following the completion of the
restructuring transactions, except that, generally speaking, during this
period, stockholders may transfer all, but not less than all, of the shares of
Class A common stock associated
10
with a share of Class B common stock if all such shares of Class A common
stock are transferred together with the associated share of Class B common
stock. The certificate of incorporation of For-Profit CBOT will grant
authority to the board of directors to remove or reduce this restriction on
transfer of the Class A common stock if it determines, in its sole and
absolute discretion, that such action is appropriate.
Although the shares of Class B common stock generally will not be subject
to any transfer restrictions, exercise of the trading rights and privileges
associated with the Class B common stock will be subject to substantially the
same process that currently applies to CBOT memberships. Under that process,
any adult, other than an employee of For-Profit CBOT, of good character,
reputation, financial responsibility and credit will be eligible for election
to membership in For-Profit CBOT. Candidates will be reviewed to determine
whether they meet applicable membership requirements in accordance with the
rules and regulations of For-Profit CBOT.
The shares of Series A convertible preferred stock generally will not be
subject to any transfer restrictions.
In addition to the restrictions discussed above, shares of Class A common
stock, Class B common stock and Series A convertible preferred stock received
in connection with the restructuring transactions by "affiliates" may be
resold only pursuant to further registration under the Securities Act or in
transactions that are exempt from registration under the Securities Act.
U.S. Federal Income Tax Consequences
We are seeking a ruling from the IRS to the effect 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 and Class B common stock in
For-Profit CBOT in connection with the restructuring transactions. Assuming
this non-recognition treatment, the tax basis in your membership will carry
over to your common stock. See "The Restructuring Transactions--U.S. Federal
Income Tax Consequences." Receipt of the IRS ruling is a condition to our
completion of the restructuring transactions.
We anticipate that the receipt of Series A convertible preferred stock by
the limited partners of Ceres in connection with the reorganization of our
electronic trading business will be tax-free to such limited partners. We
further anticipate that the conversion of the Series A convertible preferred
stock into Class A common stock of For-Profit CBOT pursuant to its terms would
also be tax-free, except to the extent of any shares that are received for
accrued and unpaid dividends on such Series A convertible preferred stock.
Dividends on the Series A convertible preferred stock paid in the form of
additional shares of Series A convertible preferred stock will be taxable to
the same extent as if they were paid in cash.
Accounting Matters
The accounting treatment of certain aspects of the restructuring
transactions will be similar to a "pooling-of-interests." Under this method of
accounting, no gain or loss will be recognized, and the assets and liabilities
of CBOT will appear on the books of For-Profit CBOT at their same recorded
amounts. See "The Restructuring Transactions--Accounting Matters."
Regulatory Matters
The completion of the restructuring transactions is subject to our receipt
of any approvals required by 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 and
confirmation by the CFTC of the transfer of our current contract market
designations to For-Profit CBOT. See "The Restructuring Transactions--
Regulatory Matters."
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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 in
all material respects with these requirements and do not currently anticipate
that they will delay completion of the restructuring transactions.
Conditions to Completing the Restructuring Transactions
We will not complete the restructuring transactions unless and until each
the following conditions is satisfied:
. the members of the CBOT have approved the restructuring transactions;
. we have received a favorable ruling from the IRS, in form and substance
satisfactory to our board of directors, relating to the restructuring
transactions;
. we have received any approvals required by the CFTC in connection with
changes to our corporate governance structure and we have confirmed with
the CFTC the transfer of our current contract market designations to
For-Profit CBOT, and we have received any other necessary governmental
or regulatory approvals and authorizations;
. we have received each required material third party consent;
. there is no court order or other regulation prohibiting or restricting
the restructuring transactions; and
. our board of directors has not determined that the restructuring
transactions are no longer in the best interests of the CBOT and its
members or that the transactions are not fair to each class of CBOT
membership.
Market for Shares; Stock Exchange Listing
No market presently exists for the Class A common stock, the Class B common
stock or the Series A convertible preferred stock. We currently expect that a
market for the shares of Class B common stock will develop that is similar to
the current market for CBOT memberships. The current markets for memberships
should facilitate the development of new markets for the corresponding series
of Class B common stock. A market for shares of Class A common stock may
develop following the expiration of any applicable restrictions on transfer.
However, we cannot provide any assurances in this regard. A market for shares
of Series A convertible preferred stock may develop, but we cannot provide any
assurances in this regard.
We have no current plans to list the Class A common stock, the Class B
common stock or the Series A convertible preferred stock on any stock exchange.
Risk Factors
There are significant risks associated with the restructuring transactions
that you should consider very carefully. These risks include, among other
things, our ability to implement in a timely and successful manner changes to
our organizational and corporate governance structure that are required in
order to operate more efficiently. Although we have a long history of operating
as a successful member-owned institution, significant changes will be required
in the manner in which we evaluate and undertake activities. These and other
risks are discussed under "Risk Factors" beginning on page 15 below.
Matters To Be Approved; Vote Required
Full Members and Associate Members are being asked to approve the
restructuring transactions described in this document, including the approval
and adoption of an amended and restated certificate of incorporation,
12
which will facilitate the demutualization of the CBOT and modernize certain
aspects of our corporate governance structure, the approval and adoption of
amended and restated bylaws, which will modernize certain other aspects of our
corporate governance structure, and the approval of all other matters relating
to the restructuring transactions, including the reorganization of our
electronic trading business.
The restructuring transactions will be approved if Full Members and
Associate Members as of the close of business on , 2001, 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 the restructuring transactions.
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. No other class of membership will be entitled to vote on the
restructuring transactions. See "Special Meeting and Proxy Information--
Available Votes; Required Vote."
Absence of Appraisal Rights
Members who object to the restructuring transactions will have no appraisal
rights under Delaware 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
common stock of For-Profit CBOT as described in this document. See "The
Restructuring Transactions--Absence of Appraisal Rights."
Board Recommendation
Our board of directors recommends that members vote "FOR" approval of the
restructuring transactions.
13
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, 2000 and
1999 and operating data for each of the three years in the period ended
December 31, 2000, respectively, have been derived from the audited
consolidated financial statements and related notes included elsewhere in this
document. The balance sheet data as of December 31, 1998, 1997 and 1996 and
operating data for each of the two years ended December 31, 1997 and 1996 have
been derived from the audited consolidated financial statements and related
notes not included in this document. 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.
[Download Table]
Year Ended December 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(dollars in thousands, except per share
data)
Operating Data
Total revenues............... $212,919 $202,896 $205,238 $175,385 $154,578
Operating expenses........... 215,546 214,529 188,320 148,186 123,808
-------- -------- -------- -------- --------
Income (loss) from
operations.............. (2,627) (11,633) 16,918 27,199 30,770
Other income and expenses
Interest income............ 1,242 1,052 1,947 2,090 1,986
Interest expense........... 6,773 6,774 7,170 6,483 --
-------- -------- -------- -------- --------
Income (loss) before
income taxes and
cumulative effect of
change in accounting
principle............... (8,158) (17,355) 11,695 22,806 32,756
Provision (benefit) for
income taxes................ 2,785 (2,895) 5,051 6,147 13,109
-------- -------- -------- -------- --------
Income (loss) before
cumulative effect of
change in accounting
principle................. (10,108) (14,460) 6,644 16,659 19,647
Cumulative effect of change
in accounting principle--
net of tax benefit of
$2,026(1)................... -- 2,920 -- -- --
-------- -------- -------- -------- --------
Income (loss) before
minority interest....... (10,108) (17,380) 6,644 16,659 19,647
Minority interest in
(income) loss of
subsidiaries................ -- 6,933 (38) (6,995) --
-------- -------- -------- -------- --------
Net income (loss)........ $(10,108) $(10,447) $ 6,606 $ 9,664 $ 19,647
======== ======== ======== ======== ========
Balance Sheet Data
Total assets................. $372,194 $373,379 $400,971 $397,449 $355,585
Total liabilities............ 180,874 172,405 183,396 193,538 160,765
Short-term borrowings........ 18,014 6,500 -- 1,662 14,357
Long-term debt............... 64,286 87,500 99,000 105,000 76,166
Total equity ................ 191,320 200,974 211,047 203,911 194,820
Proforma Data (2)
Total assets................. 372,194 373,379
Total liabilities............ 180,874 172,405
Short-term borrowings........ 18,014 6,500
Long-term debt............... 64,286 87,500
Total equity................. 191,320 200,974
Net loss..................... (10,108) (10,447)
Net loss per share........... (0.31) (0.36)
Other Data
Current ratio (3)............ 0.71 1.02 1.41 1.42 1.15
Working capital (deficit).... $(24,149) $ 1,067 $ 18,574 $ 18,457 $ 7,729
Capital expenditures......... 38,497 25,165 26,985 48,529 90,393
Times interest earned (4).... N/A N/A 2.63 4.52 N/A
Number of full time
employees at end of
period...................... 711 846 853 805 811
Sales price per Full CBOT
membership
High....................... $ 642 $ 632 $ 780 $ 857 $ 690
Low........................ $ 255 400 384 660 531
-------
(1) 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.
(2) Reflects (a) the conversion of members' equity to common stock of For-
Profit CBOT and (b) the issuance of 264,600 shares of Series A convertible
preferred stock valued at $26,460,000 to the limited partners of Ceres in
exchange for their limited partnership interests based on the December 31,
2000 valuation of Ceres.
(3) Equals current assets divided by current liabilities.
(4) Equals the sum of income (loss) before provision (benefit) for income taxes
plus interest expense, divided by interest expense.
14
RISK FACTORS
If the restructuring transactions are completed, you will receive shares of
common stock of For-Profit CBOT and may receive, to the extent that you are
also a limited partner of Ceres, shares of Series A convertible preferred stock
of For-Profit CBOT. 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 restructuring
transactions. The following risks relate principally to:
. the restructuring transactions, particularly the demutualization;
. 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; and
. changes in our corporate governance structure that will be
implemented as part of the restructuring transactions.
You should be aware that the risks and uncertainties described below are not
the only risks and uncertainties we are facing or will face in the future.
Additional risks and uncertainties not presently known to us or that we
currently believe to be immaterial may also adversely affect our business.
This document contains forward-looking statements that involve risks and
uncertainties. The results of For-Profit CBOT could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including the risks and uncertainties faced by For-Profit CBOT
described below and elsewhere in this document.
Risks Relating to the Restructuring Transactions
We are subject to the following risks in connection with the restructuring
transactions, particularly our demutualization into a stock, for-profit
corporation. Certain other risks relating to changes in our governing documents
in connection with the restructuring transactions are described below under "--
Risks Relating to Changes in Our Corporate Governance."
We Have No Internal Experience and Little Representative External Experience
Upon Which to Rely in Operating as a For-Profit Exchange
We have always operated as a nonstock, not-for-profit corporation for the
benefit of our members. As such, we have been a mutual organization focused on
delivering member benefits and enhancing member opportunity at reasonable cost.
After the restructuring transactions, For-Profit CBOT will be operated for the
long-term benefit of its stockholders rather than solely for the purpose of
delivering member benefits and enhancing member opportunity. Experience by our
management in operating a for-profit exchange would assist us in dealing with
the problems of changing to, and operating as, a for-profit exchange. The
experience of others in operating a for-profit exchange would also assist us in
identifying problems and possible solutions we may identify while operating as
a for-profit exchange. However, our management has no experience and there is
relatively little history or experience by other U.S. futures exchanges with
for-profit operations. 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 Chicago Board Options Exchange Could Be Successful in Challenging the
"Exercise Right," Which Allows Our Full Members to Obtain Trading Privileges at
the Chicago Board Options Exchange, and the Exercise Right Could Be
Extinguished or Terminated
Since 1972, when we created the Chicago Board Options Exchange, our Full
Members have had a legal right to become members of that exchange at no
additional cost. We sometimes refer to this right in this document as the
"exercise right." Over the last year, the Chicago Board Options Exchange has
stated publicly its view that, if consummated, the restructuring transactions
would extinguish the exercise right under certain circumstances. In particular,
it stated recently in a proposed rule change filed with the SEC that the
exercise right will be terminated:
. for any Full Member, if that Full Member sells any of the shares of Class
A common stock associated with a share of Class B common stock received
in the restructuring transactions without also selling all of the other
shares of Class A common stock and the associated share of Class B common
stock;
15
. for all Full Members, if the CBOT expands electronic trading on the a/c/e
system to allow non-members, i.e., persons who do not hold shares of
Class B common stock, to trade directly; or
. for all Full Members, if CBOT members who exercise their right to become
members of the Chicago Board Options Exchange are able to trade all of
the CBOT's products and the Chicago Board Options Exchange's products
simultaneously.
Because we believe that the Chicago Board Options Exchange's position violates
a 1992 agreement between us and the Chicago Board Options Exchange, which
addresses the exercise right, and because the exercise right is valuable to our
Full Members, we initiated litigation against it intended to protect the
exercise right. On January 19, 2001, the Illinois Circuit Court dismissed the
first count of our complaint for failure to sufficiently allege breach of the
1992 agreement by Chicago Board Options Exchange and for failure to allege
damages. The court also dismissed the second count of the complaint as
preempted by federal law, holding that this matter should be resolved in the
first instance by the SEC. The court's ruling did not address the merits of the
dispute, including whether or not the Chicago Board Options Exchange's position
breaches the 1992 agreement. Under this ruling, however, the SEC would
determine whether the Chicago Board Options Exchange can impose new conditions
on the exercise right under its proposed rule change filed with the SEC. In
response, on February 16, 2001, the CBOT filed an amended complaint, seeking a
declaration by the court that the Chicago Board Options Exchange breached the
1992 agreement by adopting its proposed rule change and submitting it to the
SEC for approval without the written consent of the CBOT. In addition, we are
seeking an injunction prohibiting the Chicago Board Options Exchange from
attempting to amend or modify its rule relating to the exercise right, adopted
pursuant to the 1992 agreement, without our written consent, in violation of
its obligations under the 1992 agreement. Finally, we are seeking a declaration
that certain elements of our proposed restructuring comply with the CBOT's
obligations under the 1992 agreement.
We currently anticipate that the Chicago Board Options Exchange will again
move to dismiss the amended complaint on grounds that it is preempted by
federal law, claiming that this issue should be decided by the SEC. Although we
cannot assure you that the amended complaint will not be dismissed, we believe
the Chicago Board Options Exchange's position is without merit and that a court
should resolve the issue of whether it has in fact breached the 1992 agreement,
and whether certain elements of our proposed restructuring would violate our
contractual obligations under the 1992 agreement.
In addition, the SEC is conducting a proceeding to determine whether, under
the federal securities laws, the Chicago Board Options Exchange may impose the
new conditions on the exercise right as described above. For more information
concerning this litigation and the SEC proceeding, see "Our Business--Legal
Proceedings--Chicago Board Options Exchange Litigation and Proposed Rule
Changes." While we do not believe that the Chicago Board Options Exchange's
position is legally valid, we cannot predict the outcome of that SEC
proceeding. If the SEC were to approve the proposed rule change, it is possible
that the exercise right could be extinguished or terminated or that Full
Members could be prevented from exercising the right in the future. If
approved, the Chicago Board Options Exchange's proposed rule change and the
positions it has taken in support of that rule change could also materially
adversely affect our ability or willingness to restructure or to conduct our
existing electronic trading business in a competitive manner while still
preserving the exercise right of our Full Members.
The Chicago Board Options Exchange has historically been extremely
aggressive in challenging the validity of the exercise right of our Full
Members. We cannot assure you that it will not take other actions in the future
to interfere with the exercise right or that it will not otherwise be
successful in terminating the exercise right or preventing Full Members from
exercising such right in the future.
Furthermore, because the Chicago Board Options Exchange is attempting to
impose new conditions on the exercise right pursuant to its proposed rule
change with the SEC, we may take certain actions designed to preserve the
exercise right, which could materially adversely affect our ability to execute
our business strategies and achieve our business objectives.
16
Certain Members Have Filed a Complaint in Illinois State Court Challenging the
Proposed Allocation of Shares in For-Profit CBOT
Certain Associate Members, GIMs, IDEMs and COMs have instituted litigation
in Cook County Circuit Court against certain individual Full Members and a
proposed class of all Full Members alleging that the proposed allocation of
equity in For-Profit CBOT as part of the restructuring transactions unfairly
favors Full Members to the detriment of Associate Members, GIMs, IDEMs and
COMs. The individual plaintiffs seek to represent a class of all Associate
Members, GIMs, IDEMs and COMs, and have requested, among other things, that the
court enjoin Full Members from voting in favor of the allocation contemplated
by the restructuring transactions and that the court declare a fair and
equitable allocation of shares among the members. The individual defendants
have moved to compel arbitration under the CBOT's rules and regulations and to
stay the court proceedings. Although we believe that the plaintiffs' position
is without merit and intend to vigorously defend the suit on behalf of the
individual defendant Full Members, we cannot assure you that the court will
stay proceedings and compel the parties to arbitrate the dispute under the
CBOT's rules and regulations or that the plaintiffs will not succeed in
preventing or delaying the vote which is the subject of this proxy solicitation
or in altering the proposed allocation of equity in the restructuring
transactions. For more information, see "Our Business--Legal Proceedings--
Minority Member Litigation."
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
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 mutual
organization or its value as a for-profit corporation after the restructuring
transactions, nor have we determined the value of the securities that will be
issued in respect of memberships in the restructuring transactions. The
fairness opinions that we have received from William Blair and from Arthur
Andersen are limited in scope and do not address either of the foregoing
valuation matters. Accordingly, we can give you no assurance that the value of
For-Profit CBOT will be at least equal to the value of the CBOT as a mutual
organization or that the value of the securities of For-Profit CBOT issued to
you in the restructuring transactions will be at least equal to the value of
the corresponding memberships in the CBOT that you currently own.
The Allocation of the Equity in For-Profit CBOT Contains an Element of
Uncertainty
The Independent Allocation Committee and our board of directors considered a
number of factors in determining the allocation of equity in For-Profit CBOT
among the existing CBOT members in connection with the restructuring
transactions. The Independent Allocation Committee based its conclusions on a
combination of factors including, among other things, relative voting rights,
relative liquidation rights, the allocation of partnership interests in
connection with the formation of Ceres, membership or seat prices and contract
volumes. There are other equity allocation methods that could be applied and,
if applied, might produce different results. However, the Independent
Allocation Committee and our board of directors have determined that the
proposed allocation will accomplish a fair allocation of the Class A common
stock in For-Profit CBOT among the members in respect of their memberships. See
"The Restructuring Transactions--Independent Allocation Committee of the Board"
for more information regarding the Independent Allocation Committee and the
allocation methodology.
Certain members of the CBOT have initiated litigation against certain Full
Members in the Cook County Circuit Court challenging our allocation
determination. For more information regarding this litigation, see "--Certain
Members Have Filed a Complaint in Illinois State Court Challenging the Proposed
Allocation of Shares in For-Profit CBOT" above and "Our Business--Legal
Proceedings--Minority Member Litigation."
Your Voting Rights Will Change as a Result of the Restructuring Transactions
and Full Members Will Experience Dilution in Their Relative Voting Powers
As a result of the allocation of Class A common stock among members in
connection with the restructuring transactions, Full Members will experience
dilution of their voting power relative to the voting power of Associate
Members, GIMs, IDEMs and COMs. This is a material change in your voting rights.
Our
17
current certificate of incorporation and bylaws provide that the Full Members
are entitled to one vote per membership and Associate Members are entitled to
one-sixth of one vote per membership on all matters subject to a membership
vote, while GIMs, IDEMs and COMs do not have the right to vote on any matters.
Upon completion of the restructuring transactions, except as otherwise required
by the For-Profit CBOT certificate of incorporation, the terms of any preferred
stock or Delaware law, each share of Class A common stock will generally be
entitled to vote on all matters submitted to stockholders for a vote, other
than certain limited matters for which the holders of Series B-1 and Series B-2
shares of Class B common stock have voting power. Holders of Series B-1 and B-2
shares of Class B common stock will generally be entitled to vote only on
specified matters that would adversely affect certain core rights relating to
the trading rights and privileges associated with the Class B common stock. To
the extent that they remain holders of Class A common stock, GIMs, IDEMs and
COMs, who do not currently have voting rights in the CBOT, will be entitled as
Class A common stockholders to vote on all matters submitted to the
stockholders for a vote, other than certain limited matters for which the
holders of Series B-1 and B-2 shares of Class B common stock will have voting
power. In addition, under Delaware law, holders of Class B common stock may
under certain circumstances be entitled to a class or series vote in connection
with certain amendments to the certificate of incorporation. See "Description
of Capital Stock--Description of Common Stock--Special Class and Series Voting
Rights." See "The Restructuring Transactions--Independent Allocation Committee
of the Board" and "Description of Capital Stock."
Your Relative Liquidation Rights Will Change as a Result of the Restructuring
Transactions and Full Members and GIMs Will Experience Dilution in Their
Relative Liquidation Rights
As a result of the allocation of Class A common stock among members in
connection with the restructuring transactions, Full Members and GIMs will
experience dilution of their liquidation rights in For-Profit CBOT relative to
the liquidation rights of Associate Members, IDEMs and COMs. Our current
certificate of incorporation and bylaws provide that the members would share in
the proceeds upon liquidation in a ratio of 1.000 : 0.167 : 0.111 : 0.005 :
0.005 to each Full Member, Associate Member, GIM, IDEM and COM, respectively.
This represents an implied allocation among Full Members, Associate Members,
GIMs, IDEMs and COMs as follows: 6.00 : 1.00 : 0.67 : 0.03 : 0.03. Upon
completion of the restructuring transactions, For-Profit CBOT common
stockholders will have the right to share in the proceeds of liquidation of
For-Profit CBOT pro rata on the basis of the number of shares of common stock
owned.
Accordingly, upon completion of the restructuring transactions and without
giving effect to any conversion of Series A convertible preferred stock
received by Ceres limited partners in exchange for their limited partnership
interests or the nominal equity interests, including liquidation rights,
represented by the Class B common stock, the proceeds upon liquidation would be
shared among For-Profit CBOT common stockholders in accordance with the ratio
used to allocate equity in For-Profit CBOT pursuant to the restructuring
transactions, which is 5.0 : 1.0 : 0.5 : 0.06 : 0.07 to each Full Member,
Associate Member, GIM, IDEM and COM, respectively. This will increase somewhat
the liquidation rights of stockholders who are now 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--Independent Allocation Committee of the Board" and "Description
of Capital Stock."
There is Substantial 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. After the restructuring transactions, there will be
substantial uncertainty concerning the application of this rule in the context
of a demutualized exchange. The restructuring transactions will result in the
CBOT members becoming stockholders of a stock, for-profit corporation. Absent
special circumstances, proceeds from the transfer of shares of Class A common
stock will not be subject to the prior claims of the holders of Class B common
stock unless and to the extent that such holders have otherwise perfected a
security interest in the transferred shares of Class A common
18
stock, such as by receiving a pledge of such shares. The rules and regulations
of For-Profit CBOT will provide that the proceeds of any transfer of shares of
Class B common stock will be subject to the same priority of payments provision
that is currently applicable to the transfer of CBOT memberships. However, we
are not aware of any court that has considered the enforceability of such a
provision in the context of a security issued by a demutualized exchange,
including where the security is associated with membership trading rights and
privileges. Accordingly, there is substantial uncertainty as to whether the
priority of payments provision would be enforced in accordance with its terms.
As a result, we cannot provide you any assurances as to the continued
enforceability of this priority of payments provision after completion of the
restructuring transactions.
Our Business May Be Materially Adversely Affected if We Do Not Timely Complete
the Restructuring Transactions
If we fail to complete the restructuring transactions substantially in a
timely fashion, our business may be materially adversely affected.
Specifically, we believe that we would likely be significantly less capable of
making decisions on important issues in an expeditious manner, responding
rapidly to the technological innovations currently shaping the derivatives
markets, maximizing the value of our organization or achieving the other
benefits we expect to achieve in connection with the restructuring
transactions, all of which are important to our business strategy. Although we
currently plan to complete the restructuring transactions as promptly as
reasonably practicable following satisfaction of all conditions, we cannot
assure you as to whether or when implementation of the restructuring
transactions will occur. This means that we cannot assure you that we will
obtain the expected benefits or as to the timing of any such benefits. For more
information about the restructuring transactions and the benefits we expect to
achieve in connection with the restructuring transactions, see "The
Restructuring Transactions--Background of the Restructuring Transactions--
Reasons for the Restructuring Strategy."
We May Incur Material, Unanticipated Costs in Connection with the
Restructuring Transactions
We have already incurred substantial expenses in connection with the
restructuring transactions and have planned for additional expenditures
necessary for completion of the transactions. We may, however, 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 a Favorable Ruling from the IRS
We have designed the restructuring transactions with the intention that
neither the CBOT nor its members will recognize any gain or loss for U.S.
federal income tax purposes in connection with the restructuring transactions.
We filed a request for a ruling from the Internal Revenue Service on February
1, 2001 to the effect that neither the CBOT nor the individual members will
recognize gain or loss as a result of the distribution of Class A common stock
and Class B common stock in connection with the restructuring transactions.
Because there is limited authority for the tax treatment of the demutualization
aspect of our restructuring transactions, we cannot be sure that the IRS will
issue the requested ruling or, if issued, that we will receive the requested
ruling in the near future. Generally speaking, if the IRS issues a ruling, it
is not received by the requesting company until at least four months after the
initial filing of the ruling request. Moreover, this process can, under certain
circumstances, take significantly longer. The receipt of a favorable IRS ruling
relating to the restructuring transactions is a condition to the completion of
the restructuring transactions, and we will not complete the restructuring
transactions unless and until we receive the ruling. Even if we do receive the
requested ruling from the IRS, any significant delay in the implementation of
the restructuring transactions caused by the IRS could jeopardize our ability
to achieve the expected benefits of the restructuring transactions.
We Will Be Unable to Complete the Restructuring Transactions Unless We Can
Obtain Necessary Regulatory Approvals, Including from the Commodity Futures
Trading Commission
In order to complete the restructuring transactions, we currently anticipate
that the Commodity Futures Trading Commission will be asked to approve changes
to our certificate of incorporation, bylaws and rules and
19
regulations, and the CFTC will be asked to confirm that our current contract
market designation will transfer to For-Profit CBOT. If these CFTC approvals
and any other necessary regulatory approvals and 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. Generally speaking, we currently expect that it
could take several months to receive the necessary approvals from the CFTC. 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.
Class A Common Stockholders of For-Profit CBOT May Support Decisions That Are
Contrary to the Interests of Class B Common Stockholders
Following completion of the restructuring transactions, it will be possible
for persons who are not holders of Class B common stock, and therefore are not
entitled to and do not utilize trading rights and privileges in For-Profit
CBOT, to hold voting securities of For-Profit CBOT, either as a result of
future capital raising activities, if any, or as a result of the sale or
transfer of the shares of Class A common stock to be issued in the
restructuring transactions after expiration of applicable transfer
restrictions. In addition, the holders of shares of Class B common stock will
not have the right to vote on matters generally submitted for a vote of common
stockholders, including the right to elect directors. Because holders of Class
A common stock may have solely an economic interest in For-Profit CBOT and no
interest in the trading opportunities made available by the demutualized
exchange, they may be more likely to seek to maximize the long-term enterprise
value of For-Profit CBOT rather than to enhance the trading opportunities
available to the holders of Class B common stock who meet the applicable
membership and eligibility criteria. This could lead to decisions or outcomes
that are contrary to the interests of Class B common stockholders.
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
Immediately after the restructuring transactions, all of the common stock of
For-Profit CBOT will be held by the members of our organization. There will be
no outside investors in For-Profit CBOT's common stock and no market for such
stock at that time. Because we are not offering any shares to outside investors
at this time, we have not undertaken the traditional marketing activities
associated with bringing a company to the public markets. Moreover, we have no
current plans to undertake such activities or to list our shares on a stock
exchange. We do not know whether third parties will find our shares to be an
attractive investment, or whether firms will be interested in making a market
in our stock. Consequently, we cannot assure you that any trading market for
any shares of our capital stock will develop or, if one or more develops, how
strong it may be.
We Cannot Assure You That an Orderly Market in Our Common Stock Will Develop
We have imposed transfer restrictions for the shares of Class A common
stock, which will generally expire 180 days following completion of the
restructuring transactions, in order to encourage the development of an orderly
market in our common stock. We cannot give any assurance that these
restrictions will achieve their intended purpose. In addition, if our
stockholders sell a large number of shares of Class A common stock upon the
expiration of some or all of the transfer restrictions, the market prices for
our common stock could decline significantly.
The Market Prices for Our Shares May Fluctuate Widely and Trade at Prices
Below the Recent Price of the Memberships That the Shares Replace
The market prices of the shares of Class A common stock, Class B common
stock and Series A convertible preferred stock received by you in the
restructuring transactions may fluctuate widely. Factors causing these
fluctuations will include our perceived prospects, the prospects of the
financial and futures industries and exchanges in general, differences between
our actual financial and operating results and those expected by investors. In
addition, the value of shares of Class B common stock is likely to be driven
primarily
20
by the perceived value, and the demand for, the related trading rights and
privileges including, among other things, the Chicago Board Options Exchange
exercise right. Changes in general economic or market conditions and broad
market fluctuations may influence the market prices for our stock. As a
result, the shares of Class A common stock, Class B common stock and Series A
convertible preferred stock may trade at prices significantly below the price
of the CBOT memberships and Ceres limited partnership interests in respect of
which they were issued.
Holders of Series A Convertible Preferred Stock May Never Receive Shares of
Class A Common Stock of For-Profit CBOT in Exchange for Their Series A
Convertible Preferred Stock
In connection with the reorganization of our electronic trading business,
members who hold limited partnership interests in Ceres will receive shares of
For-Profit CBOT's Series A convertible preferred stock pursuant to the Ceres
merger. One component of the overall value of the Series A convertible
preferred stock will be the right of the holder to convert such stock into
shares of Class A common stock of For-Profit CBOT at any time on or after the
date on which either For-Profit CBOT or the company operating our electronic
trading business completes a qualified underwritten public offering of its
common stock. In addition, we may redeem all or part of the Series A
convertible preferred stock at any time, and we will be required to redeem all
of the Series A convertible preferred stock upon the separation of the
electronic trading business from For-Profit CBOT. In each case, the redemption
may be for any of cash, property or securities, including shares of Class A
common stock or shares of capital stock of eCBOT, as determined by the board
of directors of For-Profit CBOT. For more information regarding this
convertibility feature and the redemption terms, see "Description of Capital
Stock--Preferred Stock--Series A Convertible Preferred Stock." However, we
currently have no plan to take any action that would give rise to any such
conversion right or redemption obligation with respect to the Series A
convertible preferred stock, and we cannot assure you that we will ever take
any such action. In addition, even if the Series A convertible preferred stock
becomes convertible, the board of directors of For-Profit CBOT may elect to
redeem such shares for consideration other than shares of Class A common
stock. As a result, holders of Series A convertible preferred stock may never
have the opportunity to obtain shares of Class A common stock in exchange for
their shares of Series A convertible preferred stock.
Risks Relating to Our Business
Our business, and the value of the stock to be issued by For-Profit CBOT,
are subject to the following risks, which include risks relating to the
industry in which we operate.
We May Be Unable to Meet Our Future Capital and Liquidity Requirements
Due primarily to lower than historical volumes in our open outcry trading
market and the significant capital expenditures relating to the development
and launch of our newly established electronic trading system and the support
of our open outcry system, we had a working capital deficit for year-end 2000
of about $24 million. We cannot assure you that we will be able to meet our
future capital expenditure requirements or that we will be able to secure any
additional financing to meet our working capital and capital expenditure
requirements. For more information regarding these and other factors affecting
our liquidity, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
As a Result of Reductions in Our Workforce, We May Lack Sufficient Personnel
to Run For-Profit CBOT
We have experienced a significant reduction in staffing over the last two
years. In 2000, the number of our employees decreased by 143, which
represented about a 16% reduction in our total workforce. We cannot assure you
that we will be able to successfully run our business with this reduced number
of employees. We may desire or need to recruit additional employees. However,
we cannot assure you that we can successfully recruit these persons.
21
Our Decision to Operate Both Pit-Based, Open Outcry Trading and Electronic
Trading, 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 outcry trading
and electronic trading systems for our products. In addition, the certificate
of incorporation of For-Profit CBOT will contain a provision requiring For-
Profit CBOT 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 the holders of Series B-1 and
Series B-2 shares of Class B common stock. As a result, we will be obligated
under the terms of our 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 operated only open outcry trading or only electronic
trading. Moreover, to the extent that we continue to operate two trading
systems, our board and management may make decisions which are designed to
enhance the continued viability of two separate trading systems. These
decisions 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 increase the
portion of our business that is generated from outside the United States. We
have entered into a strategic alliance with the Eurex Group, a Swiss-German
group that operates the world's largest derivatives exchange, and that alliance
may be expanded to include other exchanges inside and outside the United
States. The globalization of our business presents a number of inherent risks,
including, among other things, 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, including
expenses relating to the a/c/e system denominated in euros, which exposes
us to the risk of fluctuating exchange rates and we may not fully
eliminate this risk through our hedging activity;
. 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,
on 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. Together with the Eurex Group, we recently implemented the a/c/e
system for electronic trading. In implementing this system, we
22
balanced the desire to maximize system functionality against the associated
costs, in both capital 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. For instance:
. contract volume may be lower than the break-even volume on which we
budgeted costs for the a/c/e system, either because overall volume was
lower than our projections, because the portion of volume traded
electronically was lower than we projected or because our market share
was lower than we projected;
. holders of Class B common stock and other stockholders in For-Profit CBOT
who may have an interest in retaining open outcry trading, may be
successful in voting to block the further execution of aspects of our
electronic trading strategy that could involve changes that would
adversely affect the core rights of the Class B common stock that
otherwise must be approved by the Series B-1 and Series B-2 Class B
common stockholders;
. competitors that offer systems capable of 24-hour trading, with world-
wide capacity and greater access to customers may gain a competitive
advantage over the a/c/e system, which has not yet achieved this
capability; and
. users may prefer the features and technology of other systems or products
of other exchanges over ours.
We Are Subject to Certain Risks Relating to the Operation of an Electronic
Trading Market
The foundation of our electronic trading strategy is our alliance with the
Eurex Group. We have a perpetual license to use the base software and, with
Deutsche Borse AG and the Swiss Stock Exchange, we own and have the right to
use certain modifications to that software. If our alliance with the Eurex
Group is terminated, our agreements provide for the provision of transition
services while we find another technology platform and/or provider. However, we
cannot assure you that we would be able to replace this technology in a timely
or cost-effective manner. In addition, we cannot assure you that the Eurex
Group would provide such transition services if the alliance is terminated as a
result of a party's breach of such agreements.
We are subject to risks relating generally to the provision of electronic
transaction services which include our failure or inability to:
. purchase, 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, e.g., 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.
Because We Do Not Control the Joint Venture, We Are Dependent Upon the
Cooperation of Our Joint Venture Partners
Our alliance with the Eurex Group involves significant risks. We cannot give
any assurance that the Eurex Group will share our views or long-term strategic
goals with respect to the development of electronic trading. The joint venture
operating agreement is not yet signed and is not likely to be finished until
decisions are made regarding its structure and functions. Although we have a
perpetual license to the base software and, with Deutsche Borse AG and the
Swiss Stock Exchange, own and have the right to use certain modifications to
the software that have been created to the present date, the alliance has
outsourced the operation of the system to Deutsche Borse Systems AG, a
subsidiary of Deutsche Borse AG. As a result, we will also be dependent upon
our venture partners for the day-to-day operation of the a/c/e system.
23
Our Decision Not to Fund the Development of Certain Upgrades to the a/c/e
System Could Significantly Harm Our Electronic Trading Operations
A principal objective of the agreements relating to our alliance with the
Eurex Group is the development of updates and enhancements to the common source
code for the software that operates the electronic markets of CBOT and Eurex.
The parties' general agreement to share the cost of this development and to
deploy sufficient resources to achieve this objective is subject to a party's
unilateral right to decline to accept and pay for an enhancement, in which case
it would forego the right to use that enhancement until it reimburses the other
party for one-half of the costs relating to the development of the update. We
were granted a perpetual royalty-free license to the Eurex Release 2.0 software
on October 1, 1999, and we have paid for or agreed to pay for certain other
modifications that have been made to the software since September 1998.
Our financial resources have been depleted as a result of, among other
things, lower trading volumes in 2000 and the substantial expenditures
necessary to launch and operate the a/c/e system and support our open outcry
system. In order to conserve our financial resources, we have declined to
participate in the next release of the a/c/e software, a/c/e Release 2.0. This
means that we will forego the right to use the enhancements planned for that
release. We currently expect the Eurex Group to proceed on its own with this
development. We have the right to acquire the right to use the enhancements
contained in a/c/e Release 2.0 by reimbursing Deutsche Borse AG and the Swiss
Stock Exchange for one-half of their development costs, but we may not be in a
position to do that if our liquidity position does not improve in 2001. Our
decision could delay the achievement of common source code, which was expected
to create efficiencies for us, Eurex and its common users, may delay the
implementation of enhancements that may be necessary for the a/c/e system to
remain competitive with other electronic trading systems and may affect the
nature of our relationship with our joint venture partners.
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. We expect that competition will intensify in the future as a result
of continuing consolidation in the futures exchange industry and the increasing
automation of risk management services. Many of our competitors also have
greater marketing capabilities and financial, technological and personnel
resources.
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
increase substantially 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;
24
. 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; and
. exploit regulatory disparities between traditional, regulated exchanges
and alternative markets that benefit from a reduced regulatory burden and
a lower-cost business model.
Our current and prospective competitors are numerous and include securities
exchanges, futures 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 firms. We may also face competition from computer
software companies and media and technology companies. The number of businesses
providing Internet-related financial services, which are sometimes referred to
as "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 are already for-
profit companies with modern corporate governance structures that enable them
to make decisions more quickly and efficiently and enhance their overall
competitiveness. For more information concerning the competitive nature of our
industry and the challenges we face, see "Our Business--Competition."
We Are Dependent Upon the Clearing Services of the Board of Trade Clearing
Corporation
Currently, all of the contracts traded on the CBOT and on our wholly owned
subsidiary, the MidAmerica Commodity Exchange, are cleared through the Board of
Trade Clearing Corporation. The Board of Trade Clearing Corporation has
agreements with our clearing members to provide clearing services and data
processing with respect to transactions on the CBOT and the MidAmerica
Exchange. Although the Board of Trade Clearing Corporation has agreed to
provide its services to our clearing members, you should be aware that the loss
of any of its services with respect to transactions on the CBOT may have a
material adverse effect on our operations. In addition, the Board of Trade
Clearing Corporation has entered into arrangements to provide clearing services
to parties unaffiliated with the CBOT. As a result, the CBOT may experience
some loss of service as a result of the Board of Trade Clearing Corporation's
reallocation of resources, which could also have a material adverse effect on
our operations. We cannot assure you that we will be able to obtain alternative
clearing and data processing arrangements in a timely or cost-effective manner.
We Have No Written Contract For Clearing Services With Our Clearing
Organization
We believe that the services of the Board of Trade Clearing Corporation to
our clearing members provide us with a competitive advantage as the only
futures and options on futures exchange whose contracts are cleared through an
entity with a "AAA" rating by Standard & Poor's. However, we currently do not
have a contract with the Board of Trade Clearing Corporation that would
obligate it to continue to provide its clearing services to our clearing
members. Although we intend to enter into such a contract with the Board of
Trade Clearing Corporation, we cannot assure you that we will be successful in
this regard.
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 or, if necessary, to find a replacement for our technology in a timely
and cost-effective manner could have a material adverse effect on our
reputation, business, financial condition and operating results. We rely and
expect to continue to rely on third parties for various computer and
communications systems, such as telephone companies, on-line service providers,
data processors, clearance organizations and software and hardware vendors. Our
systems or those of our third party providers may fail, causing one or more of
the following effects:
. unanticipated disruptions in service to customers;
. slower response times;
25
. delays in trade execution;
. decreased customer satisfaction;
. incomplete or inaccurate accounting, recording or processing of trades;
. financial losses;
. security breaches;
. litigation or other customer claims; and
. regulatory sanctions.
We cannot assure you that we will not experience system failures, outages or
interruptions that 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 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 resources. We must continue to improve
our operational and financial systems and managerial controls and procedures,
and we will need to continue to expand, train and manage our technology
workforce. We must also maintain close coordination among our technology,
compliance, accounting, finance, marketing and sales organizations. We cannot
assure you that we will manage our growth effectively, and failure to do so
could have a material adverse effect on our business, financial condition and
operating results.
We May Not Be Able to Keep Up With Rapid Technological Changes
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality, accessibility and features of our proprietary
software, network distribution systems and other technologies. The financial
services and e-commerce industries are characterized by rapid technological
change, changes in use and customer requirements and preferences, frequent
product and service introductions embodying new technologies and the emergence
of new industry standards and practices that could render 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.
We have decided not to participate in the development of the next set of
upgrades to the a/c/e system, which means that we will not have a license to
use those upgrades. We cannot assure you that our decision will not materially
delay the implementation of technical upgrades necessary for the a/c/e system
to remain competitive with other exchanges. For more information on our
decision not to participate in the development of system upgrades, see "--Our
Decision Not to Fund the Development of Certain Upgrades to the a/c/e System
Could Significantly Harm Our Electronic Operations."
26
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 U.S.
and global financial services markets, resulting in reduced trading volume.
These events could materially adversely affect our business. These factors
include:
. economic and political conditions in the United States and elsewhere in
the world;
. 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 Generate Increased Trading in Our Electronic
Marketplaces
We currently believe that strategic alliances will play an important role in
our long-term success. For example, we believe that our alliance with the Eurex
Group will enable us to offer a wider portfolio of products, expand into cash
markets and increase customer reach by obtaining access to our strategic
partners' distribution network and allowing us to offer products to the
strategic partners' customers. We cannot assure you that our alliance with the
Eurex Group or any other alliance of ours will generate the increased trading
volumes we are seeking.
Through our alliance with the Eurex Group, we may enter into arrangements or
alliances with others. Some of these alliances may be intended to generate
increased trading volume at CBOT, and in other cases, alliances may provide
operating services to exchange clients in exchange for a fee. We cannot assure
you that we will be successful in either developing, or fulfilling the
objectives of, any such alliance. Our participation in these alliances may
strain our resources and may limit our ability to pursue other strategic and
business initiatives.
Our Business is Subject to Risks Related to our Real Estate Holdings
Revenue from our building services operations represented about 12% of our
operating revenue in 2000. Lower occupancy rates, market rental rates and non-
renewal of leases by tenants could have a material adverse effect on our future
business services revenue, overall financial condition and operating results.
Any decrease in leased space from our six largest tenants 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.
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 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
27
modifications or restructuring of our regulatory functions could entail
material costs, which we have not currently planned for.
We Are Subject to Significant Risks of Litigation
Many aspects of our business involve substantial risks of liability.
Dissatisfied customers frequently make claims regarding quality of trade
execution, improperly settled trades, mismanagement or even fraud against their
service providers. We may become subject to these claims as the result of
failures or malfunctions of systems and services provided by us. We could incur
significant legal expenses defending claims, even those without merit. Although
the Commodity Exchange Act and our CFTC-approved disclaimer and limitation of
liability rules offer us some protections, an adverse resolution of any
lawsuits or claims against us could have a material adverse effect on our
reputation, business, financial condition and operating results.
We are subject to litigation in which the plaintiffs are seeking significant
monetary recovery from the CBOT. See "Our Business--Legal Proceedings--Patent
Rights Litigations" and "--Soybean Antitrust Litigation." We cannot assure you
that we will be successful in defending these matters and any resulting
judgment could have a material adverse impact on our financial condition. In
addition, we are subject to legal proceedings and claims as a result of the
restructuring transactions. See "Our Business--Legal Proceedings--Minority
Member Litigation" and "--Chicago Board Options Exchange Litigation and
Proposed Rule Changes."
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. 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 on the patent claims. 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 have been named as a defendant in a lawsuit which alleges that we have
infringed a U.S. patent entitled "Automated Futures Trade Exchange." For more
information, see "Our Business--Legal Proceedings--Patent Rights Litigation."
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 Class B common
stockholders, or "members", and other persons who use our markets will engage
in fraud or other misconduct, which could result in regulatory sanctions and
serious reputational harm. It is not always possible to deter misconduct, and
the precautions we take to prevent and detect this activity may not be
effective in all cases.
The Existing Legal Framework for Our Industry Has Been Modified to Lower
Barriers to Entry and Decrease Continuing Regulatory Costs for Competitors
We are heavily regulated by the Commodity Futures Trading Commission under
the authority provided under the Commodity Exchange Act and by other federal
agencies. The CFTC is a "sunset agency," which
28
means that it must be periodically reauthorized by legislation. In 2000,
Congress reviewed the Commodity Exchange Act in the context of its regular
reauthorization process. That review resulted in the enactment of the Commodity
Futures Modernization Act of 2000. The Commodity Futures Modernization Act
amends the Commodity Exchange Act to reduce regulatory requirements and thereby
permits additional competition from existing or new markets or from dealers in
derivative instruments.
The Commodity Futures Modernization Act also will facilitate over-the-
counter derivative transactions and the development of other transaction
execution facilities with lesser regulatory compliance and lesser regulatory
oversight than exchanges have traditionally faced. Some of those facilities may
have no regulatory compliance requirements and regulatory oversight. These
facilities may compete for our major customers and may reduce our volume or
fees we are able to charge. 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
The following risks relate to changes in our certificate of incorporation,
bylaws and rules and regulations that will occur as part of the restructuring
transactions.
Substantial Elimination of the Petition Process and Other Changes to Our
Certificate of Incorporation and Bylaws Will Significantly Reduce the Influence
of the Members in the Management of For-Profit CBOT
The amendment of our certificate of incorporation and bylaws as part of the
restructuring transactions will substantially reduce the members' authority to
control changes to our bylaws, which currently include our rules, through use
of the petition process. Following completion of the restructuring
transactions, the rules will no longer be part of our bylaws and the sole and
exclusive authority to adopt, repeal and amend rules and regulations will
generally be vested in our board of directors, subject to the rights of holders
of Series B-1 and Series B-2 shares of Class B common stock with respect to
certain core rights associated with the trading rights and privileges of Class
B common stockholders. This means that the stockholders of For-Profit CBOT will
generally not have the authority to adopt, repeal or amend the rules and
regulations. In addition, stockholders of For-Profit CBOT will only be able to
submit proposals to amend the bylaws for a vote at the annual meeting of For-
Profit CBOT in accordance with its bylaws, which will generally require advance
notice of any proposal not less than 45, nor more than 75, days in advance of
the first anniversary of the mailing of proxy materials for the preceding
year's annual meeting. Any stockholder proposal to adopt, repeal or amend the
bylaws will require the approval of two-thirds of the voting power of the
stockholders of For-Profit CBOT entitled to vote generally in the election of
directors. In addition, stockholders will not have authority to call special
meetings of stockholders or take action by written consent of stockholders.
These changes will significantly 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.
This significant reduction in the ability of our members to participate in
the day-to-day management and operations of For-Profit CBOT may make our
organization less attractive to our current members. As a result, they may seek
to conduct their business at, or obtain membership in, one or more other
exchanges. A loss or material diminution of member trading activity could
negatively impact liquidity and trading volumes in our products. A material
reduction in the aggregate capital provided by our clearing members to
guarantee trades by them and their customers could lead to a reduction in
trading activity on our exchange, and make it more difficult for us to generate
revenue or to sustain growth.
Changes in Our Corporate Governance Will Eliminate Many Member-Dominated
Committees Which Will Significantly Reduce the Influence of the Members in the
Management of For-Profit CBOT
Our current governance structure grants significant decision-making
authority to various member-dominated committees, which we believe
significantly reduces our ability to make strategic or executive
29
decisions in a timely or efficient manner. It is currently expected that,
subject to any applicable regulatory requirements, we will eliminate many of
these committees in connection with the restructuring transactions. After
completion of the restructuring transactions, our management will be given
significant decision-making responsibilities, including with respect to matters
currently addressed by such member-dominated committees, as well as the
requisite authority to make such decisions. We currently expect that management
will make decisions in a manner intended to enhance stockholder value over the
long term, which may lead to decisions or outcomes that differ from the
decisions and outcomes that are made by our current board of directors and
committees under our current governance structure.
Delaware Law May Protect Decisions of the Board of Directors That Have
Different Effects on Class A and Class B Stockholders
Delaware law generally provides that a board of directors owes an equal duty
to all stockholders, regardless of class or series, and does not provide
separate or additional duties to any particular group of stockholders. As a
result of the restructuring transactions, For-Profit CBOT will have a dual-
class and multiple- series common stock capital structure. Moreover, the
certificate of incorporation of For-Profit CBOT will include unique provisions
that are intended to protect certain core rights associated with the trading
rights and privileges of Class B common stockholders, including, among other
things, 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 the
holders of Series B-1 and Series B-2 shares of Class B common stock. Such
provisions may have the effect of requiring the board of directors to make
certain decisions that would benefit the holders of one or more series of Class
B common stock but not the holders of Class A common stock, or which would
affect the holders of one or more series of Class B common stock and Class A
common stock differently.
Accordingly, the board of directors of For-Profit CBOT may make decisions
that may have the effect of benefitting one class of common stockholders over
the other, or which may affect the holders of each class or series of common
stock differently. Delaware law will generally protect these decisions so long
as the board of directors of For-Profit CBOT 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 stockholders
generally.
Effects of Certain Provisions Could Enable the Board of Directors to Prevent
or Delay a Change of Control
Some of the provisions of our certificate of incorporation, our bylaws and
Delaware law, as well as a stockholder rights plan of For-Profit CBOT, if
adopted, 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 common stock of For-Profit CBOT.
For-Profit CBOT's certificate of incorporation and bylaws will provide,
among other things, that our board of directors will be divided into three
classes, which will serve for classified or staggered three-year terms, that
stockholders may not take action by written consent and that special meetings
of stockholders may only be called by our chairman, our president or our board.
In addition, our board may issue up to 10,000,000 shares of preferred stock
with rights and privileges that might be senior to issued common stock,
including the Class A common stock and Class B common stock, without
stockholder approval. Furthermore, we currently anticipate that the board would
be asked to consider, and would likely adopt, a stockholder rights plan in
connection with an underwritten public offering of its common stock, if any.
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 and Class B common stock.
30
Our board believes that these provisions will protect stockholders over the
long term and ensure that stockholders receive fair compensation for their
shares in the event of an unsolicited takeover attempt. Our board believes that
provisions substantially similar to those that will be applicable to For-Profit
CBOT have been widely adopted by other public companies.
Our Issuance of Additional Shares of Capital Stock Will Dilute the Value of
the Shares We Issue to You
For-Profit CBOT will have a significant number of authorized but unissued
shares of Class A common stock that may be issued in the future at the
discretion of its board of directors, without stockholder approval. The board
of directors of For-Profit CBOT may also issue additional shares of Series A
convertible preferred stock or a newly created series of preferred stock which
may be convertible into other shares of For-Profit CBOT, including shares of
Class A common stock, without stockholder approval. In addition, we currently
expect to adopt an incentive benefit plan under which stock-based awards may be
made to employees of For-Profit CBOT. If we issue additional shares of Class A
common stock in connection with the conversion of Series A convertible
preferred stock, future acquisitions, the incentive plan or any other purpose,
your equity interest in For-Profit CBOT will be diluted and the market price or
value of your shares, if any, could decline. The board of directors of For-
Profit CBOT is expected to consider the potential dilutive effects of any
subsequent issuance of Class A common stock, or securities convertible into
shares of Class A common stock, in relation to the value generated or expected
to be generated in connection with their issuance. However, we cannot assure
you that the board of directors of For-Profit CBOT will not authorize the
issuance of additional shares of Class A common stock, preferred stock or
securities convertible into shares of Class A common stock, in the future.
31
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 its
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. As a result of this process, we have
developed, and are proposing for your approval, a series of transactions
designed to restructure the CBOT into a for-profit company.
The restructuring transactions are designed to demutualize the CBOT into a
for-profit corporation, modernize the CBOT's corporate governance structure in
order to improve the efficiency of its corporate decision-making process and
reorganize and consolidate our electronic trading business into our eCBOT
subsidiary. We believe that the restructuring transactions will enable the CBOT
to enhance its competitiveness within the futures industry, including both the
open outcry and electronic trading markets.
Also, as a for-profit company, For-Profit CBOT will have the ability to
issue capital stock. This means that we will have the flexibility to continue
to evaluate the CBOT ownership structure and to consider any number of value-
enhancing transactions in the future, such as one or more offerings of shares
of stock of For-Profit CBOT and/or our eCBOT subsidiary to the public or a
complete separation of For-Profit CBOT and eCBOT. For-Profit CBOT may be able
to complete certain of such transactions without stockholder approval. As a
result, we may determine to pursue any number of future transactions, or no
transaction at all. We currently have no plan or intention to pursue any
specific transactions other than the restructuring transactions.
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 a favorable ruling from the
Internal Revenue Service and any required regulatory approvals from the
Commodity Futures Trading Commission. However, our obligation to complete the
restructuring transactions is subject to satisfaction of a number of
conditions, including, but not limited to, 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
each class of CBOT membership. For more information about the IRS ruling, CFTC
approvals and other conditions to completing the restructuring transactions,
see "--Regulatory Matters" and "--Conditions to Completing the Restructuring
Transactions."
Background of the Restructuring Transactions
Development of the Restructuring Strategy
We were organized in 1848 as a voluntary, unincorporated association to
serve as an open-outcry marketplace for the growing agricultural market in
Chicago. In 1859, the Illinois General Assembly, by legislative act, granted us
a special certificate of incorporation that incorporated our organization. In
August 2000, we reincorporated in Delaware, and we currently exist as a
Delaware nonstock, not-for-profit corporation.
Now in our 153rd year of operation, we have become a leader in the domestic
listed derivatives market. According to industry data as reported in Futures
Industry Magazine, we had in 2000 about a 15% share of the global listed
futures and options on futures market. We are the largest domestic futures
exchange on the basis of contract volume and the world's second largest futures
exchange behind Eurex. In addition, as the "Chicago Board of Trade," we believe
that we have one of the strongest brand names in the futures industry.
Competitive conditions in the futures industry have changed significantly in
the last decade 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, in 1992 we began to make
our products available for electronic trading, initially, on the Globex system,
and, beginning in 1994, on the Project A electronic trading system, which was
operated by the electronic trading division of Ceres until August 25, 2000. On
August 27, 2000, Ceres, through
32
its participation in an alliance with the Eurex Group, began to operate the
a/c/e electronic trading system, which allows CBOT and Eurex members to access
their respective markets from a common front end. As of December 31, 2000,
total volume traded on the a/c/e/ system surpassed an aggregate of about 8.6
million contracts traded since it became operational.
Notwithstanding the success of the Globex, Project A and other 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 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 addition, 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 structure and a corporate
governance mechanism designed to position us to compete more effectively in the
evolving marketplace.
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, as legal counsel to the CBOT and the board of
directors, and Piper Marbury Rudnick & Wolfe, 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.
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 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 strategy also contemplated the
possibility that the 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, the Implementation Committee, initially consisted
of nine members of the board of directors and was chaired by the then current
chairman of our 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, 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 other members of the
Independent Allocation Committee were Dr. Robert S. Hamada, Robert H. Michel
and Ralph H. Weems. Dr. Hamada and Mr. Michel ceased to serve on the
Independent Allocation Committee effective January 1, 2001, concurrent with the
expiration of their terms as directors of the CBOT. Since no mechanism
currently exists 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 the one contemplated by the board, 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 CBOT in connection with the
transactions to implement the restructuring strategy, including the allocation
to CBOT
33
members of shares of stock of the new open-outcry company and the allocation to
CBOT members of shares of stock in the new electronic trading company.
The Implementation Committee continued the work of the Restructuring Task
Force with assistance from the management of the CBOT and its outside advisors,
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, including a preliminary step necessary in order to
proceed with the implementation of the restructuring strategy. This step
involved the reincorporation of the CBOT in Delaware as a 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 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 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,
which included the law firm of Winston & Strawn, as its special counsel, and
the investment banking firm of William Blair & Company, L.L.C., as its
financial advisor, worked to develop a recommended methodology for an
appropriate and fair allocation of value among the CBOT members in connection
with implementation of the original restructuring strategy. For more
information about the work of the Independent Allocation Committee, see "--
Independent Allocation Committee of the Board." In addition, Arthur Andersen
LLP was retained by us to prepare a valuation analysis of Ceres and the limited
partnershp interests.
In early May 2000, the Independent Allocation Committee submitted to our
board of directors its initial report, which recommended an allocation of
equity among the members in connection with the implementation of the original
restructuring strategy. 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.
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 the
report of the Independent Allocation Committee, including its recommendation
regarding the methodology to be used with respect to the allocation of shares
of stock of both of the open outcry business and the electronic trading
business among the holders of Full, Associate, GIM, IDEM and COM memberships in
the CBOT, 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 allocation of shares of common stock in the two new companies
in the ratio of 5.0 : 1.0 : 0.5 : 0.06 : 0.07 to each Full Member and Associate
Member, and each holder of a GIM, IDEM and COM, respectively, was fair, from a
financial point of view, to each of the five classes of members. For more
information about the allocation recommendation, see "--Independent Allocation
Committee of the Board" and "--Opinion of the Financial Advisor to the
Independent Allocation Committee of the Board." At this time, Arthur Andersen
provided its report to the board regarding its preliminary valuation analysis
of Ceres as of May 16, 2000.
34
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, 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 two separate, competing 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, among other things, 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 CBOT and eCBOT, 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.
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:
. 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 For-Profit CBOT,
representing both trading rights and privileges and equity ownership, to
the current members;
. adopting a revised corporate governance mechanism, 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
. reorganizing and consolidating the CBOT's electronic trading business,
part of which is currently operated by Ceres, into eCBOT, which would be
operated as a wholly owned subsidiary of the For-Profit CBOT.
At this 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 for-profit company should be
pursued instead. The board concluded that the revised strategy would enable
each of the two 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 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 value in For-Profit CBOT among
the CBOT 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, 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 an updated valuation analysis of Ceres and the limited partnership
interests in connection with the reorganization and consolidation of our
electronic
35
trading business, which is currently 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 the Ceres merger as
described further below.
Concurrently, the Independent Allocation Committee undertook to update its
recommendation regarding a fair and appropriate allocation of value among CBOT
members in the context of the transactions to implement the revised
restructuring strategy. For more information about the allocation
recommendation and the additional work of the Independent Allocation Committee,
see "--Independent Allocation Committee of the Board."
On November 21, 2000, the Independent Allocation Committee reported on and
provided to our board of directors its updated recommendation regarding the
allocation among the members of Class A common stock in respect of their
memberships in connection with the restructuring transactions. The Independent
Allocation Committee recommended, in the context of the restructuring
transactions, that an allocation of shares of Class A common stock of For-
Profit CBOT among members in respect of their memberships in connection with
the restructuring in the ratio of 5.00 : 1.00 : 0.50 : 0.06 : 0.07 to each Full
Member, Associate Member, GIM, IDEM and COM, respectively, is fair. The
Independent Allocation Committee indicated that, in reaching this
recommendation, it received and considered an updated opinion of William Blair
that the proposed allocation is fair, from a financial point of view, to each
of the five classes of members.
At the same meeting, Arthur Andersen reported to our board regarding its
updated valuation of Ceres and the 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 limit partnership interests pursuant to the Ceres
merger is fair, from a financial point of view, to Ceres and to each class of
the Ceres limited partners.
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 of directors, 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 For-Profit CBOT, the provisions to be included in
the certificate of incorporation concerning the core rights associated with the
trading rights and privileges of Class B common stockholders and clarifications
regarding the importance of considering the expected effects, if any, of the
restructuring transactions on the Chicago Board Options Exchange 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 comprised 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.
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
36
described in this document. At this meeting, management and the Executive
Committee presented to the board of directors for its review and consideration
the proposed restructuring transactions. At this meeting, the board received a
report from the Executive Committee and management regarding the restructuring
transactions and the CBOT's business strategy, including, among other things,
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 regarding the
allocation among the members of Class A common stock in respect of their
memberships in connection with the restructuring transactions, as currently
proposed, 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 is 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 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, 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 of shares of
Class A common stock among the holders of Full, Associate, GIM, IDEM and COM
memberships in the CBOT 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 allocation of shares of Class A common stock of For-Profit CBOT among
members in respect of their memberships in connection with the restructuring
transactions in the ratio of 5.0 : 1.00 : 0.50 : 0.06 : 0.07 to each Full
Member, Associate Member, GIM, IDEM and COM, respectively, is fair, from a
financial point of view, to each of the five classes of members. For more
information regarding this opinion, see "--Opinion of the Financial Advisor to
the Independent Allocation Committee of the Board."
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 is fair,
from a financial point of view, to Ceres and each class of its limited
partners. For more information regarding this opinion, see "--Opinion of Arthur
Andersen to the Board of Directors Regarding Fairness of the Ceres Merger."
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 Class A common stock among the
holders of Full, Associate, GIM, IDEM and COM memberships in the CBOT in
respect of their memberships and the terms of the Ceres merger, are 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 and immediately prior to the time of
completion of the restructuring transactions, that the restructuring
transactions remain in the best
37
interests of the CBOT and its members and remain fair to all classes of CBOT
members. For more information, see "--Conditions to Completing 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
CBOT for its members. Current industry trends, particularly increased
electronic trading of derivative securities, 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, 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, new electronic markets are emerging to compete with traditional open
outcry exchanges, which are generally lower cost, more accessible, very
focused, faster in trade execution and, increasingly, more liquid. These
pressures are forcing traditional open outcry exchanges, such as the CBOT, to
modernize in order to remain competitive.
Additional pressure is placed on the industry by the over-the-counter
derivatives market, which is estimated by the Bank for International
Settlements to have grown to over $94 trillion in notional amount outstanding
as of June 2000. Further, according to the Bank for International Settlements,
transaction volume through 2000 in over-the-counter derivatives is growing
faster than transaction volume in exchange-listed derivatives.
Members of exchanges are also under increasing pressure from clients and new
entrants in the marketplace. As a result, members of exchanges are generally
concerned about the long-term value of their memberships.
Advances in Technology and Electronic Trading. Technological innovations are
creating new competitors and encouraging the rapid development of electronic
trading systems that are challenging the traditional open outcry exchanges.
According to industry data assembled by the CBOT, since 1995, contract volume
traded on open outcry derivatives exchanges has declined by over 29%, and
electronic trading has grown by more than 143%. 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, many during the last three years,
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 currently has an investment in four
electronic communications networks. According to a special study prepared by
the SEC's Division of Market Regulation, electronic communications networks
have already captured one-third of Nasdaq's trading volume.
The CBOT is facing increasing competition from many potential electronic
competitors. 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. 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 has indicated its plan to introduce an electronic trading
system for futures and other derivatives in the first six months of 2001.
38
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
mechanisms, quickening their organizational decision-making, improving their
access to capital and technology, and enhancing their ability to quickly enter
into strategic alliances. The Chicago Mercantile Exchange, the New York
Mercantile Exchange and the Hong Kong Futures Exchange, among others, have
recently demutualized. Some exchanges have announced that they are considering
initial public offerings to raise capital necessary for strategic endeavors.
The Australian Stock Exchange and OM Gruppen AB are already publicly-held
corporations. The New York Stock Exchange, Nasdaq and Sydney Futures Exchange
have each indicated at various times in the past that they have considered
initial public offerings.
In addition to demutualization, we believe that the industry will
consolidate via 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
We have determined that it is desirable for the CBOT to restructure in
response to the changing marketplace in order to meet two principal objectives.
First, the current governance structure of the CBOT, which is slow to respond
and primarily oriented towards delivering member benefits and supporting member
opportunity rather than enterprise profitability, must be changed to adopt a
more streamlined decision-making process, more focused on maximizing value to
the enterprise. Second, the CBOT should respond to the technological
innovations that are currently shaping the futures industry.
With these two objectives in mind, we evaluated a number of restructuring
alternatives as described below under "--Strategic Alternatives Considered." We
determined that any new structure should incorporate both an updated open-
outcry exchange, in response to member demand, and an electronic marketplace,
in response to competitive pressures.
Strategic Alternatives Considered
We 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 included the following:
. maintaining the CBOT in its current form as a parent company and creating
a separate electronic trading company as a subsidiary;
. restructuring the CBOT into two separate for-profit companies, one to
conduct the open-outcry trading business and the other to conduct the
electronic trading business;
. organizing a single demutualized holding company with an open-outcry
subsidiary and an electronic trading company subsidiary; and
. 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 companies, as described in the May 2000
restructuring report. 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 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.
However, as described above under "--Background of the Restructuring
Transactions," in late August 2000, we concluded that such a strategy was no
longer appropriate in light of a number of factors, including,
39
among other things, 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 ultimately 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 under "--
Overview." Among other things, the revised strategy is 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 will enable us to successfully implement this strategy.
Description of the Restructuring Transactions
The restructuring transactions are designed to:
. demutualize our organization by converting from a nonstock, not-for-
profit membership corporation into a stock, for-profit corporation and
distributing shares of For-Profit CBOT common stock to our members;
. modernize our corporate governance structure by substantially eliminating
the membership petition process, streamlining our board of directors and
making certain other changes to improve the efficiency of our corporate
decision-making process; and
. reorganize and consolidate our electronic trading business, part of which
is currently operated by Ceres, into eCBOT, which would be operated as a
wholly owned subsidiary of the CBOT. In connection with this
reorganization of our electronic trading business, For-Profit CBOT will
issue shares of its Series A convertible preferred stock to the limited
partners of Ceres in exchange for their limited partnership interests and
Ceres will be liquidated.
The demutualization and the modernization of our corporate governance structure
will be accomplished pursuant to an amendment to our certificate of
incorporation as well as related amendments to our bylaws and rules and
regulations.
As a result of the restructuring transactions, each member will receive an
appropriate number of shares of Class A common stock, based upon the allocation
methodology developed and recommended by the Independent Allocation Committee
and adopted by our board of directors, with respect to each membership held by
such member. In addition, one share of the appropriate series of Class B common
stock will be issued in respect of each membership. Both the Class A common
stock and the Class B common stock will represent equity interests in For-
Profit CBOT and, in addition, the Class B common stock will afford a holder who
meets our membership and eligibility requirements certain trading rights and
privileges relating to both our open outcry and electronic trading systems. The
Class B common stock will be issued in five series, each of which will carry
with it the trading rights and privileges that correspond to the trading rights
and privileges of one of the five current classes of our membership, as
indicated below:
[Download Table]
Corresponding Series of
Current Class of CBOT Membership Class B Common Stock
-------------------------------- -----------------------
Full Series B-1
Associate Series B-2
GIM Series B-3
IDEM Series B-4
COM Series B-5
40
In connection with the restructuring transactions, we will also modernize
our corporate governance structure in a manner designed to improve our
decision-making processes, which we believe will enable us to compete more
effectively in the future. Specifically, our new corporate governance structure
will:
. substantially eliminate the membership petition process and generally
reduce the ability of members to participate in our day-to-day management
and operations;
. streamline our board of directors by reducing its size from 18 directors
to nine directors and by reducing the number of committees; and
. provide for certain change of control provisions, such as, among other
things, a classified or staggered board of directors, advance notice
requirements, a prohibition on stockholder action by written consent and
a prohibition on the ability of stockholders to call special meetings of
stockholders.
As a result of the reorganization and consolidation of our electronic
trading business into our wholly owned eCBOT subsidiary, members who are
limited partners of Ceres will receive shares of Series A convertible preferred
stock in For-Profit CBOT in exchange for their limited partnership interests in
Ceres pursuant to the Ceres merger as described below and Ceres will be
liquidated. The operations of Ceres will be consolidated into For-Profit CBOT,
with eCBOT conducting the electronic trading business currently operated by
Ceres.
Specifically, the restructuring transactions include the following:
Demutualization
The demutualization of the CBOT, which involves the conversion of the CBOT
from a Delaware nonstock, not-for-profit corporation into a Delaware stock,
for-profit corporation, will be effected pursuant to an amendment and
restatement of our certificate of incorporation to remove the current
restriction on the CBOT's ability to issue capital stock, which will permit the
CBOT to issue stock to the members, and provide that the CBOT shall become for-
profit. The distribution of common stock will be achieved pursuant to a
dividend to the CBOT's members of rights to receive shares of common stock in
For-Profit CBOT immediately following the effectiveness of the CBOT's
conversion to a stock, for-profit corporation.
Amendment and Restatement of Our Certificate of Incorporation. Our
certificate of incorporation currently specifies that the CBOT is not-for-
profit and has no authority to issue capital stock. It also provides that any
amendment, alteration or repeal of this provision will require, in addition to
the approval of our board of directors, the affirmative vote of the members in
accordance with certain procedures specified in our certificate of
incorporation. Accordingly, our board of directors has approved and adopted an
amended and restated certificate of incorporation, which is being submitted to
the CBOT members entitled to vote on such matters for a vote as part of the
restructuring transactions. Such amended and restated certificate of
incorporation provides, among other things, that the CBOT will be for-profit
and have the authority to issue capital stock.
In addition, the amendment and restatement of our certificate of
incorporation will incorporate certain other changes intended to modernize our
corporate governance mechanism, as described further below under "--
Modernization of Our Corporate Governance Structure--Amendment of Our
Certificate of Incorporation."
We have included the form of amended and restated certificate of
incorporation of For-Profit CBOT as Appendix D to this document. We urge you to
review carefully all of the terms and conditions of the amended and restated
certificate of incorporation before voting on the restructuring transactions.
Distribution of Rights. The conversion of the CBOT into For-Profit CBOT, a
Delaware stock, for-profit corporation, will be accomplished by an amendment
and restatement our certificate of incorporation. This amendment and
restatement will authorize us to issue stock, but will not effect the actual
distribution of shares of stock to the members. In connection with the
restructuring transactions, our board has also adopted a new regulation, which
will facilitate the distribution of For-Profit CBOT common stock by confirming
the status of the GIMs, IDEMs and COMs under Delaware law as "members" entitled
to receive such a distribution.
41
In order to effect this distribution of shares of stock to the members, our
board will declare and pay to each CBOT member a dividend of non-transferable
rights to receive shares of the common stock of For-Profit CBOT upon the
effectiveness of the conversion of the CBOT into For-Profit CBOT. Such a
dividend will be declared and distributed to the CBOT members prior to the
effectiveness of the amendment and restatement of our certificate of
incorporation described above and will entitle members to receive, immediately
following the effectiveness of the amendment and restatement of our certificate
of incorporation, shares of Class A common stock and a share of Class B common
stock of For-Profit CBOT or, alternatively, cash in an amount equal to the par
value of the underlying shares of common stock. The nominal cash election
mechanism is being utilized to ensure compliance with a technical requirement
under Delaware law, to the extent applicable, that For-Profit CBOT receive
adequate consideration for the shares of common stock to be issued to the CBOT
members in respect of their memberships.
Each CBOT member will receive a dividend of rights to receive an appropriate
number of shares of Class A common stock of For-Profit CBOT, based on the
allocation methodology developed and recommended by the Independent Allocation
Committee and adopted by our board, and rights to receive one share of an
appropriate series of Class B common stock of For-Profit CBOT with respect to
each membership held by such member. The Class A common stock will represent
solely an equity interest in For-Profit CBOT. The Class B common stock will
represent an equity interest and, subject to satisfaction of applicable
membership and eligibility requirements, a membership, including all trading
rights and privileges appurtenant to that membership, in For-Profit CBOT. As a
result, a holder of a share of Class B common stock who meets For-Profit CBOT's
membership and eligibility criteria will be a "member of a contract market"
within the meaning of the Commodity Exchange Act. Under the Commodity Exchange
Act, the term "member of a contract market" means an individual, association,
partnership, corporation, or trust owning or holding membership in, or admitted
to membership representation on, a contract market or having trading privileges
thereon. Such holders of shares of Class B common stock will be members of For-
Profit CBOT for purposes of For-Profit CBOT's rules and regulations, including
those relating to exchange floor operations and procedures, futures commission
merchants, disciplinary proceedings and arbitration of member controversies.
The Class B common stock will be issued in five series: Series B-1, Series
B-2, Series B-3, Series B-4 and Series B-5. Each series of Class B common stock
will represent a membership, and will afford a holder of such Class B common
stock who meets our membership and eligibility requirements the trading rights
and privileges that correspond to the membership and trading rights and
privileges of one of the five current classes of CBOT membership, as
illustrated below:
[Download Table]
Current Class of Corresponding Series of
CBOT Membership Class B Common Stock
---------------- -----------------------
Full Series B-1
Associate Series B-2
GIM Series B-3
IDEM Series B-4
COM Series B-5
For more information regarding the Class A common stock and the Class B common
stock, and the respective rights and privileges of such stock, see "Description
of Capital Stock--Common Stock."
The following chart indicates the number of shares of Class A common stock
and Class B common stock of For-Profit CBOT that will be distributed in respect
of each membership pursuant to the restructuring transactions:
Number of Shares of For-Profit CBOT
to Be Received Per Membership
[Download Table]
Membership Class A Shares Class B Shares
---------- -------------- --------------
Full 25,000 1 share of Series B-1
Associate 5,000 1 share of Series B-2
GIM 2,500 1 share of Series B-3
IDEM 300 1 share of Series B-4
COM 350 1 share of Series B-5
42
For more information regarding the determination of the methodology for
allocating shares of Class A common stock of For-Profit CBOT among the members,
see "--Independent Allocation Committee of the Board" and "--Opinion of the
Financial Advisor to the Independent Allocation Committee of the Board."
The allocation methodology utilized in the restructuring transactions is
currently the subject of a lawsuit brought against an alleged class of Full
Members of the CBOT on behalf of the "minority" members of the CBOT, consisting
of the Associate Members, GIMs, IDEMs and COMs. For more information regarding
this litigation, see "Our Business--Legal Proceedings--Minority Member
Litigation."
Modernization of Our Corporate Governance Structure
An important objective of the restructuring transactions is the
modernization of the corporate governance structure of CBOT. After the
restructuring transactions, For-Profit CBOT will be operated for the long-term
benefit of its stockholders rather than solely for the purpose of delivering
member benefits and enhancing member opportunity. Accordingly, the
restructuring transactions will involve significant changes, which will be
largely implemented pursuant to amendments to the certificate of incorporation,
bylaws and rules and regulations of For-Profit CBOT.
Amendment and Restatement of Our Certificate of Incorporation. We will
modernize certain aspects of our corporate governance pursuant to changes to
our certificate of incorporation. The ability to elect directors and other
voting rights will generally be granted to holders of Class A common stock.
Class B common stockholders will generally have no voting rights, other than
the ability of holders of Series B-1 and Series B-2 shares of Class B common
stock to approve changes that would adversely affect certain core rights and
such other voting rights as may be required under Delaware law. See
"Description of Capital Stock--Description of Common Stock--Description of
Additional Provisions of Class B Common Stock--Voting on Core Rights."
In addition, the certificate of incorporation of For-Profit CBOT will
contain certain change of control provisions, including provisions for a
classified or staggered board of directors and a prohibition on stockholder
action by written consent. These provisions are intended to encourage parties
that may seek to acquire control of For-Profit CBOT to negotiate with its board
of directors, which will attempt to maximize value to stockholders of For-
Profit CBOT resulting from any negotiated transaction. See "Description of
Capital Stock--Other Provisions."
You are being asked to approve the amended and restated certificate of
incorporation of For-Profit CBOT as part of the restructuring transactions. As
noted above, we have included the form of the amended and restated certificate
of incorporation of For-Profit CBOT as Appendix D to this document. We urge you
to review carefully all of the terms and conditions of the amended and restated
certificate of incorporation before voting on the restructuring transactions.
Amendment and Restatement of Our Bylaws. We will also modernize certain
aspects of our corporate governance structure pursuant to changes to our
bylaws. Consistent with the changes to the certificate of incorporation, the
bylaws of For-Profit CBOT will contain provisions intended to reduce the
ability of members to participate in the day-to-day management and operations
of that corporation. The board of directors of For-Profit CBOT will have the
authority to adopt, repeal and amend the bylaws without submitting such
amendments to the stockholders for a vote, except for amendments which would
adversely affect certain core rights of the Class B common stockholders as
described elsewhere in this document, which will also require the approval of
the holders of Series B-1 and Series B-2 shares of Class B common stock.
Further, any proposal by a stockholder to adopt, repeal and amend the bylaws
may only be brought to a vote at an annual meeting of the membership after
satisfying the advance notice requirements described below and will require the
approval of two-thirds of the voting power of the then-outstanding shares of
stock of For-Profit CBOT entitled to vote generally in the election of
directors.
43
The petition process of the members, which is currently implemented through
the ability of members to petition the board of directors to call special
meetings of the members and the requirement that members approve all changes to
the bylaws, will be substantially eliminated to the largest extent permitted
under applicable law. The principal exception consists of the preservation in
the certificate of incorporation of certain core rights associated with the
trading rights and privileges of Class B common stockholders, with respect to
which certain special voting rights will be vested with the holders of Series
B-1 and Series B-2 shares of Class B common stock. The bylaws will provide that
stockholders may not call special meetings of stockholders and only the
chairman, the president and the board of directors will have the right to call
such special meetings. The bylaws will contain provisions requiring that
advance notice be delivered to For-Profit CBOT of any business to be brought by
a stockholder before an annual meeting of stockholders and providing for
certain procedures to be followed by stockholders in nominating persons for
election to the For-Profit CBOT board of directors. Generally, such advance
notice provisions will require that a stockholder must give written notice to
the secretary of For-Profit CBOT not less than 45, nor more than 75, days prior
to the first anniversary of the date on which For-Profit CBOT first mailed its
proxy materials for the preceding year's annual meeting of stockholders. In
each case, the notice must set forth specific information regarding such
stockholder and each director nominee or other business proposed by such
stockholder, as applicable, as provided in our bylaws.
For our first annual meeting following the restructuring transactions, which
will be held in 2002, notice must be given no earlier than , 2002
and no later than , 2002.
We will also reduce the size of our board of directors to nine members,
implement a classified or staggered board and reduce the number of board
committees, in a manner generally designed to increase the efficiency of the
board of directors. See "Management and Executive Compensation--Directors and
Executive Officers" and "--Committees of the Board of Directors."
We have included the form of the amended and restated bylaws of For-Profit
CBOT as Appendix E to this document. You are being asked to approve the amended
and restated bylaws of For-Profit CBOT as part of the restructuring
transactions. We urge you to review carefully all of the terms and conditions
of the amended and restated bylaws before voting on the restructuring
transactions.
Amendment of Our Rules and Regulations. We will also modernize certain
aspects of our corporate governance structure pursuant to certain changes to
our rules and regulations. Currently, our rules are part of our bylaws and may
only be adopted, repealed or amended with the approval of the membership
pursuant to authority granted to it in our certificate of incorporation. The
bylaws of For-Profit CBOT will not include the rules and regulations and will
generally vest in the board of directors sole and exclusive authority to adopt,
repeal and amend the rules and regulations. As a result, the stockholders of
For-Profit CBOT will not have authority to adopt, repeal and amend the rules
and regulations, except for amendments that would adversely affect certain core
rights of the Class B common stockholders as described elsewhere in this
document, which will also require the approval of the holders of Series B-1 and
Series B-2 shares of Class B common stock. The board of directors will be able
to delegate some or all of the authority to amend the rules and regulations of
For-Profit CBOT to management, subject to applicable law.
The rules and regulations will also implement certain other changes that are
designed to modernize certain aspects of our corporate governance structure.
Many of these changes involve deletions of certain rules and regulations, the
substance of which will be addressed in the certificate of incorporation and/or
bylaws of For-Profit CBOT.
You are being asked to approve these changes to our rules and regulations as
part of the restructuring transactions. These changes to our rules and
regulations will be implemented by our board following the amendment and
restatement of our bylaws as described above. The form of the rules and
regulations of For-Profit CBOT, 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 F to this document a
summary entitled "Status of Current CBOT Rules and Regulations After the
Restructuring Transactions,"
44
which summarizes the changes to 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 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 and Stockholders of For-Profit
CBOT."
Reorganization of Our Electronic Trading Business
In connection with the restructuring transactions, our electronic trading
business, part of which is currently operated by Ceres, will be reorganized and
consolidated into eCBOT, our wholly owned subsidiary, so that, following the
restructuring transactions, eCBOT will conduct the electronic trading business
of For-Profit CBOT. We describe these transactions briefly below.
As part of the reorganization of our electronic trading business, a newly-
formed corporate subsidiary of For-Profit CBOT will merge with and into Ceres,
with Ceres as the surviving entity. As a result of this merger, eCBOT will
remain the general partner of Ceres and For-Profit CBOT will become a limited
partner of Ceres. Following the Ceres merger, Ceres will liquidate and its
assets will be distributed to For-Profit CBOT and eCBOT pursuant to the terms
of the Ceres limited partnership agreement. For-Profit CBOT will then transfer
to eCBOT any assets relating to the electronic trading business. As a result,
our eCBOT subsidiary will own and operate the electronic trading business of
For-Profit CBOT, including our 50% ownership interest in CBOT/Eurex Alliance,
L.L.C., and our interest in the a/c/e system.
Pursuant to the Ceres merger, the limited partners of Ceres will receive
shares of Series A convertible preferred stock of For-Profit CBOT in exchange
for their limited partnership interests. The number of shares of Series A
convertible preferred stock that will be issued in exchange for each limited
partnership interest will be determined by our board of directors and the board
of directors of eCBOT, the general partner of Ceres, by dividing:
. that partnership interest's allocable portion of the value of Ceres as
presented in Arthur Andersen's final valuation report to be delivered as
of a date reasonably proximate to the date of the completion of the Ceres
merger,
by
. the liquidation preference of $100 per share of Series A convertible
preferred stock.
In accordance with the exchange formula set forth above, the specific number
of shares of Series A convertible preferred stock that will be distributed to
each limited partner of Ceres will not be determined by our board of directors
and the board of directors of eCBOT until the time of the completion of the
Ceres merger. For purposes of illustration, the following chart indicates the
number of shares of Series A convertible preferred stock that would have been
distributed for each Class A limited partnership if the distribution had been
made on the basis of Arthur Andersen's valuation of Ceres as of December 31,
2000 as described below.
Shares of Series A Convertible Preferred Stock
To Be Received Per Class A Partnership Interest
[Download Table]
Series A Convertible
Limited Partnership Interest Preferred Stock
---------------------------- --------------------
Class A-1 132.5307
Class A-2 21.3460
Class A-3 14.6378
Class A-4 0.6406
45
Class B limited partnership interests are held only by our clearing members
and, according to the terms of the Ceres limited partnership agreement, part of
the value of the Class B limited partnership interests is based upon the CBOT
trading volume of the member holding such limited partnership interest. As a
result, the value of each Class B limited partnership interest, and the number
of shares of Series A convertible preferred stock to be issued with respect to
that limited partnership interest, varies by holder. Based upon Arthur
Andersen's valuation of Ceres as of December 31, 2000, a total of 58,800 shares
of Series A convertible preferred stock would be distributed to the 61 holders
of Class B limited partnership interests in Ceres.
You should understand that the actual number of shares of Series A
convertible preferred stock to be issued to each Ceres limited partner will be
determined by our board of directors and the board of directors of eCBOT based
on the value of each limited partnership interest as presented in Arthur
Andersen's final valuation report to be delivered to the board of directors as
of a date reasonably proximate to the date of the completion of the Ceres
merger and is not capable of determination at this time. Accordingly, the
description above is for illustrative purposes only.
For more information regarding the Series A convertible preferred stock to
be issued to the Ceres limited partners, see "Description of Capital Stock--
Preferred Stock--Series A Convertible Preferred Stock" below.
Arthur Andersen has been retained to conduct a valuation analysis of Ceres
in order to provide to our board of directors its opinion of the fair market
value of Ceres and each of the underlying partnership interests as of a date
reasonably proximate to the date of the completion of the Ceres merger. Arthur
Andersen's final valuation report will provide the basis for the use of the
Series A convertible preferred stock as merger consideration and the allocation
of the Series A convertible preferred stock among the Ceres limited partners in
the Ceres merger. In February 2001, Arthur Andersen prepared a preliminary
valuation analysis that concluded the fair market value of Ceres as of December
31, 2000 was $29,400,000. The full text of the preliminary Ceres valuation
analysis is attached as Appendix C-3 to this document.
According to this analysis, the allocation of value of Ceres among the
general partner and the limited partner classes as of December 31, 2000 was as
follows:
[Download Table]
Partnership Interest Valuation
-------------------- ---------
General Partner $ 2,940,000
Class A-1 Limited Partners 18,581,000
Class A-2 Limited Partners 1,661,000
Class A-3 Limited Partners 256,000
Class A-4 Limited Partners 82,000
Class B Limited Partners 5,880,000
-----------
Total $29,400,000
===========
For more information regarding the valuation of Ceres, see "--Ceres
Valuation Analysis of Arthur Andersen." For more information regarding the
Series A convertible preferred stock, see "Description of Capital Stock."
Arthur Andersen was also retained by our board of directors and the board of
directors of eCBOT 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 Ceres limited partner in exchange for their respective limited
partnership interests pursuant to the Ceres merger. For more information, see
"--Opinion of Arthur Andersen to the Board of Directors Regarding Fairness of
the Ceres Merger."
Although you are being asked to approve the reorganization of our electronic
trading business, you are not being asked to separately approve the Ceres
merger. We expect that the Ceres merger will be approved by the CBOT, as the
sole stockholder of eCBOT, and eCBOT, as the general partner of Ceres. However,
if the CBOT members entitled to vote do not approve the restructuring
transactions, the Ceres merger will not be completed. Completion of the Ceres
merger is also conditioned on the satisfaction of the other conditions to
completion of the restructuring transactions. For more information about
certain regulatory approvals and other conditions to
46
implementing the transactions, see "--Regulatory Matters" and "--Conditions to
Completing the Restructuring Transactions."
Independent Allocation Committee of the Board
In January 2000, in connection with its approval of the original
restructuring strategy, our board of directors established an Independent
Allocation Committee of the board, composed solely of public or independent
directors of the board, to determine and recommend to the full board an
appropriate and fair allocation among the CBOT members of shares in the two
companies contemplated by the original restructuring strategy: the company
conducting the updated open outcry trading business and the company conducting
the electronic trading business.
To assure the independence of the process, each member of the Independent
Allocation Committee confirmed that there were no conflicts of interest
presented by his service on the Independent Allocation Committee, and that no
member nor any person in a member's family held a financial interest in a CBOT
member. The Independent Allocation Committee engaged an independent financial
advisor, William Blair, and special counsel, Winston & Strawn, to assist in
developing its recommendation. Again, each of these advisors confirmed that
their service to the Independent Allocation Committee did not present a
conflict of interest. Governor Thompson, the Chairman of the Independent
Allocation Committee, is the Chairman of Winston & Strawn, special counsel to
the Independent Allocation Committee. Members of the Independent Allocation
Committee each received a fee of $20,000 for service on the committee. In
addition, the CBOT agreed to indemnify each member against liabilities arising
from such service. In addition, the CBOT agreed to compensate each member of
the Independent Allocation Committee for time spent in connection with any
litigation proceeding relating to the matters considered by the Independent
Allocation Committee at an hourly rate, not to exceed $500, equal to the rate
at which such member is compensated by third parties for legal or consulting
services or, if no such rate is applicable to a member, such rate as is
mutually agreed to by the CBOT and the member.
During the course of its initial deliberations, which took place from
January to May 2000, the Independent Allocation Committee and its advisors
reviewed member correspondence regarding their views on allocation; met with
various membership committees and groups as well as CBOT management and staff;
reviewed various CBOT organization documents, documents relating to the
creation of memberships and certain trading and financial statistics relating
to the CBOT, including historical prices for memberships; reviewed various
other materials prepared for the CBOT or the board of directors by outside
consultants, financial, legal and other advisors; participated in various
meetings with such advisors; and researched other relevant data, including the
allocation methodologies used by other exchanges in connection with
demutualization transactions.
After considering various methodologies for allocation, the Independent
Allocation Committee concluded that it would be appropriate to adopt an
allocation methodology that takes into account a combination of factors rather
than a single factor and includes the following:
. relative liquidation rights;
. relative voting rights;
. the allocation made in connection with the formation of Ceres;
. the market values of memberships; and
. the contract volumes for which each class of membership has been
responsible on a historical basis.
Although the Independent Allocation Committee did not believe that it was
appropriate to assign specific weight to any particular factor, the Independent
Allocation Committee concluded that, in establishing an allocation, relatively
greater importance should be given to liquidation rights, voting rights and the
allocation made to members in connection with the formation of Ceres. Based on
its deliberations, on May 5, 2000, the Independent Allocation Committee
unanimously recommended to the full board that an allocation of shares of
common stock in each of the open outcry trading company and the electronic
trading company to each Full Member, Associate Member, GIM, IDEM and COM in the
ratio of 5.0 : 1.0 : 0.50 : 0.06 : 0.07 is fair. In
47
reaching this conclusion, the Independent Allocation Committee received and
considered an opinion dated May 5, 2000 from William Blair that the allocation
recommended by the Independent Allocation Committee in connection with the
restructuring is fair, from a financial point of view, to the holders of each
class of membership. For more information on this opinion, see "--Opinion of
the Financial Advisor to the Independent Allocation Committee of the Board."
The recommendation of the Independent Allocation Committee on May 5, 2000,
as well as the opinion of William Blair as of such date, were based on a number
of assumptions, including that:
. the restructuring would not take the form of a liquidation;
. the trading rights and privileges of each class, including the Chicago
Board Options Exchange exercise right of Full Members, would continue;
. each member would receive in addition to their trading rights the
appropriate number of shares in both For-Profit CBOT and eCBOT per the
allocation;
. each company's shares would be issued with equal per share voting and
liquidation rights;
. such shares would be in addition to any shares or other consideration
received in connection with the reorganization of Ceres, which
transaction was outside the purview of the Committee.
The allocation did not take into consideration any transaction with the Chicago
Board Options Exchange; and the allocation of assets and liabilities between
the CBOT and eCBOT was beyond the purview of the Independent Allocation
Committee.
On May 16, 2000, the full board considered and adopted the recommendation
made by the Independent Allocation Committee on May 5, 2000, subject to any
changes in the underlying assumptions, and subject to the board's further
approval of the definitive terms and structure of transactions designed to
implement the restructuring.
Following the adoption by the board of directors of the revised
restructuring strategy in August 2000, the Independent Allocation Committee
undertook to consider the revised restructuring strategy and update its
recommendation regarding an appropriate and fair allocation of value among CBOT
members in the context of the revised restructuring strategy.
In the course of updating its initial recommendation regarding the
allocation of equity among members of CBOT, the Independent Allocation
Committee reviewed various aspects of the revised restructuring strategy that
were developed subsequent to May 5, 2000, including:
. the change in the form of the restructuring transactions to provide for
the distribution and allocation solely of shares of For-Profit CBOT and
the formation of eCBOT as a wholly owned subsidiary of For-Profit CBOT;
. the board of directors' decision to reorganize and consolidate the
electronic trading business into eCBOT through a series of transactions
involving Ceres, including a merger transaction in which the limited
partnership interests in Ceres would be exchanged for shares of Series A
convertible preferred stock of For-Profit CBOT; and
. the proposal to issue shares of common stock of For-Profit CBOT in two
classes: Class A common stock with traditional voting liquidating and
dividend rights that would represent substantially all of the equity
value and voting power initially evidenced by the common stock of For-
Profit CBOT; and Class B common stock that will be issued in five series,
two of which would have special voting rights with respect to certain
trading rights and privileges of Class B common stockholders, each of
which series will entitle an eligible holder to trading rights and
privileges that correspond to, and are substantially similar to, the
trading rights and privileges of one of the five member classes of CBOT.
The Independent Allocation Committee also considered such other factors as
it deemed relevant, including the trading volume activity by various membership
classes and the trading prices for various memberships.
48
Based on these deliberations and its conclusion that the factors which
supported its initial recommendation remained an appropriate basis for
determining an allocation methodology in the context of the restructuring
transactions and that such factors had not changed in any material respect
since May 5, 2000, on November 21, 2000 the Independent Allocation Committee
unanimously recommended to the full board that an allocation of shares of Class
A common stock of For-Profit CBOT among the members in respect of their
memberships in connection with the restructuring in the ratio of 5.0 : 1.0 :
0.50 : 0.06 : 0.07 to each Full Member, Associate Member, GIM, IDEM and COM,
respectively is fair. In reaching this conclusion, the Independent Allocation
Committee received and considered an updated oral opinion on November 20, 2000,
which was confirmed in writing on November 21, 2000, from William Blair that
such allocation is fair, from a financial point of view, to the holders of each
class of membership. For more information on this updated opinion, see "--
Opinion of the Financial Advisor to the Independent Allocation Committee of the
Board."
The updated recommendation of the Independent Allocation Committee on
November 21, 2000, as well as the opinion of William Blair as of such date,
were based on a number of assumptions, including that:
. the restructuring will not take the form of a liquidation;
. the trading rights and privileges of each membership class, including the
Chicago Board Options Exchange exercise right of Full Members, will
continue;
. each member will receive, in addition to a share of the appropriate
series of Class B common stock and associated trading rights and
privileges, the number of shares of Class A common stock to which such
member is entitled in For-Profit CBOT per the allocation ratio in respect
of his or her membership;
. such shares would be in addition to the shares of Series A convertible
preferred stock or other consideration received in connection with the
Ceres merger, the fairness of which transaction is beyond the purview the
Independent Allocation Committee and the opinion of William Blair; and
. the allocation did not take into consideration any possible transaction
or business combination with any other party.
On January 16, 2001, immediately prior to the meeting of the board of
directors to consider the restructuring transactions, the Independent
Allocation Committee met to review and consider the refinements to the
restructuring transactions recommended by the Executive Committee and
management. At the meeting of the board of directors, 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 regarding the
allocation among the members of Class A common stock in respect of their
memberships in connection with the restructuring transactions, as currently
proposed, 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,
dated January 16, 2001, that the proposed allocation is fair, from a financial
point of view, to each of the five classes of members.
Opinion of the Financial Advisor to the Independent Allocation Committee of the
Board
Since no mechanism currently exists in our certificate of incorporation or
bylaws for allocating ownership in our organization among the members, the CBOT
established the Independent Allocation Committee as described above under "--
Independent Allocation Committee of the Board" and William Blair was retained
by the Independent Allocation Committee to render a written opinion as to the
fairness, from a financial point of view, of the allocation among CBOT members
in respect of their memberships of shares of common stock of For-Profit CBOT
and shares of common stock of the new electronic trading company. William Blair
was hired based on its qualifications and expertise in providing financial
advice to companies and its reputation as a nationally recognized investment
banking firm. William Blair was paid total fees of $750,000 for the issuance of
its written opinion to the Independent Allocation Committee and the board of
directors. Payment of the fee was not conditioned on the conclusion reached by
William Blair in its opinion. We also agreed to indemnify William Blair against
potential liabilities arising out of its engagement. We note that, in the
opinion of the SEC,
49
indemnification against liabilities under the U.S. federal securities laws is
against the public policy expressed in the Securities Act and is, therefore,
unenforceable.
At the request of the Independent Allocation Committee, William Blair
originally delivered to the committee its oral fairness opinion on May 5, 2000,
which was also confirmed in writing as of such date and also addressed to our
board. In light of the August 31, 2000 abandonment of the original
restructuring strategy, which had contemplated two separate for-profit
companies, in favor of the revised restructuring strategy, which contemplates a
single demutualized company operating the electronic trading company as a
wholly-owned subsidiary, William Blair reissued its opinion on November 20,
2000, which it confirmed in writing on November 21, 2000. The November 21, 2000
opinion was also addressed to our board.
In light of the further refinements to the restructuring transactions
recommended by the Executive Committee and management in early January 2001, at
the request of the Independent Allocation Committee, William Blair reviewed and
considered the refinements to the restructuring transactions and reissued its
opinion by letter dated January 16, 2001, the date on which the Independent
Allocation Committee confirmed its updated recommendation concerning the
allocation and the board of directors met to consider, and voted to approve,
the restructuring transactions, including the recommended allocation of Class A
common stock among members in respect of their memberships. The January 16,
2001 opinion was also addressed to our board. For more information, see "--
Background of the Restructuring Transactions--Development of the Restructuring
Strategy."
The January 16, 2001 opinion, which was substantially similar to
William Blair's November 21, 2000 opinion, stated that, based upon and subject
to the matters set forth in the opinion, the allocation of shares of Class A
common stock of For-Profit CBOT in respect of 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 and Associate Member, and each holder of a GIM, IDEM and COM,
respectively, is fair, from a financial point of view, to each of the five
classes of members. William Blair's May 5 opinion had stated, with similar
qualifications, that an allocation in the same ratio of common stock of For-
Profit CBOT and of eCBOT would be fair, from a financial point of view, to each
of the five classes of members. The full text of the January 16 opinion is
attached as Appendix C-1 to this document and describes the assumptions made,
matters considered, and limits on the scope of the review undertaken, by
William Blair. We urge you to read the opinion carefully and in its entirety
before voting on the restructuring transactions.
William Blair's opinions address only the fairness, from a financial point
of view, to each class of the members of the allocation of shares of Class A
common stock among the members in respect of their memberships in connection
with the restructuring transactions. The fairness of the consideration to be
received by the limited partners of Ceres in exchange for their limited
partnership interests pursuant to the Ceres merger is beyond the scope of
William Blair's opinions. For information regarding the Arthur Andersen
fairness opinion, which addresses such matters, see "--Opinion of Arthur
Andersen to the Board of Directors Regarding Fairness of the Ceres Merger."
William Blair's opinions do not address the merits of our underlying decision
to engage in the restructuring transactions or the fairness of the
consideration to be received by the members in respect of memberships in the
restructuring transactions, and do not constitute a recommendation to any
member as to how you should vote with respect to the restructuring
transactions. See "Risk Factors--Risks Relating to the Restructuring
Transactions--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 You Will Receive in the Restructuring Transactions Compared
to the Value of the Memberships You Currently Own."
In rendering each of its opinions, William Blair assumed and relied, without
independent verification, upon the accuracy and completeness of all the
information examined by or otherwise reviewed or discussed with it for purposes
of the opinion. William Blair did not make or obtain an independent valuation
or appraisal of our assets, liabilities or solvency. Each opinion is based upon
economic, market, financial and other conditions existing on, and other
information disclosed to William Blair as of, the date of the opinion. Although
subsequent developments may affect an opinion, William Blair does not have any
obligation to update, revise, reaffirm or reissue the opinion except when
requested as provided in the letter agreement between William Blair and the
Independent Allocation Committee dated March 8, 2000 and the amendment dated
May 5, 2000.
50
In connection with its review of the restructuring transactions and the
preparation of the opinions, William Blair examined, among other things:
. certain descriptive information regarding the restructuring transactions;
. various organizational documents of the CBOT and Ceres, including the
CBOT's certificate of incorporation, bylaws, rules and regulations and
the Ceres limited partnership agreement;
. various trading and financial statistics for the CBOT;
. certain publicly available information regarding terms of certain
transactions involving restructurings of exchanges comparable to the CBOT
and the allocation of value;
. presentations provided to us by our consultants and financial and legal
advisors;
. letters to the CBOT from various members regarding the restructuring
transactions; and
. information regarding the historical trading prices of memberships.
In connection with its opinions, William Blair also examined drafts of the
Registration Statement on Form S-4 of the CBOT relating to the restructuring
transactions and the Amended and Restated Certificate of Incorporation and
Bylaws of For-Profit CBOT.
William Blair also held discussions with current and former members of our
senior management and of the various classes of members of CBOT regarding the
foregoing, considered other matters which it deemed relevant to its inquiry and
has taken into account such accepted financial and investment banking
procedures and considerations as it deemed relevant.
William Blair was also advised by the Independent Allocation Committee that,
for purposes of rendering its opinions, it could assume that the restructuring
transactions will not be effected by means of a liquidation. William Blair made
this assumption without independent legal analysis.
Furthermore, in connection with its review of the restructuring transactions
and the preparation of its opinions, William Blair assumed that:
. there will not be any transaction, including any business
combination, with the Chicago Board Options Exchange; William Blair
had been advised that prior discussions around the time of its May 5
opinion between the CBOT and Chicago Board Options Exchange of a
possible business combination had terminated; and
. all existing trading privileges and the Chicago Board Options
Exchange exercise right of Full Members will remain intact following
the restructuring transactions.
William Blair's May 5 opinion also made certain additional assumptions.
The following summarizes the principal financial analyses performed by
William Blair to arrive at the conclusions set forth in the January 16, 2001
opinion. William Blair performed similar financial analyses in arriving at its
conclusions in its May 5 and November 21, 2000 opinions. William Blair
performed certain procedures, including each of the financial analyses
described below, and reviewed with the Independent Allocation Committee the
assumptions upon which such analyses were based, and other factors. The
preparation of a fairness opinion is a complex process. The summary set forth
below does not purport to be a complete description of the analyses performed
or factors considered by William Blair in this regard.
In arriving at its conclusion, William Blair considered various
methodologies for allocating the shares of Class A common stock in For Profit
CBOT among the members in respect of their memberships in connection with the
restructuring transactions. William Blair concluded, in its professional
judgment, that an allocation methodology that takes into account a combination
of factors rather than a single factor was appropriate, and that such
combination of factors should include, with respect to each of the five classes
of members:
. relative liquidation rights;
. relative voting rights;
. the allocation made in respect of each membership in connection with the
formation of Ceres;
51
. the market values of memberships; and
. the contract volumes for which each class of membership has been
responsible on a historical basis.
In arriving at its conclusion, William Blair attached greater importance to
liquidation rights, voting rights and the allocation made in respect of each
membership in connection with the formation of Ceres.
Relative Liquidation Rights
William Blair reviewed the liquidation rights as defined in the CBOT bylaws,
including the rules, which provide for the sharing of proceeds from dissolution
allocated to each member in the event of liquidation. In addition, William
Blair reviewed the implied per share allocation ratios, as set forth below:
[Download Table]
Member Liquidation Implied Per Share
Class Share Per Member Allocation Ratio*
------ ---------------- -----------------
Full 1.000 6.00
Associate 0.167 1.00
GIM 0.111 0.67
IDEM 0.005 0.03
COM 0.005 0.03
--------
*Stated as a multiple of Liquidation Share Per Member for the Associate Member
class.
Relative Voting Rights
William Blair reviewed voting rights per member as set forth in the CBOT
certificate of incorporation, bylaws and rules and regulations. In addition,
William Blair reviewed the implied per share allocation ratios, as set forth
below:
[Download Table]
Member Relative Voting Rights Implied Per Share
Class Per Member Allocation Ratio*
------ ---------------------- -----------------
Full 1.000 6.00
Associate 0.167 1.00
GIM 0.000 0.00
IDEM 0.000 0.00
COM 0.000 0.00
--------
*Stated as a multiple of Relative Voting Rights Per Member for the Associate
Member class.
Allocation Made in Respect of Each Membership in Connection with the Formation
of Ceres
William Blair reviewed the allocation of profits as defined in the Ceres
limited partnership agreement for the 70% of Ceres owned by the Ceres limited
partners who are CBOT members other than the clearing members. In addition,
William Blair reviewed the implied per share allocation ratios, as set forth
below:
[Download Table]
Allocation of Per Member Implied
Member Profits by Member Allocation of Per Share Allocation
Class Class (1) Profits (2) Ratio (3)
------ ----------------- ------------- --------------------
Full 90.28% 0.06439% 6.00
Associate 8.36% 0.01073% 1.00
GIM 0.95% 0.00537% 0.50
IDEM 0.21% 0.00032% 0.03
COM 0.21% 0.00032% 0.03
--------
(1) As defined in the Ceres limited partnership agreement. Based on member seat
count as stated in the draft dated January 9, 2001 of the Registration
Statement on Form S-4 of the CBOT as follows: Full (1,402), Associate
(779), GIM (177), IDEM (642) and COM (643).
(2) Defined as Allocation of Profits by Member Class divided by the respective
member seat count.
(3) Stated as a multiple of Per Member Allocation of Profits for the Associate
Member class.
52
Market Values of Memberships
William Blair reviewed the median historical trading prices of memberships
for the one-year period ending July 21, 1999, the day before the announcement
of the formation of the Restructuring Task Force and the restructuring
initiative. In addition, William Blair reviewed the implied per share
allocation ratios, as set forth below:
[Download Table]
Median Membership Price
(For the One Year Implied
Member Period Ending July 21, Per Share Allocation
Class 1999) Ratio*
------ ----------------------- --------------------
Full $490,000 2.49
Associate $197,000 1.00
GIM $ 89,000 0.45
IDEM $ 27,000 0.14
COM $ 55,000 0.28
--------
*Stated as a multiple of Median Membership Price for the Associate Member
class.
William Blair also considered median historical trading prices for the five-
year period ending July 21, 1999, as well as spot market prices as of January
5, 2001 for each membership class.
Contract Volumes
William Blair reviewed the contract volume traded by each membership class
as a percentage of the total contract volume traded by all membership classes.
The analysis was based on contract trading volume data for the 28 month period
beginning September 1, 1998 and ending December 31, 2000, the latest such
period for which contract trading volume data by membership class was readily
available. In addition, William Blair reviewed the implied per share allocation
ratios, as set forth below:
[Download Table]
Percent of Total Implied
Member Contact Volume by Per Share
Class Member Class Allocation Ratio*
------ ----------------- -----------------
Full 49.00% 1.21
Associate 40.55% 1.00
GIM 0.57% 0.01
IDEM 4.86% 0.12
COM 5.02% 0.12
--------
*Stated as a multiple of Percent of Total Contract Volume by Member Class for
the Associate Member class.
The foregoing description is only a summary of the material aspects of the
financial analyses used by William Blair in connection with rendering the
opinions. 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 William Blair's opinions. In arriving at the
opinions, William Blair considered the results of all these analyses. The
analyses were prepared solely for the purposes of William Blair providing its
opinion as to the fairness, from a financial point of view, to each of the five
classes of CBOT members, of the allocation of shares of Class A common stock in
For-Profit CBOT among the members in respect of their memberships in connection
with the restructuring transactions.
Any analysis of the fairness, from a financial point of view, to the
members, involves complex considerations and judgments. The fairness opinion
and the related presentations to the Independent Allocation Committee on May 5,
2000, November 20, 2000 and January 16, 2001 were among many factors taken into
consideration by the Independent Allocation Committee in recommending the
allocation. William Blair's opinions are for the use and benefit of the
Independent Allocation Committee and the board of directors in their
consideration of the allocation in the context of the restructuring
transactions.
53
William Blair was not requested to, and did not, participate in the
structuring of the restructuring transactions nor was it asked to consider, and
its opinions do not address, the relative merits of the restructuring
transactions as compared to any alternative business strategies that might
exist for us or the effect of any other transaction in which we might engage,
the value of the CBOT before or after completion of the restructuring
transactions, or the fairness of the consideration to be received by CBOT
members in respect of their memberships in connection with the restructuring
transactions. See "Risk Factors--Risks Relating to the Restructuring
Transactions--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 You Will Receive in the Restructuring Transactions Compared
to the Value of the Memberships You Currently Own."
Opinion of Arthur Andersen to the Board of Directors Regarding Fairness of the
Ceres Merger
Arthur Andersen was retained by our board of directors and the board of
directors of eCBOT to render a written opinion as to the fairness, from a
financial point of view, to Ceres and each class of the limited partners of
Ceres, of the consideration to be received by each Ceres limited partner in
exchange for their respective limited partnership interests pursuant to the
Ceres merger. Arthur Andersen was hired based on its qualifications and
expertise in providing financial advice to companies and its reputation as a
nationally recognized professional services firm having significant financial
advisory expertise and experience. Moreover, Arthur Andersen had already been
engaged by us in connection with preparing a valuation analysis of Ceres.
Arthur Andersen confirmed to us that its service to the two boards did not
present a conflict of interest, and disclosed that it has performed and
continues to perform various accounting and tax services for the CBOT that are
unrelated to the restructuring transactions and that Arthur Andersen has
received customary fees for rendering such services. Arthur Andersen was paid
total fees of $300,000 for the services provided in connection with the
issuance of its written opinion. No portion of Arthur Andersen's fee was
contingent upon the completion of the Ceres merger or the conclusion reached in
the opinion. We also agreed to indemnify Arthur Andersen against potential
liabilities arising out of their engagement. We note that, in the opinion of
the SEC, indemnification against liabilities under the U.S. federal securities
laws is against the public policy expressed in the Securities Act and is,
therefore, unenforceable.
Arthur Andersen provided its written opinion to the two boards of directors
by letter dated January 16, 2001. The opinion of Arthur Andersen stated that,
based upon and subject to the following assumptions and limitations, including
the various assumptions and limitations set forth in the opinion, the
consideration to be received by each limited partner of Ceres in exchange for
their respective limited partnership interests pursuant to the Ceres merger, is
fair, from a financial point of view, to Ceres and each class of its limited
partners, as of the date of the opinion.
Arthur Andersen has agreed to reaffirm its opinion at or about the times at
which:
. the board approves the Ceres merger;
. the proxy statement and prospectus relating to the restructuring
transactions is disseminated to the membership in connection with the
special meeting for the purpose of voting on the restructuring
transactions; and
. the Ceres merger is completed.
The full text of the Arthur Andersen fairness opinion is attached as
Appendix C-2 to this document. We encourage you to read carefully the full text
of that opinion, including the description of the assumptions made, matters
considered, and limits on the scope of the review and analysis undertaken by
Arthur Andersen, before voting on the restructuring transactions.
As noted above, the CBOT currently anticipates receiving a reaffirmation of
the Arthur Andersen fairness opinion at or about the time of the completion of
the Ceres merger. Upon receipt, such opinion will be made available for
inspection and copying during regular business hours at our principal executive
offices located at 141 West Jackson Boulevard, Chicago, Illinois 60604, by any
CBOT member or Ceres limited partner or his or her representative who has been
so designated in writing.
54
The opinion addresses only the fairness, from a financial point of view, of
the consideration to be received by each limited partner of Ceres in exchange
for their respective limited partnership interests pursuant to the Ceres merger
to Ceres and each class of the limited partners of Ceres. Arthur Andersen has
not acted as financial advisor to Ceres, eCBOT or the CBOT in connection with
the Ceres merger, other than in connection with rendering its fairness opinion
and in connection with estimating the fair market value of Ceres and the
limited partnership interests as described below under "--Ceres Valuation
Analysis of Arthur Andersen" to assist us in determining the terms of and
effecting the Ceres merger. Additionally, Arthur Andersen has not been
authorized to, and has not solicited, alternative offers for Ceres or its
assets, and Arthur Andersen has not investigated any other alternative
transactions that may be available to Ceres and its partners. In addition, the
opinion of Arthur Andersen does not address nor shall it be construed to
address the underlying business decision to effect the Ceres merger. Their
opinion letter does not constitute a recommendation to any partner or member
with respect to whether to vote in favor of the restructuring transactions or
take any other action in connection with the Ceres merger or otherwise, and
should not be relied upon by any partner or member as such.
In the review and analysis prepared to formulate an opinion, Arthur Andersen
has assumed and relied upon the accuracy and completeness of all of the
financial and other information provided to them by management or publicly
available to them, and Arthur Andersen does not assume any responsibility for
the independent verification of such information. Arthur Andersen further
relied upon the assurances of management of Ceres, eCBOT and the CBOT, to the
effect that the management of each such entity is unaware of any facts that
would make the information they provided to Arthur Andersen incomplete or
misleading in any respect. Arthur Andersen also assumed that the information
received from the management of each of Ceres, eCBOT and/or the CBOT was
prepared in good faith and on a basis reflecting the best currently available
judgments and estimates of management. Arthur Andersen did not prepare an
independent evaluation of the software, systems architecture, network
capability, etc. of the technology assets held by Ceres, and Arthur Andersen
was not requested to, and did not, express any view whatever as to the federal,
state or local tax consequences of the Ceres merger.
The services Arthur Andersen rendered to our board of directors and the
board of directors of eCBOT in connection with the restructuring transactions
were comprised solely of financial advisory services for the purpose of
rendering its opinion as to fairness as described above and the valuation of
Ceres as described below and did not include any accounting, audit, legal or
tax services. Without limiting the foregoing, the services provided by Arthur
Andersen with respect to the Ceres merger do not constitute, nor should they be
construed to constitute in any way, a review or audit of, or any other
procedures with respect to, any financial information, nor should such services
be relied upon by any person to disclose weaknesses in internal controls,
financial statement errors or irregularities, or illegal acts or omissions of
any person affiliated with the Ceres merger. The opinion is also necessarily
based on prevailing economic and market conditions and other circumstances as
they exist and can be evaluated on the date thereof. Arthur Andersen is under
no obligation to update or revise the opinion for events occurring after the
date of the opinion except as otherwise described herein.
The opinion of Arthur Andersen was prepared solely for the benefit and use
of our board of directors and the board of directors of eCBOT in their
consideration of the terms of the Ceres merger in connection with their review
and consideration of the restructuring transactions and, such opinion may not
be relied upon by any other person, used for any other purpose or reproduced,
disseminated, quoted or referred to at any time, in any manner or for any
purpose without Arthur Andersen's prior written consent, with the exception of
the inclusion of the opinion in this document.
In connection with their analysis, Arthur Andersen performed such
investigations and analyses as it considered appropriate. Among other items
considered, it:
. read current and historical financial information including Ceres
Consolidated Statements of Financial Position as of August 31, 2000
(unaudited), Ceres and CBOT First Quarter Financial Report 2000 for
55
the quarter ended March 31, 2000 (unaudited), Ceres and CBOT Consolidated
Financial Statements for the year ended December 31, 1999 (unaudited),
Ceres Consolidated Financial Statements for the years ended December 31,
1992, 1993, 1994, 1995, 1996, 1997 and 1998 (audited), CBOT Annual Reports
for the years ended December 31, 1995, 1996, 1997, 1998, and 1999
including financial statements (audited), Ceres monthly reports of
revenues and expenses for each month, January through October, of fiscal
year 2000 (unaudited), Summary of Obligation and Payments to DBS Group for
the Eurex software as of October 31, 2000 (unaudited);
. read certain publicly available business and financial information
relating to Ceres and the CBOT including press releases and public
information extracted from the CBOT's website;
. read certain internal financial and operating information provided by
management, including Member Trading Volume for the Quarters Ending March
31, 1999, June 30, 1999, September 30, 1999, December 31, 1999, March 31,
2000 and Trailing Five-Quarter Average for Class B partners, Volume
Report: CBOT Exchange Fees System, Ceres CTI Volume Report for
Agriculture and Financials by firm number sequence for the year-to-date
through March 31, 1999, last three months for June 30, 1999, September
30, 1999, and December 31, 1999, and year-to-date through March 31, 2000,
Ceres CTI Volume Report for Agriculture and Financials by firm number
sequence for the year-to-date through August 31, 2000, Ceres Class B
Units for the year ended Decmebr 31, 1999, CBOT Class B Capital Balance
Summary.
. researched and reviewed data for certain other companies, the securities
of which are publicly traded, which they believe may be similar or
comparable to the proposed terms of the Series A convertible preferred
stock;
. held meetings and discussions with management and senior personnel to
discuss the business, operations, assets, historical financial results
and future prospects of the combined company including Jill Harley, Vice
President/Treasurer Accounting and Finance Department; Glen Johnson,
Senior Vice President/Chief Financial Officer; Terry Livingston,
Associate General Counsel/Legal; and James Amaral, Vice President of
Information Systems/Chief Investment Officer;
. considered the investment in technology made by Ceres to establish an
electronic trading system for the fiscal years ended December 31, 1997,
1998, 1999 and year-to-date through November 30, 2000;
. performed a discounted cash flow analysis of potential income generating
scenarios for Ceres based upon independent research;
. read various agreements related to Ceres, the CBOT, a/c/e, and Eurex from
a financial point of view including the Ceres Trading Limited Partnership
Second Amended and Restated Agreement of Limited Partnership dated as of
September 8, 1997, the Amended and Restated CBOT/Ceres License Agreement
dated May 15, 1998, the Electronic Trading Division Expense Agreement for
CBOT/Ceres dated May 29, 1998, the Alliance Agreement among the CBOT,
Ceres, Deutsche Borse, Swiss Stock Exchange, Eurex Zurich, Eurex
Frankfurt, and Eurex Deutschland dated October 1, 1999, the Software
License Agreement among CBOT, Ceres, Deutsche Borse, and Swiss Stock
Exchange dated October 1, 1999, the December 31, 1999 Unanimous Written
Consent of the Supervisory Board of CBOT/Eurex Alliance, LLC, the Interim
Agreement for Ceres, JV, and DBS dated January 15, 2000, the July 27,
2000 Confirmation of Rights Agreement, the July 19, 2000 Market
Supervision Services Agreement, the Master Software Development
Agreement, the Systems Operations Agreement between the Eurex Group, the
CBOT, CBOT/Eurex Alliance, L.L.C. and certain related entities and
Supporting Documents;
. considered the financial terms of certain recent business combination
transactions in the securities and futures exchange industry; and
. conducted such other studies, analyses, inquiries and investigations as
it deemed appropriate.
The following discussion summarizes the principal financial analyses and
procedures performed by Arthur Andersen to arrive at its conclusions set forth
in the opinion. This discussion is a summary that does not purport to be a
complete description of the analyses performed or factors considered by Arthur
Andersen in arriving at its opinion.
56
In arriving at its conclusions, Arthur Andersen considered various
methodologies and analyses to assess the value of Ceres and its partnership
interests and the value of the proposed merger consideration, the Series A
convertible preferred stock of For-Profit CBOT.
In developing its methodology to assess the value of Ceres and each class of
partnership interest, Arthur Andersen considered a broad scope of information,
both internal and external to Ceres, considered various approaches to
estimating value, prepared independent analyses and reviewed appropriate
documents including the Ceres Trading Limited Partnership Second Amended and
Restated Agreement of Limited Partnership dated September 8, 1997. Arthur
Andersen did not make any assessment of the contractual or legal rights
regarding distributions to partners; with respect to such matters, they relied
upon guidance provided by legal counsel to the CBOT. For a more detailed
discussion of these analyses, see "--Ceres Valuation Analysis of Arthur
Andersen."
The allocation of the fair market value of Ceres to its partnership
interests was prepared by Arthur Andersen based upon the ownership percentage
of each class in accordance with the Ceres Second Amended and Restated
Agreement of the Limited Partnership, dated September 8, 1997. The Class A
limited partners' ownership was considered pro rata according to their
respective percentage interests. The Class B limited partners' ownership was
based on a weighting of 40% allocated pro rata according to their percentage
interests and 60% allocated according to their respective "Electronic Trading
System Clearing Volume" with respect to contracts traded on the CBOT.
The allocation of the fair market value of Ceres was prepared as follows:
[Download Table]
Ownership
---------
General partner (eCBOT)........ 10%
Class A limited partners....... 70%
Class B limited partners....... 20%
----
Total.......................... 100%
====
The assessment of the value of the Series A convertible preferred stock
included a consideration of the rights and investment features of the preferred
stock, as indicated by the proposed terms for the Series A convertible
preferred stock as provided by management of the CBOT and eCBOT, relative to
similar preferred stock issues of publicly traded companies and their current
market-derived yields.
The foregoing description is only a summary of the material aspects of the
financial analyses used by Arthur Andersen in connection with rendering its
opinion. You should be aware that the preparation of a fairness opinion is a
complex process and is not necessarily susceptible to partial analysis or
summary description. 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 Arthur Andersen's opinion. In
arriving at the opinion, Arthur Andersen considered the results of all of these
analyses. The analyses were prepared solely for the use of Arthur Andersen in
its consideration of providing its opinion of the fairness, from a financial
point of view, to Ceres and each class of the Ceres limited partners of the
consideration to be received by each Ceres limited partner in exchange for
their respective limited partnership interests pursuant to the Ceres merger.
Ceres Valuation Analysis of Arthur Andersen
The CBOT board of directors retained Arthur Andersen to assist with a
valuation of Ceres and the limited partnership interests in connection with the
restructuring transactions. Arthur Andersen was hired based on its
qualifications and expertise in providing financial advice to companies and its
reputation as a nationally recognized professional services firm having
significant financial advisory expertise and experience. Arthur Andersen
confirmed to us that its service did not present a conflict of interest, and
disclosed that it has performed and continues to perform various accounting and
tax services for the CBOT that are unrelated to the restructuring transactions
and that Arthur Andersen has received customary fees for rendering such
services. Arthur Andersen has been or will be paid total fees of less than
$100,000 in connection with the valuation
57
analysis. No portion of Arthur Andersen's fee was contingent upon the
completion of the Ceres merger or the conclusion reached in the analysis. We
also agreed to indemnify Arthur Andersen against potential liabilities arising
out of their engagement. We note that, in the opinion of the SEC,
indemnification against liabilities under the U.S. federal securities laws is
against the public policy expressed in the Securities Act and is, therefore,
unenforceable.
The final valuation analysis of Ceres, which will be provided to us as of a
date reasonably proximate to the date of the completion of the Ceres merger,
will provide the basis for the use of the Series A convertible preferred stock
of For-Profit CBOT as merger consideration and the allocation of the Series A
convertible preferred stock among the Ceres limited partners in the Ceres
merger. As of the date of this document, Arthur Andersen has developed its
valuation methodology and has provided the board of directors with a
preliminary valuation analysis of Ceres in connection with its consideration of
the restructuring transactions. The full text of the preliminary Ceres
valuation analysis is attached as Appendix C-2 to this document. Upon receipt,
Arthur Andersen's final valuation report, to be dated as of a date reasonably
proximate to the date of the completion of the Ceres merger, will be made
available for inspection and copying during regular business hours at our
principal executive offices located at 141 West Jackson Boulevard, Chicago,
Illinois 60604, by any CBOT member or Ceres limited partner or his or her
representative who has been so designated in writing.
In connection with its valuation analysis, Arthur Andersen considered a
broad scope of information, both internal and external to Ceres, considered
various approaches to estimating value, prepared independent analyses and
considered appropriate documents including the Ceres Trading Limited
Partnership Second Amended and Restated Agreement of Limited Partnership dated
as of September 8, 1997. The basis of value utilized in Arthur Andersen's
valuation methodology is fair market value, which it defines as the amount at
which property would change hands between a willing buyer and a willing seller
when neither is acting under compulsion and when both have reasonable knowledge
of the relevant facts. Arthur Andersen considered various valuation approaches,
including an income approach, market approach and net asset approach. Set forth
below is a brief description of each approach.
Income Approach. The income approach measures the value of an entity by the
present value of its future economic benefits. Value indications are developed
by discounting expected cash flows to their present value at a rate of return
that incorporates the time value of funds and the risks associated with the
particular investment. The discount rate selected is based on rates of return
available from alternative investments of similar type and quality as of the
valuation date.
Market Approach. The market approach measures the value of an entity through
an analysis of recent transactions or offerings of comparative entities. These
entities may be companies whose stock is actively traded or private companies
acquired in transactions for which the terms are known to us. Consideration is
given to the financial condition and operating performance of the entity being
appraised relative to those of the selected guideline companies operating in
the same or a similar line of business, and which are potentially subject to
corresponding economic, environmental, and political factors. The guideline
companies would be considered reasonable investment alternatives.
Cost or Net Asset Approach. The cost or net asset approach measures the
value of an entity by the net aggregate fair market value of the entity's
underlying assets. Application of this approach entails a restatement of the
balance sheet of the enterprise, substituting the fair market value of its
assets and liabilities for their recorded values as stated on their financial
statements. This approach is frequently used in valuing holding companies or
capital intensive firms.
Arthur Andersen considered the three approaches described above and
concluded that the fair market value of Ceres is best determined by the net
asset approach. As of the date of the valuation described herein, the assets of
the limited partnership interest of Ceres consisted of its interest in the
a/c/e system and in CBOT/Eurex Alliance, L.L.C. and its various licensing
agreements related to electronic trading support for the CBOT.
58
In arriving at its conclusions, Arthur Andersen made the following
assumptions:
. The CBOT transitioned from the Project A platform to the a/c/e system on
or about August 27, 2000.
. The a/c/e system is deemed to be state-of-the-art by the CBOT and the
Project A platform, as a local-area network platform, was no longer
competitive. Therefore, the a/c/e system is valuable and the Project A
platform is obsolete.
. Except for order routing software to be financed and owned by the CBOT,
Ceres owns the rights to the a/c/e system software pursuant to its
alliance arrangements with Deutsche Borse AG and the Swiss Stock
Exchange.
. Ceres has, both directly and indirectly, in accordance with its 50
percent ownership in CBOT/Eurex Alliance, L.L.C., incurred costs
associated with certain a/c/e system modifications and, through December
31, 2000, these expenditures totaled $43,346,257. Additionally,
purchases of computer software and systems related to the a/c/e system
in the amount of $30,953,934 were capitalized by Ceres, as of December
31, 2000.
. The CBOT intends to reorganize and consolidate its electronic trading
business into its wholly owned eCBOT subsidiary in connection with the
restructuring transactions. As a result, it would be necessary for For-
Profit CBOT to acquire, directly or indirectly, all limited partnership
interests in Ceres not owned by eCBOT.
. The Ceres limited partnership agreement provides that eCBOT, as general
partner, may dissolve Ceres at will.
. The Ceres limited partnership agreement states that, upon dissolution of
Ceres, the assets of Ceres shall be liquidated and the proceeds shall be
distributed to the partners of Ceres in accordance with their capital
accounts and the balance, if any, in accordance with their percentage
interests.
In addition, Arthur Andersen considered that rights to the use of the a/c/e
system and the a/c/e system modifications could conceivably provide Ceres with
the ability to provide electronic trading capabilities to other exchanges.
Under this scenario, it is feasible that Ceres' economic profile would be
similar to that of its current operations, i.e., receiving fees for electronic
trades, etc., or that it could license the software for use with other
exchanges for royalty payments. However, Arthur Andersen concluded that the
economics under such scenarios are highly uncertain due to the speculative
nature of the fees achievable in an increasingly competitive environment and
the operating costs associated with continued maintenance of the system.
Additionally, given the ability of eCBOT, as the general partner of Ceres, to
unilaterally liquidate the business, Arthur Andersen concluded that the
probability of such a scenario is extremely low.
Based on the foregoing, Arthur Andersen's valuation of Ceres as of December
31, 2000 was:
[Download Table]
Assets:
Cash and cash equivalents...................................... $ 2,354,835
Accounts receivable............................................ 1,704,872
Capital contributions receivable............................... 0
Prepaid expenses............................................... 0
Deferred organization and development costs.................... 0
Computer software and systems.................................. 30,953,934
Investment in and advances to CBOT/Eurex Alliance, L.L.C....... 500,000
Previously incurred Eurex-related expenses (1)................. 43,346,257
Other fixed assets--net........................................ 513,845
-----------
Total assets................................................... $79,373,743
===========
59
[Download Table]
Liabilities and Partners' Equity:
Accounts payable and accrued expenses........................ $ 313,323
Due to CBOT/Eurex Alliance L.L.C............................. 9,152,623
Notes payable................................................ 9,069,252
Advances from general partner................................ 31,481,963
Partners' equity............................................. 29,356,583
-----------
Total liabilities and partners' equity....................... $79,373,743
===========
Concluded value of partnership (rounded)..................... $29,400,000
===========
--------
(1) Previously Incurred Eurex-Related Expenses not capitalized:
[Download Table]
Fiscal year 1998............. $10,874,753
Fiscal year 1999............. 11,024,878
Fiscal year 2000............. 21,446,626
-----------
Total........................ $43,346,257
===========
Stock Exchange Listing
We currently have no plans to list the Class A common stock, the Class B
common stock or the Series A convertible preferred stock on any stock exchange.
We may, in the future, apply to list our Class A common stock on a stock
exchange. However, we cannot provide any assurances in this regard.
U.S. Federal Income Tax Consequences
We are seeking a ruling from the IRS to the effect that, for U.S. federal
income tax purposes, you will not recognize any gain or loss strictly as a
result of receiving Class A common stock and Class B common stock of For-Profit
CBOT in connection with the restructuring transactions. Our receipt of the IRS
ruling is a condition to our completion of the restructuring transactions.
Assuming this non-recognition treatment, the tax basis in your membership
interest would carry over to your common stock of For-Profit CBOT.
We anticipate that the receipt of Series A convertible preferred stock by
the limited partners of Ceres pursuant to the reorganization of our electronic
trading business will be tax-free to such limited partners. We further
anticipate that the conversion of the Series A convertible preferred stock into
Class A common stock of For-Profit CBOT pursuant to its terms would also be tax
free, except to the extent of any shares which are received for accrued unpaid
dividends on such Series A convertible preferred stock. Dividends on the Series
A convertible preferred stock paid in the form of additional shares of Series A
convertible preferred stock will be taxable to the same extent as if they were
paid in cash.
Absence of Appraisal Rights
Members who object to the restructuring transactions will have no statutory
appraisal or dissenters rights under applicable law.
Appraisal or dissenters rights, if available, would have enabled members who
objected to certain extraordinary matters to dissent and require the
corporation to purchase their interest at the fair value immediately prior to
the matter and withdraw from the corporation. These rights generally apply to
transactions involving mergers or consolidations and the restructuring
transactions will not be effected by means of any of these transactions.
Instead, the demutualization will be accomplished by an amendment to our
certificate of
60
incorporation and distribution of our stock. Accordingly, if the restructuring
transactions are completed, notwithstanding the fact that you may vote against
the restructuring transactions, you will become entitled to shares of Class A
common stock and Class B common stock of For-Profit CBOT as described in this
document.
Accounting Matters
The accounting treatment of certain aspects of the restructuring
transactions will be similar to a "pooling-of-interests." Under this method of
accounting, no gain or loss will be recognized, and the assets and liabilities
of CBOT will appear on the books of For-Profit CBOT at their same recorded
amounts.
Regulatory Matters
In addition to those conditions described below in "--Conditions to
Completing the Restructuring Transactions," the completion of the
restructuring transactions is subject to:
. receipt of any approvals required by 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; and
. receipt of confirmation by the CFTC that For-Profit CBOT will retain our
contract market designation.
These approvals from the CFTC will be sought as soon as reasonably practicable
following membership approval of the restructuring transactions at the special
meeting of members. Although we currently expect to receive these approvals
from the CFTC, we can provide no assurance as to when or whether we will
receive such approvals.
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 in all material respects with these
requirements and do not anticipate that they will hinder, delay or restrict
completion of the restructuring transactions.
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 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 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.
Conditions to Completing the Restructuring Transactions
We will not complete the restructuring transactions unless each of the
following conditions is satisfied:
. the members of the CBOT shall have approved the restructuring transactions
in accordance with our certificate of incorporation, bylaws and rules and
regulations and applicable law;
. we shall have received each required 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 For-Profit CBOT;
. we shall have received a favorable ruling from the IRS, in form and
substance satisfactory to our board of directors, that the receipt of Class
A common stock and Class B common stock will not result in the recognition
of gain to our members under U.S. federal tax law;
61
. we shall have received any approvals required by 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 have confirmed with the CFTC the transfer of our
contract market designations to For-Profit CBOT, and we shall have received
any other governmental or regulatory approvals and authorizations
determined by us to be necessary or appropriate;
. there shall be no court order or administrative or other regulation or
similar decree prohibiting or restricting the completion of 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 transactions are not fair to each class of CBOT
membership.
In making this determination, our board of directors will give due
consideration to all relevant facts and circumstances, including, among
other things, the continued validity of the fairness opinions received by
the board in connection with the restructuring transactions, including both
the fairness opinion from William Blair relating to the allocation of the
shares of For-Profit CBOT common stock among members and the fairness
opinion from Arthur Andersen relating to the allocation of the shares of
For-Profit CBOT Series A convertible preferred stock among Ceres limited
partners, the then current status of any litigation relating to the
restructuring transactions and the expected effects, if any, of the
restructuring transactions on the CBOE exercise right.
We currently expect to complete the restructuring transactions as soon as
reasonably practicable following the satisfaction of these conditions.
Board Recommendation
The board of directors recommends that members vote "FOR" approval of the
restructuring transactions.
62
CAPITALIZATION
Set forth below is the historical capitalization of the CBOT and a pro forma
capitalization of For-Profit CBOT giving effect to the restructuring
transactions. The information set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations," the unaudited pro forma condensed consolidated financial
statements of For-Profit CBOT, included in this document as Appendix B, and the
historical consolidated financial statements of the CBOT included in this
document as Appendix A:
[Download Table]
As of December 31, 2000
-----------------------------------
Pro Forma After Effects of
------------------------------
Issuance of
Class A Acquisition of
and Class B Interest in
Actual Shares Ceres
-------- ----------- --------------
(In thousands)
Long-term debt......................... $ 64,286 $ 64,286 $ 64,286
-------- -------- --------
Members' Equity........................ $191,320
Stockholders' Equity:
Series A Cumulative Convertible
Preferred stock, $0.001 par value,
10,000,000 shares authorized,
264,600 issued and outstanding...... -- -- 26,460
Class A common stock, $0.001 par
value, 99,996,273 shares authorized,
39,797,650 shares issued and
outstanding......................... -- 40 40
Class B common stock, Series B-1,
$0.001 par value, 1,402 shares
authorized, 1,402 shares issued and
outstanding......................... -- 1 1
Class B common stock, Series B-2,
$0.001 par value, 779 shares
authorized, 779 shares issued and
outstanding......................... -- 1 1
Class B common stock, Series B-3,
$0.001 par value, 174 shares
authorized, 174 shares issued and
outstanding......................... -- -- --
Class B common stock, Series B-4,
$0.001 par value, 642 shares
authorized, 642 shares issued and
outstanding......................... -- 1 1
Class B common stock, Series B-5
$0.001 par value, 643 shares
authorized, 643 shares issued and
outstanding......................... -- 1 1
Additional paid-in capital........... -- -- --
Retained earnings.................... -- 191,276 164,816
-------- -------- --------
Total Stockholders' equity......... -- 191,320 191,320
-------- -------- --------
Total Capitalization............... $255,606 $255,606 $255,606
======== ======== ========
--------
*Pro forma data reflects such adjustments as necessary, in the opinion of
management, to reflect the (1) conversion of members' equity to common stock of
For-Profit CBOT and (2) issuance of 264,600 shares of Series A convertible
preferred stock valued at $26,460,000 to the limited partners of Ceres in
exchange for their limited partnership interests based on the December 31, 2000
valuation of Ceres. The actual number of shares of Series A convertible
preferred stock to be issued will be based on the final valuation report of
Arthur Andersen relating to the valuation of Ceres as of a date reasonably
proximate to the date of the completion of the Ceres merger. For more
information regarding the results of operations and stockholders' equity of
For-Profit CBOT on a pro forma basis, see Appendix B to this document.
63
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, 2000 and 1999 and
operating data for each of the three years in the period ended December 31,
2000, respectively, have been derived from the audited consolidated financial
statements and related notes included elsewhere in this document. The balance
sheet data as of December 31, 1998, 1997 and 1996 and operating data for each
of the two years ended December 31, 1997 and 1996 have been derived from the
audited consolidated financial statements and related notes not included in
this document. 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.
[Download Table]
Year Ended December 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(dollars in thousands, except per share
Operating Data data)
Revenues
Exchange fees................ $101,981 $102,545 $112,115 $ 88,932 $ 76,565
Market data (1).............. 61,060 54,028 53,100 47,242 44,459
Building (2)................. 24,530 22,653 21,876 21,896 21,117
Services (3)................. 17,848 20,279 16,907 15,776 10,976
Other (4).................... 7,500 3,391 1,240 1,539 1,461
-------- -------- -------- -------- --------
Total revenues............. 212,919 202,896 205,238 175,385 154,578
-------- -------- -------- -------- --------
Expenses:
Salaries and Benefits........ 56,391 64,133 57,991 49,384 46,064
General and administrative
expenses.................... 52,299 50,988 45,267 28,174 20,295
Building operating costs..... 22,584 23,171 22,572 21,023 18,763
Depreciation and
amortization................ 40,013 36,140 33,764 27,681 16,433
Programs (5)................. 3,539 7,280 8,802 9,974 9,305
Professional services........ 32,459 32,490 19,924 11,950 12,948
Other (6).................... 8,261 327 -- -- --
-------- -------- -------- -------- --------
Total expenses............. 215,546 214,529 188,320 148,186 123,808
-------- -------- -------- -------- --------
Income (loss) from
operations................ (2,627) (11,633) 16,918 27,199 30,770
Other income and expenses
Interest income.............. 1,242 1,052 1,947 2,090 1,986
Interest expense............. 6,773 6,774 7,170 6,483 --
-------- -------- -------- -------- --------
Income (loss) before income
taxes and cumulative
effect of change in
accounting principle...... (8,158) (17,355) 11,695 22,806 32,756
Provision (benefit) for income
taxes........................ 1,950 (2,895) 5,051 6,147 13,109
-------- -------- -------- -------- --------
Income (loss) before
cumulative effect of change
in accounting principle..... (10,108) (14,460) 6,644 16,659 19,647
Cumulative effect of change in
accounting principle--
net of tax benefit of $2,026
(7).......................... -- 2,920 -- -- --
-------- -------- -------- -------- --------
Income (loss) before
minority interest........... (10,108) (17,380) 6,644 16,659 19,647
Minority interest in (income)
loss of subsidiaries......... -- 6,933 (38) (6,995) --
-------- -------- -------- -------- --------
Net income (loss)............ $(10,108) $(10,447) $ 6,606 $ 9,664 $ 19,647
======== ======== ======== ======== ========
Balance Sheet Data
Total assets.................. $372,194 $373,379 $400,971 $397,449 $355,585
Total liabilities............. 180,874 172,405 189,924 193,538 160,765
Short-term borrowings......... 18,014 6,500 -- 1,662 14,357
Long-term debt................ 64,286 87,500 99,000 105,000 76,166
Total equity.................. 191,320 200,974 211,047 203,911 194,820
Proforma Data (8)
Total assets.................. 372,194 373,379
Total liabilities............. 180,874 172,405
Short-term borrowings......... 18,014 6,500
Long-term debt................ 64,286 87,500
Total equity.................. 191,320 200,974
Net loss...................... (10,108) (10,447)
Net loss per share............ (0.31) (0.36)
Other Data
Current ratio (9)............. 0.71 1.02 1.41 1.42 1.15
Working capital (deficit)..... (24,149) 1,067 18,574 18,457 7,729
Capital expenditures.......... 38,497 25,165 26,985 48,529 90,393
Times interest earned (10).... N/A N/A 2.63 4.52 N/A
Number of full time employees
at end of period............. 711 846 853 805 811
Sales price per full CBOT
membership--High............. $ 642 $ 632 $ 780 $ 857 $ 690
Low........................... $ 225 400 384 660 531
64
--------
(1) Beginning in 2000, the CBOT repriced the distribution of quotation data. At
the same time, the CBOT introduced a rebate to member firms for quotations.
This rebate is offset against quotation revenue.
(2) Building revenue consists of rental payments from tenants for leased space
in buildings owned by the CBOT.
(3) Service revenue consists of those charges for telecommunications, member
services-related fees, workstation fees, exchange floor services and other
services.
(4) Other revenues consist of members' dues, 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.
(5) Program costs contain primarily marketing and communication programs.
(6) Other operating expense contains severance expenses and a one-time contract
settlement in 2000.
(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 (a) the conversion of members' equity to common stock of For-
Profit CBOT and (b) the issuance of 264,600 shares of Series A convertible
preferred stock valued at $26,460,000 to the limited partners of Ceres in
exchange for their limited partnership interests based on the December 31,
2000 valuation of Ceres.
(9) Equals current assets divided by current liabilities.
(10) Equals the sum of income (loss) before provision (benefit) for income
taxes plus interest expense divided by interest expense.
65
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 certain factors,
including the risks and uncertainties faced by us described below and elsewhere
in this document, including under "Risk Factors" above.
The following should be read in conjunction with our financial statements
appearing in the appendices to this document.
Overview
Our primary business is the operation of markets for the trading of listed
financial and commodity futures contracts and options on futures contracts. In
addition to our traditional open outcry auction markets, we offer electronic
trading through our a/c/e system, which we jointly own and operate through our
alliance with the Eurex Group. We derive revenue from exchange fees relating to
the trading in our markets, which accounted for about 47.9% of our total
revenues in 2000. In order to increase our volume and resulting revenues, we
seek to develop and promote contracts designed to satisfy the trading, hedging
and risk-management needs of our market participants.
Because our trading fees are assessed on a per-transaction basis, our
trading revenues are directly correlated to the volume of contracts traded on
our markets. Many factors may affect our trading volume, including fluctuations
in interest rate volatility, growth in equity trading, the general domestic
business cycle, changes in weather and farming conditions and changes in the
debt management policy of the United States government. Recently, our trading
revenues have been affected by the reduced volume of trading.
In addition to trading fees, we also derive revenue from the sale of our
market data. Because we are the primary market for our products, our price
information has value as a key indicator of the overall 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 about
28.7% of our total revenue in 2000.
The expenses relating to our trading operations are mostly fixed expenses,
which means that our overall expense structure is generally independent of our
trading volume. Salaries and expenses represent our largest expense category
and are mostly dependent upon our staffing requirements and the overall
employment market. Professional services expenses have increased in recent
years primarily due to expenses associated with making our computer systems
year 2000 compliant, enhancements to our trading systems and development of the
restructuring transactions described in this document.
We also rent out commercial space in the buildings that we own. In 2000,
total revenues from our real estate operations represented about 11.5% of our
total revenues. 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.
Results of Operations
Year ended December 31, 2000 compared to year ended December 31, 1999
Net Loss. For the year ended December 31, 2000, we had a net loss of $10.1
million compared to a net loss of $10.4 million for the year ended December 31,
1999. Loss before income taxes and other items improved to $8.2 million in 2000
from $17.4 million in 1999 due to higher revenues and lower expenses. The loss
for 2000 is primarily the result of a one-time contract settlement expense
related to the termination of the employment agreement with our former
president and chief executive officer of about $8.0 million and bad debt
expense of $2.1 million related to amounts receivable from one of our market
data customers.
66
Revenues. In 2000, our consolidated operating revenues increased 4.9% to
$212.9 million compared to consolidated operating revenues of $202.9 million in
1999. Revenues from exchange fees were essentially unchanged at $102.0 million
compared to $102.5 million in 1999. Exchange fees can be divided into two
components: exchange trading fees and electronic trading fees. The amount of
exchange fees allocable to exchange trading was $83.8 million in 2000, compared
to $83.9 million in 1999. The largest component of exchange trading fees, non-
member fees, decreased from $68.2 million in 1999 to $65 million in 2000, a
decline of 4.7%. The decrease in non-member fees was partially offset by an
increase in the fee rate charged to members and delegates beginning in
September 2000. The amount of exchange fees allocable to electronic trading was
$18.2 million in 2000 compared to $18.6 million in 1999. Total trading volume
declined to 233.5 million contracts in 2000 from 254.6 million contracts in
1999. Trading volume for electronic trading was 15.5 million contracts in 2000
and 11.2 million contracts in 1999.
The decreased revenue from exchange fees was partially offset by increased
revenue from the sale of market data. In 2000, the CBOT recognized $61.0
million in revenue from the sale of market data while in 1999 it was $54.0
million, representing an increase of 13%. This increase was due primarily to an
increase in the price charged for certain market data.
Building revenue from leased office space at 141 West Jackson Boulevard in
Chicago also increased to $24.5 million in 2000, or 7.9% above our building
revenue in 1999. Our per square foot rental rate increased in this same period.
The amount of lease space remained steady from 1999 to 2000.
Service revenues decreased 12.3% from $20.3 million in 1999 to $17.8 million
in 2000. Service revenues consist of telephone charges, badge fees, booth space
and member services related fees. The decrease was primarily attributable to
decreased revenues from fees charged to access trading floor communication
system and the elimination of Project A terminal leasing in September 2000.
Dues received from the membership were $5.5 million in 2000, compared to
1999 dues of $0.4 million. This increase was a result of the reinstatement of
dues charged to all CBOT members in June 2000.
Other operating revenue for the exchange trading segment includes fines
levied on members and member firms by regulatory committees and the board of
directors based on the rules and regulations of the CBOT. Other operating
revenue was $0.8 million in 2000 compared to $1.7 million in 1999. This
decrease is due primarily to a one-time disciplinary fine levied by the board
of directors in 1999. Other operating revenue in 2000 for the electronic
trading segment of $1.2 million included gains on foreign currency transactions
of $1.0 million and consulting revenues of $0.2 million in 2000, compared to
$1.3 million of other operating revenue in 1999, which related to a favorable
settlement of a lawsuit.
Interest income, which is not a component of operating income, was $1.2
million in 2000, which represented an increase of 20% from 1999 interest income
of $1.0 million. This increase resulted from an overall increase in cash and
cash equivalents. Offsetting the interest income was interest expense of $6.8
million in 2000 and 1999. Interest expense remained the same as in 1999 due to
higher interest rates offset by a lower debt balance in 2000.
Expenses. Operating expenses totaled $215.5 million in 2000, compared to
$214.5 million in 1999, which is an increase of 0.5%. Salaries and benefits
decreased 12.0% to $56.4 million from $64.1 million in 1999. The decrease in
salary and benefits expenses is due to reduced staffing levels relative to
1999. Salary expense decreased $2.8 million from $47.8 million in 1999 to $45.0
million in 2000. In addition, incentive compensation for employees decreased
$3.1 million from $4.2 million in 1999 to $1.1 million in 2000. Furthermore,
pension and savings plan expense decreased $1.9 million from $4.4 million in
1999 to $2.5 million in 2000.
Professional service expenses were $32.5 million in 2000, unchanged from
1999. This expense category includes the costs of restructuring, which was
about $9.9 million in 2000 compared to $1.7 million in 1999. Included in 1999,
were costs of about $8.0 million associated with making our computer systems
year 2000 compliant.
67
General and administrative expenses increased $1.3 million to $52.3 million
in 2000, a 2.6% increase from the $51.0 million in general and administrative
expenses in 1999. These expenses represent our general operating costs, such as
telecommunications expenses, the cost of information machines on the trading
floors and data processing expenses, totaling $17.2 million. Operating expenses
of the a/c/e system, totaling $21.4 million in 2000, the expenses associated
with the communications lines for the Project A workstations of $2.6 million,
and bad debt expense of $2.1 million, were also included in general and
administrative expenses.
Building operating expenses decreased 2.6% from $23.2 million in 1999 to
$22.6 million in 2000. Program costs decreased 52.1% from $7.3 million in 1999
to $3.5 million in 2000. These costs are primarily attributable to the Market
and Product Development Department and the Communications Department and have
decreased as a result of the change in the marketing efforts of the CBOT.
While the CBOT reflects a loss before income taxes, the CBOT generated a
provision for income taxes due to the non-deductibility of certain
restructuring costs.
Year Ended December 31, 1999 compared to year ended December 31, 1998
Net Income/(Loss). For the year ended December 31, 1999, we had a net loss
of $10.4 million compared to net income of $6.6 million for the year ended
December 31, 1998. This operating loss was primarily the result of increased
salaries and benefits, professional services and general and administrative
expenses and the change in accounting principle.
In 1999, the CBOT adopted Statement of Position ("SOP") 98-5, Reporting on
the Costs of Start-Up Activities. Accordingly, the CBOT expensed costs
associated with start-up activities which had otherwise been capitalized and
amortized on a straight-line basis over 60 months. The cumulative effect of
this change in accounting principle was $2.9 million, net of tax benefit of
$2.0 million.
Revenues. In 1999, our consolidated operating revenues decreased 1.1% to
$202.9 million compared to consolidated operating revenues of $205.2 million in
1998. Revenues from exchange fees decreased 8.6% from $112.1 million in 1998 to
$102.5 million in 1999, principally as a result of lower trading volume. In
1999, 254.6 million contracts were traded, which represented a 9.5% decrease
from the 281.2 million contracts traded in 1998. The portion of these contracts
allocable to electronic trading was 11.2 million in 1999, compared to 12.3
million in 1998. Exchange trading fees were $83.9 million in 1999, compared to
$89.4 million in 1998, a decrease of 6.2%. Electronic trading fees were $18.6
million in 1999 compared to $22.8 million in 1998, a decrease of 18.4%. The
largest component of exchange trading fees, non-member fees, decreased from
$80.7 million in 1998 to $76.7 million in 1999, a decline of 5.0%.
The decrease in exchange fees as a result of lower trading volume was
partially offset by increased revenue from the sale of market data. In 1999, we
received $54.0 million in revenue from the sale of market data and in 1998, we
received $53.1 million in revenue from the sale of market data, representing an
increase of 1.7%.
Building revenue from leased office space at 141 West Jackson Boulevard in
Chicago also increased to $22.7 million in 1999, or 3.7% above our rental
revenue in 1998 of $21.9 million. Our per square foot rental rate increased in
this same period. The amount of leased space remained steady from 1998 to 1999.
Service revenues increased 20.1% from $16.9 million in 1998 to $20.3 million in
1999.
Service revenues consist of telephone charges, badge fees, booth space and
member services related fees, and the increase primarily is attributable to
increased revenues from our trading floor communication system and from the
greater number of Project A terminals leased.
Other operating revenues for exchange trading were $1.7 million in 1999
compared to $0.4 million in 1998. This increase was due primarily to a one-time
disciplinary fine levied by the board of directors in 1999. Other operating
revenues for electronic trading were $1.3 million in 1999 compared to $0.4
million in 1998. This is primarily the result of a favorable settlement of a
lawsuit in 1999.
68
Interest income, which is not a component of operating income, was $1.1
million in 1999, which represented a decrease of 42.1% from 1998 interest
income of $1.9 million. This decrease resulted from an overall decrease in
cash. Offsetting the interest income was interest expense of $6.8 million in
1999. Interest expense decreased $0.4 million, or 5.6%, from $7.2 million in
1998 due to our reduced debt balance in 1999.
Expenses. Operating expenses totaled $214.5 million in 1999, compared to
$188.3 million in 1998, which was an increase of 13.9%. Salaries and benefits
increased 10.5% to $64.1 million in 1999 from $58.0 million in 1998. The
increase in salary and benefits expenses of $6.1 million was due to increased
staffing levels relative to 1998, as well as non-cash changes to our pension
plan assumptions of $0.6 million.
Professional services expense was $32.5 million in 1999 and $19.9 million in
1998, which was an increase of $12.6 million or 63.3%. The increase in expenses
in connection with professional services was partly attributable to an
additional $8.0 million of expenses incurred in 1999 to make our computers and
systems year 2000 compliant. In addition, we incurred restructuring costs of
$1.7 million and professional fees for order routing of $6.6 million in 1999.
Our general and administrative expenses increased $5.7 million to $51.0
million in 1999, a 12.6% change from the $45.3 in general and administrative
expenses in 1998. These expenses represent our general operating costs, such as
telecommunications expenses, the cost of information machines on the trading
floors and data processing expenses totaling $14.9 million in 1999 compared to
$11.6 million in 1998. The expenses associated with the communications lines
for the increased number of Project A workstations, totaling $4.6 million in
1999 compared to $2.3 million in 1998, were also included in general and
administrative expenses. Depreciation and amortization expense increased $2.4
million in 1999 primarily as a result of computer equipment additions.
Building operating expenses increased 2.7% from $22.6 million in 1998 to
$23.2 million in 1999. Program costs decreased 17.0% from $8.8 million in 1998
to $7.3 million in 1999, which was primarily attributable to a change in the
marketing efforts of the Market and Product Development Department and the
Communications Department.
Minority interest in net loss of subsidiaries, which represents the Ceres
limited partners' share of Ceres's net loss as well as the minority interest
share of the net loss of Ceres's subsidiary, Chicago Board Brokerage, LLC, or
"CBB," of $6.9 million in 1999 was primarily attributable to CBB's net loss for
1999. CBB was dissolved in 1999.
The provision for income taxes decreased $8.0 million, from $5.1 million in
1998 to a net tax benefit of $2.9 million in 1999. This decrease was primarily
due to our pretax loss of $17.4 million in 1999, compared to pretax income of
$11.7 million in 1998.
Financial Condition
For the year ended December 31, 2000, total assets were $372.2 million, a
decrease of $1.2 million from $373.4 million in 1999. Current assets increased
$3.0 million from $49.3 million in 1999 to $52.3 million in 2000, due to an
increase in cash and cash equivalents in the amount of $5.8 million offset by a
decrease of $7.1 million in income taxes receivable for which the CBOT received
refunds in 2000. In addition, accounts receivable increased $4.2 million from
1999 primarily due to the increased fees received from market data and exchange
fees partially offset by an increase in the allowance for doubtful accounts of
$2.1 million. Property and equipment, net of accumulated depreciation, was
$305.1 million in 2000, a decrease of $4.3 million from $309.4 million in 1999,
primarily due to purchases of computer equipment and software more than offset
by depreciation. Included in property and equipment the capitalization of
software for the a/c/e system as required to be capitalized under Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Other assets of $14.8 million increased by $0.2
million from 14.6 million at December 31, 1999.
69
At December 31, 2000, the CBOT held $28.2 million in cash and cash
equivalents, compared to $22.4 million at December 31, 1999. This increase
consisted primarily of net cash generated by operating activities of $46.4
million less net cash used primarily for capital expenditures and investments
of $38.6 million and net repayment of debt of $2.0 million. Working capital
deficit at December 31, 2000 was $24.1 million compared to working capital of
$1.1 million at December 31, 1999. The decrease was primarily the result of an
increase in the current portion of long-term debt of $11.5 million and amount
due to CBOT/Eurex Alliance, L.L.C. of $8.9 million.
At December 31, 2000, total liabilities increased $8.5 million to $180.9
million from $172.4 million at December 31, 1999. This increase consisted
primarily of $1.8 million in deferred taxes, $8.9 million due to CBOT/Eurex
Alliance, L.L.C., and a one-time contract settlement payable of $6.1 million
offset by an $11.7 million reduction in outstanding debt and reductions in
accounts payable. Total debt of the CBOT at December 31, 2000 was $82.3 million
and included $75 million of privately placed notes and $7.3 million of a
revolving credit line with a lending institution. Members' equity was $191.3
million at December 31, 2000 compared to $201.0 million at December 31, 1999.
Liquidity and Capital Resources
For the year ended December 31, 2000, cash and cash equivalents increased
$5.8 million from $22.4 million at December 31, 1999 to $28.2 million at
December 31, 2000. Net cash flows from operating activities were $46.4 million
in 2000, which reflected increases in certain liabilities, including the amount
due to CBOT/Eurex Alliance, L.L.C. of $8.9 million. Net cash flows used in
investing activities for 2000 was $38.6 million, which was primarily due to the
purchase of computer software relating to the a/c/e system. Net cash flows used
in financing activities were $2.0 million for the year ended December 31, 2000
which was attributable to a net reduction in the principal outstanding on our
lines of credit.
For the year ended December 31, 1999, interest payments were $6.8 million.
These consisted primarily of interest paid for the private placement of senior
notes and for the revolving credit line of interest. The $75.0 million
principal amount for the private placement senior notes requires annual
principal repayments of $10.7 million beginning in March 2001 with a final
repayment of remaining principal in March 2007.
The CBOT has a $10 million line of credit expiring in May 2001. Borrowings
under this line of credit are secured by the CBOT's receivables and carry
interest at LIBOR plus 62.5 basis points. As of December 31, 2000, about $2.0
million was available under the line of credit based on the borrowing base
terms. This credit line contains covenants that require, among other things,
that the CBOT maintain specified levels of minimum net worth and meet defined
financial ratios.
As of December 31, 2000, the CBOT had a working capital deficit of about
$24.1 million, which reflects the substantial resources that the CBOT has
committed to the development, maintenance and support of both its open outcry
and electronic trading systems as well as the impact of lower than historical
volumes in its open outcry trading market. Since 1998, we have made substantial
expenditures related to the creation of the a/c/e system, while continuing to
upgrade our open outcry system and facilities. We have taken steps to improve
our cash flow and to bring our working capital positive by the end of 2001. To
generate cash earlier in 2001, given certain debt obligations due in March
2001, the CBOT has accelerated the period by which member dues are billed and
collected, from quarterly to annual advance billing. Pursuant to the CBOT rules
and regulations, dues were assessed on a quarterly basis beginning in June
2000. Prior to June 2000, dues had been waived by the CBOT as a result of its
cash flow and working capital position. The waiving of dues in previous periods
had no impact on CBOT billing annual dues for 2001 on January 1, 2001.
Management developed, and the board of directors has approved, the CBOT's
operating budget for 2001, which reflects positive working capital by year-end
2001. This plan reflects the full year's impact of the increases in exchange
fee rates implemented September 1, 2000. The plan also includes reductions to
capital and operational spending. The CBOT plans to defer certain technological
enhancements not deemed crucial to the operation of the open outcry system and
of the a/c/e system. Trading revenue in the plan is based on levels of trading
historically experienced by the CBOT, but lower than that for 2000.
70
You should be aware that our assumed revenues for 2001 are based upon
certain assumptions, including assumptions relating to our annual trading
volume next year. Futures trading volume has historically been subject to
significant fluctuations and we cannot assure you that we will achieve the
trading volume levels assumed in our budget.
The CBOT has the ability to assess and collect additional dues from our
members to support our cash needs. Although not currently contemplated, we may
also consider additional sources of funds such as restructuring our outstanding
senior notes into a longer term mortgage secured by our buildings, a sale of
some or all of our real estate and conversion of our credit line into long-term
asset-based financing. However, we cannot provide any assurance that these
sources will be available or that they will be sufficient to meet our liquidity
needs for the foreseeable future.
For important information about risks related to our future capital and
liquidity requirements, see "Risk Factors--Risk Factors Relating to Our
Business--We May Be Unable to Meet Our Future Capital and Liquidity
Requirements."
Market Risk
The CBOT provides the contract market for trading futures and options on
futures. However, it does not trade futures and options on futures for its own
account. The CBOT invests available cash in highly liquid, short-term
investment grade paper. The CBOT does not believe there is any significant risk
associated with these short term investments.
The CBOT's current revolving credit line is tied to the LIBOR rate.
Fluctuations in the LIBOR rate will have an impact on the amount of interest
paid by the CBOT.
Foreign Currency Risk
The CBOT historically has transacted minimal business in foreign currencies.
The alliance with the Eurex Group has created additional foreign currency
transactions in 1999 and 2000, specifically in the euro. The CBOT has entered
into foreign currency forward contracts to hedge foreign currency fluctuations.
Specifically, on September 27, 2000, the CBOT entered into foreign exchange
forward contracts with a financial institution to hedge our risk of foreign
currency fluctuations related to certain commitments to the Eurex Group and
Deutsche Borse Systems AG which are denominated in euros for the operations of
the a/c/e system and additional software enhancements. The notional amount of
these contracts total about $29.0 million with exchange rates ranging from
.89429 to .91100 and maturities at various dates through 2003 corresponding to
the terms of the commitments. In December, 2000, the CBOT decided not to
pursue, at this time, certain software enhancements. The CBOT then entered into
about $9.8 million of foreign exchange forward contracts offseting certain
contracts entered into in September. Any gain or loss on the forward contracts
hedging commitments that have not been fulfilled and recorded are deferred. The
CBOT believes that fluctuations in foreign currency exchange rates will not
have a material adverse effect on its results of operations.
Recent Accounting Pronouncements
Financial Accounting Standards Board Statement of Financial Accounting
Standards ("FAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as amended by FAS No. 138, will be effective for the CBOT's fiscal
year beginning January 1, 2001. FAS No. 133 will require that all derivative
instruments be recorded on the consolidated statement of financial condition at
fair value including derivatives embedded in financial instruments or contracts
that are not clearly and closely related to the economic characteristics of the
host financial instrument or contract. Changes in the fair value of derivatives
will be recorded each quarter in net income or, if the derivative is designated
as a cash flow hedge, in other comprehensive income.
71
Upon adoption of these new accounting standards, the CBOT is expected to
have cumulative effect transition adjustments of a net loss of about $100,000
before taxes and of other comprehensive income of about $500,000, also before
taxes. The CBOT also expects to have changes in recorded assets and
liabilities. All of this is a result of recording all derivative financial
instruments on the Consolidated Statement of Financial Condition at fair value.
Quarterly Comparisons
The CBOT's operating results may fluctuate from period to period as a result
of, among other things, trading volume. The information below, which sets forth
by quarter the CBOT's income statement data for the years ended December 31,
2000 and 1999, should be read in conjunction with the "Selected Consolidated
Financial Data."
[Download Table]
Year Ended December 31, 2000
-----------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- --------
Revenues............................... $55,391 $52,349 $50,907 $ 54,272
Expenses............................... 54,090 53,150 51,349 56,957
Income (loss) from operations.......... 1,301 (801) (442) (2,685)
Income (loss) before minority interest. (790) (2,166) (2,424) (4,728)
Minority interest in (income) loss of
subsidiaries.......................... -- -- (72) 72
Net Income (loss)...................... (790) (2,166) (2,496) (4,656)
Year Ended December 31, 1999
-----------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- --------
Revenues............................... $54,071 $52,404 $52,416 $ 44,005
Expenses............................... 48,899 52,679 51,685 61,266
Income (loss) from operations.......... 5,172 (275) 731 (17,261)
Income (loss) before cumulative effect
of change in accounting principle and
minority interest..................... 3,504 (1,432) (1,346) (15,186)
Cumulative effect of change in
accounting principle.................. 2,920 -- -- --
Minority interest in (income) loss of
subsidiaries.......................... 5,614 260 1,059 --
Net Income (loss)...................... 584 (1,432) (1,550) (8,049)
On January 1, 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. The cumulative effect of this change in accounting
principle was $4,946,000, net of a tax benefit of $2,026,000.
On September 30, 1999, the CBOT dissolved the brokerage division of Ceres
known as Chicago Board Brokerage, LLC. Losses in the amount of about $10.6
million were generated by Chicago Board Brokerage, LLC in 1999.
In the fourth quarter 1999, the CBOT experienced lower trading volume due to
the year 2000 issue. This resulted in about $8 million in reduced revenues. In
addition, expenses increased by about $10 million relating to year 2000
compliance and restructuring costs.
In the second quarter 2000, the CBOT recognized a one-time contract
settlement related to the termination of the employment agreement with our
former president and chief executive officer of about $8 million.
In the fourth quarter of 2000, the CBOT recognized bad debt expense of $2.1
million related to amounts receivable from one of our market data customers.
72
OUR BUSINESS
Overview
Founded in 1848, we are one of the world's leading exchanges for the trading
of futures and options on futures contracts, with total volume in 2000 of about
234 million contracts, which represented about 15% of the total volume of all
global listed futures and options on futures contracts. According to industry
data as reported in Futures Industry Magazine, we ranked second worldwide among
major futures exchanges in volume of contracts traded in 2000, transacting
about 40% of the global listed agricultural futures and options contracts,
e.g., wheat, corn, soybeans, and about 19% of the global listed financial
futures and options contracts, e.g., Treasury bonds and notes. From our origins
in the nineteenth century as a market for trading cash grain, we have evolved
into a major financial center in the twenty-first century, offering a diverse
range of contracts based on interest rates, agricultural commodities, equity
indices and other underlying instruments and risk-based activities.
We operate markets for the trading of commodity and financial futures
contracts, as well as options on futures contracts. These contracts have been
developed through our extensive research and development efforts and through
relationships with market participants and other financial institutions. We
operate traditional open outcry auction markets where our members trade in a
centralized location with other members. Members may be individual traders, who
risk their personal capital and provide significant liquidity to our markets,
or floor brokers who are executing transactions on behalf of customers or
member firm proprietary accounts. We also make our products available for
trading on an electronic trading system operated pursuant to our alliance with
the Eurex Group, which includes the operators of the world's largest
derivatives exchange.
We also engage in extensive regulatory compliance activities, including
market surveillance and financial supervision activities, designed to ensure
market integrity and provide financial safeguards for users of our markets. Our
traditional open outcry and electronic trade execution services provide market
participants the ability to determine current market prices, known as "price
discovery," and trade matching services that offer market participants price
transparency, anonymity and immediacy. Further, we market and distribute
valuable real-time and historical market data generated from trading activity
in our markets to users of our products and related cash and derivative markets
and financial information providers.
Our market participants include many of the world's largest banks,
investment firms and agricultural corporations. These participants use our
products for hedging, risk management, asset allocation and speculation. Other
market users include financial institutions, such as public and private pension
funds, mutual funds, hedge funds and other managed funds, insurance companies,
corporations, commercial banks, professional independent traders and retail
customers. Our users can be broadly categorized as hedgers or speculators,
depending on whether they transfer risk or accept risk. Hedgers are market
participants who seek to transfer price risk in an underlying commodity, e.g.,
soybeans, or financial instrument, e.g., Treasury bonds. Speculators, on the
other hand, accept price risk and attempt to make profits through buying and
selling futures contracts by anticipating price changes and generally have no
interest in making or taking delivery of the underlying commodity or
instrument.
We have developed innovative and cost-effective products and execution and
order routing systems which benefit our members and customers. As indicated in
the chart below, we have recently experienced a decline in trading volume. We
believe that such decline in our trading volume have been caused primarily by a
decrease in interest rate volatility, growth in equity trading, changes in
Federal Reserve monetary policy and the business cycle of the U.S. economy.
73
Chicago Board of Trade
Annual Futures and Options Volume
1990-2000
[Bar Chart]
1990 154,231,583
1991 139,437,298
1992 150,031,392
1993 178,773,075
1994 219,504,074
1995 210,673,044
1996 222,438,505
1997 242,698,919
1998 281,189,436
1999 254,561,215
2000 235,847,733
--------
Source: CBOT records
Presently, derivatives markets are experiencing significant and rapid
changes due to relaxation of regulatory barriers and advances in technology.
Foreign exchanges and exchange-like enterprises operated by or for banks and
broker-dealers have gained increased access to U.S. markets as a result of
regulatory changes. The ability of computer and telecommunications systems
today to efficiently and economically bring buyers and sellers together
presents new challenges to centralized open outcry auction markets, including
our open outcry markets. These changes are lowering barriers to entry and
creating a lower-cost business model, forcing traditional open outcry exchanges
to streamline their operations and reduce costs. We believe that large market
users and the threat of competition have forced exchanges to seek more
efficient trading, processing and clearing facilities. We have responded to
these challenges by implementing innovative technology, including the a/c/e
system, to preserve and enhance our current business and to streamline our
trade execution and processing, which has resulted in substantial automation.
We have also sought to refine our existing products, develop innovative new
products to satisfy customers' demands and continue to enhance the ability of
our independent traders to provide liquidity in our markets.
In order to continue to enhance our ability to compete in this dynamic
marketplace, our business strategy includes demutualizing the CBOT by
converting the CBOT from a non-stock, not-for-profit corporation into a stock,
for-profit corporation pursuant to the restructuring transactions described in
this document. We intend to seek to improve our corporate governance structure
by, among other things, reducing our board size and focusing the role of the
board on traditional oversight activities. We will reduce significantly the
number and responsibility of existing committees and will enhance and expand
the responsibility and authority of our management. The restructuring
transactions will also significantly reduce members' rights with respect to
participation in the day-to-day management and operation of our business,
including through the substantial elimination of the membership petition
process. For example, following the restructuring transactions, our
stockholders will not have the right to call special meetings of stockholders
to vote on proposals and will not
74
be able to take stockholder action by written consent instead of a meeting.
Stockholders may request a vote on a proposal to amend our bylaws at our annual
meetings, but only if the request complies with certain advance notice
requirements under our bylaws and the regulations regarding proxy solicitation
under the federal securities laws. We believe that the restructuring
transactions will enable us to strengthen and expand our core business.
Products
We believe that the range and diversity of the products that may be traded
on our exchange facilities contribute significantly to our success. These
products include futures contracts and options on futures contracts based upon
interest rates, debt instruments, agricultural commodities, stock indices and
other underlying instruments. We have a product development and a marketing
division to support market participants and foster the trading and development
of current and future products. Our product development and marketing staffs
meet regularly with market users, members and clearing members to determine
whether our current products, facilities and services meet the participants'
needs and whether modifications or enhancements are necessary. Our product
development and marketing staffs also develop new product ideas in consultation
with market users and other financial institutions.
The following chart depicts the distribution of trading volumes across our
three major product sectors in 2000:
.interest rate products;
.agricultural and other non-financial/commodities products; and
.stock index products.
Chicago Board of Trade
2000 Annual Futures and Options Volume Distribution
[Pie Chart]
Interest Rate Products 72.6% 169,432,716
Agricultural Products 25.8% 60,303,460
Stock Index Products 1.6% 3,772,840
Metals, Energy and PCS Insurance products make up less than 0.1%.
--------
Source: CBOT records
75
Interest Rate Products
Seventy-three percent of all of the contracts traded at the CBOT during 2000
were either financial futures or options on financial futures contracts. Our
interest rate product line includes our Treasury bond futures contract, which
is currently our largest single product based on trading volume. Trading of
Treasury bond futures and options contracts comprised about 47% of our
financial product volume and about 34% of our total transaction volume for
2000. Our other interest rate products include ten-year, five-year and two-year
Treasury note futures and options, federal agency futures and options, "Fed
funds" futures, as well as municipal bond index futures and options.
Trading volumes in our interest rate products have fluctuated over the last
decade. We believe that these fluctuations primarily reflect changes in Federal
Reserve monetary policies and changing levels of interest rate volatility
during these periods, rather than successful competition from other exchanges
or increased use of alternative products or markets by market participants. The
overall volume of our interest rate products for 2000 was down about 11% over
the same period in 1999. We believe that the primary causes for this decline
have been reduced issuance of long-term debt by the U.S. government, reflecting
in part favorable budgetary conditions, as well as the government's repurchase
of outstanding bonds. These policies have reduced the supply of cash 30-year
Treasury bonds, removed bonds from credit market benchmark status and caused a
decline in Treasury bond futures and options volume at the CBOT.
We believe that hedgers and speculators have increasingly turned to our ten-
year and five-year Treasury notes in order to manage interest rate risks. The
increase in volumes for ten-year and five-year notes has offset some of the
decrease in volume for the 30-Year bonds. Volume in our interest rate products
continues to constitute a significant part of our business. The following chart
indicates the annual trading volume of interest rate futures and options on the
CBOT from 1990 through 2000.
Chicago Board of Trade
Annual Interest Rate Futures and Options Volume
1990-2000
[Bar Chart]
1990 113,440,091
1991 101,592,869
1992 112,656,672
1993 136,322,817
1994 177,017,577
1995 160,300,159
1996 156,994,150
1997 179,703,338
1998 218,570,232
1999 190,996,164
2000 170,883,197
--------
Source: CBOT records
76
Market participants take advantage of the flexibility and liquidity of the
interest rate products we list. Our market users generally include banks,
broker/dealers and other financial institutions, all of whom must cope with
interest rate risk that arises naturally from their core business activities,
e.g., lending, borrowing, underwriting fixed-income securities, or from their
dealing in interest rate swaps, structured derivative products and other over-
the-counter products. A significant number of our clearing member firms are
affiliates of major domestic and international banks who utilize our interest
rate markets for their proprietary trading activities. Asset managers also use
our interest rate products to lengthen or shorten the effective duration of
their portfolios. We believe that our contracts are especially useful for this
purpose where physical restructuring of a portfolio is difficult or where
futures transaction costs are less than cash market transaction costs.
Agricultural and Non-Financial/Commodities Products
Agricultural products are the core product area from which we started. We
have maintained a strong franchise in our agricultural products, including
contracts based on soybeans, soybean oil and meal, corn, wheat, oats, rough
rice and other agricultural commodities. Our market users include agricultural
producers, grain elevators, food processors and retail customers. Other non-
financial/commodities products we offer include silver and gold futures, silver
options and insurance options. Together, our agricultural and other non-
financial and commodities products represented about 26% of all contracts
traded at the CBOT in 2000. Our trading volumes in these products from 1990
through 2000 are illustrated in the following chart. We believe that continuing
consolidation and restructuring in the agricultural sector and the reduction or
elimination of government subsidies could provide growth in our agricultural
markets as large producers and processors are more likely to adopt formal
hedging and risk management programs.
Chicago Board of Trade
Annual Agricultural Futures and Options Volume
1990-2000
[Bar Chart]
1990 39,613,019
1991 37,002,033
1992 36,928,711
1993 42,150,250
1994 42,348,484
1995 50,260,845
1996 65,369,379
1997 62,023,609
1998 58,749,036
1999 59,407,848
2000 60,303,460
--------
Source: CBOT records
77
Stock Index Products
In addition to futures and options on futures contracts on the Dow Jones
Industrial Averagesm, we have recently introduced futures contracts on three
other Dow JonesSM indices: Transportation, Utility and Composite Indexes. Also,
pending approval by the CFTC, we are considering launching futures on the Dow
Jones Composite Internet Indexsm sometime in the future. These indices are
intended to allow traders and investors the opportunity to invest in the entire
market, in selected portions of the market or in the relative performances of
the various market sectors relative to one another and relative to the entire
market. Market users of these products include public and private pension
funds, investment companies, mutual funds, insurance companies and other
financial services companies that benchmark their investment performance to
different segments of the equity markets. As depicted in the following chart,
our equity index product trading volumes have increased since the introduction
of the Dow Jones indices in late 1997, from 912,000 contracts in 1997, to 3.8
million contracts in 1998, to 4.1 million contracts in 1999. In 2000, equity
index trading volume fell to 3.8 million contracts.
Chicago Board of Trade
Annual Stock Index Futures and Options Volume
1990-2000
[Bar Chart]
1990 951,555
1991 705,986
1992 363,094
1993 158,384
1994 0
1995 0
1996 0
1997 911,608
1998 3,812,910
1999 4,125,646
2000 3,773,803
--------
Source: CBOT records
In 2000, Congress adopted legislation that allows us to trade single-stock
futures contracts under the regulatory jurisdiction of the CFTC and the SEC.
This new type of product could have significant appeal to retail investors and
institutional investors.
Under the Commodity Futures Modernization Act of 2000, single-stock futures
contracts should be available to be traded on markets limited to institutional
investors trading for their own account by August 21, 2001. Single stock
futures should be available to be traded on markets that also allow retail
investors to participate as well as brokered trades for institutional investors
by December 21, 2001.
Execution Facilities
We currently operate two trade execution facilities: a traditional pit-
based, open outcry trading market and, through our alliance with the Eurex
Group, the a/c/e system.
78
Open Outcry Trading
In the traditional open outcry trading environment, traders who risk
personal capital, or floor brokers, who may execute orders for institutional,
commercial, proprietary and retail customers, bid and offer in an open outcry
auction arena. This environment facilitates discovery of market prices. We
believe that the CBOT has a strong history of providing a venue that offers its
users tremendous liquidity, access to trading opportunities, and a reliable and
stable trading environment.
Open outcry trading occurs in individual arenas and represented about 93% of
our total volume in 2000 and currently represents about 87% of our total
volume. The trading pits are the centralized meeting place for floor brokers
and independent traders to trade contracts. Orders for market participants not
on the trading floor are relayed to brokers for execution in the trading pits.
The trading floors, which cover about 115,150 square feet, have booths
surrounding the trading pits from which clearing member firm personnel can
communicate with customers regarding current market activity and prices and
receive orders either electronically or by telephone. In addition, our trading
floors display current market information and news on wallboards hung above the
pits.
We have enhanced our open outcry and electronic trading markets through
automation and lower fees to help us maintain liquidity for market users. To do
this, we have streamlined processes involving order entry, trade execution and
open outcry price discovery. The basis for maintaining an open outcry trading
system is our belief that many market participants find this system to be an
efficient mechanism for price discovery. The open outcry system leverages our
members' market-making expertise by utilizing hundreds of speculators to
facilitate liquidity and to provide floor brokers with a mechanism to manage
execution risk for customers. We believe that the open outcry system is
regarded as having a long-standing history as an environment of integrity,
stability and reliability.
Technology Supporting our Open Outcry Execution Facilities
In order to maintain the viability and growth of the open outcry trading
system, we have invested and, to the extent that our resources permit, we plan
to continue to invest in technology. The CBOT will seek to continue its
development of technology to provide market participants with rapid, reliable
and cost-effective transaction processing. However, we cannot assure you that
we will be able to fund technology in the future. This approach will focus on
the following applications.
Order Transmission Systems. Our Order Direct application protocol interface
enables our member firms to transmit orders electronically to and from the open
outcry pits and any other firm or broker, and provides an entry point for
Internet-based orders from customers and branch offices. This application has
resulted in increased order and confirmation speed, reduced transaction costs,
decreased risk of error, improved customer account tracking and bookkeeping and
faster clearing reconciliation. eOpenoutcry.com is our web-enabled, browser-
based software system that allows trade order entry, execution and confirmation
display via the Internet, enhancing member access to the trading floor while
reducing transaction costs.
Trade Execution Systems. Our customers may select one of the following two
trade execution systems.
. COMET is the CBOT's booth-based order entry device that fulfills the need
for fast and efficient electronic order delivery to the trading floor
while preserving the firm's choice of delivery method to the broker. In
keeping with the firm's preference, COMET orders may be "flashed" by
hand, delivered by wireless headset or delivered electronically to the
broker for execution. COMET then enables the trade data to be
electronically routed to the firm's bookkeeping system and to the
clearing location on a real-time basis.
. Electronic Clerks are the CBOT's order receipt and deck management
devices for brokers. Using a hard-wired or wireless Electronic Clerk,
unit brokers may receive orders from multiple member firms.
79
Orders are automatically organized by price and order type for ease and
speed of execution and trade confirmations are automatically returned to
the originator.
Floor Operations Technology. Floor operations technology consists of the
pricing and quotation network as well as the data network. The pricing and
quotation network collects and disseminates in real time all CBOT pricing data.
The internal data network connects futures commission merchants and other
building occupants with the floor and one another for all CBOT pricing data.
The pricing quotation network comprises price reporters who monitor the price
fluctuation in each of the pits and use an electronic data network to
communicate this information. As trades are executed, the reporters enter the
price data into the pricing network. The price network transmits the data to
the wall board display system, the historical data library and the data
services network for re-transmittal through information providers such as
Bloomberg. The current data network is a traditional wired network.
Substantially all futures commission merchant offices have the capability to
access the network in order to communicate with other offices and the floor.
Most futures commission merchants have external data connections as well as
Internet access.
Electronic Trading
The CBOT has made its products available for electronic trading since 1992,
initially, on the Globex system, and, beginning in 1994, on Project A, which
was operated through the electronic trading division of Ceres. Since 1998,
Project A provided access to the CBOT's global benchmark financial and index
products 22 hours each trading day, with workstations located in the United
States, Europe and Asia.
In August 2000, Project A was shut down and replaced by the a/c/e system,
which is the product of an alliance between the CBOT and certain affiliates and
Deutsche Borse AG, the Swiss Stock Exchange and their jointly owned
subsidiaries, Eurex Zurich AG and Eurex Frankfurt AG. A jointly-owned company
called CBOT/Eurex Alliance, L.L.C. was established to provide services related
to electronic trading to Ceres and to Eurex. We plan to make CBOT products
accessible electronically throughout Europe and through access points in Hong
Kong and Tokyo as soon as reasonably practicable following receipt of the
necessary regulatory approvals. We have obtained permission to put our
terminals in several foreign countries, including the United Kingdom, Germany,
Switzerland, Hong Kong and Japan.
At launch, 81 CBOT member firms were able to trade all CBOT products on the
a/c/e system. As of December 31, 2000, volume on the a/c/e system surpassed an
aggregate of about 8.6 million contracts traded since it became operational.
The chart below illustrates monthly volume on the a/c/e system for the months
of September through December 2000:
80
Chicago Board of Trade
Monthly a/c/e Volume
September - December 2000
[Bar Chart]
September 2,005,061
October 2,282,747
November 2,274,670
December 1,787,467
--------
Source: CBOT records
Ceres owns a/c/e Release 1.0, which is the current version of the a/c/e
software operated for the CBOT. In addition, Ceres has a perpetual license to
use Eurex Release 2.0, which is the base software over which the a/c/e software
operates.
Under a licensing agreement, Ceres provides services related to the
operation of the a/c/e system and a sublicense of the a/c/e software to the
CBOT. In addition, under a separate agreement, Ceres operates with employees
seconded to it from the CBOT.
The CBOT/Eurex Alliance, L.L.C. has retained Deutsche Borse Systems AG, a
subsidiary of Deutsche Borse AG, to provide system operations and software
development services for the a/c/e system. In addition, we have retained Eurex
Frankfurt AG to provide market supervision services for electronic trading on
the a/c/e system and to train CBOT employees to perform this function
independently. The joint venture operating agreement is not yet signed and is
not likely to be finished until decisions are made regarding its structure and
functions.
CBOT/Eurex Alliance may also provide services to us, Eurex and to other
exchanges. CBOT/Eurex Alliance has engaged in negotiations with exchanges in
the Asia-Pacific region and the principals also had discussions concerning a
plan to make options on individual U.S. equities available for electronic
trading. CBOT/Eurex Alliance's profits are shared equally by its two members,
Ceres Alliance L.L.C., a wholly owned subsidiary of Ceres, and Eurex
Beteiligungen AG, and its expenses are allocated among the two members as
incurred.
We currently limit direct access to the a/c/e system to our members. This
may inhibit the growth of the electronic trading system, and may inhibit
revenue growth as well. Members are permitted to have an unlimited number of
terminals to conduct proprietary or customer trading, and member firms that
handle customer business are permitted to connect their own electronic order
routing systems to the a/c/e system. Eurex member firms have been given the
right to obtain electronic access to our products traded on the a/c/e system by
leasing
81
a Full Membership or Associate Membership or buying an Associate Membership. It
is possible that the restrictions contained in our access policy may be relaxed
in order to attempt to increase revenue growth, but it is also possible that
these restrictions may remain unchanged or even be tightened, including, among
other reasons, in order to preserve the value of the shares of Class B common
stock of For-Profit CBOT in light of issues raised by the Chicago Board Options
Exchange with respect to the exercise right. For more information, see "Risk
Factors--Risks Relating to the Restructuring Transactions--The Chicago Board
Options Exchange Could Be Successful in Challenging the "Exercise Right,' Which
Allows Our Full Members to Obtain Trading Privileges at the Chicago Board
Options Exchange, and the Exercise Right Could Be Extinguished or Terminated."
Our retention of some or all of these restrictions may inhibit revenue growth
relating to our electronic trading markets.
Market Data
Our markets generate valuable information regarding the prices of our
products and the trading activity in those markets. We sell our market data,
which includes bids, offers, trades and trade size, to vendors who redistribute
the data to persons or entities that use our markets or that monitor general
economic conditions. Such persons and entities include financial information
providers, futures commission merchants, banks, broker-dealers, public and
private pension funds, investment companies, mutual funds, insurance companies,
hedge funds, commodity pools, individual investors and other financial services
companies or organizations.
We believe the market data supplied by the CBOT enhances trading activity in
our products and trading activity in related cash and derivatives markets. The
dissemination of real-time data generates revenue and supports our customer
bases with timely market information. In general, the price information is sent
via dedicated networks to over 140 worldwide quote vendors and subvendors.
These firms consolidate our market data and information with data from other
exchanges and third party data and news services and the firms resell the
consolidated data and information to their subscribers. These quote vendors
distribute our market data through dedicated networks, the Internet and
wireless handheld devices.
Our market data is currently displayed on nearly 200,000 screens worldwide.
Revenue from market data represented about 29% of our total revenue during
2000. Our revenue from market data has grown from less than $45 million in 1996
to more than $61 million in 2000. We attribute this increase to a change in our
market data pricing structure that we instituted last year, as well as a
substantial increase in the total number of display devices receiving our
market data. Our total screen count has increased from less than 135,000 in
1996 to over 194,000 as of December 31, 2000.
We believe that the evolution of technology and the financial services
industry will change the existing distribution channels, sales methods and
pricing structure for market data. These changes might adversely impact the
revenue we receive from market data. Increases in the volume of electronic
trading, the use of the Internet as a distribution mechanism and increases in
the use of our products by individual retail investors will all impact revenue
from market data.
Building Services
Our building services division operates the CBOT's commercial real estate
assets. In total, we own and manage three buildings, with over 1.5 million
square feet of commercial space in the aggregate, in the central business
district of the City of Chicago. As of December 31, 2000, the buildings were
about 99% occupied, with about 27% of the occupied space used by the CBOT
itself.
Tenants pay market rates for rent. The majority of tenant leases have terms
of five years, with large tenants having leases for up to ten years. The
largest tenant, other than the CBOT itself, leases 15% of the rentable area and
the next five largest tenants lease about 12% of our commercial space. The CBOT
manages both the real estate and the general services relating to such real
estate such as cleaning, power and telephone services. Building services
generated about 12% of our operating revenue for 2000.
82
The majority of our commercial lease space is designated as "Class A," which
describes that class of premium commercial office space which is typically
located in central business districts and provides the highest level of
services and amenities. We have spent considerable resources so that all three
buildings have advanced telecommunication infrastructure and services. The
demographics of the tenants of our commercial space has begun to widen beyond
traditional brokerage/trading service firms to include technology-related firms
which we believe is due to the location and desirable telecommunications
infrastructure of our buildings.
Marketing and Advertising
Our marketing department targets both institutional and retail customers.
Our marketing programs for institutional customers are designed to educate
highly sophisticated traders, portfolio managers, corporate treasurers and
other market professionals about innovative uses of our products, such as new
hedging and risk management strategies. We also seek to educate these users
about changes in product design, margin requirements and new clearing services.
Our marketing typically involves the development of personal relationships with
professional traders who actively use our markets. We participate in a number
of domestic and international trade shows and seminars regarding futures and
options and other marketing events designed to inform market users about our
products. Through these relationships and programs, we attempt to determine the
needs of our customer base and we use this information in our product
development and product maintenance efforts.
Our advertising strategy is based on both targeted direct contact and
cooperative venture advertising techniques. We utilize direct mail, electronic
mail and fax networking extensively. We also support CBOT product-specific
advertising by futures commission merchants, reimbursing up to 50% of their
costs for certain approved programs.
Competition
We are currently one of the eight principal futures exchanges in the United
States. According to Futures Industry Magazine, we are currently the largest
domestic futures exchange and the second largest futures exchange in the world,
in each case based on contract volume.
We face a variety of competitors and competing marketplaces and products. We
compete by offering market participants efficient, cost-effective and liquid
marketplaces for trade execution through both open outcry and electronic
trading systems, broadly disseminated and transparent market and quotation
data, access to market making, superior product design and innovative
technology. Additionally, we are continually enhancing our products and
providing additional efficiencies to our customers. We are committed to
improving the technology, services, market integrity and liquidity that will
continue to make us an industry leader.
In addition to competition from futures exchanges that offer comparable
derivative products, we also face competition from other exchanges, from
electronic trading systems, from consortia of end users and futures commission
merchants and from technology firms. Other futures exchanges have trading
systems and financial market expertise that may lead them to consider listing
copies of our products. These potential competitors would still need to obtain
regulatory approval, establish market liquidity and develop derivative product
clearing services. For information concerning legislative changes that may make
it easier for potential competitors to enter our markets, see "--Regulation--
Changes in Existing Laws and Rules."
Electronic trading firms that currently specialize in the trading of equity
securities have electronic trade execution and routing systems that could be
used to trade products that compete with our products. In an industry where all
derivatives are traded electronically, the concept of an exchange, including
the services we provide and our sources of revenue, may change swiftly and
substantially. Increased development of the electronic trading markets could
increase substantially competition for some or all of the products and services
we currently provide. For more information, see "Risk Factors--Risks Relating
to Our Business--Intense Competition Could Materially Adversely Affect Our
Market Share and Financial Performance." Typically,
83
while these firms have advanced electronic and Internet technology, significant
capitalization and competitive pricing, we believe they lack the overall market
liquidity and neutrality offered by our electronic and open outcry trading
systems. They also currently lack the financial security and guarantees
provided by a "AAA" rated clearinghouse such as Board of Trade Clearing
Corporation.
Consortia owned by member firms and large market participants also may
become our competitors, particularly with respect to our Treasury futures and
options contracts. For instance, BrokerTec Global LLC, an electronic inter-
dealer fixed income broker, has announced its intention to develop or acquire a
facility for futures products, and has applied to the CFTC for designation as a
contract market. Most of the members of BrokerTec Global LLC are either
clearing member firms of the CBOT or affiliates of our clearing member firms,
and are significant participants in the Treasury market.
Technology companies, market data and information vendors, and front end
software vendors also represent potential competitors because, as purveyors of
market data, these firms typically have substantial distribution capabilities.
As technology firms, they also have access to trading engines that can be
connected to their data and information networks. Additionally, technology and
software firms that develop trading systems, hardware and networks but who are
otherwise outside of the financial services industry may be attracted to enter
our markets.
Strategic Alliances, Acquisitions and Divestitures
Due to increasing competitive pressures in the futures industry, we review
our competitive position on an ongoing basis and from to time consider, and
engage in discussions with other parties regarding, various strategic
alliances, acquisitions and divestitures in order to continue to compete
effectively, improve our financial results, increase our business and allocate
its resources efficiently. It is also important for us to form strategic
partnerships, such as the recent alliance with Eurex, to bring together the
necessary expertise and resources to address competitive pressures and meet new
market demands.
Our Members
We are currently owned by our members. Members and individuals who have
leased seats from members can execute trades for their own accounts or for the
accounts of customers of clearing member firms. The trades of members and
lessees of memberships for their own accounts qualify for lower fees in
recognition of the market liquidity that their trading activity provides.
Members and lessees also benefit from market information advantages that may
accrue from their proximity to trading activity on the trading floors.
There are five classes of CBOT memberships:
. Full;
. Associate;
. GIM (and one-half Associate Members, as described below);
. IDEM; and
. COM.
Each class of membership has different trading rights and privileges. All
membership applicants are reviewed and approved by us in accordance with
membership and eligibility requirements set forth in our rules and regulations.
Currently, memberships can be purchased or sold at prevailing market prices
pursuant to transfer mechanisms established by our rules and regulations. Set
forth below is a table listing the high and low prices for each type of
membership from January 1, 1998 through March 1, 2001.
84
Price Range for Memberships
The following table contains, for the periods indicated, the high and low
sales prices of memberships of each of the five classes of membership in the
CBOT, reported in thousands.
[Download Table]
Full Associate GIM IDEM COM
--------- --------- -------- -------- ---------
Calendar Year High Low High Low High Low High Low High Low
------------- ---- ---- ---- ---- ---- --- ---- --- ---- ----
1998
First Quarter.................. $780 $714 $489 $434 * * $90 $66 $147 $132
Second Quarter................. 725 483 410 210 $80 $61 57 28 130 62
Third Quarter.................. 495 384 204 120 * * 36 20 69 44
Fourth Quarter................. 500 431 225 175 * * 33 20 71 44
1999
First Quarter.................. 600 490 282 186 100 75 30 25 70 55
Second Quarter................. 633 560 246 220 * * 36 26 75 54
Third Quarter.................. 620 530 218 155 * * 32 24 60 47
Fourth Quarter................. 475 400 166 130 * * 33 24 46 39
2000
First Quarter.................. 520 410 150 105 70 58 27 16 37 30
Second Quarter................. 642 472 138 90 50 50 16 6 35 22
Third Quarter.................. 642 328 150 61 70 21 27 4 37 14
Fourth Quarter................. 350 255 80 50 31 23 13 ** 18 10
2001
First Quarter (through
March 1, 2001)................ 350 295 85 62 35 35 7 1 19 12
--------
*Indicates no sales in the quarter.
**Indicates a sale price of less than $1,000.
Source: CBOT records.
Individual Members
Our membership committee reviews applicants and conducts proceedings to
determine whether candidates meet our membership and eligibility requirements.
Additionally, registration or a temporary license to act as either a floor
broker or a floor trader must be granted by the National Futures Association
before an individual can begin trading on our trading floors. All members must
be guaranteed or qualified to trade by a clearing member before they may
personally execute a transaction on the CBOT.
Full Members. Our Full Members are entitled to execute trades in all futures
and options contracts listed on the CBOT. As of March 1, 2001, there were 1,402
Full Members.
Associate Members. Our Associate Members are entitled to execute trades in
all futures and options contracts listed in the CBOT's Government Instruments
Market, Index, Debt and Energy Market and Commodity Options Market. As of March
1, 2001, there were 779 Associate Members.
GIMs/One-Half Associate Members. The holder of a GIM membership is a member
entitled to execute trades in all futures contracts assigned to the market
category known as the "Government Instrument Market," which includes contracts
in certain U.S. government and agency securities, certain foreign government
securities and certain domestic certificates of deposit. We are currently
phasing out GIM memberships by converting each GIM membership into a one-half
Associate Membership upon the sale of such membership and permitting the
conversion of two one-half Associate Memberships into one Associate Membership.
Following completion of the restructuring transactions, two Series B-3 shares
of Class B common stock will be
85
convertible into one Series B-2 share of Class B common stock, 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. For more
information, see "Description of Capital Stock--Description of Common Stock."
As of March 1, 2001, there were 171 GIMs and three one-half Associate
Memberships.
For purposes of the restructuring transactions, including for purposes of
determining the number of shares of Class A common stock and the appropriate
series of Class B common stock to be distributed in respect thereof, all one-
half Associate Memberships shall be treated as GIM memberships.
IDEMs. The holder of an IDEM membership is a member entitled to execute
trades in all IDEM futures contracts assigned to the market category known as
the "Index, Debt and Energy Market," which includes contracts in certain stock
and bond indices, certain money market instruments and certain energy, i.e.,
crude oil, a gasoline and heating oil, products. As of March 1, 2001, there
were 642 IDEMs.
COMs. The holder of a COM membership is a member entitled to execute trades
in all options contracts assigned to the market category known as the
"Commodity Options Market," which includes contracts in U.S. Treasury Bond
futures options and all other options contacts listed for trading by the CBOT.
As of March 1, 2001, there were 643 COMs.
Clearing Members
Under our rules, all CBOT contracts must be cleared through the Board of
Trade Clearing Corporation, or such other clearing entity as the CBOT board of
directors designates. Such contracts are subject to the bylaws of Board of
Trade Clearing Corporation, and our rules provide that it may not change its
bylaws without the consent of the CBOT board of directors. However, Board of
Trade Clearing Corporation has disputed this restriction and its governing
documents do not contain a similar restriction requiring the CBOT's approval
for changes to its bylaws. In addition, no person or organization may become a
stockholder of Board of Trade Clearing Corporation until approved by the CBOT.
Board of Trade Clearing Corporation has informed us that it is the world's
largest fully independent futures and futures options clearinghouse and the
only futures and options clearinghouse that is rated "AAA" by Standard &
Poor's. On a daily basis, Board of Trade Clearing Corporation compares the data
that is submitted by its members, collects and disburses original and variation
or "mark-to-market" margin payments though a network of banks, and provides its
financial guarantee of performance for every trade that is accepted by it for
clearing. Since its inception in 1925, Board of Trade Clearing Corporation has
designed risk management policies and practices for the CBOT and its members.
We currently anticipate entering into a contract regarding clearing-related
services with Board of Trade Clearing Corporation prior to the completion of
the restructuring transactions. However, we cannot provide any assurances in
this regard. Our inability to enter into a contract with Board of Trade
Clearing Corporation, or some other entity which would provide comparable
clearing-related services to For-Profit CBOT, could materially adversely affect
our business.
Other Business Relationships and Subsidiaries
Ceres Trading Limited Partnership. The Ceres Trading Limited Partnership is
a Delaware limited partnership, which we formed in 1992 to initiate the
development of our electronic trading system. Ceres currently owns rights to
electronic trading of the CBOT's products, including on the a/c/e system. It
has entered into contractual arrangements with us for the provision of services
in connection with the operation of the system and the provision of related
support services. We currently charge Ceres the fair value for these services.
In addition, we have entered into an agreement with Ceres whereby we pay Ceres
a licensing fee to provide our members and delegates access to the a/c/e
system. This licensing fee is about equal to the exchange fees received by us
as a result of transactions executed on the a/c/e system.
86
Our wholly owned subsidiary, eCBOT, is the general partner of Ceres. In
addition, as of December 31, 2000, Ceres had 3,620 owners of its Class A
limited partnership interests, of which there are four series, and 61 owners of
its Class B limited partnership interests. The following table indicates the
number of limited partnership interests held by the CBOT members as of
December 31, 2000:
Ceres Limited Partnership Interests By Individual Membership Class
[Download Table]
Class A-1 Class A-2 Class A-3 Class A-4 Class B
Limited Limited Limited Limited Limited
Partnership Partnership Partnership Partnership Partnership
Membership Class Interests Interests Interests Interests Interests
---------------- ----------- ----------- ----------- ----------- -----------
Full.................... 1,388 -- -- -- --
Associate............... -- 779 -- -- --
GIM..................... -- -- 169 -- --
IDEM.................... -- -- -- 641 --
COM..................... -- -- -- 643 --
Clearing Member......... -- -- -- -- 61
Except for a nominal number of interests held by the eCBOT, Class A limited
partnership interests are generally held by individual CBOT members. Class B
limited partnership interests are held by CBOT clearing member firms.
Ceres's wholly owned subsidiary, Ceres Alliance L.L.C., holds the CBOT's 50%
interest in CBOT/Eurex Alliance, L.L.C., a Delaware limited liability company.
The other member of CBOT/Eurex Alliance is Eurex Beteiligungen AG, a Swiss
company owned by Deutsche Borse AG and the Swiss Stock Exchange. CBOT/Eurex
Alliance does not presently employ its own staff, and operates with personnel
seconded to it by the CBOT and the Eurex Group. Generally, the voting rights,
percentage interests and profits of the CBOT/Eurex Alliance are shared equally
between its two members, the Ceres Alliance L.L.C. and Eurex Beteiligungen AG,
and its expenses are allocated among the members as incurred.
The following chart illustrates the current structure of the CBOT/Eurex
Alliance:
[CHART]
[CHART]
[SWISS [DEUTSCHE [CBOT NON- [CBOT
STOCK _ BORSE CLEARING _ CLEARING
EXCHANGE] AG] MEMBERS] MEMBERS]
[EUREX [DEUTSCHE [CBOT] [BOTTC]
ZURICH BORSE
AG] SYSTEMS [MIDAM] [E-CBOT] [C-B-T]
AG]
[EUREX [EUREX
FRANKFURT BETEILIGUNGEN [CERES TRADING
AG] AG] LIMITED
PARTNERSHIP]
[EUREX
CLEARING [CERES ALLIANCE
AG] LLC]
[CBOT/EUREX
ALLIANCE
LLC]
87
As part of the restructuring transactions, we will reorganize our electronic
trading business, part of which is currently operated by Ceres. In order to
accomplish this reorganization, Ceres will be consolidated into For-Profit
CBOT. Following the reorganization of our electronic trading business, our
eCBOT subsidiary will hold our interest in the CBOT/Eurex Alliance and the
a/c/e system.
The following chart illustrates the anticipated structure of the CBOT/Eurex
Alliance following completion of the restructuring transactions:
[CHART]
[SWISS [DEUTSCHE [CBOT NON- [CBOT
STOCK BORSE CLEARING CLEARING
EXCHANGE] - AG] MEMBERS] - MEMBERS]
[EUREX [DEUTSCHE [CBOT] [BOTCC]
ZURICH BORSE
AG] SYSTEMS [MIDAM] - [C-B-T]
AG]
[EUREX [EUREX [E-CBOT]
FRANKFURT BETEILIGUNGEN
AG] AG] [CERES ALLIANCE
LLC]
[EUREX
CLEARING [CBOT/EUREX
AG] ALLIANCE
LLC]
For more information regarding the reorganization of the electronic trading
business, see "The Restructuring Transactions--Description of the Restructuring
Transactions--Reorganization of Our Electronic Trading Business."
MidAmerica Commodity Exchange. The MidAmerica Commodity Exchange is
currently a wholly owned subsidiary of the CBOT and became affiliated with the
CBOT in 1986. The MidAmerica Exchange is an Illinois not-for-profit corporation
formed to act as a contract market for futures and options products. The
MidAmerica Exchange is housed in the CBOT building and provides the trading
environment for smaller contracts based on those contracts currently traded at
the CBOT, Chicago Mercantile Exchange and the New York Mercantile Exchange.
Intellectual Property
We regard our brand name and logos and substantial portions of our marketing
elements, products, market data, software and technology as proprietary, and we
attempt to protect these elements by relying on trademark, service mark,
copyright and trade secret laws, contracts, restrictions on disclosure and
other methods. For example, with respect to trademarks, we currently have
registered marks in more than 15 countries.
We are undertaking a review of our intellectual property to identify
property and methods of doing business which should be protected, as well as
the extent of current protection for that property and the availability of
additional protection. We believe that our various trade and service marks have
been registered where needed. Recent legal developments allowing patent
protection for methods of doing business hold the possibility of additional
protection, which we are examining.
Employees
As of December 31, 2000, we had 711 full-time employees and 23 part-time
employees. These numbers do not include 53 full-time employees of C-B-T
Corporation, our subsidiary engaged in managing our properties, which operates
the CBOT building located at 141 West Jackson Boulevard.
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We consider our relations with our employees to be good. Forty-three of the
53 C-B-T Corporation's employees are represented by one of the following
unions:
. Chicago & North East Illinois District Council of Carpenters;
. United Brotherhood of Carpenters & Joiners of America;
. International Union of Operating Engineers Local 399, AFL-CIO; and
. Local 73, General Service Employees Union, SEIU, AFL-CIO.
Facilities
Our principal executive offices are located at 141 West Jackson Boulevard,
Chicago, Illinois 60604. Our telephone number is (312) 435-3500.
We own the three buildings located at the property at 141 West Jackson
Boulevard, which consists of a total of about 1,523,077 square feet. We occupy
about 596,693 square feet of office, trading floor and support space. We lease
the remaining space in this building to third parties. The trading area has
state-of-the-art wallboard price display systems, order routing and
communications systems.
In addition, we lease 2,053 square feet of office space at 1455 Pennsylvania
N.W. in Washington, D.C. This space houses our government relations operations.
The current lease on the Washington office space expired on January 31, 2001
and is currently being renewed on a month-to-month basis. We currently expect
that this lease will be renegotiated on terms satisfactory to us.
We lease 1,800 square feet of office space at 52-54 Gracechurch Street in
London, England, which is used by our European marketing staff. The current
lease on the London office expires on June 2004.
We believe that our facilities are adequate for our current operations and
that additional space can be obtained if needed.
Regulation
Regulation of the U.S. Futures Exchange Industry
Our operations are subject to extensive regulation by the Commodity Futures
Trading Commission under the Commodity Exchange Act. The Commodity Exchange Act
generally requires that futures trading in commodities be conducted on a
commodity exchange designated as a contract market by the CFTC. That act
establishes non-financial criteria for an exchange to be designated to list
futures and options contracts. Designation as a contract market for the trading
of a specified futures contract is non-exclusive. This means that the CFTC may
designate additional exchanges as contract markets for trading the same or
similar contracts. For information regarding the CFTC approvals required as a
condition to the restructuring transactions, see "The Restructuring
Transactions--Regulatory Matters."
We are a self-regulatory organization that is subject to the oversight of
the CFTC. In order to guard against default risk with respect to contracts
traded on the CBOT, we have instituted detailed risk management policies and
procedures. To manage the risk of financial non-performance, we have
established minimum capital requirements for all futures commission merchant
member firms. In addition we operate and maintain systems to:
. ensure that futures commission merchant members maintain capital in
excess of the risk based capital requirement adopted by the Board to
Trade Clearing Corporation;
. require that all clearing futures commission merchant member firms
electronically file a financial statement each month. All other futures
commission merchant members must electronically file quarterly financial
statements. Firms are placed on additional reporting, i.e., daily, weekly
or monthly reporting, when necessary;
89
. analyze futures commission merchant member firms financial statements
with a state-of-the computer system designed to immediately detect
financial violations and unfavorable financial trends;
. require that all futures commission merchant member firms collect initial
and variation margin from their customers;
. on a daily basis, collect large trader information to determine those
firms which may have increased financial exposure and, whenever
necessary, the CBOT will contact firms to ensure financial compliance;
. during volatile market conditions, simulate the effect of market moves on
large trader positions in order to identify those firms that have
increased risk exposure; and
. exercise broad disciplinary authority over member firms including the
ability to issue fines in the case of serious rule violations, and in the
case of a financially distressed firm, we may take various emergency
actions to protect customers, other member firms and the CBOT.
We also have surveillance and compliance operations and procedures to monitor
and enforce compliance with rules pertaining to the trading, position sizes,
delivery obligations and financial condition of members.
Changes in Existing Laws and Rules
Additional legislation or regulation, or changes in existing laws and rules
or their interpretation, may directly affect our mode of operation and our
profitability. Congress has recently adopted amendments to the Commodity
Exchange Act that will reduce the cost and burdens of listing new contracts for
trading. The CFTC has proposed new rules to implement those changes. Other
amendments to the Commodity Exchange Act have been adopted by Congress that
might be less favorable to our business. The regulations under which we have
operated since 1974 have been changed in a manner that will permit unregulated
competitors and competitors in other regulated industries to attempt to trade
our products in their own trading facilities without the same regulatory costs
we bear.
The Commodity Exchange Act generally requires all futures contracts to be
executed on an exchange that has been approved by the CFTC. For many years, 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 using exchange-like
electronic transaction systems and clearing unless specific permission,
including the imposition of specific conditions, was granted by the CFTC. These
limitations on the exemptions granted to the over-the-counter market were
called into question by a November 1999 report of the President's Working Group
on Financial Markets, which is made up of the Treasury Secretary, the Chairmen
of the SEC, the CFTC and the Board of Governors of the Federal Reserve System.
The working group advocated a complete exemption from the Commodity Exchange
Act for some principal-to-principal derivative exchanges that provide
electronic trade execution services comparable to those performed by us. The
customers who may access those exempt exchanges are also significant customers
of regulated exchanges like ours. The working group recommended equivalent
treatment for the existing electronic markets operated by regulated exchanges
or their affiliates and further recommended legislation that would permit CFTC-
regulated clearing organizations to clear futures, options on futures contracts
and OTC derivatives that are not securities or securities options. In contrast,
the working group recommended permitting banks and SEC-regulated clearing
organizations to clear financial derivative contracts, as well as equities,
government securities, repurchase and reverse repurchase agreements and other
instruments. Finally, the working group recommended permitting banks and
broker-dealers, and their affiliates, to operate currency futures markets for
retail customers without being subject to regulation under the Commodity
Exchange Act. All of the working group proposals, if adopted, would likely to
increase the number and quality of competitors who provide execution and
clearing services for standardized derivative contracts.
In February 2000, the CFTC staff released a report advocating the passage of
broad regulatory exemptions to create a regulatory environment that would
permit the futures industry to accommodate itself to real world
90
competitive conditions. Its goal is regulation by oversight rather than
prescription. The degree of regulation proposed is directly related to the
characteristics of the product and the type of customer that has direct or
indirect access to the market, with retail customer markets being subject to
greater regulation. The CFTC's proposal would treat open-outcry markets and
electronic trading market in the same way.
During 2000, Congress considered legislation to implement the suggestions of
the working group and the CFTC. On October 19, 2000, the U.S. House of
Representatives passed that legislation in a bill numbered H.R. 4541, by a vote
of 377 to 4. Further amendments were made to that bill and, as amended, it was
reintroduced in the House of Representatives as H.R. 5660 on December 14, 2000.
The U.S. House of Representatives and Senate each passed H.R. 5660 on December
15, 2000. It was signed into law by President William J. Clinton on December
21, 2000 as the Commodity Futures Modernization Act of 2000.
The Commodity Futures Modernization Act provides a series of exclusions from
the Commodity Exchange Act that would allow our competitors to trade futures
contracts identical to the ones that we offer without any form of regulation or
oversight by the CFTC under certain circumstances. Generally those exclusions
are available to markets limited to financial products traded among
institutions, whether traded electronically or not. We too could comply with
those exclusions and operate markets that are outside CFTC jurisdiction. If we
chose to remain subject to CFTC jurisdiction, the Commodity Futures
Modernization Act replaces the current rigid and rigorous statutory
requirements exchanges now face with flexible core principles that exchanges--
called contract markets or derivatives transaction execution facilities--would
need to satisfy subject to CFTC oversight. In addition, if we elect to trade
our non-agricultural contracts on the derivatives transaction execution
facility platform, banks and broker-dealers would become qualified to act as a
sales force for our contracts, thus expanding our sales force substantially.
Finally, the Commodity Futures Modernization Act lifts the current ban on
trading in single-stock futures subject to the coordinated oversight of the
CFTC and SEC, providing U.S. futures exchanges with the opportunity to compete
for this new market.
The Commodity Futures Modernization Act's new regulatory framework for
exchanges could reduce our regulatory costs and enhance our ability to deliver
cost-effective services to our customers. The new framework will also make it
easier for others to compete with us at lower regulatory cost. Thus, the
regulatory framework may provide greater regulatory advantages for some of our
competitors than it does for us.
Legal Proceedings
From time to time, we are involved in legal proceedings and litigation
arising in the ordinary course of business. As of the date of this document,
except as described below, we are not a party to any litigation or other legal
proceeding that, in our opinion, could have a material adverse effect on our
business, operating results or financial condition.
Minority Member Litigation. On August 11, 2000, eight Associate Members,
GIMs, IDEMs and COMs filed a complaint, on behalf of themselves and seeking to
represent a class of all Associate Members, GIMs, IDEMs and COMs, with the
Circuit Court of Cook County, Illinois. The complaint names as defendants five
persons holding Full Memberships owned by corporations with multiple Full
Memberships in the CBOT and seeks a defendant class of all Full Members.
The complaint alleges that the allocation developed by our Independent
Allocation Committee is unfair and the allocation methodology used by the
Independent Allocation Committee improperly weights members' voting and
liquidation rights as well as the historical distribution of market values of
memberships. The plaintiffs seek a declaratory judgment that the allocation is
unfair to Associate Members, GIMs, IDEMs and COMs, and that the vote of Full
Members in favor of the allocation 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 requests
that the court enjoin Full Members from voting in favor of the allocation and
declare a fair and equitable allocation of shares pursuant to the restructuring
transactions. The CBOT has assumed the defense of the Full Members named as
defendants in the complaint.
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On January 9, 2001, the defendants moved to dismiss the case on the grounds
that the complaint did not sufficiently allege that the defendants would breach
any fiduciary duties to Associate Members, GIMs, IDEMs and COMs by voting in
favor of the restructuring. On January 25, 2001, the Circuit Court denied
defendants' motions to dismiss without ruling on the merits of the dispute,
including whether Full Members owe fiduciary duties to plaintiffs or whether
the allocation is actually unfair. On February 6, 2001, a motion to compel
arbitration under the CBOT rules and regulations, which provide for arbitration
of disputes between members at the CBOT, and to stay the proceedings in
Illinois court was filed on behalf of individual defendant Steinborn. On
February 8, 2001, a similar motion to compel arbitration and stay proceedings
was filed on behalf of the additional individual defendants. A hearing on the
motions to compel arbitration and stay proceedings is scheduled for March 23,
2001.
Although we believe that the plaintiffs' position is without merit, we
cannot assure you that the court will stay proceedings and compel the parties
to arbitrate the dispute under CBOT's rules and regulations or that the
plaintiffs will not succeed in preventing or delaying the vote which is the
subject of this proxy solicitation or in altering the proposed allocation of
equity in the restructuring transactions. For more information, see "Risk
Factors--Risks Relating to the Restructuring Transactions--Certain Members Have
Filed a Complaint in Illinois State Court Challenging the Proposed Allocation
of Shares in For-Profit CBOT" and "--The Allocation of the Equity in For-Profit
CBOT Contains an Element of Uncertainty."
Chicago Board Options Exchange Litigation and Proposed Rule Change. The
restructuring transactions have been designed to preserve the exercise right.
In particular, we believe that the restructuring transactions comply with the
1992 agreement between the Chicago Board Options Exchange and the CBOT. First,
we do not believe that a Full Member's sale of equity shares, i.e., shares of
Class A common stock, in For-Profit CBOT constitutes "splitting or dividing"
that CBOT Full Membership into two or more parts. Moreover, we believe that if
a Full Member sells some or all of his equity shares in For-Profit CBOT that
Full Member would retain all of the trading rights and privileges appurtenant
to Full Membership, thus entitling that Full Member to retain the exercise
right under the 1992 agreement.
In addition, we believe that the restructuring transactions comply with the
provision of the 1992 agreement which provides that the exercise right would
survive "in the event the CBOT merges or consolidates with or is acquired by or
acquires another entity" so long as the following three conditions are met:
. the surviving entity must be an "exchange" that maintains a market in
futures, securities, options or financial instruments;
. the 1,402 Full Members must be granted "membership" in the surviving
exchange; and
. the 1,402 Full Members must be entitled to "have full trading rights and
privileges in all products then or thereafter traded on the surviving
exchange."
We believe that the restructuring transactions will result in For-Profit
CBOT satisfying each of the three conditions stated in the 1992 agreement with
the Chicago Board Options Exchange and, accordingly, that the exercise right
will carry over to the holders of Series B-1 shares of Class B common stock of
For-Profit CBOT. However, the Chicago Board Options Exchange has challenged
this position.
On June 30, 2000, we filed a complaint against the Chicago Board Options
Exchange seeking declaratory and injunctive relief with respect to our Delaware
reincorporation. Specifically, we sought a declaration that becoming a Delaware
not-for-profit corporation would not violate a 1992 agreement between the
parties or serve to extinguish the exercise right of our Full Members. On
August 3, 2000, after the Chicago Board Options Exchange agreed in court that
it would take no action to extinguish or limit the exercise right based solely
on the reincorporation of the CBOT in Delaware, the court dismissed the CBOT's
complaint.
On August 30, 2000, the Chicago Board Options Exchange filed a proposed rule
change with the SEC. The Chicago Board Options Exchange filed an amended
proposed rule change on October 10, 2000, and is seeking SEC approval of its
position. In its proposed rule change, the Chicago Board Options Exchange
attempts to impose new conditions on the exercise right not included in Article
Fifth(b) of its certificate of incorporation or in the 1992 agreement.
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In particular, the Chicago Board Options Exchange has stated recently in a
filing with the SEC that the exercise right will be terminated:
. for any Full Member, if that Full Member sells any of the shares of Class
A common stock associated with a share of Class B common stock received
in the restructuring transactions without also selling all of the other
shares of Class A common stock and the associated share of Class B common
stock;
. for all Full Members, if the CBOT expands electronic trading on the a/c/e
system to allow non-members, i.e., persons who do not hold shares of
Class B common stock, to trade directly; or
. for all Full Members, if CBOT members who exercise their right to become
Chicago Board Options Exchange members are able to trade all of the
CBOT's products and the Chicago Board Options Exchange's products
simultaneously.
On October 17, 2000, the CBOT filed a second complaint seeking a declaration
that the restructuring transactions do not extinguish the exercise right and an
injunction prohibiting the Chicago Board Options Exchange from taking any
action to the contrary. On January 19, 2001, the Illinois Circuit Court
dismissed Count I of our complaint for failure to sufficiently allege breach of
the 1992 agreement by the Chicago Board Options Exchange and for failure to
allege damages. The court also dismissed Count II of the complaint as preempted
by federal law, holding that this matter should be resolved in the first
instance by the SEC. The court's ruling did not address the merits of the
dispute, including whether or not the Chicago Board Options Exchange's position
breaches the 1992 agreement. Under this ruling, however, the SEC would
determine whether the Chicago Board Options Exchange can impose new conditions
on the exercise right under its proposed rule change filed with the SEC. In
response, on February 16, 2001, the CBOT filed an amended complaint, seeking a
declaration by the court that the Chicago Board Options Exchange breached the
1992 agreement by adopting its proposed rule change and submitting it to the
SEC for approval without the written consent of the CBOT. In addition, the CBOT
seeks an injunction prohibiting the Chicago Board Options Exchange from
attempting to amend or modify its Rule 3.16(b), relating to the exercise right,
adopted pursuant to the 1992 agreement, without our written consent, in
violation of its obligations' under the 1992 agreement. Finally, the CBOT seeks
a declaration that certain elements of its proposed restructuring comply with
the CBOT's obligations under the 1992 agreement.
We anticipate that the Chicago Board Options Exchange will again move to
dismiss the amended complaint on grounds that it is preempted by federal law,
claiming that this issue should be decided by the SEC. Although we cannot
assure you that the amended complaint will not be dismissed, we believe the
Chicago Board Options Exchange's position is without merit and that a court
should resolve the issue of whether it has in fact breached to 1992 agreement,
and whether certain elements of our proposed restructuring would violate our
contractual obligations under the 1992 agreement.
On November 17, 2000, the SEC requested public comment on the Chicago Board
Options Exchange's proposed rule change. On December 11, 2000 we filed a
comment letter with the SEC challenging the legal validity of the proposed rule
change and urging the SEC not to approve it.
On February 12, 2001, we filed a supplementary comment letter with the SEC
summarizing the proposed restructuring transactions and notifying the SEC of
developments at the Illinois Circuit Court. On February 26, 2001, the Chicago
Board Options Exchange filed with the SEC a letter in support of its proposed
rule change and in response to our filed opposition to that proposed rule
change. The Chicago Board Option Exchange's letter takes the position that
after the restructuring transactions the CBOT will not be a membership
corporation and therefore will not satisfy one of the conditions for retention
of the exercise right under the 1992 agreement. The Chicago Board Options
Exchange also claims that the a/c/e system gives our members who exercise the
right to become Chicago Board Options Exchange members the ability to trade on
the Chicago Board Options Exchange trading floor and at the CBOT trading floor
at the same time, activity that the Chicago Board Options Exchange claims is
incompatible with the exercise right. If approved by the SEC, the Chicago Board
Options Exchange's proposed rule change and the positions it has taken in
support of that rule change could materially adversely affect our ability or
willingness to restructure or to conduct our existing electronic trading
business in a competitive manner while still preserving the exercise right of
our Full Members.
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While we do not believe that the Chicago Board Options Exchange's position
is legally valid, we cannot predict the outcome of that SEC proceeding. If the
SEC were to approve the Chicago Board Options Exchange's proposed rule change,
it is possible that the exercise right could be extinguished or terminated for
all Full Members or that Full Members could be prevented from exercising the
right in the future.
The Chicago Board Options Exchange has historically been extremely
aggressive in challenging the validity of the exercise right of our Full
Members. We cannot assure you that the Chicago Board Options Exchange will not
take other actions in the future to interfere with the exercise right or will
not otherwise be successful in terminating the exercise right or preventing
Full Members from exercising such right in the future.
Furthermore, because the Chicago Board Options Exchange is attempting to
impose new conditions on the exercise right pursuant to its proposed rule
change with the SEC, we may be forced to take certain actions designed to
preserve the exercise right, such as restricting access to electronic trading
on our a/c/e system, which could materially adversely affect our ability to
execute our business strategies and achieve our business objectives.
For more information about these risks, see "Risk Factors--Risks Relating to
the Restructuring Transactions--The Chicago Board Options Exchange Could Be
Successful in Challenging the "Exercise Right,' Which Allows Our Full Members
to Obtain Trading Privileges at the Chicago Board Options Exchange, and the
Exercise Right Could Be Extinguished or Terminated."
Patent Rights Litigation. On May 5, 1999, the CBOT, the Chicago Mercantile
Exchange, the New York Mercantile Exchange and Cantor Fitzgerald, L.P., were
sued by Electronic Trading Systems, Inc. in the United States District Court
for the Northern District of Texas (Dallas Division) for alleged infringement
of Wagner United States patent 4,903,201, entitled "Automated Futures Trade
Exchange." On February 1, 2001, the complaint was amended to allege that CBOT
infringed the patent by operating Project A, which we decommissioned in August
2000, as well as the a/c/e system. We have secured an opinion from our patent
counsel that the a/c/e system does not infringe plaintiff's patent. The
district court has recently denied our motion to dismiss for lack of personal
jurisdiction and our motion to transfer the case to the Northern District of
Illinois.
Soybean Antitrust Litigation. On November 14, 1989, plaintiff Sanner brought
suit against us. This case is pending in federal court in the Northern District
of Illinois, Eastern Division. The one remaining count in this case is an
antitrust claim for monetary damages brought on behalf of a class of soybean
farmers alleging a conspiracy to fix the price of cash soybeans. The claim is
based on an emergency order promulgated by our board of directors in connection
with the July 1989 soybean futures contract. The other defendants in this suit
are certain individuals alleged to have been involved in recommending or
implementing the emergency order. All of the other claims brought in
plaintiff's original complaint, which was filed in 1989, have been dismissed.
The court certified the Sanner case as a class action, but our motion for
reconsideration of this decision, and requesting summary judgment, is still
pending, and discovery is complete. The court denied our motion for summary
judgment but without prejudice to reassert a motion for summary judgment on the
issues of market power and antitrust injury. We have also filed a motion to
reconsider the court's certification of a class which has been pending for some
time. At the request of this court, the motion is being withdrawn without
prejudice and will be refiled after the court rules on another motion in the
case. No trial date has been set.
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MANAGEMENT AND EXECUTIVE COMPENSATION
Directors and Executive Officers
The board of directors currently consists of 18 directors, including:
. the chairman of the board;
. the vice chairman of the board;
. nine elected directors who are Full Members and of whom at least two are
nonresident;
. four non-member directors nominated and approved by the board of
directors;
. two elected directors who are Associate Members; and
. the president and chief executive officer, who serves as a non-voting
member of the board.
Currently, there is one vacant non-member directorship.
Following the completion of the restructuring transactions, the board of
directors of For-Profit CBOT will be reduced to nine members, consisting of:
. two independent directors;
. five additional directors, who are holders of Class B common stock and
who meet the membership and eligibility requirements of For-Profit CBOT;
and
. one at-large director; and
. the chairman of the board of directors.
These directors, other than the chairman, will be elected by the holders of
Class A common stock at a special election to be held as soon as reasonably
practicable following completion of the restructuring transactions.
Neither the at-large director nor the chairman will be subject to any
qualifications. However, from and after the special election of directors
following completion of the restructuring transactions and until the second
annual meeting of stockholders thereafter, which we currently expect to be held
in 2003, the position of the chairman will be held by the person who held the
office of chairman of the board of directors immediately prior to such
election, and such person will not be elected by the stockholders but rather
shall hold the position of the chairman by virtue of his holding of the office
of chairman of the board. All of the other directors will be elected by the
stockholders at the expiration of their terms commencing with the first annual
meeting of stockholders following completion of the restructuring transactions.
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Set forth below are the names, ages and positions of the persons currently
serving as directors and executive officers of the CBOT. We currently expect
that such persons will, subject to resignation, removal and disqualification,
constitute the directors and executive officers of For-Profit CBOT immediately
following completion of the restructuring transactions. However, we cannot
provide any assurances in this regard and, accordingly, this list may change.
[Download Table]
Name Age Positions Held
---- --- --------------
David J. Vitale 54 President and Chief Executive Officer
Carol A. Burke 49 Executive Vice President and General
Counsel
Patrick J. Catania 50 Executive Vice President, Business
Development
Glen M. Johnson 52 Senior Vice President and Chief
Financial Officer
James P. Amaral 46 Senior Vice President and Chief
Information Officer
Philip P. Hannigan 61 Senior Vice President, Real Estate
Operations
Bryan T. Durkin 40 Senior Vice President, Office of
Investigations and Audits and Order
Routing
Celesta S. Jurkovich 54 Senior Vice President, Government
Relations
Nickolas J. Neubauer 55 Chairman of the Board of Directors
Charles P. Carey 47 Vice Chairman
Raymond Cahnman 55 Director
James E. Cashman 47 Director
Mark E. Cermak 48 Director
Robert F. Corvino 43 Director
James F. Curley 56 Director
Andrew J. Filipowski 50 Director
Douglas M. Kurzydlo 46 Director
Veda Kaufman Levin 53 Director
James P. McMillin 41 Director
Joseph Niciforo 40 Director
James R. Thompson 64 Director
J. Andrew Wallace 39 Director
Michael D. Walter 51 Director
Ralph H. Weems 68 Director
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We currently expect that the term for each director listed above, other than
the chairman of the board, will end in connection with the special election of
directors to occur as soon as reasonably practicable following completion of
the restructuring transactions.
Set forth below is a description of the backgrounds of the persons named in
the table above. All executive officers of the CBOT listed below are officers
of, and hold the same positions with, the MidAmerica Commodity Exchange.
David J. Vitale has served as President and Chief Executive Officer since
February 2001. Prior to joining the CBOT, Mr. Vitale served as a director and
Vice Chairman of Bank One Corporation from October 1998 until November 1999 and
as a director and Vice Chairman of First Chicago NBD Corporation from October
1995 until the merger of Bank One Corporation and First Chicago NBD Corporation
in October 1998. Prior to that time, he served in a number of different
capacities with First Chicago Corporation and The First National Bank of
Chicago.
Carol A. Burke has served as Executive Vice President and General Counsel
since February 1995 and Senior Vice President and General Counsel since April
1994. Prior to that time, Ms. Burke held other positions in the President's
office and the Legal Department of the CBOT.
Patrick J. Catania has served as Executive Vice President, Business
Development since August 1997. From April 1995 to August 1997, he served as
Senior Vice President of Market & Product Development, and held other marketing
positions with the CBOT prior to 1995. Mr. Catania also serves on the
Management Committee of the CBOT/Eurex Alliance, L.L.C.
Glen M. Johnson has been our Senior Vice President and Chief Financial
Officer since February 1995. From December 1982 to February 1995, he was Vice
President and Treasurer of the CBOT.
James P. Amaral is Senior Vice President and Chief Information Officer, a
position he has held since March 1999. From January 1994 until March 1999, he
was President of Applied Management Services, Inc., an information technology
consulting firm. He served on the Management Committee of CBOT/Eurex Alliance,
L.L.C. from November 1999 to November 2000.
Philip F. Hannigan has served as Senior Vice President, Real Estate
Operations since February 1995. From May 1984 to February 1995, he served as
Vice President, Real Estate Operations.
Bryan T. Durkin has been a Senior Vice President, Office of Investigations &
Audits and Order Routing since October 1999. From December 1993 through October
1999, he served as Vice President & Administrator, Office of Investigations &
Audits.
Celesta S. Jurkovich has served as Senior Vice President, Government
Relations of the CBOT since February 1995. Prior to that time, she served as
Vice President, Government Relations.
Nickolas J. Neubauer has been Chairman of the CBOT since January 2001. He
has been an independent trader on the CBOT since February 1978. He is the
President of Sano Corporation, an Arizona real estate corporation that he
founded in 1991. He owns two Full Memberships in the CBOT and one CBOE
membership.
Charles P. Carey has been a director since 1997 and Vice Chairman since
January 2000. He also serves on the Finance, Executive and Human Resources
Committees. Since January 1995, Mr. Carey has been a Vice President of First
Options of Chicago, a trading company and a wholly owned subsidiary of Spear,
Leeds & Kellogg L.P., which is currently expected to be acquired by Refco Group
Ltd., LLC. He also is the Managing Member of RCH Trading LLC, a registered
broker-dealer. Mr. Carey holds one Full membership in the CBOT and is a partner
at Henning & Carey, a commodity trading firm.
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Raymond Cahnman has been a director since January 2000. Mr. Cahnman has been
a trader on the board for the previous five years, and he currently trades with
TransMarket Group L.L.C., a clearing firm. Mr. Cahman holds, directly or
indirectly, by virtue of his controlling interest in TransMarket Group L.L.C.,
three Full Memberships, six Associate Memberships, eight GIMs, five IDEMs and
four COMs.
James E. Cashman has been a director since January 1996, and is a member of
the board's Finance Committee. He has been an independent trader on the CBOT
since July 1977. Mr. Cashman also is a member of RCH Trading LLC, a registered
broker-dealer. Mr. Cashman holds one Full Membership in the CBOT.
Mark Cermak has been a director since January 2000, and is a member of the
Regulatory Compliance Committee and the chairman of the Membership Committee.
He is currently a President of O'Connor & Co. LLC, a clearing member of the
CBOT, a position he has held since January 1995. Mr. Cermak holds one Full
Membership in the CBOT.
Robert F. Corvino has been a director since January 2000. He is also a
member of the Finance Committee. Mr. Corvino is a member of RCH Trading LLC, a
registered broker-dealer. From November 1985 to May 2000, Mr. Corvino was an
independent trader. He holds one Full Membership in the CBOT.
James F. Curley has been a director since January 1993, and is on the
Executive, Finance and Human Resources Committees. Since April 1997, Mr. Curley
has been the Chief Executive Officer of Cresvale International (US) LLC, a
Futures Commission Merchant, which owns two Full Memberships in the CBOT. From
March 1994 through June 1996, he was Chairman and Chief Executive Officer of
Republic New York Securities Inc. He holds one Full Membership in the CBOT.
Andrew J. Filipowski has served as a director since January 2000. Mr.
Filipowski is the founder and, since June 1999, has been the President and
Chief Executive Officer of Divine Interventures Inc, a business incubator that
provides capital and management help for business to business e-commerce
companies. Prior to June 1999, Mr. Filipowski was Chairman, President and Chief
Executive Officer of Platinum Technology International Inc., a software
services company. He is a director of Blue Rhino Corp., a propane cylinder
exchange distributor; Bluestone Software, Inc., a software company; eShare
Technologies, a provider of contract management software solutions; AEC, Inc.,
a manufacturer of auxiliary hardware for the plastics industry; Eagle River
Interactive, a multimedia firm focused on electronic commerce; Mastering
Computers, Inc., an information technology training company; and Memco Inc., a
software company specializing in security applications.
Douglas M. Kurzydlo has been a director since January 1996. For the previous
twenty years, he has been an independent broker/trader on the CBOT. He serves
on the board's Executive, Audit, Regulatory Compliance, Appellate and Finance
Committees. He owns one Full Membership.
Veda Kaufman Levin has served as a director since January 2000. She has been
the Senior Vice President--Head of Institutional Equity Derivatives at Lazard
Freres & Co LLC since April 1994. Ms. Kaufman Levin serves on the
Implementation Committee of the Board and on the Lessor Committee, of which she
is the Chairperson. She holds one Full Membership in the CBOT.
James Patrick McMillin has been a director since January 2000, and is the
Co-Chairman of the Floor Members Committee. He is currently an Account Sales
Manager at Comdisco Inc., a provider of equipment leasing and network services,
data protection and financial and technology management. He has held this
position since April 2000. Mr. McMillin is the founder and a principal of
Eclipse Futures, Inc., a clearing firm. Mr. McMillin holds one Associate
Membership in the CBOT.
Joseph Niciforo has served as a director since January 1999. He is also a
member of the Finance Committee. Since June 2000, he has been Managing Director
of Fixed Income for Tudor Investment Corp., a hedge fund. From March 1997 to
June 2000, Mr. Niciforo was President of Bearcat Capital, a commodities trading
firm. From January 1990 to December 1996, Mr. Niciforo was a partner in Tudor
Investment Corp. Mr. Niciforo holds one Full Membership and one Associate
Membership in the CBOT.
98
James Robert Thompson, Jr., has served as a director since February 1991.
Governor Thompson has been the Chairman of the law firm of Winston & Strawn, a
national law firm, since January 1991. From January 1977 to January 1991, he
was the Governor of the State of Illinois. He serves on the Audit and Human
Resources Committee and is Chairman of the Independent Allocation Committee of
our board of directors. Governor Thompson is a director of Jefferson Smurfit
Group, Plc, an integrated producer of packaging products; FMC Corporation, a
diversified chemicals company; Hollinger International Inc., a newspaper
publisher; Prime Retail, Inc., a real estate investment trust specializing in
factory outlet centers; Prime Group Realty Trust, a real estate investment
trust focused on industrial properties; and Navigant Consulting, Inc., a
consultant to energy and utility-related companies.
John Andrew Wallace has served as a director since January 1999, and is a
member of the Executive, Finance, and Human Resources Committees. He has served
as Managing Director of Sales at R.J. O'Brien & Associates since February 1999.
From August 1984 to January 1999, Mr. Wallace was Senior Vice President of
Sales at Salomon Smith Barney, a financial services company. He owns one
Associate Membership in the CBOT, and R.J. O'Brien & Associates holds two Full
Memberships in the CBOT.
Michael D. Walter has been a director since January 2000, and is a member of
the Audit Committee. Since October 1996, he has been Senior Vice President,
Economic Strategies of ConAgra Foods, Inc. From February 1989 to September
1996, Mr. Walter was President of ConAgra Specialty Grain Cos. ConAgra holds
one Full Membership in the CBOT.
Ralph Weems has been a director since January 1990 and previously served as
a director from January 1985 to January 1988. He serves as the Chairman of our
Audit Committee and as a member of the Independent Allocation Committee of the
board of directors. Mr. Weems has owned and operated an independent farm since
June 1955.
Committees of the Board of Directors
It is currently expected that the board of directors of For-Profit CBOT will
have a nominating committee, an executive committee, an audit committee and a
compensation committee. It is currently expected that the members of these
committees will be elected by For-Profit CBOT's board of directors following
the effectiveness of the restructuring transactions. Each of these committees
is described in more detail below.
Nominating Committee
It is currently expected that the board of directors of For-Profit CBOT will
have a nominating committee consisting of four directors, which will include
the chairman, one independent director and, if elected to the board, the chief
executive officer. This committee will review the qualifications of potential
candidates and will propose to the then-sitting board of directors for their
review and approval nominees for vacant positions or positions expected to be
vacant on the board of directors, including the eight positions expected to be
filled in connection with the special election following completion of the
restructuring transactions.
Executive Committee
It is currently expected that the board of directors of For-Profit CBOT will
have an executive committee consisting of the chairman of the board and two
other directors. The Executive Committee will exercise the authority of the
full board of directors when the board is not in session, except as required by
the certificate of incorporation or bylaws of For-Profit CBOT or applicable
law.
Audit Committee
It is currently expected that the board of directors of For-Profit CBOT will
have an audit committee consisting of at least three directors, all of whom
will be independent directors. This committee will review the results and scope
of the audit and other services provided by the independent auditors as well as
the accounting and internal control procedures and policies of For-Profit CBOT.
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Compensation Committee
It is currently expected that the board of directors of For-Profit CBOT will
have a compensation committee consisting of at least three directors, of which
at least two of whom will be independent directors. It will oversee the
compensation and benefits of For-Profit CBOT's management and employees.
Other Committees
In addition to these committees, we currently intend to create or maintain
certain non-board advisory bodies and other non-board committees comprised of
directors, officers and/or stockholders.
Director Compensation
We currently expect that each independent director of For-Profit CBOT will
receive an annual fee of $40,000, plus a meeting attendance fee of $1,500 for
each regular meeting of the board that they attend. We currently expect that
the annual fee for independent directors may be paid in equal parts cash and
shares of Class A common stock. The shares of Class A common stock may, at the
election of such director, be paid on a deferred basis. All directors receive
reimbursement of expenses for travel to meetings.
David P. Brennan, the chairman of the board of directors in 1999 and 2000,
received director's fees of $240,000 during 2000. Mr. Neubauer was elected by
the members to serve as chairman of the board of directors in December 2000 and
began to serve in such capacity in January 2001. It is currently expected that
Mr. Neubauer will be paid $240,000 in director's fees for 2001.
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Executive Compensation
The following table sets forth information relating to the compensation paid
to, accrued or earned by our chief executive officer and each of the next four
most highly compensated executive officers for services rendered during the
year ended December 31, 2000.
[Download Table]
Annual Compensation
-------------------------------------------
Name and Principal Other Annual
Position Salary Bonus Compensation(1)(3) Total
------------------ -------- ------ ------------------ --------
Dennis A. Dutterer(2)......... $578,558 $ -- $ -- $578,558
President and Chief Executive
Officer
Carol A. Burke................ 419,375 -- 98,194 517,569
Executive Vice President and
General Counsel
Patrick J. Catania............ 419,375 20,000 124,544 563,919
Executive Vice President,
Business Development
James P. Amaral............... 400,000 25,000 8,692 433,692
Senior Vice President and
Chief Information Officer
Phillip F. Hannigan........... 264,369 -- 73,302 337,672
Senior Vice President, Real
Estate Operations
--------
(1) Executives under contract are entitled to participate in all employee
benefit plans and to receive all other fringe benefits as are from time to
time made available to the senior management of the CBOT, which includes
the CBOT contribution to a qualified 401(k) savings plan and the CBOT
contribution to a non-qualified plan.
(2) Thomas R. Donovan was President and Chief Executive Officer through April
2000. Mr. Donovan received $479,200 in Salary and $596,421 in Other Annual
Compensation during 2000. Upon his departure, Mr. Donovan was paid $958,400
in partial settlement of his contract and $818,326 for accrued vacation and
sick days. Dennis A. Dutterer, who was appointed Interim President and
Chief Executive Officer in April 2000, resigned in December 2000, effective
as of January 15, 2001. Pursuant to a letter agreement between the CBOT and
the Board of Trade Clearing Corporation, Mr. Dutterer's salary was paid by
the Board of Trade Clearing Corporation but CBOT was obligated to reimburse
the Board of Trade Clearing Corporation for such amounts, including any
applicable employment taxes. See "--Employee Related Agreements."
(3) The following table shows the amount of each category of "Other Annual
Compensation" paid with respect to each of the named individuals:
[Download Table]
401(k)
Matching Pension Supplemental
Name Contribution Contribution Plan Other Total
---- ------------ ------------ ------------ ------ -------
Mr. Dutterer.......... -- -- -- -- --
Ms. Burke............. $32,528 -- $59,983 $5,683 $98,194
Mr. Catania........... 30,208 -- 80,683 13,653 124,544
Mr. Amaral............ -- -- -- 8,692 8,692
Mr. Hannigan.......... 3,336 -- 64,990 4,976 73,302
Employee Benefit Plans
Stock Plan
We are currently reviewing, and expect to adopt in connection with the
restructuring transactions or the special election to be held following the
restructuring transactions, a stock plan under which stock-based awards may be
made to employees and directors of For-Profit CBOT and its subsidiaries,
including eCBOT. In order to incentivize management, it is currently expected
that For-Profit CBOT will have a long-term equity
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incentive plan which will enable For-Profit CBOT to grant to such individuals
stock options, stock appreciation rights, restricted stock, performance awards
and other similar awards. The purpose of the plan will be to enable For-Profit
CBOT to attract and retain highly qualified employees, officers and directors.
We currently expect that the number of shares to be authorized for issuance
under such plan will be consistent with plans adopted by comparable public
companies.
401(k) and Thrift Plan
For-Profit CBOT will maintain the 401(k)-type plan currently sponsored by us
and currently known as the "Employee Savings Plan." This is a defined
contribution retirement plan intended to qualify under Section 401 of the
Internal Revenue Code. Employees of For-Profit CBOT will be eligible to
participate in this plan after completing 1,000 hours of work on the first day
of the month following one year of employment.
The following table describes the elective employee and matching employer
contributions as defined under this plan, and the vesting of employer
contributions:
[Download Table]
Employee Contributions* Employer Contributions
----------------------- ----------------------
Basic Pre-Tax 1-4%.......... 100% Match up to 4%
Voluntary Pre-Tax 5-10%..... None
Voluntary After-Tax 1-10%... None
Vesting..................... 20% after working 1,000 hours in the first
year of employment and 20% for each
calendar year after working 1,000 hours
thereafter. Participants become fully
vested after completing five years of
vesting service.
--------
* Subject to limits (Employee Contributions restricted to a combined limit of
17%) and other statutory annual limits.
Pension Plan
For-Profit CBOT will also maintain a non-contributory defined benefit
pension plan that provides a predetermined amount of retirement income to
eligible participants and their beneficiaries. To participate in this plan, an
employee must complete one year of employment and be 21 years of age. The
policy will be to fund currently required pension costs to the extent allowed
for a tax deduction by the IRS. Participants become fully vested in the plan
after five years of vesting service, i.e., one year of vesting service is
obtained by completing 1,000 hours of work in a calendar year after age 18.
Health Plan
For-Profit CBOT will maintain the health plan currently sponsored by us
which provides multiple medical and dental coverage options covering qualified
participants and their eligible dependents. New employees are eligible to
participate in the plan if working on a full-time basis after 30 days of
consecutive active service. Plan funding is accomplished through a combination
of fully insured and self-funded arrangements. Employees contribute specified
amounts to the plan, depending on the medical or dental option elected and the
number of dependents covered. The administration of claims is performed by
insurance carriers and paid claims administrators.
Insurance Benefit Plan
For-Profit CBOT will maintain our non-contributory welfare plan providing
life, disability and accidental death and dismemberment benefits to eligible
participants. New employees are eligible to participate in the plan if working
on a full-time basis after 31 days of consecutive active service. The plan pays
certain insurance carriers premiums through which designated benefits are paid.
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Non-Qualified Plans
For-Profit CBOT will maintain our non-qualified plans that are not subject
to the Employee Retirement Income Security Act of 1974. Employees whose
compensation limits their benefits under Section 415 of the Internal Revenue
Code are compensated at year end for any benefit shortfall based on current
actuarial assumptions that mirror the defined benefit or defined contribution
plans.
For-Profit CBOT also will maintain a nonqualified supplemental pension plan
for certain former employees. The liability for this nonqualified plan is
funded by life insurance on the lives of the participating employees. For-
Profit CBOT will succeed to the trust established by us for the purpose of
administering the nonqualified plan.
Employment-Related Agreements
Donovan Agreement
We entered into an agreement with Thomas R. Donovan dated as of April 14,
2000, relating to the termination of Mr. Donovan's position as our President
and Chief Executive Officer. The agreement terminated Mr. Donovan's employment
agreement dated May 18, 1999, and provided that Mr. Donovan would render
limited consulting services to us and would receive reimbursement of out-of-
pocket expenses related to those services. The agreement also sets forth non-
competition terms and severance benefits. Pursuant to the Agreement, Mr.
Donovan is entitled to:
. a lump sum payment of about $1.4 million, paid on May 1, 2000, and
additional payments of equal amount, payable on January 1 of each year
from 2001 through 2003;
. a lump sum payment for 120 unused sick days, equal to about $479,200,
paid on May 1, 2000;
. provision of certain medical and insurance benefits through December 31,
2003, or until Mr. Donovan's earlier death;
. annual payments through December 31, 2003 to equal the amount we would
have paid to our pension plan, as determined by an actuary, on Mr.
Donovan's behalf during such time pursuant to the plan contribution
formula; and
. provision of medical and dental coverage after the term of the agreement
as contemplated in Mr. Donovan's prior employment contract.
Dutterer Agreement
On April 18, 2000, Mr. Dutterer entered into a letter agreement with the
CBOT and the CBOT entered into a letter agreement with the Board of Trade
Clearing Corporation, which agreements provided for Mr. Dutterer's employment
as Interim President and Chief Executive Officer of the CBOT and his retention
of his position as President and Chief Executive Officer of the Board of Trade
Clearing Corporation under the terms of his existing employment agreement with
the Board of Trade Clearing Corporation, as amended. Pursuant to the
agreements, Mr. Dutterer was entitled to receive a base salary of $825,000 per
year for his services to the CBOT and any discretionary bonus determined by our
board of directors. His employment with the CBOT was "at will" and the CBOT is
not responsible for any severance obligations. Under the agreements, the CBOT
agreed to reimburse the Board of Trade Clearing Corporation for its payment of:
. Mr. Dutterer's base salary;
. applicable employment taxes; and
. the amount of any discretionary bonus awarded to Mr. Dutterer by the CBOT
board of directors, with such reimbursement for employment taxes and
bonus being grossed-up for any additional taxes resulting from the
reimbursement.
All other expenses relating to the employment of Mr. Dutterer are the
responsibility of the Board of Trade Clearing Corporation.
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Pursuant to his agreement with the CBOT, Mr. Dutterer agreed to abstain from
taking part in discussions and decisions that involve a potential conflict of
interest between the CBOT and the Board of Trade Clearing Corporation. The
agreement also contained certain confidentiality provisions and the CBOT's
agreement to indemnify Mr. Dutterer and to provide liability insurance to the
extent provided to the CBOT's other officers. Effective in January 2001, Mr.
Dutterer resigned from his position as Interim President and Chief Executive
Officer of the CBOT and returned to his position as President and Chief
Executive Officer of the Board of Trade Clearing Corporation on a full-time
basis.
Vitale Agreement
On February 20, 2001, we entered into an employment agreement with David J.
Vitale, our President and Chief Executive Officer, which has a term of four
years unless terminated earlier by the CBOT or the Executive or as a result of
Mr. Vitale's death or permanent disability. Under the agreement, Mr. Vitale is
entitled to a base salary of $1,250,000 per year in addition to a performance
bonus, which for fiscal year 2001 may not be less than $750,000. He is entitled
to participate in all of our employee benefit plans that are generally
available to senior management. In addition, in the event that Mr. Vitale's
term of employment terminates prior to achieving vested status under such
employee benefit plans, he will be entitled to an additional benefit under a
non-qualified deferred compensation plan in an amount equal to the amount of
non-vested benefits accrued under such employee benefit plans. He is also
entitled to have certain perquisites paid for or reimbursed by the CBOT,
including club memberships, automobile allowance and financial planning and
other professional expenses not to exceed $25,000.
In addition, Mr. Vitale received an incentive award, consisting of equity
appreciation rights, which will entitle him to receive the benefit of any
appreciation in the value of the CBOT's memberships and/or common stock. The
equity appreciation rights, which have been granted in the form of appreciation
units, give Mr. Vitale the right to receive the excess of the fair market value
of the covered equity with respect to an appreciation unit on the date such
appreciation unit is exercised over the grant value of such appreciation unit.
The following table summarizes the type, number, grant value and covered
equity with respect to each appreciation unit granted to Mr. Vitale:
[Enlarge/Download Table]
EQUITY APPRECIATION RIGHTS COVERED EQUITY
---------------------------------------------- ---------------------------------------------------------------
Number of Grant Class B Common
Class of Appreciation Value Membership Equivalent Class A Common Stock Stock Equivalent
Appreciation Unit Units Per Unit Per Unit Equivalent Per Unit Per Unit
------------------------ ------------ -------- ---------------------- --------------------- ------------------
A-1A.................... 25 $400,000 1 Full Membership A-1 Conversion Shares 1 Share Series B-1
A-1B.................... 10 $600,000 1 Full Membership A-1 Conversion Shares 1 Share Series B-1
A-2..................... 10 $80,000 1 Associate Membership A-2 Conversion Shares 1 Share Series B-2
A-4..................... 5 $10,000 1 IDEM Membership A-4 Conversion Shares 1 Share Series B-4
A-5..................... 5 $20,000 1 COM Membership A-5 Conversion Shares 1 Share Series B-5
The number of shares of Class A common stock covered by an appreciation
right is dependent upon the number of shares of Class A common stock issued
with respect to the membership equivalent for such appreciation unit following
completion of the restructuring transactions. The appreciation rights will
generally vest in accordance with the schedule set forth in the following
table:
[Enlarge/Download Table]
Number of Applicable Appreciation Units Vested
Class of Appreciation -----------------------------------------------------------------------
Unit February 20, 2002 February 20, 2003 February 20, 2004 February 20, 2005
--------------------- ----------------- ----------------- ----------------- -----------------
A-1A.................... 10 Units 5 Units 5 Units 5 Units
A-1B.................... 4 Units 2 Units 2 Units 2 Units
A-2..................... 4 Units 2 Units 2 Units 2 Units
A-4..................... 2 Units 1 Unit 1 Unit 1 Unit
A-5..................... 2 Units 1 Unit 1 Unit 1 Unit
In the event that Mr. Vitale's term of employment is terminated because of
death, he would be entitled to receive his base salary through the end of the
sixth calendar month following the calendar month during which his employment
is terminated and any portion of the incentive award that is not vested would
immediately vest. In the event that Mr. Vitale's term of employment is
terminated because of permanent disability, he would be
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entitled to receive his base salary through the earlier of the expiration of
his employment agreement and the first year of such permanent disability, and
would be entitled to receive one-half his base salary during the remaining term
of the employment agreement, if any. In addition, upon permanent disability,
any portion of the incentive award that is not vested would immediately vest.
If Mr. Vitale is terminated by the CBOT for cause, terminates employment
without good reason or the employment agreement reaches the end of its term, he
would be entitled to his base salary through his last day of employment and any
portion of the incentive award that has not been exercised would be forfeited.
In the event that the CBOT terminates Mr. Vitale without cause or Mr. Vitale
terminates with good reason, Mr. Vitale would be entitled to his base salary
through the expiration of his employment agreement and any portion of the
incentive award that is not vested would immediately vest; provided that any
unexercised incentive awards shall be forfeited four years following the date
of termination. In addition, Mr. Vitale would be entitled to payment of his
performance bonus of $750,000 in the event that the date of termination without
cause or for good reason occurs prior to payment of performance bonuses for
fiscal year 2001.
In the event that the restructuring transactions are not completed within 12
months of the date of the employment agreement, which term may be extended by
Mr. Vitale for six months, thereafter, Mr. Vitale may terminate the employment
agreement in the thirty day period immediately following the end of such term.
Under such circumstances, he would be entitled to receive his base salary
through the earlier of the expiration of his employment agreement and the end
of the second full fiscal year following the fiscal year of his election to
terminate employment and any portion of the incentive award that is not
exercised would be forfeited. In the event of a change of control, Mr. Vitale
or the CBOT may terminate Mr. Vitale's employment, and Mr. Vitale would be
entitled to receive his base salary through the earlier of the expiration of
his employment agreement and the end of the second full fiscal year following
the fiscal year such change of control occurs and all outstanding incentive
awards would become vested immediately prior to the transaction giving rise to
the change of control.
Mr. Vitale is also subject to certain non-competition and non-solicitation
provisions during the employment term and, in the event his employment
agreement is terminated prior to expiration, for one year following the date of
termination.
Other Agreements
We also have Executive Employment Agreements with Carol A. Burke, our
Executive Vice President and General Counsel, and Patrick J. Catania, our
Executive Vice President, Market and Product Development. The term of each
agreement began May 18, 1999 and runs until May 18, 2002 or the earlier death,
total and permanent disability or termination of the executive. The employment
period under each agreement will be extended for one calendar month for each
calendar month after May 2001 that Ms. Burke and Mr. Catania serve under their
respective agreements. The CBOT, Ms. Burke and Mr. Catania each have the right
to provide notice to the other party to their respective agreements of their
intent to cease extending such agreement and, upon such notice, the term of
such agreement shall terminate 12 calendar months following the furnishing of
notice of such intent. Each agreement provides for a base salary of $500,000
and annual increases as determined by our board of directors in its sole
discretion. Each agreement provides that the executive is entitled to
participate in all of our employee benefit plans that are generally available
to senior management, including post-employment medical and dental benefits.
In the event of Ms. Burke's or Mr. Catania's disability, the affected
executive would receive his or her base compensation for the first year during
which the executive is under the disability. After the first year, the affected
executive would receive one-half of his or her base pay during the remainder of
the disability, but not beyond the end of the employment term. This disability
pay would be reduced to the extent the affected executive receives payments
from other sources such as insurance as a result of the disability. We may
terminate the affected executive if the disability is total and permanent, in
which case such executive would be entitled to his or her base compensation
through the end of the employment term.
Pursuant to the agreements, Ms. Burke and Mr. Catania each agree to certain
non-competition provisions during the employment term and for one year after
thereafter.
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Beneficial Ownership of Management and Directors
The following table lists the shares of capital stock of For-Profit CBOT
that will be beneficially owned following the restructuring transactions by
each of the directors, each of the executive officers named in the summary
compensation table included under "--Executive Compensation" and For-Profit
CBOT's directors and executive officers as a group. This information is based
on the beneficial ownership by those persons of CBOT memberships and Ceres
limited partnership interests as of December 6, 2000. There was no person known
to For-Profit CBOT to be the beneficial owner of more than five percent of the
membership interests of CBOT as of December 6, 2000. None of the persons listed
in the table below will beneficially own one percent or more of any of the
shares of Class A common stock, Class B common stock, Series A convertible
preferred stock or will beneficially own one percent or more of the total
equity of For-Profit CBOT.
[Download Table]
Number of Number of
Shares of Shares of
Class A Series A
Name of Beneficial Common Number of Shares of Convertible
Owner Stock Class B Common Stock Preferred(1)
------------------ --------- ----------------------- ------------
Dennis A. Dutterer.............. -- -- --
Thomas R. Donovan............... -- -- --
Nickolas J. Neubauer............ 50,000 2 shares of Series B-1 265.0614
David P. Brennan................ 25,000 1 share of Series B-1 132.5307
David J. Vitale................. -- -- --
Carol A. Burke.................. -- -- --
Patrick J. Catania.............. -- -- --
James P. Amaral................. -- -- --
Philip P. Hannigan.............. -- -- --
Charles P. Carey................ 25,000 1 share of Series B-1 132.5307
Raymond Cahnman(2).............. 127,900 3 shares of Series B-1 648.5359
6 shares of Series B-2
8 shares of Series B-3
5 shares of Series B-4
4 shares of Series B-5
James E. Cashman................ 25,000 1 share of Series B-1 132.5307
Mark E. Cermak.................. 25,000 1 share of Series B-1 132.5307
Robert F. Corvino............... 25,000 1 share of Series B-1 132.5307
James F. Curley................. 25,000 1 share of Series B-1 132.5307
Andrew J. Filipowski............ -- -- --
Douglas M. Kurzydlo............. 25,000 1 share of Series B-1 132.5307
Veda Kaufman Levin.............. 25,000 1 share of Series B-1 132.5307
James P. McMillin............... 5,000 1 share of Series B-2 21.3460
Joseph Niciforo................. 30,000 1 share of Series B-1 153.8767
1 share of Series B-2
James R. Thompson............... -- -- --
J. Andrew Wallace(3)............ 55,000 2 shares of Series B-1 286.4074
1 share of Series B-2
Michael D. Walter(4)............ 25,000 1 share of Series B-1 132.5307
Ralph H. Weems.................. -- -- --
Directors and Executive Officers
as a group
(24 persons)(5)................ 492,900 17 shares of Series B-1 2,568.0037
9 shares of Series B-2
8 shares of Series B-3
5 shares of Series B-4
4 shares of Series B-5
--------
(1) Because the number of shares of Series A convertible preferred stock to be
distributed to each limited partner of Ceres pursuant to the Ceres merger
will be based on the value of Ceres as of the time of the completion of the
restructuring transactions, the number of such shares of Series A
convertible preferred
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stock that will actually be issued to each limited partner of Ceres is not
known at this time. For purposes of illustration only, the numbers of
shares of Series A convertible preferred stock that would be allocated to
such persons pursuant to the Ceres merger allocation formula are included
in the above table using a valuation of Ceres as of December 31, 2000. For
more information on the Ceres merger, see "The Restructuring Transactions--
Opinion of Arthur Andersen to the Board of Directors Regarding Fairness of
the Ceres Merger" and "--Ceres Valuation Analysis of Arthur Andersen."
(2) Includes 10,700 shares of Class A common stock and two Series B-2 and two
Series B-5 shares of Class B common stock owned by TransMarket Group LLC,
which Mr. Cahnman may be deemed to beneficially own. Mr. Cahnman disclaims
such beneficial ownership.
(3) Includes 50,000 shares of Class A common stock and two Series B-1 shares
of Class B common stock owned by R. J. O'Brien & Associates, which Mr.
Wallace may be deemed to beneficially own. Mr. Wallace disclaims such
beneficial ownership.
(4) Includes 25,000 shares of Class A common stock and one Series B-1 share of
Class B common stock owned by ConAgra Specialty Grain Cos., which Mr.
Walter may be deemed to beneficially own. Mr. Walter disclaims such
beneficial ownership.
(5) Includes 89,100 shares of Class A common stock and three Series B-1
shares, one Series B-2 share, three Series B-3 shares, three Series B-4
shares and two Series B-5 shares of Class B common stock, which the
directors and executive officers may be deemed to beneficially own.
Our directors and officers hold memberships entitling them to cast an
aggregate of 18 1/2 votes on the proposal, representing about 1.2% of the
total votes that may be cast.
Until January 1, 2001, our board of directors was composed of twenty-seven
members, at which time the terms of nine directorships expired and ceased to
exist pursuant to our certificate of incorporation and bylaws. Some of these
directors may have held Full, Associate, GIM, IDEM or COM memberships.
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DESCRIPTION OF CAPITAL STOCK
We describe generally below the material terms of the capital stock of For-
Profit CBOT. However, this description is not complete. For a complete
description of the terms of our capital stock, we refer you to the forms of
For-Profit CBOT's amended and restated certificate of incorporation and For-
Profit CBOT's amended and restated bylaws, which are attached as Appendices D
and E, respectively, to this document. We urge you to read those documents
carefully before voting on the restructuring transactions.
For more information about our capital stock and how your rights and
obligations as stockholders will differ from your current rights and
obligations as members, see "Comparison of the Rights of Members of the CBOT
and Stockholders of For-Profit CBOT."
General
Under its certificate of incorporation, the authorized capital stock of For-
Profit CBOT will consist of:
. 100,000,000 shares of common stock, $0.001 par value per share, of which
99,996,273 shares will be designated as Class A common stock and 3,727
shares will be designated Class B common stock; and
. 10,000,000 shares of preferred stock, $0.001 par value per share.
Immediately following the completion of the restructuring transactions,
39,797,650 shares of Class A common stock, 1,402 Series B-1 shares of Class B
common stock, 779 Series B-2 shares of Class B common stock, 174 Series B-3
shares of Class B common stock, 642 Series B-4 shares of Class B common stock
and 643 Series B-5 shares of Class B common stock will be outstanding.
As described above under "The Restructuring Transactions--Reorganization of
Our Electronic Trading Business," shares of Series A convertible preferred
stock will be issued to the limited partners of Ceres in exchange for their
Ceres limited partnership interests pursuant to the Ceres merger. It is not
possible at this time to determine the exact number of shares of Series A
convertible preferred stock which will be outstanding immediately after the
completion of the restructuring transactions. However, based on the valuation
of Ceres as of December 31, 2000, 264,600 shares of Series A convertible
preferred stock would be outstanding immediately following completion of the
restructuring transactions. In addition, we currently expect that dividends on
the Series A convertible preferred stock will be paid for the foreseeable
future in the form of additional shares of Series A convertible preferred
stock. Accordingly, additional shares of Series A convertible preferred stock
will be issuable over time.
The shares of Class A common stock, Class B common stock and Series A
convertible preferred stock issued in connection with the restructuring
transactions will be validly issued, fully paid and non-assessable.
Description of Common Stock
Overview
For-Profit CBOT will have a dual-class common stock capital structure,
consisting of the following two classes of common stock:
. Class A common stock; and
. Class B common stock.
The Class A common stock of For-Profit CBOT will represent solely an equity
interest in For-Profit CBOT. The Class B common stock of For-Profit CBOT will
represent an equity interest in For-Profit CBOT, but will also represent a
membership in For-Profit CBOT, including all trading rights and privileges
associated therewith if the holder satisfies applicable membership and
eligibility requirements. The Class B common stock of For-Profit CBOT will be
issued in five series, as described below:
. Series B-1, which will, subject to satisfaction of applicable membership
and eligibility requirements, represent a membership with all trading
rights and privileges currently associated with a Full Membership in the
CBOT;
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. Series B-2, which will, subject to satisfaction of applicable membership
and eligibility requirements, represent a membership with all trading
rights and privileges currently associated with an Associate Membership
in the CBOT;
. Series B-3, which will, subject to satisfaction of applicable membership
and eligibility requirements, represent a membership with all trading
rights and privileges currently associated with a GIM Membership in the
CBOT;
. Series B-4, which will, subject to satisfaction of applicable membership
and eligibility requirements, represent a membership with all trading
rights and privileges currently associated with an IDEM Membership in the
CBOT; and
. Series B-5, which will, subject to satisfaction of applicable membership
and eligibility requirements, represent a membership with all trading
rights and privileges currently associated with a COM Membership in the
CBOT.
Dividend Rights
Subject to the limitations under Delaware law and priorities and preferences
that may apply to any outstanding shares of preferred stock, including the
Series A convertible preferred stock, holders of common stock will be entitled
to receive such dividends or other distributions as may be declared by For-
Profit CBOT's board of directors out of funds legally available therefor.
Subject to applicable law, the board of directors of For-Profit CBOT will be
able to determine, in its sole and absolute discretion, the time of
declarations and payments, and the amounts, of dividends on For-Profit CBOT
common stock. Class A common stock and Class B common stock will participate
ratably in any dividend declared by the board of directors. This means that
holders of Class A common stock and holders of Class B common stock will share
equally in all dividends, based on the number of shares held.
We do not currently anticipate that For-Profit CBOT will pay cash dividends
on its common stock in the foreseeable future.
Voting
Class A Common Stock. Unless otherwise required by the certificate of
incorporation of For-Profit CBOT, the terms of any preferred stock or
applicable law, with the exception of certain matters reserved to the holders
of Class B common stock as described below under "--Description of Additional
Provisions of Class B Common Stock--Voting on Core Rights," holders of Class A
common stock will be entitled to one vote per share with respect to each matter
presented to the stockholders of For-Profit CBOT on which the holders of common
stock of For-Profit CBOT are entitled to vote generally, including the election
of directors, amendments to the certificate of incorporation, mergers, sales of
all or substantially all of the corporate assets or property or a dissolution.
Except as may be provided in connection with any preferred stock, including the
Series A convertible preferred stock, in a certificate of designation filed
pursuant to Delaware law, or as may otherwise be required by Delaware law or
the certificate of incorporation of For-Profit CBOT, the Class A common stock
will be the only capital stock of For-Profit CBOT entitled to vote generally in
the election of directors and on all other matters presented to the
stockholders of For-Profit CBOT. Except as may otherwise be required by
Delaware law, holders of Series B-1 and B-2 shares of Class B common stock will
have the right to approve changes that would adversely affect certain specified
core rights associated with the trading rights and privileges of the Class B
common stock. For more information, see "--Description of Additional Provisions
of Class B Common Stock--Voting on Core Rights." The Class A common stock will
not have cumulative voting rights.
Class B Common Stock. With the exception of the matters reserved to the
holders of Class B common stock as described below under "--Description of
Additional Provisions of Class B Common Stock--Voting on Core Rights," and as
may otherwise be required by Delaware law, holders of Class B common stock will
have no voting rights. The holders of Series B-1 and B-2 shares of Class B
common stock will have the right
109
to approve certain changes to our certificate of incorporation, bylaws and
rules and regulations relating to the core rights of Class B common
stockholders as described below under "--Description of Additional Provisions
of Class B Common Stock--Voting on Core Rights." In voting on these matters and
any amendment to the certificate of incorporation required by Delaware law to
be submitted to a class vote, holders of Series B-1 shares of Class B common
stock will be entitled to one vote per share and holders of Series B-2 shares
of Class B common stock will be entitled to one-sixth of one vote per share. As
described below under "--Special Class and Series Voting Rights," in the event
that a class vote of the Class B common stockholders is required by Delaware
law in connection with an amendment to our certificate of incorporation, the
holders of Series B-3, Series B-4 and Series B-5 shares of Class B common stock
will each be entitled to one-tenth of one vote per share in any such class
vote.
Special Class and Series Voting Rights. Under Delaware law, the holders of
the outstanding shares of each class of For-Profit CBOT common stock will be
entitled to vote as a class upon any proposed amendment to the certificate of
incorporation which would:
. increase or decrease the aggregate number of authorized shares of such
class;
. increase or decrease the par value of the shares of such class; or
. alter or change the powers, preferences or special rights of the shares
of such class so as to affect them adversely.
In the event that a class vote of the Class B common stock is required by
Delaware law in connection with any such amendment of our certificate of
incorporation, holders of Class B common stock will be entitled to the per
share voting power illustrated below:
[Download Table]
Series of Per Share
Class B Stock Voting Power
------------- ------------
B-1 1
B-2 1/6
B-3 1/10
B-4 1/10
B-5 1/10
In addition, if any proposed amendment to the certificate of incorporation
would alter or change the powers, preferences or special rights of one or more
series of any class, including each series of the Class B common stock, so as
to affect them adversely, but not so affect the entire class, then only the
shares of the series so affected by the proposed amendment will be considered a
separate class for purposes of these special class voting rights. In the event
that a series vote of one or more series of the Class B common stock is
required by Delaware law in connection with any such amendment of our
certificate of incorporation, holders of the shares of any such series will be
entitled to one vote per share on such matters.
The special class and series voting rights will result from the application
of certain provisions of Delaware law which relate to for-profit, stock
corporations. This result is inconsistent with the result that would likely be
obtained under our current certificate of incorporation, bylaws and rules and
regulations, which provide that only Full Members and Associate Members are
entitled to vote, based on their respective per share voting power, including
with respect to such amendments to our certificate of incorporation. The
certificate of incorporation of For-Profit CBOT will include unique provisions
that are intended to protect certain core rights associated with the trading
rights and privileges of Class B common stockholders. These provisions reflect
the unique circumstances of the CBOT and are not customary in other corporate
charters. Due to the unique nature of these provisions, there is little
guidance under applicable law as to how they would be applied in specific
factual contexts. Among other things, it may be difficult to assess the impact
of possible changes to these provisions on individual classes or series of
stock. As a result, there may be uncertainty under certain circumstances as to
whether any special class or series votes would be required in order to approve
an amendment of the certificate of incorporation of For-Profit CBOT to amend,
modify or repeal such provisions.
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Board of Directors. The certificate of incorporation and bylaws of For-
Profit CBOT will provide that the current board of directors will continue to
serve as directors until such time as the board of directors calls for a
special election, which we expect will occur as soon as reasonably practicable
following completion of the restructuring transactions. At that time, the size
of the board of directors will be reduced to nine members. The Class A common
stockholders will elect eight members of the new nine-member board of
directors, which will be composed of:
. two independent directors;
. five directors who are holders of Class B common stock and who meet the
membership and eligibility requirements of For-Profit CBOT;
. one at-large director; and
. the chairman of the board of directors.
Neither the at-large director nor the chairman will be subject to any
qualifications. However, from and after the special election of directors to be
held following completion of the restructuring transactions and until the
second annual meeting of stockholders thereafter, which we currently expect to
be held in the second or third quarter of 2003, the position of the chairman
will be held by the person who held the office of chairman of the board of
directors immediately prior to such election, and such person will not be
elected by the stockholders but rather will hold the position of the chairman
by virtue of his holding of the office of chairman of the board of directors.
This provision is intended to ensure that the current chairman of the board
will serve as the chairman for a period of time at least equal to the term for
which he was elected in order to provide for a smooth transition of the
corporation through the restructuring process. All of the other directors will
be elected by the stockholders, as will the chairman, commencing with the
second annual meeting of stockholders following completion of the restructuring
transactions.
In addition, the board of directors will be classified or staggered with
respect to terms of office. This means that the board will be divided into
three classes of directors, with the term of each class of directors expiring
in successive years over a three-year period. Initially, the three classes of
directors will consist of:
. one independent director and two Class B directors, each to serve a one-
year term;
. one independent director, one Class B director and the chairman, each to
serve a two-year term; and
. the at-large director and two Class B directors, each to serve a three-
year term.
At each annual election following the special election, each class of directors
whose term has expired will stand for election for a new three-year term. We
currently expect that the first annual election following the special election
to be held after completion of the restructuring transactions will occur in the
second or third quarter of 2002.
Conversion Rights of Series B-3 Shares. Two Series B-3 shares of Class B
common stock will be convertible at the option of their holder, at any time,
into one Series B-2 share of Class B common stock. No fractional Series B-2
shares of Class B common stock will be issued upon any such conversion of
Series B-3 shares of Class B common stock. This convertibility feature is
designed to facilitate our current plan to phase out GIM memberships and, after
completion of the restructuring transactions, Series B-3 shares of Class B
common stock. Upon conversion of such Series B-3 shares, they will be retired
and will not be reissued.
No Conversion, Preemptive or Subscription Rights
Except as otherwise described above under "--Conversion Rights of Series B-3
Shares," holders of Class A common stock and Class B common stock will have no
conversion, preemptive or subscription rights.
Liquidation Rights
Upon any liquidation, dissolution or winding up of For-Profit CBOT, whether
voluntary or involuntary, holders of Class A common stock and Class B common
stock of For-Profit CBOT will be entitled to receive
111
pro rata such assets as are available for distribution to stockholders after
there shall have been paid or set apart for payment the full amounts necessary
to satisfy any preferential or participating rights to which holders of each
outstanding series of preferred stock, including the Series A convertible
preferred stock, are entitled by the terms of such series. In other words, each
share of Class A common stock and Class B common stock shall have equal
liquidation rights.
Description of Additional Provisions of Class B Common Stock
The Class B common stock will be divided into five series, as follows:
[Download Table]
Trading Rights Number of Votes
Series Number of Shares and Privileges Per Share on "Core Rights"
------ ---------------- -------------- --------------------------
B-1 1,402 Full 1
B-2 779 Associate 1/6
B-3 174 GIM --
B-4 642 IDEM --
B-5 643 COM --
The Class B common stock will, subject to satisfaction of applicable
membership and eligibility requirements, represent a membership, including all
trading rights and privileges appurtenant to that membership, in For-Profit
CBOT. As a result, a holder of a share of Class B common stock who meets For-
Profit CBOT's membership and eligibility requirements will be a "member of a
contract market" within the meaning of the Commodity Exchange Act. Under the
Commodity Exchange Act, the term "member of a contract market" means an
individual, association, partnership, corporation, or trust owning or holding
membership in, or admitted to membership representation on, a contract market
or having trading privileges thereon. Such holders of shares of Class B common
stock will be members of For-Profit CBOT for purposes of For-Profit CBOT's
rules and regulations, including those relating to exchange floor operations
and procedures, futures commission merchants, disciplinary proceedings and
arbitration of member controversies.
Trading Rights and Privileges. Each series of Class B common stock will have
certain trading rights and privileges that correspond to trading rights and
privileges of the five current classes of CBOT members as set forth above. For-
Profit CBOT's certificate of incorporation, bylaws and rules and regulations
will provide as follows:
. Trading Rights and Privileges. Each holder of a share of Class B common
stock who meets For-Profit CBOT's membership and eligibility criteria
will be entitled to all trading rights and privileges appurtenant to
those shares, which would result in the holder being a "member of a
contract market" within the meaning of the Commodity Exchange Act and a
member of For-Profit CBOT for purposes of For-Profit CBOT's rules and
regulations. The trading rights and privileges associated with each
series of Class B common stock will generally correspond to one of our
five current classes of members and will have the rights and privileges
of the applicable class of membership.
While we believe that the holders of Series B-1 shares of Class B common
stock will retain the exercise right with respect to the Chicago Board
Options Exchange after the restructuring transactions, the Chicago Board
Options Exchange has challenged this position and, accordingly, we cannot
provide any assurances in this regard. For more information relating to
litigation and other matters concerning this exercise right, see "Risk
Factors--Risks Relating to the Restructuring Transactions--The Chicago Board
Options Exchange Could Be Successful in Challenging the "Exercise Right,'
Which Allows Our Full Members to Obtain Trading Privileges at the Chicago
Board Options Exchange, and the Exercise Right Could Be Extinguished or
Terminated."
. Electronic Trading Rights and Privileges. A holder of a share of Class B
common stock who meets For-Profit CBOT's membership and eligibility
requirements also will be entitled to trade electronically through the
electronic trading system of For-Profit CBOT, which will be operated by
eCBOT after the restructuring transactions, with each series of Class B
common stock having trading rights and privileges that generally
correspond to the trading rights and privileges currently applicable to
the membership
112
associated with that series. This right is intended to protect the holders
of those shares from subsequent changes in the eCBOT's access policy.
Although no such changes are currently anticipated, we cannot assure you
that changes in eCBOT's access policy will not be considered or
implemented in the future.
. Use and Leasing of Trading Privileges. Each holder of a share of Class B
common stock who meets For-Profit CBOT's membership and eligibility
requirements may use the trading rights and privileges associated with
that share or may delegate those rights and privileges to another person,
provided that such person also satisfies the applicable membership and
eligibility requirements imposed by For-Profit CBOT. We currently expect
that these requirements will be substantially the same as the
requirements set forth in our current rules.
Voting on Core Rights. Except as may otherwise be required by Delaware law,
holders of Series B-1 and B-2 shares of Class B common stock will have the
right to approve amendments to the certificate of incorporation, bylaws and
rules and regulations involving changes that would adversely affect specified
core rights relating to certain trading rights and privileges associated with
the Class B common stock. These core rights will consist of:
. the allocation of products which a holder of any series of Class B
common stock is permitted to trade on For-Profit CBOT's exchange
facilities, including both the open-outcry and electronic trading
systems;
. the requirement that holders of shares of Class B common stock who meet
the applicable membership and eligibility requirements will be charged
transaction fees for trades of For-Profit CBOT's products for their
accounts that are lower than the transaction fees charged to any
participant who is not a holder of Class B common stock for the same
products, whether trading utilizing the open outcry trading system or
the electronic trading system;
. the number of authorized shares of any series of Class B common stock;
. the membership and eligibility requirements to hold shares of any series
of Class B common stock or to exercise the associated trading rights or
privileges; and
. 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
the holders of Series B-1 and Series B-2 shares of Class B common stock.
This commitment to maintain open outcry markets is described further
below under "--Commitment to Maintain Open Outcry Markets."
The affirmative vote of a majority of the voting power of the then outstanding
shares of the Series B-1 shares and the Series B-2 shares of Class B common
stock, voting together as a single class based on their respective per share
voting power, will be required in order to approve any amendments to the
certificate of incorporation, bylaws and rules and regulations involving
changes that would adversely affect these core rights. Based on the respective
voting power of the two series of Class B common stock, any change adversely
affecting the core rights may be effected by the approval of the holders of
Series B-1 shares of Class B common stock even though the holders of the
Series B-2 shares of Class B common stock voted against the change. This
result is consistent with the result that would be obtained under our existing
certificate of incorporation, bylaws and rules and regulations. Except as may
otherwise be required by Delaware law, including the special class and series
voting rights described above, holders of Class A common stock and holders of
Series B-3, B-4 and B-5 shares of Class B common stock will not have the right
to vote on amendments to the certificate of incorporation, bylaws, rules and
regulations involving changes that would adversely affect these core rights.
Commitment to Maintain Open Outcry Markets. The certificate of
incorporation of For-Profit CBOT will provide that, subject to the following
terms and conditions, the CBOT 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.
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Notwithstanding the foregoing, the board of directors may discontinue any
open outcry market at such time and in such manner as it may determine if the
board of directors 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 shares of
the Series B-1 and the Series B-2, voting together as a single class based on
their respective per share voting power, approve the discontinuance of such
open outcry market.
For purposes of the foregoing, an open outcry market will be deemed "liquid"
for so long as it meets either of the following tests, in each case as measured
on a quarterly basis:
. if a comparable exchange-traded product exists, the open outcry market
has maintained at least 30 percent of the average daily volume of such
comparable product, including for calculation purposes, volume from
exchange-for-physicals transactions in such open outcry market; or
. if no comparable exchange-traded product exists, the open outcry market
has maintained at least 40 percent of the average quarterly volume in
that market as maintained by the CBOT in 2000, including, for calculation
purposes, volume from exchange-for-physicals transactions in such open
outcry market.
Preferred Stock
For-Profit CBOT will be authorized to issue up to 10,000,000 shares of
preferred stock. The For-Profit CBOT certificate of incorporation will
authorize the board, without approval of the stockholders, to issue these
shares from time to time in one or more series, to establish the number of
shares to be included in each series, to fix the rights, preferences and
privileges of the shares of each wholly unissued series and any of its
qualifications, limitations or restrictions. Such preferred stock is sometimes
referred to as "blank check" preferred stock.
Among the specific matters that may be determined by the board in connection
with the issuance of such preferred stock are the following:
. the designation of each series;
. the number of shares of each series;
. the rate of dividends, if any;
. whether dividends, if any, shall be cumulative or non-cumulative;
. the terms of redemption, if any;
. the amount payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of For-Profit CBOT;
. rights and terms of conversion or exchange, if any;
. restrictions on the issuance of shares of the same series or any other
series, if any; and
. voting rights, if any.
Except as otherwise provided in the terms of any such series, the board of
directors may increase or decrease the number of shares of any series, but not
below the number of shares of that series then outstanding, without any further
vote or action by the stockholders of For-Profit CBOT. The board may authorize
the issuance of preferred stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders of shares of
Class A common stock and Class B common stock.
Although no shares of preferred stock other than the Series A convertible
preferred stock will be outstanding and we have no current plans to issue any
other preferred stock, the issuance of shares of preferred stock, or the
issuance of rights to purchase such shares, could be used to discourage an
unsolicited acquisition proposal. For example, a business combination could be
impeded by the issuance of a series of preferred stock containing class voting
rights that would enable the holder or holders of such series to block any such
transaction. Alternatively, a business combination could be facilitated by the
issuance of a series of preferred stock having sufficient voting rights to
provide a required percentage vote of the stockholders. In addition,
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under certain circumstances, the issuance of preferred stock could adversely
affect the voting power and other rights of the holders of common stock.
Although the board of directors of For-Profit CBOT will be required to make any
determination to issue any such stock based on its judgment as to the best
interests of For-Profit CBOT and the stockholders of For-Profit CBOT, it could
act in a manner that would discourage an acquisition attempt or other
transaction that some, or a majority, of the stockholders might believe to be
in their best interests or in which stockholders might receive a premium for
their stock over prevailing market or other prices of such stock. We do not
currently intend to seek stockholder approval prior to the issuance of
currently authorized stock, unless otherwise required by law or other
applicable requirements.
One of the anticipated benefits of the restructuring transactions is the
positioning of For-Profit CBOT to better access capital markets, and For-Profit
CBOT may, in the future, issue shares of preferred stock to one or more private
investors in capital-raising transactions. However, we cannot provide any
assurances in this regard.
Series A Convertible Preferred Stock
Of the authorized shares of preferred stock, certain shares will be
designated as Series A Cumulative Convertible Preferred Stock. These shares of
Series A convertible preferred stock will be issued to members who are limited
partners of Ceres in exchange for their limited partnership interests in
connection with the reorganization of our electronic trading business. In
particular, the Ceres limited partners will receive these shares of Series A
convertible preferred stock pursuant to the terms of the Ceres merger. It is
not possible at this time to determine the exact number of shares of Series A
convertible preferred stock which will be outstanding immediately after the
completion of the restructuring transactions. However, based on the valuation
of Ceres as of December 31, 2000, 264,600 shares of Series A convertible
preferred stock would be issued in connection with the restructuring
transactions. For more information regarding the reorganization of our
electronic trading business, including the Ceres merger, see "The Restructuring
Transactions--Description of the Restructuring Transactions--Reorganization of
Our Electronic Trading Business." In addition, as described below under "--
Dividends," we currently expect that dividends on the Series A convertible
preferred stock will be paid for the foreseeable future in the form of
additional shares of Series A convertible preferred stock. Accordingly,
additional shares of Series A convertible preferred stock will be issuable over
time.
This summary description of the Series A convertible preferred stock is not
complete. The terms of the Series A convertible preferred stock are set forth
in the form of certificate of designation relating to the Series A convertible
preferred stock, which has been filed as an exhibit to the registration
statement of which this document is a part. We urge you to review and consider
carefully that document before voting on the restructuring transactions.
The material terms of the Series A convertible preferred stock are
summarized below:
Dividends. Subject to the rights of any senior preferred stock that may
be issued, the holders of Series A convertible preferred stock will be
entitled to receive, out of funds legally available for such purposes,
annual dividends of $8.00 per share, and the dividends will be prior and in
preference to payment of dividends on the common stock of For-Profit CBOT,
including both the Class A common stock and the Class B common stock.
Dividends will be cumulative and become payable when, as and if declared by
the Board, on a quarterly basis, on or about March 31, June 30, and
September 30 and December 31 of each year.
Dividends on Series A convertible preferred stock may be paid, as
determined in the sole and absolute discretion of the board of directors,
either in cash or in additional shares of Series A convertible preferred
stock. We currently expect that dividends on the Series A convertible
preferred stock will be paid for the foreseeable future in the form of
additional shares of Series A convertible preferred stock. The board may,
in its sole and absolute discretion, elect to issue fractional shares of
Series A convertible preferred stock. Until all accrued dividends are paid
to the holders of Series A convertible preferred stock, no dividends may be
paid on our common stock, including both the Class A common stock and the
Class B common stock, or any other security ranking junior to the Series A
convertible preferred stock.
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Liquidation Preference. In the event of any liquidation, dissolution or
winding up of For-Profit CBOT, the holders of the Series A convertible
preferred stock will receive, subject to the rights of any senior preferred
stock that may be issued, and prior and in preference to any payment to the
holders of common stock, including both the Class A common stock and the
Class B common stock, or any other security ranking junior to the Series A
convertible preferred stock with respect to liquidation, the sum of $100
per share, plus an amount equal to any dividends accrued but not paid per
share on the date fixed for the distribution, for each share of Series A
convertible preferrred stock. We sometimes refer to this amount in this
document as the "Series A convertible preferred liquidation preference."
If the assets available for distribution to holders of the Series A
convertible preferred stock are insufficient to permit the payment in full
of the Series A convertible preferred liquidation preference, any available
assets would be distributed ratably on the basis of liquidation preference
among the holders of shares of Series A convertible preferred stock and
shares of any capital stock ranking on a parity with the Series A
convertible preferred stock. Following payment of the Series A convertible
preferred liquidation preference, any assets that remain in For-Profit CBOT
may be paid to the holders of the common stock and any other junior
securities then outstanding.
Holder Conversion Rights. The shares of Series A convertible preferred
stock will become convertible, at each holder's option, at and after such
time, if any, as either:
. For-Profit CBOT completes an underwritten public offering of Class A
common stock in which the net proceeds are at least $25 million; or
. the company conducting all or substantially all of the electronic
trading business of For-Profit CBOT completes an underwritten public
offering of equity interests and the net proceeds of such offering
are at least $25 million.
For purposes of this provision, "substantially all" means 80% or more of
the electronic trading business of For-Profit CBOT, based on the fair
market value, as determined by the board of directors of For-Profit CBOT in
its sole and absolute discretion, of the assets, both tangible and
intangible, of the electronic trading business as of the time that the
proposed transaction is approved by the board of directors.
The number of shares of Class A common stock into which each share of
Series A convertible preferred stock will be convertible will equal the
Series A convertible preferred liquidation preference, divided by the value
of a share of Class A common stock as determined under the terms of the
Series A convertible preferred stock. If the conversion right was triggered
as a result of a qualified public offering by For-Profit CBOT of Class A
common stock, the value of the Class A common stock will be determined
based on the price at which shares of Class A common stock were sold to the
public in such offering. In all other cases, the value of such shares of
Class A common stock will be determined based, if the shares of Class A
common stock are then publicly traded, on a ten-day average of the closing
prices for such stock or, if not then publicly traded, on the fair market
value as determined by the board of directors in its sole and absolute
discretion.
This convertibility feature will be subject to certain antidilution
protections in the event of certain changes affecting the Class A common
stock. For-Profit CBOT may pay cash instead of issuing any fractional
shares of Class A common stock upon any conversion of the Series A
convertible preferred stock.
Voting. As required under Delaware law, so long as any share of Series A
convertible preferred stock is outstanding, in addition to any vote or
consent of stockholders required by law or our certificate of incorporation
or bylaws, the vote of at least a majority of the votes entitled to be cast
by the Series A convertible preferred stockholders will be required for any
amendment to the certificate of designations setting forth the terms of the
Series A convertible preferred stock, the certificate of incorporation or
the bylaws of For-Profit CBOT that would adversely affect the powers,
preferences or special rights of the Series A convertible preferred stock;
provided that no vote will be required under the terms of the Series A
convertible preferred stock in connection with any action in which
provision is made for the redemption of all outstanding shares of Series A
convertible preferred stock. Other than in connection with a merger
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involving For-Profit CBOT, the authorization or creation of a class of
capital stock senior to or on parity with the Series A convertible
preferred stock as to dividend or liquidation payments will be deemed to be
an amendment that adversely affects the powers, preferences or special
rights of the Series A convertible preferred stock. Except as may otherwise
be required by law, the Series A convertible preferred stock will have no
other voting rights.
Redemption Rights. For-Profit CBOT will be entitled at any time to
redeem all or any part of the outstanding shares of Series A convertible
preferred stock. Each share of Series A convertible preferred stock will be
redeemable for a redemption price payable in cash, property or securities,
which may include shares of Class A common stock or shares of capital stock
of eCBOT, in an amount equal to the Series A convertible preferred
liquidation preference. The form in which any redemption price will be paid
will be determined by the board of directors of For-Profit CBOT in its sole
and absolute discretion. In addition, For-Profit CBOT will be required to
redeem all of the Series A convertible preferred stock upon a separation of
all or substantially all of the electronic trading business from For-Profit
CBOT, whether by means of a spin-off, split-off, transfer of assets or
other similar transaction. For purposes of this provision, "substantially
all" means 80% or more of the electronic trading business of For-Profit
CBOT, based on the fair market value, as determined by the board of
directors of For-Profit CBOT in its sole and absolute discretion, of the
assets, both tangible and intangible, of the electronic trading business as
of the time that the proposed transaction is approved by the board.
To the extent that the shares of Series A convertible preferred stock
are redeemed for shares of Class A common stock, the value of the Class A
common stock will be determined based, if publicly traded, on a ten-day
average of the closing prices for such stock or, if not then publicly
traded, on the fair market value, as determined by the board of directors
in its sole and absolute discretion. Any partial redemption of the Series A
convertible preferred stock will be made pro rata among the holders of such
stock.
Transfer Restrictions
Class A Common Stock. The shares of Class A common stock will be subject to
restriction on transfer for the first 180 days following completion of the
restructuring transactions, except that, generally speaking, during this
period, stockholders may transfer all, but not less than all, of the shares of
Class A common stock associated with a share of Class B common stock if all of
such shares of Class A common stock are transferred together with the
associated share of Class B common stock. After expiration of such 180-day
period, the Class A common stock generally will be freely transferable, in
whole or in part, with or without the associated share of Class B common stock.
The certificate of incorporation will grant the board of directors authority to
remove or reduce this transfer restriction if the board determines, in its sole
and absolute discretion, that such action is appropriate.
You should understand that the Chicago Board Options Exchange has stated
publicly its view that, if consummated, the restructuring transactions would
extinguish the exercise right of our Full Members under certain circumstances.
In particular, the Chicago Board Options Exchange has stated recently in a
filing with the SEC seeking a rule change that the exercise right will be
terminated for any Full Member who sells any of the shares of Class A common
stock associated with a share of Class B common stock received in the
restructuring transactions without also selling all of the other shares of
Class A common stock and the associated share of Class B common stock. While we
do not believe that its position is legally valid, we cannot predict the
outcome of the Chicago Board Options Exchange's SEC proceeding seeking approval
of its proposed rule change. If the Chicago Board Options Exchange were to
prevail with the SEC and have its rule change approved, it is possible that the
exercise right could be terminated or that Full Members could be prevented from
exercising the right in the future if they transfer any of their shares of
Class A common stock associated with a share of Class B common stock without
also transferring all of their other shares of Class A common stock and their
associated share of Class B common stock. You should give careful consideration
to this matter before deciding to transfer any of your shares of Class A common
stock without also transferring all of your other shares of Class A common
stock and your associated share of Class B common stock.
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For more information, see "Risk Factors--Risks Relating to the
Restructuring--The Chicago Board Options Exchange Could Be Successful in
Challenging the "Exercise Right,' Which Allows Our Full Members to Obtain
Trading Privileges at the Chicago Board Options Exchange, and the Exercise
Right Could Be Extinguished or Terminated."
Class B Common Stock. Although the shares of Class B common stock generally
will not be subject to any transfer restriction, exercise of the trading
privileges associated with Class B common stock will be subject to
substantially the same process that currently applies to the membership
associated with those shares. Under that process, any adult, other than an
employee of For-Profit CBOT, of good character, reputation, financial
responsibility and credit will be eligible for election to membership in For-
Profit CBOT. Candidates will be reviewed to determine whether they meet
applicable membership requirements in accordance with the rules and
regulations of For-Profit CBOT. Consistent with our present practice, a person
wishing to exercise trading rights and privileges in For-Profit CBOT will be
required to agree to be bound by the certificate of incorporation, bylaws,
rules and regulations adopted by the board with respect to those rights and
privileges.
Series A Convertible Preferred Stock. The shares of Series A convertible
preferred stock generally will
not be subject to any restrictions on transfer.
In addition to the restrictions discussed above, shares of Class A common
stock, Class B common stock and Series A convertible preferred stock received
in connection with the restructuring transactions by "affiliates" may be
resold only pursuant to further registration under the Securities Act or in
transactions that are exempt from registration under the Securities Act.
Other Provisions
For-Profit CBOT will establish a number of change of control provisions
that may have the effect of encouraging persons considering unsolicited tender
offers or other unilateral takeover proposals to negotiate with For-Profit
CBOT's board of directors rather than pursue non-negotiated takeover attempts.
Some of these provisions will be implemented pursuant to the certificate of
incorporation and bylaws of For-Profit CBOT and others will be implemented
independently. These provisions will include the following:
Advance Notice Procedures. For-Profit CBOT's bylaws will establish
advance notice procedures with regard to stockholder proposals relating to
the nomination of candidates for election as directors or new business to
be brought before meetings of stockholders. For-Profit CBOT's bylaws will
contain provisions requiring that advance notice be delivered to For-Profit
CBOT of any business to be brought by a stockholder before an annual
meeting of stockholders and providing for certain procedures to be followed
by stockholders in nominating persons for election to the For-Profit CBOT
board of directors.
Generally, such advance notice provisions will require that a
stockholder must give written notice to the secretary of For-Profit CBOT
not less than 45, nor more than 75, days prior to the first anniversary of
the date on which For-Profit CBOT first mailed its proxy materials for the
preceding year's annual meeting of stockholders. In each case, the notice
must set forth specific information regarding such stockholder and each
director nominee or other business proposed by such stockholder, as
applicable, as provided in the bylaws. Except as described below with
respect to nominations by stockholders, for persons to be elected to the
board of directors of For-Profit CBOT, stockholders will not be permitted
to make proposals, or bring other business, to a special meeting of
stockholders.
For our first annual meeting following the restructuring transactions,
which will be held in 2002, notice must be given no earlier than ,
2002 and no later than , 2002.
Nominations by stockholders for persons to be elected to the For-Profit
CBOT board of directors at a special meeting of the stockholders, if
directors are to be elected at such meeting, will require that a
stockholder give written notice to the Secretary of For-Profit CBOT not
later than the later of the 90th day prior to such special meeting or the
10th day following the day on which public announcement is first
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made of the date of the special meeting and of the nominees proposed by the
For-Profit CBOT board of directors.
Special Meetings of Stockholders. For-Profit CBOT's certificate of
incorporation and bylaws will not provide stockholders the right to call a
special meeting of stockholders. The bylaws will expressly provide that
only the chairman of the board, the president or the board of directors may
call special meetings of the stockholders.
No Action by Written Consent of Stockholders. For-Profit CBOT's
certificate of incorporation will require that all stockholder actions must
be taken by a vote of the stockholders at an annual or special meeting, and
will not permit the stockholders to take action by written consent without
a meeting.
Amendment of Certificate of Incorporation. For-Profit CBOT's certificate
of incorporation will generally require the approval of not less than a
majority of the voting power of all then-outstanding shares of stock of
For-Profit CBOT entitled to vote generally in the election of directors,
voting together as a single class, in order to amend the certificate of
incorporation.
Amendment of Bylaws. For-Profit CBOT's certificate of incorporation will
generally require the approval of not less than two-thirds of the voting
power of all then-outstanding shares of stock of For-Profit CBOT entitled
to vote generally in the election of directors, voting together as a single
class, in order to adopt, repeal or amend the bylaws in response to a
stockholder proposal. This provision will make it more difficult to dilute
the change of control effects of the bylaws of For-Profit CBOT. The
certificate of incorporation will permit the board to amend the bylaws
without any stockholder vote, except where a vote of the holders of Series
B-1 and Series B-2 Class B common stock is required by the certificate of
incorporation as described elsewhere in this document or a vote of a series
of preferred stock is required by the terms of such series.
Delaware Anti-Takeover Statute. For-Profit CBOT will elect to be subject
to a Delaware anti-takeover law. Subject to certain exceptions, this
statute prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless:
. prior to such date, the board of directors of the corporation
approved either the business combination or the transaction which
resulted in the stockholder's becoming an interested stockholder;
. upon completion of the transaction which resulted in the
stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding, for purposes of determining the number of shares
outstanding, those shares owned by persons who are directors and
also officers and by employee stock plans in which employee
participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender
or exchange offer; or
. on or after such date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock which is not owned
by the interested stockholder.
For purposes of this statute, a "business combination" includes a
merger, asset sale or other transaction resulting in a financial benefit to
the interested stockholder, and an "interested stockholder" is a person
who, together with affiliates and associates, owns, or within three years
prior to the date of determination whether the person is an "interested
stockholder," did own, 15% or more of the corporation's voting stock.
Stockholder Rights Plan. It is currently anticipated that the board of
directors of For-Profit CBOT would be asked to consider, and would likely
adopt, a stockholder rights plan in connection with any underwritten public
offering of its common stock. The basic objective of a rights plan is to
provide for an
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appropriate role for the board of directors in the event of a potential
change of control. A rights plan seeks to protect the corporation and its
stockholders from abusive takeover measures to maximize stockholder value
if the corporation is sold and to encourage potential acquirors to
negotiate with the board of directors rather than make an unsolicited
takeover proposal. A rights plan aims to accomplish these goals by making
attempts to acquire control of the corporation without the board's approval
unacceptably expensive and dilutive to the bidder. This is implemented by
the issuance to each stockholder of one contingent stock purchase right,
which would be triggered by certain events generally involving the
acquisition by a third party of a significant amount of the corporation's
stock. You should understand that we do not have any current plan or
intention to conduct any such offering of common stock.
Limitation of Liability of Directors
The certificate of incorporation of For-Profit CBOT will provide, as
authorized by Delaware law, that a director of For-Profit CBOT will not be
personally liable to For-Profit CBOT or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability imposed by
law, as in effect from time to time:
. for any breach of the director's duty of loyalty to For-Profit CBOT or
its stockholders;
. for any act or omission not in good faith or which involved intentional
misconduct or a knowing violation of law;
. for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided by Delaware law; or
. for any transaction from which the director derived an improper personal
benefit.
The inclusion of this provision in our certificate of incorporation may have
the effect of reducing the likelihood of derivative litigation against
directors, and may discourage or deter stockholders or management from bringing
a lawsuit against directors for breach of their duty of care, even though such
an action, if successful, might otherwise have benefitted For-Profit CBOT and
its stockholders.
Our certificate of incorporation and bylaws will provide that For-Profit
CBOT will indemnify its directors and executive officers and may indemnify its
other officers and employees and other agents to the fullest extent permitted
by law. The bylaws will also permit For-Profit CBOT to secure insurance on
behalf of any officer, director, employee or other agent for any liability
arising out of his or her actions in that capacity, regardless of whether the
bylaws would permit indemnification.
Transfer Agent
We currently anticipate that For-Profit CBOT will serve as the transfer
agent for the Class A common stock, Class B common stock and the Series A
convertible preferred stock. However, we currently expect to engage a third
party to serve as transfer agent and registrar for the Class A common stock
within a reasonable period of time following the elimination of the
restrictions on the transfer of the Class A common stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Class A Common Stock
The 39,797,650 shares of our Class A common stock to be distributed in
connection with the restructuring transactions will be subject to a complete
restriction on transfer during the 180-day period following their distribution,
except that stockholders may transfer all, but not less than all, of their
shares of Class A common stock during this period if all such shares are
transferred together with the associated share of Class B common stock. After
expiration of such 180-day period, the shares of Class A common stock will be
freely tradable without restriction under the Securities Act, except for any
such shares which may be received by "affiliates" as defined under the
Securities Act.
Class A common stock received in connection with the restructuring
transactions by "affiliates" may be resold only pursuant to further
registration under the Securities Act or in transactions that are exempt from
registration under the Securities Act.
Sales of substantial amounts of our Class A common stock in the open market,
or the availability of such shares for sale, could adversely affect the price
of our Class A common stock and/or our other capital stock.
You should understand that the Chicago Board Options Exchange has stated
publicly its view that the exercise right will be terminated for any Full
Member who sells any of the shares of Class A common stock associated with a
share of Class B common stock received in the restructuring transactions
without also selling all of the other shares of Class A common stock and the
associated share of Class B common stock. While we do not believe that the
Chicago Board Options Exchange's position is legally valid, we cannot provide
you any assurances in this regard. Thus, it is possible that the exercise right
could be terminated or that Full Members could be prevented from exercising the
right in the future if they transfer any of their shares of Class A common
stock associated with a share of Class B common stock without also transferring
all of their other shares of Class A common stock and their associated share of
Class B common stock. You should give careful consideration to this matter
before deciding to transfer any of your shares of Class A common stock without
also transferring all of your other shares of Class A common stock and your
associated share of Class B common stock.
For more information, see "Risk Factors--Risks Relating to the
Restructuring--The Chicago Board Options Exchange Could Be Successful in
Challenging the "Exercise Right,' Which Allows Our Full Members to Obtain
Trading Privileges at the Chicago Board Options Exchange, and the Exercise
Right Could Be Extinguished or Terminated."
Class B Common Stock
The 3,640 shares of our Class B common stock to be initially distributed in
connection with the restructuring transactions will not be subject to transfer
restrictions following the completion of the restructuring transactions, except
for any such shares which may be received by "affiliates." Such shares will be
subject to the restrictions described above under "--Class A Common Stock." In
addition, transfers of shares of Class B common stock and exercise of the
trading privileges associated with Class B common shares will be subject to
substantially the same process as applies to the current memberships associated
with those shares.
Under that process, any adult, other than an employee of For-Profit CBOT, of
good character, reputation financial responsibility and credit will be eligible
to become a member in For-Profit CBOT. A committee of For-Profit CBOT will
review applicants and, if appropriate, conduct proceedings to determine whether
candidates meet applicable membership requirements. Consistent with our present
practice, a person wishing to exercise trading privileges of For-Profit CBOT
will be required to agree to be bound by the bylaws, rules and regulations
adopted by the board with respect to those privileges.
Sales of substantial amounts of our Class B common stock, including one or
more series, or the availability of such shares for sale, could adversely
affect the price of our Class B common stock, or one or more series, and/or our
other capital stock.
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Series A Convertible Preferred Stock
The shares of Series A convertible preferred stock to be distributed
pursuant to the Ceres merger in connection with the restructuring transactions,
as well as shares of Series A convertible preferred stock issued in payment of
dividends on such shares, will generally be freely tradable without restriction
under the Securities Act, except for any such shares which may be received by
"affiliates." Such shares will remain subject to restrictions as described
above under "--Class A Common Stock."
Sales of substantial amounts of our Series A convertible preferred stock in
the open market, or the availability of such shares for sale, could adversely
affect the price of our Series A convertible preferred stock and/or our other
capital stock.
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COMPARISON OF THE RIGHTS OF MEMBERS OF THE CBOT AND
STOCKHOLDERS OF FOR-PROFIT CBOT
Overview
As a result of the restructuring transactions, the CBOT will change its
status from that of a Delaware nonstock, not-for-profit corporation to that of
a Delaware stock, for-profit corporation. In addition, in connection with the
restructuring transactions, our board of directors has adopted and we are
proposing certain significant changes to our certificate of incorporation,
bylaws and rules and regulations. Generally speaking, these changes are
designed to implement a more modern and efficient corporate governance
structure. After the restructuring transactions, For-Profit CBOT will be
operated for the long-term benefit of its stockholders rather than solely for
the purpose of delivering member benefits and enhancing member opportunity.
You are being asked to approve these changes as part of the restructuring
transactions. As a result, many of your rights and obligations as stockholders
of For-Profit CBOT will change from those that you currently have as members of
the CBOT. In this section, we will describe those changes that we believe to be
material. We urge you to carefully review and consider these changes in your
rights and obligations before voting on the restructuring transactions.
The following description summarizes the material differences between the
rights and obligations of holders of the CBOT memberships and holders of Class
A common stock and Class B common stock of For-Profit CBOT. We do not intend
this summary to be a complete statement of the rights and obligations of
holders of the common stock of For-Profit CBOT, or a comprehensive comparison
of the rights and obligations of members of the CBOT and the holders of common
stock of For-Profit CBOT, or a complete description of the specific provisions
referred to in this summary. We do not intend that this identification of
specific differences is to indicate that other equally or more significant
differences do not exist.
The forms of the For-Profit CBOT amended and restated certificate of
incorporation and bylaws are attached as Appendices D and E to this document,
respectively. Our current certificate of incorporation, bylaws and rules and
regulations have been filed as exhibits to the registration statement of which
this document forms a part. In addition, the form of the rules and regulations
of For-Profit CBOT has been filed as an exhibit to such registration statement.
A summary of the status of certain current CBOT rules and regulations after the
restructuring transactions is attached as Appendix F to this document. We urge
you to review and consider carefully each of these documents before voting on
the restructuring transactions.
For-Profit Status; Authority to Issue Capital Stock
Currently, our certificate of incorporation expressly provides that the CBOT
is not-for-profit and has no authority to issue capital stock. This provision
will be eliminated from the certificate of incorporation of For-Profit CBOT,
which will enable us to issue the shares of Class A common stock, Class B
common stock and Series A convertible preferred stock in connection with the
restructuring transactions.
As described below under "--Authorized Capital," For-Profit CBOT will have
the ability to issue additional shares of capital stock in the future at the
discretion of the board of directors, without stockholder approval. The
issuance of additional shares of capital stock could cause your equity interest
in For-Profit CBOT to be diluted and the market price or value of your shares,
if any, to decline.
Dividends
Delaware law currently provides that corporations, whether for-profit or
not-for-profit, may declare and pay dividends on the shares of its stock, or to
its members if the corporation is a nonstock corporation, out of funds legally
available for such purposes. Neither the CBOT's current certificate of
incorporation nor For-Profit
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CBOT's certificate of incorporation otherwise restricts the CBOT's or For-
Profit CBOT's authority to declare and pay dividends. Consequently, the CBOT,
under the current certificate of incorporation, and For-Profit CBOT, under the
proposed certificate of incorporation, are, for purposes of Delaware law,
authorized to declare and pay dividends.
However, the right to receive dividends as common stockholders of For-Profit
CBOT will be subject to priorities and preferences that may apply to any
outstanding shares of preferred stock, including the Series A convertible
preferred stock.
We have no current plans to pay cash dividends on the common stock in the
foreseeable future.
Authorized Capital
Currently, our bylaws authorize five classes of membership:
. Full;
. Associate;
. GIM;
. IDEM; and
. COM.
In order to authorize any additional classes of membership, it would be
necessary to amend our bylaws. The authorized or maximum number of Associate
Members, GIMs, IDEMs and COMs under the bylaws is 866, 351, 642 and 643,
respectively. Our certificate of incorporation and bylaws do not expressly
provide for an authorized or maximum number of Full Memberships. However, our
certificate of incorporation, bylaws, rules and regulations do not authorize
the creation of new members in existing classes. Therefore, we believe that the
creation of new members would require an amendment to our bylaws, which, in the
case of Full Members, has the result of creating a de facto authorized or
maximum number of Full Memberships equal to the current number of such
memberships, which is 1,402.
Under its certificate of incorporation, For-Profit CBOT will be authorized
to issue up to 100,000,000 shares of common stock, par value $0.001 per share,
of which 99,996,273 shares will be designated as Class A common stock and 3,727
shares will be designated as Class B common stock, and up to 10,000,000 shares
of preferred stock, par value $0.001 per share.
The Class A common stock will represent solely an equity interest in For-
Profit CBOT. The Class B common stock will represent an equity interest and,
subject to satisfaction of applicable membership and eligibility requirements,
a membership in For-Profit CBOT. The Class B common stock will be issued in
five series, each of which will entitle an eligible holder to trading rights
and privileges that correspond to the trading rights and privileges of one of
the five currently authorized classes of membership.
Immediately after the restructuring transactions, the following will be
issued and outstanding:
. 39,797,650 shares of Class A common stock;
. 1,402 Series B-1 shares of Class B common stock;
. 779 Series B-2 shares of Class B common stock;
. 174 Series B-3 shares of Class B common stock;
. 642 Series B-4 shares of Class B common stock; and
. 643 Series B-5 shares of Class B common stock
In addition, shares of Series A convertible preferred stock will be
outstanding immediately after the restructuring transactions. It is not
possible at this time to determine the exact number of shares of Series A
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convertible preferred stock which will be outstanding immediately after the
completion of the restructuring transactions. However, based on the valuation
of Ceres as of December 31, 2000, 264,600 shares would be outstanding as a
result of the issuance of such shares pursuant to the Ceres merger. In
addition, we currently expect that dividends on the Series A convertible
preferred stock will be paid for the foreseeable future in the form of
additional shares of Series A convertible preferred stock. Accordingly,
additional shares of Series A convertible preferred stock will be issuable over
time.
Immediately after the restructuring transactions, all of such shares will be
held by the former CBOT members and the former Ceres limited partners.
The creation of any additional classes of common stock will require an
amendment to the certificate of incorporation and stockholder approval. The
board of For-Profit CBOT, however, will be authorized, without stockholder
approval, to create and issue additional classes of preferred stock, having
such powers, designations and preferences as are set forth in a resolution
adopted by the board and set forth in a certificate of designations filed with
the State of Delaware.
We currently expect that 39,797,650 shares of Class A common stock, 3,640
shares of Class B common stock and, based on the valuation of Ceres as of
December 31, 2000 as described elsewhere in this document, 264,600 shares of
Series A convertible preferred stock will be issued and outstanding immediately
after completion of the restructuring transactions. As a result, based on the
foregoing, the board of For-Profit CBOT would be authorized to issue up to an
additional 60,198,623 shares of Class A common stock, 87 Series B-2 shares of
Class B common stock issuable upon the conversion of Series B-3 shares of Class
B common stock and 9,735,400 shares of preferred stock without requiring an
amendment to the For-Profit CBOT certificate of incorporation and without
stockholder approval. The authorization of any additional shares of Class A
common stock, Class B common stock, including additional shares of each series
of Class B common stock, and preferred stock in excess of these amounts would
require an amendment to the For-Profit CBOT certificate of incorporation, which
would, in turn, require stockholder approval.
In the event of the issuance of additional shares of capital stock,
including pursuant to conversion of the Series A convertible preferred stock,
future acquisitions, a stock incentive plan or for any other purpose, will
dilute your equity interest in For-Profit CBOT and the market price or value of
your shares, if any, could decline.
Terms and Conditions of Membership
Currently, the terms and conditions of membership in the CBOT are set forth
in our certificate of incorporation, bylaws, rules and regulations. The terms
and conditions of membership, including all trading rights and privileges, will
continue to be set forth in For-Profit CBOT's certificate of incorporation,
bylaws, rules and regulations. However, under For-Profit CBOT's certificate of
incorporation, the terms and conditions of membership will relate only to the
shares of Class B common stock to be issued in connection with the
restructuring transactions. The terms and conditions of membership in the CBOT
include, but are not limited to, general provisions related to application for
membership, member rights, privileges and obligations, member conduct and
discipline, registration, assessments and fees, purchase and sale or transfers
of memberships or membership interests, insolvency and trading and other rights
and privileges of the various classes of membership.
For-Profit CBOT's certificate of incorporation will provide that the rights
and obligations, including trading rights and privileges, of CBOT members will
be associated with the shares of Class B common stock to be issued in
connection with the restructuring transactions. As described above, the Class B
common stock will be issued in five series of stock: Series B-1, B-2, B-3, B-4
and B-5. The certificate of incorporation for For-Profit CBOT will provide that
each holder of Series B-1, B-2, B-3, B-4 and B-5 shares of Class B common stock
who satisfies the membership and eligibility requirements with respect to a
Full Membership, Associate Membership, GIM Membership, IDEM Membership or COM
Membership, respectively, in each case, as set
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forth in For-Profit CBOT's rules and regulations, will be entitled to all of
the rights and privileges, including all trading rights and privileges, of a
CBOT Full Member, Associate Member, GIM, IDEM or COM, as the case may be,
subject to applicable Delaware law or as otherwise provided in For-Profit
CBOT's certificate of incorporation, bylaws and rules and regulations.
Transferability
Currently, the CBOT's rules and regulations provide limitations on, and a
procedure to facilitate, the purchase, sale or transfer of memberships. This
procedure will continue to be applicable, in substantially the same form, to
the purchase, sale or transfer of shares of the Class B common stock.
Class A common stock will be subject to a complete restriction on transfer
for the first 180 days following completion of the restructuring transactions,
except that, generally speaking, during this period, stockholders may transfer
all, but not less than all, of the shares of Class A common stock associated
with a share of Class B common stock if all such shares of Class A common stock
are transferred together with the associated share of Class B common stock.
Generally speaking, after expiration of the 180-day period, the Class A common
stock will be freely transferable, in whole or in part, with or without the
associated share of Class B common stock. The certificate of incorporation will
grant the board of directors authority to remove or reduce this transfer
restriction if the board determines, in its sole and absolute discretion, that
such action is appropriate. In addition to these restrictions, shares of Class
A common stock and Class B common stock received in connection with the
restructuring transactions by "affiliates" may be resold only pursuant to
further registration under the Securities Act or in transactions that are
exempt from registration under the Securities Act.
You should understand that the Chicago Board Options Exchange has stated
publicly its view that, if consummated, the restructuring transactions would
extinguish the exercise right of our Full Members under certain circumstances.
In particular, it has stated recently in a filing with the SEC seeking a rule
change that the exercise right will be terminated for any Full Member who sells
any of the shares of Class A common stock associated with a share of Class B
common stock received in the restructuring transactions without also selling
all of the other shares of Class A common stock and the associated share of
Class B common stock. While we do not believe that the Chicago Board Options
Exchange's position is legally valid, we cannot predict the outcome of its SEC
proceeding seeking approval of its proposed rule change. If the Chicago Board
Options Exchange were to prevail with the SEC and have its rule change
approved, it is possible that the exercise right could be terminated or that
Full Members could be prevented from exercising the right in the future if they
transfer any of their shares of Class A common stock associated with a share of
Class B common stock without also transferring all of their other shares of
Class A common stock and their associated share of Class B common stock. You
should thus give careful consideration to this matter before deciding to
transfer any of your shares of Class A common stock without also transferring
all of your other shares of Class A common stock and your associated share of
Class B common stock.
For more information, see "Risk Factors--Risks Relating to the
Restructuring--The Chicago Board Options Exchange Could Be Successful in
Challenging the "Exercise Right,' Which Allows Our Full Members to Obtain
Trading Privileges at the Chicago Board Options Exchange, and the Exercise
Right Could Be Extinguished or Terminated."
Voting Rights
Under the CBOT's current certificate of incorporation and bylaws, Full
Members and Associate Members have the right to vote on all matters submitted
to a vote of the general membership. Each Full Member is entitled to one vote
and each Associate Member is entitled to one-sixth of one vote on all such
matters. GIMs, IDEMs and COMs have no right to vote under the current
certificate of incorporation and bylaws.
Other than as required by the certificate of incorporation of For-Profit
CBOT, the terms of any preferred stock or Delaware law, with the exception of
the right to approve changes that would adversely affect certain core rights
reserved for the holders of Series B-1 shares and B-2 shares of Class B common
stock, each share
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of Class A common stock will entitle its holder to one vote on all matters
submitted to a vote of stockholders. Except for such changes to core rights and
as may otherwise be required by Delaware law, the holders of Class B common
stock will have no voting rights. See "Description of Capital Stock--
Description of Common Stock--Voting on Core Rights" for a description of these
core rights.
As a result, to the extent that they hold shares of Class A common stock,
GIMs, IDEMs and COMs will have the right to vote on all matters submitted to a
vote of the general membership. The allocation of shares of Class A common
stock among members in connection with the restructuring transactions will
result in a dilution of Full Members' voting rights relative to the voting
rights of Associate Members, GIMs, IDEMs and COMs.
In addition, under Delaware law, the holders of the outstanding shares of
each class and series of For-Profit CBOT common stock will be entitled to vote
as a class or series upon certain proposed amendments to the certificate of
incorporation, as described above under "Description of Capital Stock--
Description of Common Stock--Special Class and Series Voting Rights." In the
event that a class vote of the Class B common stock is required by Delaware law
in connection with any such amendment of our certificate of incorporation:
. holders of Series B-1 shares of Class B common stock will be entitled to
one vote per share;
. holders of Series B-2 shares of Class B common stock will be entitled to
one-sixth of one vote per share;
. holders of Series B-3 shares of Class B common stock will be entitled to
one-tenth of one vote per share;
. holders of Series B-4 shares of Class B common stock will be entitled to
one-tenth of one vote per share; and
. holders of Series B-5 shares of Class B common stock will be entitled to
one-tenth of one vote per share.
As a result, if required by Delaware law, GIMs, IDEMs and COMs will be
entitled to vote in connection with certain amendments to our certificate of
incorporation after the restructuring transactions. Currently, GIMs, IDEMs and
COMs have no such voting rights. This result is inconsistent with the result
that would likely be obtained under our current certificate of incorporation,
bylaws and rules and regulations, which provide that only Full Members and
Associate Members are entitled to vote, including with respect to such
amendments to our certificate of incorporation. Moreover, the certificate of
incorporation of For-Profit CBOT will include unique provisions that are
intended to protect certain core rights associated with the trading rights and
privileges of Class B common stockholders. These provisions reflect the unique
circumstances of the CBOT and are not customary in other corporate charters.
Due to the unique nature of these provisions, there is little guidance under
applicable law as to how they would be applied in specific factual contexts.
Among other things, it may be difficult to assess the impact of possible
changes to these provisions on individual classes or series of stock. As a
result, there may be uncertainty under certain circumstances as to whether any
special class or series votes would be required in order to approve an
amendment of the certificate of incorporation of For-Profit CBOT to amend,
modify or repeal such provisions.
Liquidation Rights
The CBOT's current rules and regulations provide that, in the event of a
full liquidation of the CBOT, the members would share in the proceeds from
dissolution in an approximate ratio of 6.00 : 1.00 : 0.67 : 0.03 : 0.03 for
each Full Membership, Associate Membership, GIM, IDEM and COM, respectively.
In the event of a full liquidation of For-Profit CBOT, liquidating
distributions will be made to Class A common stockholders and Class B common
stockholders pro rata based on the number of shares of common stock they hold.
As a result of the issuance of shares of Class A common stock and Class B
common stock in
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the restructuring transactions, Full Members and GIMs will experience a decline
in their liquidation rights relative to the liquidation rights of Associate
Members, IDEMs and COMs.
Proceeds of Membership
Under our current rules and regulations, upon any transfer of a membership,
whether made by a member voluntarily or by the board of directors, the proceeds
are applied pursuant to a priority set forth in the rules and regulations. The
types of claims that currently have priority in the proceeds of a transferred
membership include, among other things: dues, assessments, service fees, fines,
contributions, and other charges and indebtedness payable to the CBOT or a
clearing house, amounts owed to clearing members, and amounts owed on loans
that financed the purchase of such membership.
Following completion of the restructuring transactions, the claims of Class
B common stockholders will not have an automatic priority of the claims of non-
members against the proceeds of the sale of shares of Class A common stock or
Class B common stock. Absent special circumstances, proceeds from the transfer
of shares of Class A common stock will not be subject to the prior claims of
Class B common stockholders unless such Class B common stockholders have
otherwise perfected a security interest in the transferred shares of Class A
common stock, such as by receiving a pledge of such shares. The rules and
regulations of For-Profit CBOT will provide that the proceeds of any transfer
of shares of Class B common stock will be subject to the same priority of
payments provision that is currently applicable to the transfer of CBOT
memberships. However, we are not aware of any court's having considered the
enforceability of such a provision in the context of a security issued by a
demutalized exchange, including where the security is associated with
membership trading rights and privileges. Accordingly, there is substantial
uncertainty as to whether the priority of payments provision would be enforced
in accordance with its terms. As a result, we cannot provide you any assurances
as to the continued enforceability of this priority of payments provision after
completion of the restructuring transactions.
Amendment of Certificate of Incorporation
Under our current certificate of incorporation, amendments to the
certificate of incorporation must be adopted by the board of directors in
accordance with Delaware law and then submitted to a vote of the membership.
Proposals to amend the certificate of incorporation will be adopted if at least
300 votes have been cast at a special meeting of the membership and a majority
of the votes cast were in favor of the proposal.
Under For-Profit CBOT's certificate of incorporation, amendments must also
be adopted by the board of directors and then submitted to a vote of the
stockholders. However, proposals to amend the certificate of incorporation will
be adopted only if at least a majority of the voting power of all of the then-
outstanding shares of stock of For-Profit CBOT entitled to vote generally in
the election of directors, voting together as a single class, are voted in
favor of the the proposal, except for changes that would adversely affect
certain core rights relating to the trading rights and privileges associated
with the Class B common stock, which will require only the approval of a
majority of the voting power of the Series B-1 and Series B-2 shares of Class B
common stock, voting together as a class based on their respective per share
voting power, except as otherwise required by Delaware law as described below.
As a result, it will be more difficult to amend the certificate of
incorporation of For-Profit CBOT.
In addition, under Delaware law, the holders of the outstanding shares of
each class and series of For-Profit CBOT common stock will be entitled to vote
as a class or series upon certain proposed amendments to the certificate of
incorporation, as described above under "Description of Capital Stock--
Description of Common Stock--Special Class and Series Voting Rights" and "--
Voting." As a result, to the extent that they hold shares of Class B common
stock, GIMs, IDEMs and COMs will be entitled to vote as described above under
"--Voting Rights" in connection with such amendments to our certificate of
incorporation after the restructuring transactions. Currently, GIMs, IDEMs and
COMs have no such voting rights by virtue of our status as a nonstock, not-for-
profit corporation.
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Amendment of Bylaws and Rules and Regulations; Substantial Elimination of the
Petition Process
Currently, our certificate of incorporation provides that the bylaws, which
include the rules, may only be adopted, amended or repealed with the approval
of the membership. Proposed amendments to the bylaws may be independently
recommended by the board of directors for submission to a vote at a special
meeting of the membership. In addition, 25 or more members have the right to
petition for the board of directors' approval to call a special meeting of the
membership for the purpose of voting on amendments to the bylaws. If the board
of directors does not approve the initial petition, 100 or more members have
the right to petition for such special meeting and such special meeting will
then be called by the board of directors or the chairman of the board in
accordance with the procedures set forth in the certificate of incorporation
and bylaws, See "--Special Meetings." Proposals to amend the bylaws, including
the rules, will be adopted if at least 300 votes have been cast at a special
meeting and a majority of the votes case were in favor of the proposal. This
process, together with certain other provisions of the bylaws, rules and
regulations, including those relating to the nomination procedures for elective
officers and the annual election, constituted what is sometimes referred to as
the "petition process" of the CBOT membership. This petition process
effectively vests in the voting membership the authority to adopt, amend and
repeal bylaws, including the rules, which, together with our certificate of
incorporation and the regulations, generally govern the rights and obligations
of the members of the CBOT.
Under For-Profit CBOT's bylaws, the board of directors will be authorized to
adopt, amend or repeal bylaws, which will expressly exclude the rules and
regulations, provided such amendment does not adversely affect certain core
rights, in which case such amendment would be required to be submitted to a
vote of the holders of Series B-1 and Series B-2 shares of Class B common
stock. In addition, stockholders will have the right to submit proposals to
amend the bylaws to a vote of the stockholders at any annual meeting, subject
to compliance with the advance notice requirements of the bylaws described
under "Description of Capital Stock--Other Provisions--Advance Notice
Procedures" and compliance with the federal securities laws relating to the
regulation of proxy solicitation. Stockholder-initiated proposals to amend the
bylaws will be adopted only if at least two-thirds of the voting power of all
of the then-outstanding shares of stock of For-Profit CBOT entitled to vote
generally in the election of directors, voting together as a single class, are
voted in favor of the proposal, and any other vote required under the
certificate of incorporation or the terms of any series of preferred stock is
obtained. As a result, it will become more difficult for the stockholders of
For-Profit CBOT to propose and adopt amendments to the bylaws of For-Profit
CBOT.
Under our current certificate of incorporation and bylaws, the rules are
deemed to be part of the bylaws and are therefore subject to the petition
process described above. Under For-Profit CBOT's certificate of incorporation
and bylaws, the rules and regulations will not be incorporated into the bylaws
and the board of directors will have sole and exclusive authority to adopt,
amend or repeal rules and regulations, provided that such amendments do not
adversely affect a core right, in which case such amendment would be required
to be submitted to a vote of the holders of Series B-1 and Series B-2 shares of
Class B common stock.
In connection with the restructuring transactions, the petition process is
being substantially eliminated to the largest extent permissible under
applicable law. The principal exception consists of the preservation in the
certificate of incorporation of certain core rights associated with the trading
rights and privileges of Class B common stockholders, with respect to which
certain special voting rights will be vested with the holders of Series B-1 and
Series B-2 shares of Class B common stock. This is an important aspect of the
restructuring transactions, which will materially change your rights. Following
completion of the restructuring transactions, your ability as a common
stockholder of For-Profit CBOT to participate in the day-to-day management and
operations of For-Profit CBOT will be significantly reduced as a result of the
substantial elimination of the petition process.
In sharp contrast to the substantial rights of current CBOT members pursuant
to the petition process, following the completion of the restructuring
transactions, you will have rights more consistent with those of stockholders
in a publicly held corporation. The substantial elimination of the petition
process is designed to modernize the corporate governance of For-Profit CBOT in
order to improve the efficiency of our decision-
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making process. Since this represents a material change to your rights, we urge
you to give careful consideration to this aspect of the restructuring
transactions before voting on the restructuring transactions.
Election of Directors
Currently, our certificate of incorporation provides that the nominating
committee will nominate candidates to stand for election to the board of
directors. In addition, members have the right to petition, which petition must
be signed by at least 40 members, to nominate other candidates to stand for
election to the board of directors.
Under For-Profit CBOT's certificate of incorporation and bylaws, nominations
for directors will be made by the nominating committee of the board of
directors and may be made by stockholders satisfying the advance notice
requirements described above under "Description of Capital Stock--Other
Provisions--Advance Notice Procedures" and elections for directors will be
conducted by proxy solicitation in connection with an annual meeting of the
stockholders. As a result of the advance notice requirements under For-Profit
CBOT's bylaws, stockholder influence on the nomination process in connection
with the election of directors will be substantially diminished. In addition,
any proxy solicitation must be conducted in accordance with the federal
securities laws, as applicable. Since this represents a material change to your
rights, we urge you to give careful consideration to this aspect of the
restructuring transactions before voting on the restructuring transactions.
Special Meetings
Currently, our certificate of incorporation and bylaws provides that 25 or
more members have the right to petition for the board of directors' approval to
call a special meeting of the membership for the purpose of voting on
amendments to the bylaws. If the board of directors does not approve the
initial petition, 100 or more members have the right to petition for such
special meeting and the such special meeting will then be called by the board
of directors or the chairman of the board in accordance with the procedures set
forth in the certificate of incorporation and bylaws. Independently, the board
of directors or the chairman of the board may call for a special meeting of the
membership for any purpose to be held at such place, on such date, and at such
time as they or he or she fix.
Under For-Profit CBOT's bylaws, special meetings of the stockholders may
only be called by the chairman of the board, president or by the board of
directors acting pursuant to a resolution of a majority of the board of
directors. As a result, stockholders of For-Profit CBOT will not have authority
to cause the board of directors or chairman of the board to call a special
meeting of the stockholders for any purpose, including stockholder proposals to
amend the bylaws. Since this represents a material change to your rights, we
urge you to give careful consideration to this aspect of the restructuring
transactions before voting on the restructuring transactions.
Annual Meetings
Under our current bylaws, the annual meeting of the members is required to
be held on the first Thursday after the third Tuesday in February at 2:30 p.m.
As a matter of practice, member matters are generally not submitted to a vote
at such meeting.
Under For-Profit CBOT's bylaws, an annual meeting will be required to be
held for the purpose of electing directors and transacting such other business
as may be properly called come before the meeting at such place, on such date,
and at such time as the board of directors shall each year fix, provided that
the date of the annual meeting shall be within 13 months of the last annual
meeting of stockholders as required by applicable law.
Repeal of Certain Rules and Regulations
In order to implement certain changes to the corporate governance structure
of For-Profit CBOT in connection with the restructuring transactions, certain
rules and regulations will be repealed or eliminated in their entirety. A
summary of those rules and regulations that will be repealed or eliminated in
their entirety is
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set forth in Appendix F to this document, which is entitled, "Status of Certain
Current CBOT Rules and Regulations After the Restructuring Transactions." We
urge you to review this summary carefully before voting on the restructuring
transactions.
Board of Directors
Currently, our certificate of incorporation provides that our board of
directors consists of 18 directors. The certificate of incorporation and bylaws
of For-Profit CBOT will provide that the current board of directors will
continue to serve as directors until such time as the board of directors calls
for a special election, which we expect will occur as soon as reasonably
practicable following completion of the restructuring transactions. At that
time, the size of the board will be reduced to nine members. Class A common
stockholders will elect eight members of a new nine-member board of directors,
consisting of two independent directors, five directors who will be holders of
Class B common stock and who will meet the membership and eligibility
requirements of For-Profit CBOT, one at-large director and the chairman of the
board of directors.
Neither the at-large director nor the chairman will be subject to any
qualifications. However, from and after the special election of directors to be
held following completion of the restructuring transactions and until the
second annual meeting of stockholders thereafter, which we currently expect to
be held in the second or third quarter of 2003, the position of the chairman
will be held by the person who held the office of chairman of the board of
directors immediately prior to such election, and such person will not be
elected by the stockholders but rather will hold the position of the chairman
by virtue of his holding of the office of chairman of the board of directors.
This provision is intended to ensure that the current chairman of the board
will serve as the chairman for a period of time at least equal to the term for
which he was elected in order to provide for a smooth transition of the
corporation through the restructuring process. All of the other directors will
be elected by the stockholders, as will the chairman, commencing with the
second annual meeting of stockholders following completion of the restructuring
transactions.
Change of Control Provisions
Currently, our certificate of incorporation, bylaws, rules and regulations
do not contain robust change of control provisions.
For-Profit CBOT will establish a number of change of control 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 of For-Profit CBOT rather than pursue non-negotiated takeover
attempts. These provisions will include, among other things:
. a classified or staggered board structure;
. advance notice requirements in connection with stockholder meetings;
. elimination of the ability of stockholders to call stockholder meetings;
. a prohibition on the ability of stockholders to take action by written
consent;
. supermajority stockholder approval requirements in connection with the
amendment of the bylaws; and
. the application of the provisions of the Delaware anti-takeover statute.
In addition, we currently anticipate that, in the event For-Profit CBOT were
to conduct an underwritten public offering, the board of directors would be
asked to consider, and would likely adopt, a stockholder rights plan. For more
information about these provisions, see "Description of Capital Stock--Other
Provisions." We have no current plan or intention to conduct any such offering.
These provisions could have the following effects, among others:
. delaying, deferring or preventing a change of control;
. delaying, deferring or preventing the removal of existing management;
131
. deterring potential acquirors from making an offer to For-Profit CBOT's
stockholders; and
. limiting any opportunity of For-Profit CBOT's stockholders to realize
premiums over prevailing market or other prices of For-Profit CBOT's
common stock in connnection with offers by potential acquirors.
This could be the case notwithstanding that a majority of For-Profit CBOT's
stockholders might benefit from such a change in control or offer.
Appraisal Rights
In transactions generally involving a merger of For-Profit CBOT,
stockholders of For-Profit CBOT will have the right to dissent and, pursuant to
a statutory procedure, receive a cash payment equal to the appraised fair value
of their shares. These rights are currently available to the members of the
CBOT as a result of its reincorporation in Delaware earlier this year.
132
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
OF THE RESTRUCTURING TRANSACTIONS
The following is a summary of the material U.S. federal income tax
consequences of the restructuring transactions to us and our members:
In issuing rulings to other exchanges involved in the process of
demutualization, we understand that the Internal Revenue Service has adopted
the position that:
. the equity component of a membership or stock is to be treated as
separate property from the trading rights associated with that membership
or stock so that the demutualization will be treated, in effect, as two
exchanges, an exchange of the equity components and an exchange of the
trading rights; and
. the taxability of each exchange must be tested under the relevant
provisions of the Code applicable to the particular property rights.
Thus, we understand that the exchange of the equity components will be tested
for tax-free status under the corporate reorganization or corporate formation
provisions, as applicable, and the exchange of the trading rights will be
treated as taxable or not based on whether there is any significant
modification in the legal rights associated with those rights under Code
Section 1001, which provides for recognition of gain or loss on the sale or
exchange of property. The IRS has not taken a position on whether, even if
there is a significant modification of the trading rights, the exchange would
nevertheless constitute a tax-free exchange of like-kind property under Code
Section 1031.
Based upon the foregoing, we believe that:
. No gain or loss will be recognized by a member with respect to the
receipt of Class A common stock and the equity component of Class B
common stock. Similarly, no gain or loss will be recognized with respect
to the receipt of the trading rights associated with the Class B common
stock in exchange for the trading rights associated with the member's
current membership in the CBOT. In this connection, the IRS may take the
position that the Chicago Board Options Exchange exercise right
represents a separate trading right from that relating to the right to
trade on the CBOT itself.
. If the foregoing exchanges do not result in the recognition of gain or
loss, the aggregate basis in a member's current membership will carry
over to the property received and must be allocated to the various
components. Since the equity rights and the trading rights will be
treated as separate property for tax purposes, the basis in the equity
rights will be allocated among the equity rights received in proportion
to their fair market values, and the basis in the existing trading rights
will carry over to the basis of the trading rights received. It is not
entirely clear how basis will be allocated between trading rights and
equity rights because no separate market exists for those property
rights. Members who intend to sell some but not all of their stock should
consult their own tax advisors.
. The holding period of the Class A common stock, Class B common stock and
the trading rights and privileges received by a member will include the
period for which such person's current membership has been held, provided
that such membership is held as a capital asset on the date of the
distribution of For-Profit CBOT stock.
. We will not recognize any gain or loss upon our conversion to a for-
profit stock corporation.
It is a condition to the completion of the restructuring transactions that
we receive a private letter ruling from the IRS, in form and substance
satisfactory to our board of directors, generally to the effect that the
restructuring transactions will have the foregoing effects. An opinion of
counsel will not satisfy this condition. We filed a request for the ruling with
the IRS on February 1, 2001. Because of the novelty and complexity of the
restructuring transactions, it is unclear at this time whether the IRS will
issue a favorable ruling or, if the IRS is willing to issue a ruling, when the
ruling will be received. Because none of the other exchanges in the process of
demutualization has presented the IRS with facts identical to those of the CBOT
or the restructuring
133
transactions described herein, in particular with respect to either
capitalization or the Chicago Board Options Exchange exercise right, no
assurance can be given that the IRS will issue a favorable ruling or, if so,
how long it will take to obtain such a ruling. Any such ruling would generally
be binding on the IRS. Although an IRS ruling can be revoked or modified
retroactively under some extraordinary circumstances, we are not aware of any
such circumstances that would cause the IRS to revoke or modify any such ruling
with respect to the restructuring transactions.
We currently anticipate that the receipt of Series A convertible preferred
stock by the limited partners of Ceres pursuant to the reorganization of our
electronic trading business will be tax-free to such limited partners. It is
further anticipated that the conversion of the Series A convertible preferred
stock into Class A common stock of For-Profit CBOT pursuant to its terms will
also be tax-free, except to the extent of any shares which are received for
accrued and unpaid dividends on such Series A convertible preferred stock.
Dividends on the Series A convertible preferred stock paid in the form of
additional shares of Series A convertible preferred stock will be taxable to
the same extent as if they were paid in cash.
Because of the complexity of the tax laws, and because the tax consequences
of the restructuring transactions to you may be affected by matters not
discussed in this section, you are urged to consult your own tax advisor with
respect to your own particular circumstances and with respect to the specific
tax consequences of the restructuring transactions to you, including the
applicability and effect of state, local and foreign tax laws and any proposed
changes in applicable tax laws.
SPECIAL MEETING AND PROXY INFORMATION
Persons Making the Solicitation
The proxy solicitation being made pursuant to this document is being
conducted on behalf of our board of directors.
Time and Place of Special Meeting
The special meeting will be held on , , 2001 at 2:30 p.m.,
Central time, in the Visitor Center Theater, Fifth Floor, at our executive
offices located at 141 West Jackson Boulevard, Chicago, Illinois 60604.
Matters To Be Approved
Full Members and Associate Members are being asked to approve the
restructuring transactions described more fully in this document, including the
following propositions:
. the approval and adoption of the amended and restated certificate of
incorporation, which will facilitate the demutualization of the CBOT and
modernize certain aspects of our corporate governance structure;
. the approval and adoption of the amended and restated bylaws, which will
modernize certain other aspects of our corporate governance structure;
and
. the approval of all other matters relating to the restructuring
transactions, including, among other things, the reorganization of our
electronic trading business.
Although you are being asked to approve each of these propositions separately,
each of these propositions is related to, and expressly conditioned upon the
approval of, the other propositions. This means that we will not take any one
or more of these actions relating to the restructuring transactions without
taking all three actions. Accordingly, unless ALL THREE of the propositions
relating to the restructuring transactions are approved by the requisite vote
of the members as described in this document, the restructuring transactions
will not have been approved by the members and, accordingly, none of them will
be completed.
134
Eligibility to Vote
Although this document will be mailed to all members, you are eligible to
vote at the special meeting only if you were a Full Member or Associate Member
as of the close of business on , , 2001, which is the record date
for the special meeting of the membership at which a vote on the restructuring
transactions will be taken. In accordance with our certificate of
incorporation, bylaws, rules and regulations, GIMs, IDEMs and COMs are not
eligible to vote on the restructuring transactions.
Available Votes; Required Vote
On the record date for the special meeting, there were 1,402 Full Members
and 779 Associate Members. Under our certificate of incorporation, bylaws,
rules and regulations, each Full Member will be entitled to one vote for each
Full Membership owned and each Associate Member will have one-sixth of a vote
for each Associate Membership owned. The restructuring transactions will be
approved if Full Members and Associate Members, voting together as a single
class based upon their respective voting rights, cast at least 300 votes at the
special meeting, whether in person or by proxy, and at least a majority of the
votes are cast in favor of the restructuring transactions.
Under our certificate of incorporation, bylaws, rules and regulations, GIM,
COM and IDEM members are not entitled to vote on the restructuring
transactions.
Our directors and officers held memberships as of December 6, 2000 entitling
them to cast an aggregate of 18 2/3 votes on the proposal, which would
represent about 1.2% of the total votes that may be cast.
Board Recommendation
Our board of directors recommends that you vote "FOR" approval of the
restructuring transactions, including ALL THREE of the propositions relating to
the restructuring transactions.
Manner of Voting; Costs
You may vote on the restructuring transactions by attending the special
meeting in person and registering your vote. You may also vote by completing
the enclosed proxy and submitting it in accordance with its instructions. You
may revoke your proxy at any time before it is voted at the meeting by:
. sending written notice to Paul J. Draths at the Secretary's Office, Board
of Trade of the City of Chicago, Inc., 141 West Jackson Boulevard,
Chicago, IL 60604;
. submitting a later dated proxy; or
. attending the special meeting and voting in person.
Attendance at the special meeting will not automatically revoke your proxy.
All properly executed and unrevoked proxies will be voted at the special
meeting or at any adjournment of the special meeting.
You may vote FOR, AGAINST OR ABSTAIN in the vote on the restructuring
transactions. You should understand that an abstention will not have the legal
effect of voting against the proposal but will be relevant to determining
whether 300 votes have been cast, which is necessary for the proposal to be
approved. A proxy received without an indication as to how it is to be voted
will be voted FOR the restructuring transactions. A proxy that has more than
one box marked will not be counted as a vote cast. Your proxy must be received
prior to 2:15 p.m., Central time, on , 2001 to be counted.
To obtain a replacement proxy, please call Paul J. Draths, Secretary of the
CBOT, at (312) 435-3500 between the hours of 7:30 a.m. and 4:30 p.m., Central
time.
135
The cost of soliciting proxies will be borne by us. In addition to
solicitation by mail, our directors, officers and employees may solicit proxies
in person or by telephone.
LEGAL MATTERS
The validity of the shares of Class A common stock, Class B common stock and
Series A convertible preferred stock offered hereby will be passed upon for
For-Profit CBOT by Morris, Nichols, Arsht & Tunnell. Certain legal matters
relating to U.S. federal income tax considerations in connection with the
restructuring transactions will be passed upon for For-Profit CBOT by Kirkland
& Ellis. Kirkland & Ellis has in the past represented the CBOT and its board of
directors and continues to represent the CBOT and its board of directors in
connection with various matters. Morris, Nichols, Arsht & Tunnell acts as
special Delaware counsel to the CBOT.
EXPERTS
The consolidated financial statements of the Board of Trade of the City of
Chicago, Inc. and Subsidiaries as of December 31, 2000 and 1999 and for each of
the three years in the period ended December 31, 2000 included in this
prospectus have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein and elsewhere in the registration
statement, which report expresses an unqualified opinion and includes an
emphasis of a matter regarding the change in accounting by the Board of Trade
of the City of Chicago, Inc. for its investment in Ceres Trading Limited
Partnership from the equity method of accounting to the consolidation basis of
accounting, and have been so included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-4 under the
Securities Act of 1933, as amended, with respect to the shares of Class A
common stock, Class B common stock and Series A convertible preferred stock of
For-Profit CBOT being offered in connection with the restructuring
transactions.
This proxy statement and prospectus, which constitutes a part of the
registration statement, does not contain all of the information set forth in
the registration statement. Consistent with the rules and regulations of the
SEC, some items of information are contained in exhibits to the registration
statement. Statements made in this proxy statement and prospectus as to the
content of any contract, agreement or other document filed or incorporated by
reference as an exhibit to the registration statement are not necessarily
complete. You should refer to the corresponding exhibit for a more complete
description of the relevant matter and read all statements in this proxy
statement and prospectus with due consideration of that exhibit.
Following completion of the restructuring transactions, For-Profit CBOT will
be required to file periodic reports and other information with the SEC. The
SEC filings of For-Profit CBOT are available to the public at the SEC's web
site at http://www.sec.gov.
136
APPENDIX A
BOARD OF TRADE OF THE CITY OF CHICAGO, INC.
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
[Download Table]
Page
----
Independent Auditors' Report.............................................. A-2
Consolidated Statements of Financial Condition as of December 31, 2000 and
1999..................................................................... A-3
Consolidated Statements of Income for the Years Ended December 31, 2000,
1999 and 1998............................................................ A-4
Consolidated Statements of Members' Equity for the Years Ended December
31, 2000, 1999 and 1998.................................................. A-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998...................................................... A-6
Notes to Consolidated Financial Statements................................ A-7
A-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Members
of the Board of Trade of the City of Chicago, Inc.
We have audited the accompanying consolidated statements of financial
condition of the Board of Trade of the City of Chicago, Inc. and its
subsidiaries (the "Board") as of December 31, 2000 and 1999 and the related
consolidated statements of income, members' equity and cash flows for each of
the three years ended December 31, 2000. These consolidated financial
statements are the responsibility of the Board's management. Our responsibility
is to express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Board of Trade of the City
of Chicago, Inc. and its subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Board
changed its method of accounting for its investment in Ceres Trading Limited
Partnership. All periods presented have been adjusted to reflect this change.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 14, 2001
(March 2, 2001 as to Note 13)
A-2
BOARD OF TRADE OF THE CITY OF CHICAGO, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 2000 and 1999
(in thousands)
[Download Table]
ASSETS 2000 1999
------ -------- --------
Current assets
Cash and cash equivalents:
Held under deposit and membership transfers.............. $ 4,653 $ 4,458
Unrestricted............................................. 23,552 17,991
-------- --------
Total cash and cash equivalents........................ 28,205 22,449
Accounts receivable, net................................... 20,920 16,733
Prepaid expenses and other................................. 3,129 2,927
Income taxes receivable.................................... 127 7,234
-------- --------
Total current assets................................... 52,381 49,343
-------- --------
Property and equipment
Land....................................................... 34,234 34,234
Buildings and equipment.................................... 305,922 293,416
Furnishings and fixtures................................... 153,504 173,677
Computer software and systems.............................. 50,203 26,760
Construction in progress................................... 938 826
-------- --------
Total property and equipment........................... 544,801 528,913
Less accumulated depreciation and amortization............. 239,745 219,507
-------- --------
Property and equipment--net............................ 305,056 309,406
Other assets................................................. 14,757 14,630
-------- --------
Total assets................................................. $372,194 $373,379
======== ========
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
Current liabilities
Accounts payable........................................... $ 17,805 $ 20,087
Accrued real estate taxes.................................. 8,500 8,650
Accrued pension liabilities................................ 844 2,732
Accrued exchange fee refunds............................... 384 2,205
Accrued liabilities........................................ 7,954 3,236
Due to CBOT/Eurex Alliance................................. 8,939 --
Funds held for deposit and membership transfers............ 4,653 4,458
Note payable............................................... 9,282 --
Current portion of long-term debt.......................... 18,014 6,500
Other current liabilities.................................. 155 408
-------- --------
Total current liabilities.............................. 76,530 48,276
-------- --------
Deferred income taxes........................................ 28,572 26,755
Long-term debt............................................... 64,286 87,500
Other liabilities............................................ 11,486 9,874
-------- --------
Total long-term liabilities............................ 104,344 124,129
-------- --------
Total liabilities...................................... 180,874 172,405
Members' equity.............................................. 191,320 200,974
-------- --------
Total liabilities and members' equity.................. $372,194 $373,379
======== ========
See notes to consolidated financial statements
A-3
BOARD OF TRADE OF THE CITY OF CHICAGO, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2000, 1999 and 1998
(in thousands)
[Download Table]
2000 1999 1998
-------- -------- --------
Revenues:
Exchange fees.................................. $101,981 $102,545 $112,115
Market data.................................... 61,060 54,028 53,100
Building....................................... 24,530 22,653 21,876
Services....................................... 17,848 20,279 16,907
Dues........................................... 5,484 389 414
Other.......................................... 2,016 3,002 826
-------- -------- --------
Total revenues............................... 212,919 202,896 205,238
-------- -------- --------
Expenses:
Salaries and benefits.......................... 56,391 64,133 57,991
Depreciation and amortization.................. 40,013 36,140 33,764
Professional services.......................... 32,459 32,490 19,924
General and administrative expenses............ 52,299 50,988 45,267
Building operating costs....................... 22,584 23,171 22,572
Programs....................................... 3,539 7,280 8,802
Other.......................................... 8,261 327 --
-------- -------- --------
Total expenses............................... 215,546 214,529 188,320
-------- -------- --------
Income (loss) from operations.................... (2,627) (11,633) 16,918
Interest income.................................. 1,242 1,052 1,947
Interest expense................................. 6,773 6,774 7,170
-------- -------- --------
Income (loss) before income taxes and cumulative
effect of change in accounting principle........ (8,158) (17,355) 11,695
Provision (benefit) for income taxes
Current........................................ 133 (1,198) 3,160
Deferred....................................... 1,817 (1,697) 1,891
-------- -------- --------
Total provision (benefit) for income taxes... 1,950 (2,895) 5,051
-------- -------- --------
Income (loss) before cumulative effect of change
in accounting principle......................... (10,108) (14,460) 6,644
Cumulative effect of change in accounting
principle--net of tax benefit of $2,026......... -- 2,920 --
-------- -------- --------
Income (loss) before minority interest........... (10,108) (17,380) 6,644
Minority interest in (income) loss of
subsidiaries.................................... -- 6,933 (38)
-------- -------- --------
Net income (loss)................................ $(10,108) $(10,447) $ 6,606
======== ======== ========
See notes to consolidated financial statements
A-4
BOARD OF TRADE OF THE CITY OF CHICAGO, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
For the Years Ended December 31, 2000, 1999 and 1998
(in thousands)
[Download Table]
2000 1999 1998
-------- -------- --------
BALANCE--Beginning of year........................ $200,974 $211,047 $203,911
Net income (loss)................................. (10,108) (10,447) 6,606
Capital contributions............................. 454 374 530
-------- -------- --------
BALANCE--End of year.............................. $191,320 $200,974 $211,047
======== ======== ========
See notes to consolidated financial statements
A-5
BOARD OF TRADE OF THE CITY OF CHICAGO, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000, 1999 and 1998
(in thousands)
[Download Table]
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income (loss)............................... $(10,108) $(10,447) $ 6,606
Adjustments to reconcile net income (loss) to
net cash flows from operating activities:
Cumulative effect of change in accounting
principle.................................... -- 4,946 --
Depreciation and amortization................. 40,013 36,140 33,764
Loss on disposition of property and equipment. 3,800 220 1,421
Deferred income taxes (benefit)............... 1,817 (1,697) 1,891
Minority interest in income (loss) of
subsidiaries................................. -- (6,933) 38
Other......................................... -- (19) (5)
Changes in assets and liabilities:
Accounts receivable........................... (4,187) 2,551 (1,411)
Prepaid expenses and other current assets..... (202) 28 249
Income taxes receivable....................... 7,107 241 (4,489)
Other assets.................................. (949) (4,187) (5,328)
Accounts payable.............................. (2,282) (6,058) 4,824
Accrued real estate taxes..................... (150) 97 307
Accrued pension liabilities................... (1,888) 749 178
Accrued exchange fee refunds.................. (1,821) 1,448 (114)
Accrued liabilities........................... 4,718 1,308 (263)
Due to CBOT/Eurex Alliance.................... 8,939 -- --
Funds held for deposit and membership
transfers.................................... 195 (862) (2,208)
Other current liabilities..................... (253) (29) 19
Other liabilities............................. 1,612 (187) (3,152)
-------- -------- --------
Net cash flows from operating activities.... 46,361 17,309 32,327
-------- -------- --------
Cash flows from investing activities:
Acquisition of property and equipment........... (38,497) (25,165) (26,985)
Proceeds from sale of property and equipment.... 356 390 --
Investment in CBOT/Eurex Alliance............... (500) -- --
-------- -------- --------
Net cash flows from investing activities.... (38,641) (24,775) (26,985)
-------- -------- --------
Cash flows from financing activities:
Payments of mortgage note and unsecured note.... -- -- (1,662)
Payment of 1997 revolving credit agreement...... (19,000) (5,000) (6,000)
Proceeds from 2000 secured revolving credit
agreement...................................... 7,300 -- --
Note payable.................................... 9,282 -- --
Capital contributions from members.............. 454 374 530
Capital contributions from minority interest in
subsidiaries................................... -- 723 3,280
Distributions to minority interest in
subsidiaries................................... -- (400) (5,943)
-------- -------- --------
Net cash flows from financing activities.... (1,964) (4,303) (9,795)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 5,756 (11,769) (4,453)
Cash and cash equivalents--Beginning of year..... 22,449 34,218 38,671
-------- -------- --------
Cash and cash equivalents--End of year........... $ 28,205 $ 22,449 $ 34,218
======== ======== ========
Cash paid for:
Interest........................................ $ 6,166 $ 6,797 $ 6,943
Income taxes.................................... $ -- -- 8,917
See notes to consolidated financial statements
A-6
BOARD OF TRADE OF THE CITY OF CHICAGO, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2000, 1999 and 1998
1. Summary of significant accounting policies
Basis of presentation
The consolidated financial statements include the accounts of the Board of
Trade of the City of Chicago, Inc., its wholly owned subsidiaries, including
Electronic Chicago Board of Trade, Inc. ("eCBOT") established in 2000, and its
controlled subsidiary, Ceres Trading Limited Partnership ("Ceres"), which holds
a 50% ownership interest in CBOT/Eurex Alliance LLC ("CBOT/Eurex Alliance")
(collectively, the "CBOT"). The CBOT accounts for its interest in CBOT/Eurex
Alliance under the equity method. The CBOT's investment in CBOT/Eurex Alliance
is included in other assets on the Consolidated Statements of Financial
Condition. All intercompany balances and transactions have been eliminated in
consolidation.
As a result of the CBOT's proposed restructuring plans, the CBOT has changed
its method of accounting for its investment in Ceres from the equity method to
reporting Ceres in its consolidated financial statements as a consolidated
subsidiary. As a result of this change in method of accounting to
consolidation, the consolidated financial statements for all periods presented
have been adjusted to reflect Ceres as a consolidated subsidiary. This change
had no effect on the CBOT's previously reported net income, but changed certain
components of its cash flows and had the following effect on the Consolidated
Statements of Financial Condition and of Income (in thousands):
[Download Table]
1999 1998
-------------------- --------------------
As As As As
Previously Reported Previously Reported
Reported Currently Reported Currently
---------- --------- ---------- ---------
Current assets................... $ 49,838 $ 49,343 $ $
Total assets..................... 366,101 373,379
Current liabilities.............. 40,998 48,276
Total liabilities................ 165,127 172,405
Members' equity.................. 200,974 200,974
Revenues......................... 182,905 202,896 181,978 205,238
Net income (loss)................ (10,447) (10,447) 6,606 6,606
In conjunction with its proposed restructuring plans to demutualize the
organization, on January 26, 2001 the CBOT filed its Registration Statement
with the Securities and Exchange Commission.
Operations
The CBOT has experienced losses in 1999 and 2000. In addition, CBOT has debt
obligations coming due in the first half of 2001. As a result of these
circumstances, management of CBOT has established a plan to improve cash flow
and working capital. To generate cash earlier in 2001, the CBOT has accelerated
the period by which member dues are billed and collected, from a quarterly to
an annual billing cycle, with the 2001 dues payable January 1, 2001. Management
developed, and the board of directors has approved, the CBOT's operating budget
for 2001. This plan includes the full year impact of rate increases to exchange
fees implemented September 1, 2000 and certain reductions to capital and
operational spending. In addition, the CBOT plans to defer certain
technological enhancements not deemed crucial to the operation of the open
outcry system and of the a/c/e system. Trading revenue assumed by the plan is
based on levels of trading historically experienced by the CBOT, but lower than
that for 2000.
Use of estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
A-7
Property and equipment
Property and equipment, excluding land, are reported at historical cost, net
of accumulated depreciation. Land is reported at cost. Computer software and
systems include purchased and internally developed software. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets as follows:
[Download Table]
Buildings and equipment.................................... 10 to 60 years
Furnishings and fixtures................................... 3 to 10 years
Computer software and systems.............................. 3 to 5 years
On October 1, 1999, the CBOT, through Ceres, entered into a Software
Licensing Agreement (the "License") with Deutsche Borse AG and the Swiss Stock
Exchange for use of software for trading financial derivative products. The
License continues into perpetuity unless terminated by Ceres and is being
amortized over 3 years. The cost of such license is included in Computer
Software and Systems in the Consolidated Statements of Financial Condition.
Revenue recognition
The largest source of the CBOT's operating revenues is exchange fees. These
fees are recognized as revenue in the same period that the trades are made
through the CBOT.
The CBOT provides real time and delayed market data information to market
data vendors regarding the prices of the futures and options on futures
contracts traded through the CBOT. Fees for market data, which are based on the
number of subscribers are remitted to the CBOT by market data vendors. The CBOT
recognizes revenue for market data based on quotation services provided to
market data vendors on a monthly basis. These revenues are included in Market
Data in the Consolidated Statements of Income.
Revenues from the rental of office space is recognized over the life of the
lease term utilizing the straight- line method and is included in Building in
the Consolidated Statements of Income. All service revenues and other revenues
are recognized when earned.
Dues from members are recognized over the assessment period. The CBOT
assessed dues on a quarterly basis beginning in June 2000. Prior to June 2000,
dues had been waived by the CBOT as a result of its cash flow and working
capital position. The waiver of dues by the CBOT in previous periods had no
impact on the CBOT's billing of annual dues for 2001 on January 1, 2001.
Other revenue results primarily from fines levied on members and member's
firms for rule infractions, as determined by CBOT's regulatory committees and
the board of directors. The fines are recognized as revenue when assessed.
Income taxes
The CBOT and its wholly owned subsidiaries file a consolidated federal
income tax return. Income taxes are determined using the asset and liability
method, which requires deferred taxes be adjusted to reflect the tax rates at
which future taxable amounts will be settled and realized. The provision for
federal income taxes excludes any amount related to the minority interest's
portion of income or loss since they are required to report their respective
shares of income or loss in their individual tax returns.
Cash flows
For purposes of the Consolidated Statements of Cash Flows, cash and cash
equivalents include highly liquid investments with maturities of three months
or less from date of purchase.
A-8
Long-lived assets
Long-lived assets to be held and used by the CBOT are reviewed to determine
whether any events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. The CBOT bases its evaluation on
such impairment indicators as the nature of the assets, the future economic
benefit of the assets, any historical or future profitability measurements, as
well as other external market conditions or factors that may be present. If
such impairment indicators are present or other factors exist that would
indicate that the carrying amount of the asset may not be recoverable, the CBOT
determines whether an impairment has occurred through the use of an
undiscounted cash flows analysis of assets at the lowest level for which
identifiable cash flows exist. In the event of an impairment, the CBOT
recognizes a loss for the difference between the carrying amount and the
estimated value of the asset as measured using quoted market prices or, in the
absence of quoted market prices, a discounted cash flow analysis.
Operating Segments
Management has identified three reportable operating segments, Exchange
Trading, Building Services and Electronic Trading. These represent the services
provided by CBOT. The accounting policies of the segments are the same as
described in the summary of significant accounting policies. The CBOT evaluates
segment reporting based on revenues and income from operations.
Adoption of new accounting policies
In 1999, the CBOT adopted Statement of Position ("SOP") 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use." SOP
98-1 provides guidance on accounting for the costs of computer software
developed or modified for internal use. The adoption of SOP 98-1 did not have a
material impact on the consolidated financial statements.
In 1999, the CBOT also adopted 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 on a
straight-line basis over 60 months. The cumulative effect of this change in
accounting principle of $2,920,000, net of tax benefit of $2,026,000, is
reflected in the Consolidated Statement of Income for the year ended December
31, 1999.
Recent accounting pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended and interpreted,
requires 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 the derivative instruments to be recorded each
period in current earnings or other comprehensive income depending on the
intended use of the derivatives. If the derivative is designated in a fair-
value hedge, the changes in the fair value of the derivative and the hedged
item will be recognized in earnings. If the derivative is designated in a cash-
flow hedge, changes in the fair value of the derivative will be recorded in
other comprehensive income and will be recognized in the Consolidated
Statements of Income when the hedged item affects earnings. SFAS No. 133
defines new requirements for designation and documentation of hedging
relationships as well as ongoing effectiveness assessments in order to use
hedge accounting. For a derivative that does not qualify as a hedge, changes in
fair value will be recognized in earnings. SFAS No. 133 is required to be
adopted by the CBOT effective January 1, 2001. The CBOT expects that at January
1, 2001, it will record approximately $100,000 as a cumulative transition
adjustment to earnings relating to derivatives not designated as hedges prior
to adoption of SFAS No. 133 and to derivatives designated in fair-value type
hedges prior to adopting SFAS No. 133, and approximately $500,000 in other
comprehensive income as a cumulative transition adjustment for derivatives
designated in cash-flow type hedges prior to adopting SFAS No. 133.
Prior year reclassifications
Certain reclassifications have been made in prior year amounts to conform to
current year presentations.
A-9
2. Minority Interests in Subsidiaries
Ceres was formed by the CBOT, as general partner, for the purpose of
engaging in activities related to financial and futures markets. The CBOT,
through eCBOT, as general partner, holds a 10% interest in Ceres. Members of
the CBOT are the limited partners of Ceres. Under the terms of the Ceres
partnership agreement, income and losses are allocated to the general partner
and limited partners based on their partnership interests. Losses in excess of
limited partner capital accounts are allocated to eCBOT, as general partner.
In 1997, Ceres acquired a 60% interest in Chicago Board Brokerage, LLC
("CBB"). During 1999, CBB was dissolved. In conjunction with the dissolution of
CBB, certain liabilities totaling approximately $789,000 were distributed to
and assumed by the CBOT. The CBOT made full payment in 1999.
Minority interests in subsidiaries includes the limited partners' interests
in Ceres and the minority interest in CBB.
3. Debt
Debt at December 31 consisted of the following (in thousands):
[Download Table]
2000 1999 1998
------- ------- -------
Private placement senior notes, due in 2007, at
annual interest rate of 6.81%................... $75,000 $75,000 $75,000
Unsecured revolving credit agreement, due in
2001, at annual interest rate based on LIBOR
(6.13% and 5.11% at December 31, 1999 and 1998,
respectively), plus .3%......................... -- 19,000 24,000
Secured revolving credit agreement, due in 2001,
at an annual interest rate based on LIBOR
(6.6875% at December 31, 2000), plus .625%...... 7,300 -- --
------- ------- -------
Total........................................ 82,300 94,000 99,000
Less current portion............................. 18,014 6,500 --
------- ------- -------
Total........................................ $64,286 $87,500 $99,000
======= ======= =======
In August 2000, the CBOT entered into a secured revolving credit agreement,
under which the CBOT had borrowed $7,300,000 at December 31, 2000. The
borrowing base, secured by certain receivables of the CBOT, will fluctuate
based on receivable balances. The CBOT used the proceeds to repay the 1997
unsecured revolving credit agreement. The secured revolving credit agreement
contains convenants that require, among other things, that the CBOT maintain
specified levels of minimum net worth and meet defined financial ratios.
In March 1997, the CBOT issued through a private placement, $75,000,000 in
6.81% senior notes due in 2007. The CBOT entered into an unsecured revolving
credit agreement for an aggregate of $50,000,000, maturing in 2001, under which
the CBOT borrowed $30,000,000. The aggregate commitment under the unsecured
revolving credit agreement was reduced by 25% each year beginning in March
1998.
During 1999, the CBOT increased the borrowing capacity under its line of
credit agreement to $30,000,000. At December 31, 1999, there were no amounts
borrowed under this agreement. The agreement was cancelled in 2000.
The aggregated amount of principal repayment requirements of the secured
revolving credit agreement and the private placement senior notes as of
December 31, 2000 are as follows (in thousands):
[Download Table]
2001............................. $18,014
2002............................. 10,714
2003............................. 10,714
2004............................. 10,714
2005 and thereafter.............. 32,144
A-10
Ceres has agreed to reimburse Deutsche Borse AG and the Swiss Stock Exchange
(collectively "Eurex") 10.2 million euros ($9,282,000 at December 31, 2000) for
certain software modifications for the a/c/e system. This amount, included in
note payable in the Consolidated Statements of Financial Condition, is due at
various dates during the second quarter of 2001. Payment of 3 million euros
will be due immediately in the event at least 200,000 contracts are traded on
the a/c/e system for five consecutive days.
4. Income taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. These temporary
differences result in taxable or deductible amounts in future years.
Differences between financial reporting and tax bases arise most frequently
from differences in the timing of expense recognition.
Significant components of the CBOT's deferred tax assets and liabilities as
of December 31, 2000 and 1999 are as follows (in thousands):
[Download Table]
2000 1999
------- -------
Deferred tax liabilities:
Depreciation........................................... $28,601 $29,988
Capitalized interest................................... 2,095 2,146
Other.................................................. 5,659 335
------- -------
Total deferred tax liabilities....................... 36,355 32,469
Deferred tax assets:
Employee and retiree benefit plans..................... 3,093 4,032
Other.................................................. 4,690 1,682
------- -------
Total deferred tax assets............................ 7,783 5,714
------- -------
Net deferred tax liabilities............................. $28,572 $26,755
======= =======
The CBOT has not established a valuation reserve at December 31, 2000 and
1999 as management believes that all deferred tax assets are fully realizable.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
[Download Table]
2000 1999 1998
----- ----- ----
Statutory federal income tax rate.................. (35.0)% (35.0)% 35.0%
State income tax rate, net of federal income tax
effect............................................ 1.4 (3.4) 5.1
Corporate restructuring costs...................... 42.3 5.9 --
Non-deductible expenses............................ 6.5 4.5 3.3
Other, net......................................... 8.7 0.2 (0.2)
----- ----- ----
Effective income tax rate.......................... 23.9% (27.8)% 43.2%
===== ===== ====
5. Membership
At December 31, 2000 and 1999, the membership consisted of the following:
[Download Table]
2000 1999
----- -----
Full memberships.............................................. 1,402 1,402
Associate memberships......................................... 779 770
GIMs.......................................................... 169 191
COMs.......................................................... 643 643
IDEMs......................................................... 641 641
A-11
All classes of membership generally have the same relative characteristics
with the exception of voting and trading rights and member preferences.
In accordance with the CBOT rules and regulations, the members preferences
in dissolution are commensurate with their class of membership. These
preferences along with their respective percentages are as follows:
[Download Table]
Preferences Percentage
----------- ----------
Full members....................................... 1.0 77.7%
Associate memberships.............................. 0.167 13.0%
GIMs............................................... 0.11 8.5%
IDEMs.............................................. 0.005 0.4%
COMs............................................... 0.005 0.4%
------
100.0%
======
Dues on CBOT memberships were waived for each quarter in 1999 and 1998. The
CBOT reinstated dues on memberships in June 2000.
6. Benefit Plans
Substantially all employees of the CBOT are covered by a noncontributory,
defined benefit pension plan. The benefits of this plan are based primarily on
the years of service and the employees' average compensation levels. The CBOT's
funding policy is to contribute, annually, the maximum amount that can be
deducted for federal income tax purposes. The plan assets are primarily
invested in marketable debt and equity securities.
The following provides a reconciliation of pension benefit obligation, plan
assets, funded status and net periodic benefit expense of the plan as of and
for the years ended December 31 (in thousands):
[Download Table]
2000 1999
------- -------
Change in benefit obligation:
Benefit obligation, beginning of year................ $23,799 $22,676
Service cost......................................... 1,678 1,575
Interest cost........................................ 1,950 1,604
Actuarial loss (gain)................................ 1,635 (758)
Benefits paid........................................ (2,710) (1,298)
------- -------
Benefit obligation, end of year........................ $26,352 $23,799
======= =======
Change in plan assets:
Fair value of plan assets at January 1............... $14,141 $14,521
Actual return on plan assets......................... 1,397 550
Company contributions................................ 5,031 368
Benefits paid........................................ (2,710) (1,298)
------- -------
Fair value of plan assets at December 31............... $17,859 $14,141
======= =======
Funded status:
Funded status of the plan at December 31............. $(8,493) $(9,658)
Unrecognized cost:
Actuarial and investment net losses.................. 6,664 4,870
Prior service cost................................... 10 9
Transition obligation................................ (204) (409)
------- -------
Accrued benefit cost................................... $(1,531) $(5,188)
======= =======
A-12
[Download Table]
2000 1999 1998
------- ------- ------
The components of net periodic benefit cost
are as follows:
Service cost............................... $ 1,678 $ 1,575 $1,073
Interest cost.............................. 1,950 1,604 1,327
Expected return on plan assets............. (1,397) (1,306) (1,139)
Net amortization:
Transition asset......................... (204) (204) (204)
Unrecognized prior service cost.......... (1) 15 15
Unrecognized net loss.................... 394 278 --
------- ------- ------
Net periodic benefit expense............... $ 2,420 $ 1,962 $1,072
======= ======= ======
Accrued benefit costs are included in other long-term liabilities on the
Consolidated Statements of Financial Condition.
The assumptions used in the measurement of the pension benefit obligation as
of December 31 are as follows:
[Download Table]
2000 1999
---- ----
Weighted average discount rate................................ 7.25% 6.5%
Expected return on plan assets................................ 9.0 9.0
Rate of compensation increase................................. 5.0 5.0
The CBOT has a retiree benefit plan which covers all eligible employees, as
defined. Employees retiring from the CBOT on or after age 55, who have at least
ten years of service, or after age 65 with five years of service, are entitled
to postretirement medical and life insurance benefits. The CBOT continues to
fund benefit costs on a pay-as-you-go basis. These costs totaled approximately
$80,700, $57,500 and $52,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
The following provides a reconciliation of postretirement obligation, plan
assets, funded status and net periodic benefit cost of the plan as of and for
the years ended December 31 (in thousands):
[Download Table]
2000 1999
------- -------
Change in benefit obligation:
Benefit obligation, beginning of year................ $ 3,490 $ 3,468
Service cost......................................... 238 238
Interest cost........................................ 285 250
Actuarial loss (gain)................................ 161 (408)
Benefits paid........................................ (85) (58)
------- -------
Benefit obligation, end of year........................ $ 4,089 $ 3,490
======= =======
Change in plan assets:
Fair value of plan assets at January 1............... $ -- $ --
Company contributions................................ 85 58
Benefits paid........................................ (85) (58)
------- -------
Fair value of plan assets at December 31............... $ -- $ --
======= =======
Funded status:
Funded status of the plan at December 31............. $(4,089) $(3,490)
Unrecognized net gain................................ (1,035) (1,252)
Unrecognized transition obligation................... 1,558 1,688
------- -------
Accrued benefit cost................................... $(3,566) $(3,054)
======= =======
A-13
[Download Table]
2000 1999 1998
------- ------- ----
The components of net periodic benefit cost are
as follows:
Service cost................................. $ 237 $ 238 $169
Interest cost................................ 285 250 212
Expected return on plan assets............... -- -- --
Net amortization:
Transition liabilities..................... 130 130 130
Net gain................................... (56) (31) (96)
------- ------- ----
Net periodic benefit cost...................... $ 596 $ 587 $415
======= ======= ====
Accrued benefit costs are included in other long-term liabilities on the
Consolidated Statements of Financial Condition.
The assumptions used in the measurement of the postretirement obligation as
of December 31 are as follows:
2000 1999
---- ----
Weighted average discount rate................. 7.25% 6.5%
Rate of compensation increase.................. 5.0 5.0
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 11% in 2000 and 1999 (decreasing by 1%
per year until a long-term rate of 5% is reached). If the health care cost
trend rate assumptions were increased by 1%, the accumulated postretirement
benefit obligation as of December 31, 2000 would be increased by 10%. The
effect of this change on the sum of the service costs and interest cost would
be an increase of 11%. If the health care cost trend rate assumptions were
decreased by 1%, the accumulated postretirement benefit obligation as of
December 31, 2000 would be decreased by 8%. The effect of this change on the
sum of the service costs and interest cost would be a decrease of 11%.
In addition to the defined benefit plan, the CBOT maintains a qualified
savings plan pursuant to Section 401(k) of the Internal Revenue Code. The plan
is a defined contribution plan offered to eligible employees of the CBOT, who
meet certain length of service requirements and elect to participate in the
plan. The CBOT will make matching contributions to certain participants based
on a formula specified by the plan. The cost of these matching contributions
amounted to approximately $1,368,000, $1,370,000 and $1,268,000 for the years
ended December 31, 2000, 1999 and 1998, respectively. The CBOT also sponsors a
nonqualified supplemental pension plan for certain former employees. The
liability for this nonqualified plan is funded by life insurance policies on
the lives of the participating employees. The CBOT has established a trust for
the purpose of administering the nonqualified plan.
The CBOT provides a health plan which provides benefits (hospital, surgical,
major medical and short-term disability) covering full-time salaried employees
of the CBOT. The plan is self-funded by the CBOT as claims are paid. Employees
contribute specified amounts to extend coverage to eligible dependents.
7. Commitments
Certain office space, data processing and office equipment are leased.
Certain of these leases contain escalation clauses. Rental expense for the
years ended December 31, 2000, 1999 and 1998 was $2,173,000, $2,461,000 and
$2,902,000, respectively. The future minimum rental payments under
noncancelable leases in effect as of December 31, 2000, in the aggregate and
for the next five years, are as follows (in thousands):
[Download Table]
2001.............................. $ 632
2002.............................. 287
2003.............................. 243
2004.............................. 187
2005.............................. 144
------
Total......................... $1,493
======
A-14
Building revenues relate primarily to the leasing of office and commercial
space, generally for periods ranging from one to five years. Future minimum
rentals receivable under noncancelable leases in effect as of December 31,
2000, in the aggregate and for the next five years, are as follows (in
thousands):
[Download Table]
2001............................. $22,482
2002............................. 17,831
2003............................. 10,521
2004............................. 5,524
2005............................. 2,134
2006 and thereafter.............. 1,739
-------
Total........................ $60,231
=======
In June 1997, Dow Jones & Company; ("Dow Jones") agreed to license certain
indexes and trademark rights to the CBOT. The agreement, which expires
September 30, 2002, requires the CBOT to pay Dow Jones annual royalties, based
on trading volumes with a minimum annual requirement of $2.0 million. The
initial license fee remitted to Dow Jones is being amortized over the term of
the agreement and is included in other assets on the Consolidated Statements of
Financial Condition.
The CBOT has established a policy, on Electronic Order Routing Systems
failure, that the maximum responsibility with respect to all claims from member
firms and floor brokers in any period of twelve consecutive months is not to
exceed $3,000,000.
Effective in 2000, Ceres entered into an alliance with Eurex for the trading
of financial derivative products on the a/c/e system. Ceres and Eurex each owns
50% of CBOT/Eurex Alliance. CBOT/Eurex Alliance and Ceres have commitments with
Eurex, Deutsche Borse Systems and Eurex Frankfort AG for approximately 120
million euros as of December 31, 2000 to fund the operations of the a/c/e
system and additional software enhancements. These payments are due at various
times through 2003 as follows in their approximate U.S. dollar equivalent as of
December 31, 2000 (in thousands):
[Download Table]
2001 $36,183
2002 26,078
2003 12,770
Certain additional modifications for the a/c/e system developed by Deutsche
Borse AG may be implemented on the a/c/e system, for which Ceres has agreed to
reimburse Deutsche Borse AG in the amount of 9.8 million euros ($9.2 million at
December 31, 2000) payable at various dates between June 30, 2001 and June 30,
2002.
The CBOT has employment agreements with certain members of management. In
addition, the CBOT entered into an agreement with its former President and
Chief Executive Officer, dated as of April 14, 2000, whereby his employment
agreement dated May 18, 1999, was terminated. The agreement sets forth certain
payments and benefits to include: approximately $1.9 million, paid on May 1,
2000; $1.4 million, payable on January 1 of each year from 2001 through 2003;
and certain medical, insurance and pension benefits. These costs are recognized
in other expense in the Consolidated Statements of Income.
A-15
8. Foreign Currency Forward Contracts
On September 27, 2000, the CBOT entered into foreign exchange forward
contracts with a financial institution to hedge its risk of foreign currency
fluctuations related to certain commitments in Eurodollars to Eurex and related
entities. The notional amount of these contracts total about $29.0 million with
exchange rates ranging from .89429 to .91100 and maturities at various dates
through 2003 which correspond to the terms of the commitments. In December
2000, the CBOT decided not to pursue, at this time, certain software
enhancements for the a/c/e system. The CBOT then entered into about $9.8
million of foreign exchange forward contracts offsetting certain of the
contracts entered into in September 2000. Gains and losses on the forward
contracts, which are hedging commitments, are deferred, and totaled a gain of
about $500,000 at December 31, 2000. A net gain of about $800,000 at December
31, 2000 on all other forward contracts is recognized currently in earnings and
is included in other revenue in the Consolidated Statements of Income.
9. Litigation and Settlement
The CBOT has been named as a defendant in various lawsuits. Although the
ultimate outcome of these matters cannot be presently determined, it is the
opinion of the management of the CBOT that resolution of these matters will not
have a material adverse effect on the consolidated financial statements.
Management believes that the right of Full Members to become members of the
Chicago Board Options Exchange, Inc. ("CBOE") will be preserved after the
proposed restructuring transactions. The CBOE has filed a proposed rule change
with the Securities and Exchange Commission whereby this right would be
terminated upon the occurrence of certain events. The CBOT initiated litigation
to protect this right and may take additional action to preserve this right.
Management believes that the outcome of these actions will not have a material
adverse effect on the consolidated financial statements.
As a result of the CBOT's proposed restructuring transactions, certain
Associate Members, GIMs, IDEMs and COMs have instituted litigation against
certain Full Members and a proposed class of all Full Members challenging the
proposed allocation of shares to the Associate Members, GIMs, IDEMs and COMs.
Management believes that the complaint is without merit and intends to
vigorously defend the suit on behalf of the individual defendant Full Members.
Management further believes that these proceedings will not have any material
adverse effect on the consolidated financial statements.
In April 1998 and January 1999, CBB was named as a defendant in two lawsuits
that sought to enjoin CBB from using the software under a license agreement
with Market Data Corporation ("MDC"). In April 1999, CBB entered into
settlement agreements whereby all claims against CBB were dismissed and CBB
received $1.0 million from MDC, which is recognized in the Consolidated
Statements of Income.
10. Deposits of U.S. Treasury securities
The rules and regulations of the CBOT require certain minimum financial
requirements for agricultural regularity and conditions of regularity for
originators of GNMA collateralized depository receipts, maintenance of capital
requirements and deposits on pending arbitration matters. To satisfy these
requirements, firms have deposited U.S. Treasury securities with the CBOT.
These deposits are not considered assets and
liabilities of the CBOT, nor does any interest earned on these deposits accrue
to the CBOT. The aggregate market value of these securities was about $15.0
million as of December 31, 2000 and 1999.
A-16
11. Operating Segments
The CBOT has three reportable operating segments, the Chicago Board of
Trade, Inc. ("Exchange Trading"), C-B-T Corporation ("Building Services," a
wholly owned real estate subsidiary) and Ceres's Electronic Trading Division
("Electronic Trading"), which maintains the electronic trading system. The CBOT
evaluates segment performance based on revenues and income from operations.
Revenues for each segment are based on the type of trading used by the external
customers, or from tenants of the CBOT's buildings. Intercompany transactions
between segments have been eliminated. A summary by operating segment follows
(in thousands);
[Download Table]
Exchange Building Electronic All
Trading Services Trading Other Total
-------- -------- ---------- ------- --------
Year Ended December 31, 2000
Revenues:
Exchange fees $ 83,789 $ -- $ 18,192 $ -- $101,981
Market data 61,060 -- -- -- 61,060
Building -- 24,530 -- -- 24,530
Services 17,848 -- -- -- 17,848
Members' dues 5,484 -- -- -- 5,484
Other 804 -- 1,020 192 2,016
-------- -------- -------- ------- --------
Total revenues 168,985 24,530 19,212 192 212,919
Depreciation and amortization 22,040 13,908 4,065 -- 40,013
Income (loss) from operations 21,836 (11,962) (12,618) 117 (2,627)
Total assets 100,531 236,342 35,321 -- 372,194
Capital expenditures 8,248 3,286 26,963 -- 38,497
Year Ended December 31, 1999
Revenues:
Exchange fees $ 83,913 $ -- $ 18,632 $ -- $102,545
Market data 53,962 -- -- 66 54,028
Building -- 22,653 -- -- 22,653
Services 20,279 -- -- -- 20,279
Members' dues 389 -- -- -- 389
Other 1,709 -- -- 1,293 3,002
-------- -------- -------- ------- --------
Total revenues 160,252 22,653 18,632 1,359 202,896
Depreciation and amortization 22,100 13,657 117 266 36,140
Income (loss) from operations 7,743 (14,175) (2,072) (3,129) (11,633)
Total assets 118,305 244,696 10,356 22 373,379
Capital expenditures 11,001 5,676 8,488 -- 25,165
Year Ended December 31, 1998
Revenues:
Exchange fees $ 89,365 $ -- $ 22,750 $ -- $112,115
Market data 53,012 -- -- 88 53,100
Building -- 21,876 -- -- 21,876
Services 16,907 -- -- -- 16,907
Members' dues 414 -- -- -- 414
Other 404 -- -- 422 826
-------- -------- -------- ------- --------
Total revenues 160,102 21,876 22,750 510 205,238
Depreciation and amortization 19,564 13,305 20 875 33,764
Income (loss) from operations 34,014 (14,001) 2,448 (5,543) 16,918
Total assets 130,585 250,620 7,107 12,659 400,971
Capital expenditures 20,038 4,122 701 2,124 26,985
A-17
12. Fair value of financial instruments
The CBOT believes that the carrying amount for certain of its financial
instruments is a reasonable estimate of fair value. Cash equivalents, accounts
receivable, prepaid expenses and other, and other assets are carried at amounts
which approximate fair value. Similarly, liabilities including accounts payable
and accrued liabilities, current portion of long-term debt, funds held for
deposit and membership transfers and other liabilities are carried at amounts
approximating fair value.
The carrying value of long-term debt approximates fair value. Fair value is
estimated using discounted cash flow analyses, based on the CBOT's estimated
incremental borrowing rate on borrowings with similar terms and maturities.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 2000 and 1999. Although management
is not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date, and current estimates of fair
value may differ significantly from the amounts presented herein.
13. Subsequent Events
On February 15, 2001, a purchaser of the CBOT's market data filed a
voluntary bankruptcy petition under Chapter 11. As a result, the CBOT
established an allowance of about $2,100,000 for amounts receivable from this
entity.
In February 2001, the CBOT entered into an employment agreement with its new
president as well as amended two employment agreements with current executives
of the CBOT. The agreements call for, among other incentives and benefits,
payments in the aggregate of about $3,000,000 during 2001.
* * * * *
A-18
APPENDIX B
PRO FORMA FINANCIAL INFORMATION
OF FOR-PROFIT CBOT
B-1
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements give effect to (i) the issuance of 39,797,650 shares of Class A
common stock, 1,402 shares of Class B Series B-1 common stock, 779 shares of
Class B Series B-2 common stock, 174 shares of Class B Series B-3 common stock,
642 shares of Class B Series B-4 common stock, and 643 shares of Class B Series
B-5 common stock in connection with the proposed demutualization and conversion
of membership interests as described elsewhere in this document and (ii) the
proposed acquisition of the Class A and Class B limited partners' interest in
Ceres Trading Limited Partnership by the issuance of Series A Convertible
Preferred Stock, as if they had occurred as of December 31, 2000, for purposes
of the unaudited pro forma condensed consolidated statement of financial
condition, and as of the beginning of the years ended December 31, 2000 and
1999 for purposes of the unaudited pro forma condensed consolidated statements
of income.
The unaudited pro forma information reflects the issuance of 39,797,650
shares of Class A common stock, 1,402 Class B Series B-1 common stock, 779
Class B Series B-2 common stock, 174 Class B Series B-3 common stock, 642 Class
B Series B-4 common stock, and 643 Class B Series B-5 common stock in exchange
for previously existing membership interests. No cash will be paid of received.
The unaudited pro forma information also reflects the acquisition of the
limited partners' interest in Ceres Trading Limited Partnership through the
issuance of 264,600 shares of Series A Cumulative Convertible Preferred Stock,
par value $.001 per share for $26,460,000, which represents the value of the
limited partners' interest as of December 31, 2000. This acquisition will be
effected through the purchase of the limited partner interests of Ceres Trading
Limited Partnership at the fair value on the date of the transaction. As there
are no material changes expected in the operations and business of the Ceres
Trading Limited Partnership, management believes that the fair value of the
Ceres Trading Limited Partnership will not change significantly before the date
of completion of the restructuring transactions. Ceres Trading Limited
Partnership will be liquidated after the proposed transaction has been
completed. As of December 31, 2000, there were 3,639 Class A limited
partnership units and 61 Class B limited partnership units outstanding in Ceres
Trading Limited Partnership. As of that date, the CBOT held 21 Class A limited
partnership units representing 0.5% of the outstanding units of that class.
For purposes of the calculation of net loss per share, the net loss was
adjusted by the 8% dividend on the Series A Cumulative Convertible Preferred
Stock. The number of shares used in the calculation of net loss per share is
based on the Class A and B shares to be issued to the members and are assumed
to be outstanding from the beginning of the period.
The unaudited pro forma condensed consolidated financial statements are
based on available information and on assumptions management believes are
reasonable and that reflect the effects of the transactions described above.
These unaudited pro forma condensed consolidated financial statements are
provided for informational purposes only and should not be construed to be
indicative of the CBOT's consolidated financial position or results of
operations had these transactions been consummated on the dates assumed and do
not in any way represent a projection or forecast of the CBOT's consolidated
financial position or results of operations for any future date or period. The
unaudited pro forma condensed consolidated financial statements should be read
in conjunction with the audited consolidated financial statements of the CBOT,
together with the related notes and report of independent auditors, and with
the information set forth under our "Capitalization," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Our
Business".
B-2
BOARD OF TRADE OF THE CITY OF CHICAGO, INC.
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF FINANCIAL CONDITION
December 31, 2000
(in thousands)
[Download Table]
Pro Forma After
-----------------------
Issuance of Acquisition
Class A and of Interest
ASSETS Actual B Shares in Ceres
------ -------- ----------- -----------
Current assets
Cash and cash equivalents:
Held under deposit and membership transfers. $ 4,653 $ 4,653 $ 4,653
Unrestricted................................ 23,552 23,552 23,552
-------- -------- --------
Total cash and cash equivalents........... 28,205 28,205 28,205
Accounts receivable........................... 20,920 20,920 20,920
Prepaid expenses.............................. 3,129 3,129 3,129
Income taxes receivable....................... 127 127 127
-------- -------- --------
Total current assets...................... 52,381 52,381 52,381
-------- -------- --------
Property and equipment
Land.......................................... 34,234 34,234 34,234
Buildings and equipment....................... 306,860 306,860 306,860
Furnishings and fixtures...................... 153,504 153,504 153,504
Computer software and systems................. 50,203 50,203 50,203
-------- -------- --------
Total property and equipment.............. 544,801 544,801 544,801
Less accumulated depreciation and
amortization................................. 239,745 239,745 239,745
-------- -------- --------
Property and equipment--net............... 305,056 305,056 305,056
Other assets.................................... 14,757 14,757 14,757
-------- -------- --------
Total assets.............................. $372,194 $372,194 $372,194
======== ======== ========
LIABILITIES, STOCKHOLDERS' EQUITY AND MEMBERS'
EQUITY
----------------------------------------------
Current liabilities
Accounts payable.............................. $ 17,805 $ 17,805 $ 17,805
Accrued real estate taxes..................... 8,500 8,500 8,500
Accrued pension obligation.................... 844 844 844
Accrued exchange fee rebates.................. 384 384 384
Accrued liabilities........................... 7,954 7,954 7,954
Funds held for deposit and membership
transfers.................................... 4,653 4,653 4,653
Current portion of long-term debt............. 18,014 18,014 18,014
Due to CBOT/Eurex Alliance.................... 8,939 8,939 8,939
Other current liabilities..................... 9,437 9,437 9,437
-------- -------- --------
Total current liabilities................. 76,530 76,530 76,530
-------- -------- --------
Deferred income taxes........................... 28,572 28,572 28,572
Long-term debt.................................. 64,286 64,286 64,286
Other liabilities............................... 11,486 11,486 11,486
-------- -------- --------
Total long-term liabilities............... 104,344 104,344 104,344
-------- -------- --------
Total liabilities......................... 180,874 180,874 180,874
Cumulative convertible preferred stock.......... -- -- 26,460
Common stock.................................... -- 44 44
Retained earnings............................... -- 191,276 164,816
Members' equity................................. 191,320 -- --
-------- -------- --------
Total liabilities, stockholders' equity
and members' equity...................... $372,194 $372,194 $372,194
======== ======== ========
The accompanying introduction and notes are an integral part of this Unaudited
Pro Forma Condensed Consolidated Statement of Financial Condition
B-3
BOARD OF TRADE OF THE CITY OF CHICAGO, INC.
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 31, 2000
(in thousands, except share and per share data)
[Download Table]
Pro Forma After
---------------------
Issuance
of Class Acquisition
A and B of Interest
Actual Shares in Ceres
-------- -------- -----------
Revenues:
Exchange fees............................... $101,981 $101,981 $ 101,981
Market data................................. 61,060 61,060 61,060
Building.................................... 24,530 24,530 24,530
Services.................................... 17,848 17,848 17,848
Dues........................................ 5,484 5,484 5,484
Other....................................... 2,016 2,016 2,016
-------- -------- -----------
Total revenue............................. 212,919 212,919 212,919
-------- -------- -----------
Expenses:
Salaries and benefits....................... 56,391 56,391 56,391
Depreciation and amortization............... 40,013 40,013 40,013
Professional services....................... 32,459 32,459 32,459
General and administrative expenses......... 52,299 52,299 52,299
Building operating costs.................... 22,584 22,584 22,584
Programs.................................... 3,539 3,539 3,539
Other....................................... 8,261 8,261 8,261
-------- -------- -----------
Total expenses............................ 215,546 215,546 215,546
-------- -------- -----------
Income from operations........................ (2,627) (2,627) (2,627)
Interest income............................. 1,242 1,242 1,242
Interest expense............................ 6,773 6,773 6,773
-------- -------- -----------
Loss before income taxes...................... (8,158) (8,158) (8,158)
Provision (benefit) for income taxes
Current..................................... 133 133 133
Deferred.................................... 1,817 1,817 1,817
-------- -------- -----------
Total provision for income taxes.......... 1,950 1,950 1,950
-------- -------- -----------
Net loss...................................... $(10,108) $(10,108) $ (10,108)
======== ======== ===========
Net loss per share............................ $ (0.31)
===========
Shares used in the calculation of net loss per
share........................................ 39,801,290
===========
The accompanying introduction and notes are an integral part of this Unaudited
Pro Forma Condensed Consolidated Statement of Income
B-4
BOARD OF TRADE OF THE CITY OF CHICAGO, INC.
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 31, 1999
(in thousands, except share and per share data)
[Download Table]
Pro Forma After
---------------------
Issuance
of Class Acquisition
A and B of Interest
Actual Shares in Ceres
-------- -------- -----------
Revenues:
Exchange fees............................... $102,545 $102,545 $ 102,545
Quotations.................................. 54,028 54,028 54,028
Building.................................... 22,653 22,653 22,653
Services.................................... 20,279 20,279 20,279
Dues........................................ 389 389 389
Other....................................... 3,002 3,002 3,002
-------- -------- -----------
Total revenues............................ 202,896 202,896 202,896
-------- -------- -----------
Expenses:
Salaries and benefits....................... 64,133 64,133 64,133
Depreciation and amortization............... 36,140 36,140 36,140
Professional services....................... 32,490 32,490 32,490
General and administrative expenses......... 50,988 50,988 50,988
Building operating costs.................... 23,171 23,171 23,171
Programs.................................... 7,280 7,280 7,280
Other....................................... 327 327 327
-------- -------- -----------
Total expenses............................ 214,529 214,529 214,529
-------- -------- -----------
Loss from operations.......................... (11,633) (11,633) (11,633)
Interest income............................. 1,052 1,052 1,052
Interest expense............................ 6,774 6,774 6,774
-------- -------- -----------
Loss before income taxes and cumulative effect
of change in accounting principle............ (17,355) (17,355) (17,355)
Provision for income taxes
Current..................................... (1,198) (1,198) (1,198)
Deferred.................................... (1,697) (1,697) (1,697)
-------- -------- -----------
Total provision for income taxes.......... (2,895) (2,895) (2,895)
-------- -------- -----------
Loss before cumulative effect of change in
accounting principle......................... (14,460) (14,460) (14,460)
Cumulative effect of change in accounting
principle--net of tax benefit of $2,026...... 2,920 2,920 2,920
-------- -------- -----------
Net loss before minority interest............. (17,380) (17,380) (17,380)
Minority interest in loss of subsidiaries..... 6,933 6,933 5,225
-------- -------- -----------
Net loss...................................... $(10,447) $(10,447) $ (12,155)
======== ======== ===========
Net loss per share............................ $ (0.36)
===========
Shares used in the calculation of net loss per
share........................................ 39,801,290
===========
The accompanying introduction and notes are an integral part of this Unaudited
Pro Forma Condensed Consolidated Statement of Income
B-5
NOTES TO UNAUDITED PROFORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The Unaudited Proforma Condensed Consolidated Statements of Financial
Condition reflects such adjustments as necessary, in the opinion of management,
to reflect the conversion of members' equity to common stock of For-Profit CBOT
and issuance of 264,600 shares of Series A convertible preferred stock valued
at $26,460,000 to the limited partners of Ceres in exchange for their limited
partnership interests based on the December 31, 2000 valuation of Ceres. The
actual number of shares of Series A convertible preferred stock to be issued
will be based on the final valuation report of Arthur Andersen relating to the
valuation of Ceres as of a date reasonably proximate to the date of the
completion of the Ceres merger.
The CBOT has estimated $12,400,000 for expenses to be incurred in connection
with the restructuring transactions. As of December 31, 2000 and 1999, the CBOT
has recognized $11,600,000 and $1,743,000, respectively, of these expenses in
the Unaudited Proforma Condensed Consolidated Statements of Income.
Net loss per share for the year ended December 31 is calculated as follows
(in thousands, except per share amounts):
[Download Table]
2000 1999
-------- --------
Net loss.................................................... $(10,108) $(12,155)
Less dividends on 8% cumulative convertible preferred
stock.................................................... 2,117 2,117
-------- --------
Loss attributable to common stockholders.................... $(12,225) $(14,272)
======== ========
Weighted average shares outstanding......................... 39,801 39,801
======== ========
Net loss per common share................................... $ (0.31) $ (0.36)
======== ========
B-6
APPENDIX C-1
FAIRNESS OPINION OF WILLIAM BLAIR & COMPANY, L.L.C.
January 16, 2001
The Independent Allocation Committee of the Board of Directors of
The Board of Trade of the City of Chicago, Inc.
The Board of Directors of the Board of Trade of the City of Chicago, Inc.
141 West Jackson Blvd.
Chicago, IL 60604
Gentlemen:
We understand that the Board of Trade of the City of Chicago, Inc. (the
"CBOT") is to be restructured and demutualized into a for-profit corporation
with current members owning the for-profit corporation (the "For-Profit CBOT").
In connection with the initial proposal for such restructuring and
demutualization ("Initial Restructuring Proposal") you previously requested,
and we delivered, our opinion dated May 5, 2000 (the "May 5 Opinion") as to the
fairness, from a financial point of view, of the allocation of ownership
described below (the "Allocation") among the members and holders of membership
interests (the "Members") of the CBOT with respect to their respective
memberships (the "Memberships").
Subsequent to the delivery of the May 5 Opinion, the Initial Restructuring
Proposal was revised (the "Restructuring") and at your request, on November 21,
2000, we updated the May 5 Opinion in light of the Restructuring (the "November
21 Opinion"). You have now requested that we update the November 21 Opinion. In
the Restructuring, the capital stock of the For-Profit CBOT will consist of
Class A and Class B common stock (39,805,150 shares and 3,643 shares,
respectively) and Series A Cumulative Convertible Preferred Stock ("Series A
Preferred"). Class A shares of common stock will have customary voting (subject
to the voting rights of the Class B common stock with respect to "core rights"
as defined in the draft Registration Statement on Form S-4 of the CBOT,
referred to below), liquidation and dividend rights and will represent
substantially all of the equity value and voting power of the common stock of
the For-Profit CBOT. Class A shares of common stock will be issued to each
member in accordance with the Allocation ratio in respect of his or her
Membership. Class B shares of common stock will be issued in five series,
corresponding respectively to the trading rights and privileges of the five
classes of Membership in the CBOT. One share of Class B common stock will be
issued to each Member in the series corresponding to his or her Membership. We
understand that any dividends on shares of common stock must be paid ratably on
shares of Class A and Class B common stock.
We understand that, as a result of the Restructuring, the CBOT's electronic
trading operations now conducted by the Ceres Trading Limited Partnership
("Ceres") will be operated as a wholly-owned subsidiary of For-Profit CBOT
focused exclusively on electronic trading (the "eCBOT"). Pursuant to this
reorganization of the CBOT's electronic trading operations, Ceres will be
liquidated and limited partnership interests in Ceres will be exchanged for
shares of Series A Preferred of For-Profit CBOT. The fairness of the
consideration received by the limited partners of Ceres in exchange for their
partnership interests pursuant to the merger of a wholly owned subsidiary of
the CBOT with and into Ceres (the "Ceres Merger") and the fairness of the
consideration received by the Members for their respective Memberships are
beyond the scope of this opinion, which addresses only the fairness, from a
financial point of view, of the Allocation on a relative basis among the
different classes of Members. We have been advised by the Independent
Allocation Committee of the Board of Directors of the CBOT in reliance upon the
advice of the Implementation Committee of the Board of Directors of the CBOT
that, for purposes of rendering this opinion, we may assume that the
Restructuring will not be effected by means of a liquidation. Please note that
we have made such assumption and that we have made such assumption without
independent legal analysis.
C-1-1
In connection with our review of the Restructuring and the preparation of
our opinion herein, we have examined: (a) certain descriptive information
concerning the Restructuring; (b) the draft dated January 9, 2001 of the
Registration Statement on Form S-4 of the CBOT relating to the proposed
issuance of shares of common stock and preferred stock of the For-Profit CBOT;
(c) the draft dated January 9, 2001 of the Amended and Restated Certificate of
Incorporation and By-Laws of For-Profit CBOT; (d) various CBOT documents
including the Board of Trade rules and regulations; (e) various trading and
financial statistics for the CBOT; (f) certain publicly available information
regarding terms of certain transactions involving restructurings of exchanges
comparable to the CBOT and the allocation of value; (g) presentations provided
to the CBOT by consultants and financial and legal advisors; (h) letters to the
CBOT from various members regarding the Restructuring; (i) information
regarding the historical trading prices of Memberships; and (j) certain other
information regarding the CBOT and its operations. We have also held
discussions of the foregoing with current and former members of the senior
management of the CBOT and of the various classes of Members, have considered
other matters which we have deemed relevant to our inquiry and have taken into
account such accepted financial and investment banking procedures and
considerations as we have deemed relevant.
Furthermore, in connection with our review of the Restructuring and the
preparation of our opinion herein, we have assumed that: (a) there will not be
any transaction (including any business combination) with the Chicago Board
Options Exchange (the "CBOE"); in this connection, we understand that prior
discussions between the CBOT and the CBOE of a possible business combination
have terminated; and (b) all existing trading rights and privileges and the
CBOE exercise right of Full Members will remain intact following the
Restructuring; in this connection, we note that CBOE has stated publicly its
view that, if consummated, the Restructuring would extinguish the exercise
right, and has also stated most recently in a filing with the SEC that the
exercise right will be terminated under certain conditions.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all the information
examined by or otherwise reviewed or discussed with us for purposes of this
opinion. We have not made or obtained an independent valuation or appraisal of
the assets, liabilities or solvency of the CBOT. We were not requested to, and
did not, participate in the structuring of the Restructuring nor were we asked
to consider, and our opinion does not address, the relative merits of the
Restructuring as compared to any alternative business strategies that might
exist for the CBOT or the effect of any other transaction in which the CBOT
might engage. Our opinion herein is based upon economic, market, financial and
other conditions existing on, and other information disclosed to us as of, the
date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion except as provided in the letter agreement
between William Blair & Company and the Independent Allocation Committee dated
March 8, 2000 and any amendments thereto.
William Blair & Company has been engaged in the investment banking business
since 1935. We have acted as the investment banker to the Independent
Allocation Committee in connection with the Restructuring and have received a
fee from the CBOT for our services. In addition, the CBOT has agreed to
indemnify us against certain liabilities arising out of our engagement.
Our investment banking services and our opinion were provided for the use
and benefit of the Independent Allocation Committee of the Board of Directors
and the Board of Directors of the CBOT in connection with the Restructuring of
the CBOT. Our opinion is limited to the fairness, from a financial point of
view, to the Members of the CBOT of the Allocation of shares of Class A common
stock in respect of their Memberships in connection with the Restructuring as
described below, and we do not address the merits of the underlying decision by
the CBOT to engage in the Restructuring and this opinion does not constitute a
recommendation to any Member as to how such Member should vote with respect to
the Restructuring. It is understood that this letter may not be disclosed or
otherwise referred to without prior written consent, except that the opinion
may be included in its entirety in a proxy statement and prospectus mailed to
the Members by the CBOT in connection with the Restructuring.
In arriving at our conclusion, we have considered various methodologies for
allocating the shares of Class A common stock in For-Profit CBOT. We have
concluded that an allocation methodology that takes into
C-1-2
account a combination of factors rather than a single factor is appropriate,
and that such combination of factors should include, with respect to each of
the five classes of Members: (a) relative liquidation rights; (b) relative
voting rights; (c) the allocation made in respect of each class of Membership
in connection with the formation of Ceres; (d) the market values of
Memberships; and (e) the contract volumes for which each class of Membership
has been responsible on a historical basis. In arriving at our conclusion, we
have attached greater importance to liquidation rights, voting rights and the
allocation made in respect of each Membership in connection with the formation
of Ceres.
Based upon and subject to the foregoing, it is our opinion that the
Allocation to Members of shares of Class A common stock in For-Profit CBOT in
respect of their Memberships in connection with the Restructuring in the ratio
of 5.0 : 1.0 : 0.5 : 0.06 : 0.07 to each Full, Associate, GIM, IDEM and COM
Membership, respectively, is fair, from a financial point of view to each of
the five classes of Members.
Very truly yours,
/S/ WILLIAM BLAIR & COMPANY, L.L.C.
-------------------------------------
WILLIAM BLAIR & COMPANY, L.L.C.
C-1-3
APPENDIX C-2
FAIRNESS OPINION OF ARTHUR ANDERSEN LLP
Boards of Directors
Board of Trade of the City of Chicago, Inc.
Electronic Chicago Board of Trade, Inc.
c/o
Ms. Carol A. Burke
Executive Vice President and
General Counsel
Chicago Board of Trade
141 West Jackson Boulevard
Chicago, Illinois 60604
January 16, 2001
Ladies and Gentlemen:
You have asked us to advise you with respect to the fairness from a
financial point of view to the Ceres Trading Limited Partnership ("Ceres") and
each class of the limited partners of Ceres of the consideration to be received
by each limited partner of Ceres in exchange for their respective limited
partnership interest pursuant to the Transaction (as defined below). We
understand that Ceres is a Delaware limited partnership, having five classes of
limited partners: Class A-1, Class A-2, Class A-3, Class A-4 and Class B. We
also understand that the Electronic Board of Trade, Inc. ("eCBOT"), a wholly
owned subsidiary of the Board of Trade of the City of Chicago, Inc. (the
"CBOT"), is the general partner of Ceres.
We understand that the CBOT is to be restructured pursuant to a series of
transactions (collectively, the "Restructuring") that generally involve (i) the
demutualization of the CBOT into a for-profit corporation ("For-Profit CBOT"),
with the members of the CBOT receiving shares of common stock of For-Profit
CBOT in respect of their memberships in the CBOT; (ii) the modernization of the
corporate governance mechanism of the CBOT pursuant to, among other things,
changes to the certificate of incorporation, bylaws and rules and regulations
of the CBOT; and (iii) the reorganization and consolidation of the electronic
trading business of the CBOT, part of which is currently operated by Ceres,
into eCBOT.
We also understand that, as part of the reorganization of the electronic
trading business of the CBOT in connection with the Restructuring, a newly
formed corporate subsidiary of For-Profit CBOT will merge with and into Ceres,
with Ceres as the surviving entity (the "Transaction"). As a result of the
Transaction, eCBOT will remain the general partner of Ceres and the For-Profit
CBOT will become a limited partner of Ceres. Following the Transaction, Ceres
will liquidate and its assets will be distributed to For-Profit CBOT and eCBOT
pursuant to the terms of the Amended and Restated Agreement of Limited
Partnership of Ceres. Pursuant to the Transaction, each limited partnership
interest in Ceres (other than any limited partnership interests then held by
For-Profit CBOT or any of its affiliates) will be exchanged for a number of
shares of the 8% Series A Cumulative Convertible Preferred Stock (the "Series A
Convertible Preferred Stock") of For-Profit CBOT. The number of shares of
Series A Convertible Preferred Stock that will be issued in exchange for each
limited partnership interest will be determined by the Boards of Directors of
the CBOT and eCBOT by dividing:
a) That partnership interest's allocable portion of the value of Ceres as
presented in the valuation report regarding the value of Ceres and the
partnership interests in Ceres, to be delivered as of a date reasonably
proximate to the consummation of the Transaction,
by
b) the liquidation preference of $100 per share of Series A Convertible
Preferred Stock.
C-2-1
In connection with our analysis, you have furnished us with certain
documents and other information concerning the Ceres and the CBOT, as we
requested. We have performed such investigations and analyses as we considered
appropriate. Among other items we have considered, we have:
1) Read current and historical financial information including Ceres
Consolidated Statements of Financial Position year-to-date for the
period ended August 31, 2000 (unaudited), Ceres and CBOT First Quarter
Financial Report 2000 for the quarter ended March 31, 2000 (audited),
Ceres and CBOT Consolidated Financial Statements for the year ended
December 31, 1999 (audited), Ceres Consolidated Financial Statements for
the years ended December 31, 1992, 1993, 1994 1995, 1996, 1997 and 1998
(audited), CBOT Annual Reports for the years ended December 31, 1995,
1996, 1997, 1998, and 1999 including financial statements (audited),
Ceres monthly reports of revenues and expenses for each month, January
through October, of fiscal year 2000 (unaudited), Summary of Obligation
and Payments to DBS Group for the Eurex software as of October 31, 2000
(unaudited);
2) Read certain publicly available business and financial information
relating to Ceres and the CBOT including Press Releases and public
information extracted from CBOT's website;
3) Read certain internal financial and operating information provided by
management, including Member Trading Volume for the Quarters Ending
March 31, 1999, June 30, 1999, September 30, 1999, December 31, 1999,
March 31, 2000 and Trailing Five-Quarter Average for Class B partners,
Volume Report: CBOT Exchange Fees System, Ceres CTI Volume Report for
Agriculture and Financials by firm number sequence for the year-to-date
through March 31, 1999, last three months for June 30, 1999, September
30, 1999, and December 31, 1999, and year-to-date through March 31,
2000, Ceres CTI Volume Report for Agriculture and Financials by firm
number sequence for the year-to-date through August 31, 2000, Ceres
Class B Units for the year ended December 31, 1999, CBOT Class B Capital
Balance Summary.
4) Researched and analyzed data for certain other companies, the securities
of which are publicly traded, which we believe may be similar or
comparable to the proposed terms of the 8% Series A Cumulative
Convertible Preferred Stock;
5) Held meetings and discussions with management and senior personnel to
discuss the business, operations, assets, historical financial results
and future prospects of For-Profit CBOT;
6) Considered the investment in technology made by Ceres for the fiscal
years ended December 31, 1997, 1998, 1999 and the interim through
November 30, 2000 to establish an electronic trading system;
7) Performed a discounted cash flow analysis of potential income generating
scenarios for Ceres based upon independent research and input from
management;
8) Read various agreements related to Ceres, the CBOT, a/c/e, and Eurex
from a financial point of view including the Ceres Trading Limited
Partnership Second Amended and Restated Agreement of Limited Partnership
dated as of September 8, 1997, Amended and Restated CBOT/Ceres License
Agreement dated May 15, 1998, Electronic Trading Division Expense
Agreement for CBOT/Ceres dated May 29, 1998, Implementation Regulations
of Eurex Deutschland and Eurex Zurich Concerning Technical Equipment
dated September 6, 1999, Alliance Agreement between CBOT, Ceres,
Deutsche Borse, Swiss Stock Exchange, Eurex Zurich, Eurex Frankfurt, and
Eurex Deutschland dated October 1, 1999, Software License Agreement
between CBOT, Ceres, Deutsche Borse, and Swiss Stock Exchange dated
October 1, 1999, the December 31, 1999 Unanimous Written Consent of the
Supervisory Board of CBOT/Eurex Alliance, LLC, Interim Agreement for
Ceres, JV, and DBS dated January 15, 2000, the July 27, 2000
Confirmation of Rights Agreement, the April 13, 2000 Market Supervision
Services Agreement, Master Software Development Agreement, and Systems
Operations Agreement and Supporting Documents;
9) Considered the financial terms of certain recent business combination
transactions in the securities and futures exchange industry; and
10) Conducted such other studies, analyses, inquiries and investigations as
we deemed appropriate.
C-2-2
In our analysis and in formulating our opinion, we have assumed and relied
upon the accuracy and completeness of all the financial and other information
provided to us or publicly available, and we have not assumed any
responsibility for the independent verification of such information. We have
further relied upon the assurances of management of Ceres and the CBOT that
they are unaware of any facts that would make the information provided to us
incomplete or misleading in any material respect. We have assumed, with your
consent, that the financial forecasts and projections provided to us by Ceres
and/or the CBOT, if any, were prepared in good faith and on a basis reflecting
the best currently available judgments and estimates of management. We have not
prepared an independent evaluation of the software, systems architecture,
network capability, etc. of the technology assets held by the Company. We
express no view whatever as to the federal, state or local tax consequences of
the Transaction.
Our services to the Company in connection with the Transaction have been
comprised solely of financial advisory services and not accounting, audit,
legal or tax services. Without limiting the foregoing, our services with
respect to the Transaction do not constitute, nor should they be construed to
constitute in any way, a review or audit of or any other procedures with
respect to any financial information nor should such services be relied upon by
any person to disclose weaknesses in internal controls, financial statement
errors or irregularities, or illegal acts or omissions of any person affiliated
with the Transaction. Our opinion is necessarily based on economic and market
conditions and other circumstances as they exist and can be evaluated by us on
the date hereof.
We have not acted as financial advisor to the CBOT, eCBOT or Ceres in
connection with the Transaction other than in connection with rendering this
opinion and in connection with estimating the fair market value of Ceres and
the partnership interests in Ceres for consideration by the Boards in effecting
the Transaction. Additionally, we have not been authorized to and have not
solicited alternative offers for Ceres or its assets, or investigated any other
alternative transactions that may be available to Ceres. It is our
understanding that none of the CBOT, eCBOT or Ceres has solicited or received
any offers for Ceres or its assets. Our opinion does not address nor shall it
be construed to address the underlying business decision to effect the
Transaction. We have performed and continue to perform various internal
accounting and tax services unrelated to the Transaction for Ceres and/or the
CBOT and have received customary fees for the rendering of such services.
It is understood that this letter is solely for the benefit and use of the
Boards of Directors of the CBOT, eCBOT and Ceres in their consideration of the
Transaction and may not be relied upon by any other person, used for any other
purpose or reproduced, disseminated, quoted or referred to at any time, in any
manner or for any purpose without our prior written consent with the exception
of its inclusion in the United States Securities and Exchange Commission, Form
S-4 Registration Statement related to the Restructuring, including, among other
things, the Transaction. This letter does not constitute a recommendation to
any member with respect to whether to vote in favor of the Restructuring or
take any other action in connection with the Restructuring or otherwise, and
should not be relied upon by any member as such.
Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, it is our opinion that as of the date hereof,
the consideration to be received by each limited partner of Ceres in exchange
for their respective limited partnership interests pursuant to the Transaction,
is fair, from a financial point of view, to Ceres and each class of the limited
partners of Ceres.
ARTHUR ANDERSEN LLP
/S/ ARTHUR ANDERSEN LLP
CHICAGO, ILLINOIS
JANUARY 16, 2001
C-2-3
APPENDIX C-3
PRELIMINARY VALUATION ANALYSIS OF ARTHUR ANDERSEN LLP
Board of Trade of the City of Chicago, Inc.
Electronic Chicago Board of Trade, Inc.
Members of the Boards of Directors
c/o
Board of Trade of the City of Chicago, Inc.
141 West Jackson Blvd.
Chicago, Illinois 60604-2994
Attn: Carol A. Burke, Executive Vice President and General Counsel
February 28, 2001
Ladies and Gentlemen:
We have completed our valuation analysis of the Ceres Trading Limited
Partnership ("Ceres") and the limited partnership interests in Ceres as of
December 31, 2000. The objective of our analysis was to provide our opinion of
the fair market value of Ceres and each of the underlying limited partnership
interests as of December 31, 2000 in connection with the proposed restructuring
transactions. We understand that a wholly owned affiliate of the Board of Trade
of the City of Chicago, Inc. ("CBOT"), Electronic Chicago Board of Trade, Inc.
("eCBOT"), is the General Partner of Ceres and that the results of our analysis
will be used to assist CBOT and eCBOT in considering a proposed merger
transaction in connection with the restructuring transactions. Specifically, we
understand that our analysis will be used to assist the Boards of Directors of
CBOT and eCBOT with regard to the use of the Series A convertible preferred
stock of For-Profit CBOT as merger consideration and the allocation of the
Series A convertible preferred stock among the Ceres limited partners pursuant
to the Ceres merger.
Arthur Andersen LLP does not make specific recommendations to buy or sell;
our work is designed to provide information that will assist you in making an
informed decision. We confirm that our services as described herein do not
present a conflict of interest. We have performed and continue to perform
various accounting and tax services for the CBOT that are unrelated to the
restructuring transactions and we have received customary fees for such
services. No portion of our fee was contingent upon the completion of the Ceres
merger or the conclusion reached in our analysis. Our valuation analysis and
conclusion are subject to the attached Statement of General Assumptions and
Limiting Conditions.
Definition of Value
The basis of value in our analysis is fair market value, which is defined as
the amount at which property would change hands between a willing buyer and a
willing seller when neither is acting under compulsion and when both have
reasonable knowledge of the relevant facts.
Scope of the Analysis and Methodology
We considered a broad scope of information, both internal and external to
Ceres, considered various approaches to estimating value, prepared independent
analyses and considered appropriate documents including the Ceres Second
Amended and Restated Agreement of Limited Partnership dated as of September 8,
1997 (the "Agreement"). We considered various valuation approaches, including
an income approach, market approach and net asset approach.
Income Approach. The income approach measures the value of an entity by the
present value of its future economic benefits. Value indications are developed
by discounting expected cash flows to their present value at a rate of return
that incorporates the time value of funds and the risks associated with the
particular investment. The discount rate selected is based on rates of return
available from alternative investments of similar type and quality as of the
valuation date.
C-3-1
Market Approach. The market approach measures the value of an entity through
an analysis of recent transactions or offerings of comparative entities. These
entities may be companies whose stock is actively traded or private companies
acquired in transactions for which the terms are known to us. Consideration is
given to the financial condition and operating performance of the entity being
appraised relative to those of the selected guideline companies operating in
the same or a similar line of business, and which are potentially subject to
corresponding economic, environmental, and political factors. The guideline
companies would be considered reasonable investment alternatives.
Cost or Net Asset Approach. The cost or net asset approach measures the
value of an entity by the net aggregate fair market value of the entity's
underlying assets. Application of this approach entails a restatement of the
balance sheet of the enterprise, substituting the fair market value of its
assets and liabilities for their recorded values as stated on their financial
statements. This approach is frequently used in valuing holding companies or
capital intensive firms.
We considered the three approaches described above and concluded that the
fair market value of Ceres is best determined by the net asset approach. As of
the date of valuation, the assets of Ceres consisted of its interest in the
a/c/e system software and in CBOT/Eurex Alliance, L.L.C. and its various
licensing agreements related to electronic trading support for the CBOT.
In arriving at our conclusions, we made the following assumptions:
. The CBOT transitioned from the Project A platform to the a/c/e system on
or about August 27, 2000.
. The a/c/e system is deemed to be state-of-the-art by the CBOT and the
Project A platform, as a local-area network platform, is no longer
competitive. Therefore, the a/c/e system is valuable and the Project A
platform is obsolete.
. Except for order routing software to be financed and owned by the CBOT,
Ceres owns the rights to the a/c/e system software pursuant to its
alliance agreements with Deutsche Borse AG and the Swiss Stock Exchange.
. Ceres has, both directly and indirectly, in accordance with its 50
percent ownership in CBOT/Eurex Alliance, L.L.C., incurred costs
associated with certain a/c/e system modifications and, through December
31, 2000, these expenditures totaled $43,346,257. Additionally, purchases
of computer software and systems related to the a/c/e system in the
amount of $30,953,934 were capitalized by Ceres, as of December 31, 2000.
. The CBOT intends to reorganize and consolidate its electronic trading
business into its wholly owned eCBOT subsidiary in connection with the
restructuring transactions. As a result, it would be necessary for For-
Profit CBOT to acquire, directly or indirectly, all limited partnership
interests in Ceres currently held by the members of the CBOT.
. The Ceres limited partnership agreement provides that eCBOT, as general
partner, may dissolve Ceres at will.
. The Ceres limited partnership agreement states that, upon dissolution of
Ceres, the assets of Ceres shall be liquidated and the proceeds shall be
distributed to the partners of Ceres in accordance with their capital
accounts and the balance, if any, in accordance with their percentage
interests.
We considered that rights to the use of a/c/e system and the a/c/e
system modifications could conceivably provide Ceres with the ability to
provide electronic trading capabilities to other exchanges. Under this
scenario, it is feasible that Ceres' economic profile would be similar to
that of its current operations (i.e. receiving fees for electronic trades,
etc.) or that it could license the software for use with other exchanges
for royalty payments. However, the economics under such scenarios are
highly uncertain due to the speculative nature of the fees achievable in an
increasingly competitive environment and the operating costs associated
with continued maintenance of the system. Additionally, given the ability
of eCBOT, as the general partner of Ceres, to unilaterally liquidate the
business, the probability of such a scenario is extremely low.
C-3-2
Exhibit 1 presents the Electronic Trading Division's historical financial
statements.
Exhibit 2 presents our derivation of the net asset value of Ceres, as of
December 31, 2000. As shown, the partners' equity restated at market value
amounts to $29,356,583. Therefore, we conclude that the fair market value of
Ceres, as of the valuation date, is $29,400,000 (rounded).
Allocation of Fair Market Value to Partnership Interests
We understand that, pursuant to Section 3.4(a) of the Agreement, the
partners' capital accounts shall be marked-to-market upon dissolution of Ceres
in accordance with the terms and provisions of Section 4 of the Agreement.
Accordingly, our allocation to the Class B unit holders adjusts their capital
account balances such that 40 percent of the value is allocated pro rata
according to the number of Class B units owned and 60 percent is allocated
according to their respective Electronic Trading System Clearing Volume with
respect to contracts traded on the CBOT. For tax purposes, we understand that
the capital account balances for all Class B unit holders were zero, as of
December 31, 2000. The allocation of Ceres' market value among the Class A and
Class B unit holders is provided in Exhibit 3(a) through 3(b).
Very truly yours,
ARTHUR ANDERSEN LLP
/s/ ARTHUR ANDERSEN LLP
C-3-3
STATEMENT OF GENERAL ASSUMPTIONS AND LIMITING CONDITIONS
This report has been made with the following general assumptions and
limiting conditions:
1. No investigation has been made of, and no responsibility is assumed for,
the legal description or legal matters related to the asset(s) being
valued, including title or encumbrances. Title to the asset(s) is
assumed to be good and marketable unless otherwise stated. The asset(s)
is (are) assumed to be free and clear of any liens, easements or
encumbrances unless otherwise stated.
2. Information furnished by others, upon which all or portions of this
valuation are based, is believed to be reliable, but has not been
verified in all cases. No warranty is given as to the accuracy of such
information.
3. This report has been made only for the purpose stated and shall not be
used for any other purpose. Neither this report nor any portions thereof
including, without limitations, any conclusions as to value, the
identity of Arthur Andersen or any individuals signing or associated
with this report, or the professional associations or organizations with
which they are affiliated shall be disseminated to third parties by any
means without the prior written consent and approval of Arthur Andersen.
Arthur Andersen has consented to the inclusion of this report in the
Form S-4 Registration Statement of CBOT relating to the restructuring
transactions described therein.
4. It is assumed that all required licenses, certificates of occupancy,
consents, or other legislative or administrative authority from any
local, state, or national, government or private entity or organization
have been, or can readily be, obtained or renewed for any use on which
the value estimate contained in this report is based.
5. Full compliance with all applicable federal, state and local zoning,
use, environmental and similar laws and regulations are assumed, unless
otherwise stated.
6. Responsible ownership and competent property management are assumed.
C-3-4
EXHIBIT 1(a)
CERES TRADING LIMITED PARTNERSHIP
HISTORICAL SUMMARY OF OPERATIONS--ELECTRONIC TRADING DIVISION
[Enlarge/Download Table]
1996 2000
1994 Actual 1995 Actual Actual 1997 Actual 1998 Actual 1999 Actual Actual
----------- ----------- ---------- ----------- ----------- ----------- ------------
Average Daily Volume.... 1,789 2,086 9,526 28,812 46,161 44,640
Annual Volume........... 67,974 531,928 2,438,712 5,929,134 12,339,328 11,160,033
Revenue Per Contract.... $ 0.35 $ 1.46 $ 2.30 $ 2.05 $ 1.84 $ 1.67
Revenues:
Nonmember Fees......... $ 20,798 $ 514,907 $3,213,283 $ 5,691,075 $22,751,000 $18,632,118
Member Fees............ 3,228 259,897 2,405,659 6,447,761 -- --
Interest............... 67,036 359,000 54,133
----------- ----------- ---------- ----------- ----------- ----------- ------------
Total Revenues....... $ 24,026 $ 774,804 $5,618,942 $12,205,872 $23,110,000 $18,686,251 $ 19,240,003
Operating Expenses:
Information Systems
Allocation............ 351,834 760,168 1,438,233 2,307,315 2,816,646 3,658,836
Leased Programmers..... 145,020 493,365 940,660 995,196 4,355,979 4,048,777 2,760,677
Other.................. 66,401 103,677 1,419,848 3,132,303
Equity (Gain)/Loss in
CEJV.................. --
Eurex-Related
Expenses.............. 10,874,753 11,024,878 21,446,626
----------- ----------- ---------- ----------- ----------- ----------- ------------
Subtotal-Operating
Expenses............ 496,854 1,253,533 2,378,893 3,368,912 18,151,055 20,152,339 27,339,606
Partnership Overhead
Expenses:
Administration
Allocation............ 62,256 88,800 102,183 97,484 -- -- 426,093
BOTCC Computer
Services.............. 8,774 9,747 8,631 8,816 -- --
Audit/Legal Fees....... 8,068 14,837 29,526 32,222 -- --
Other Overhead
Expenses.............. 1,485 1,647 552 195 -- --
----------- ----------- ---------- ----------- ----------- ----------- ------------
Subtotal--Overhead
Expenses............ 80,583 115,031 140,892 138,717 168,808 246,859 426,093
Earnings Before Taxes,
Interest &
Depreciation........... $ (553,411) $ (593,760) $3,099,157 $ 8,698,243 $ 4,790,137 $(1,712,947) $ (8,525,697)
Depreciation Expense.... 433,471 532,854 533,593 421,240 20,334 116,661 4,152,637
----------- ----------- ---------- ----------- ----------- ----------- ------------
Earnings Before Taxes
and Interest........... $ (986,882) $(1,126,614) $2,565,564 $ 8,277,003 $ 4,769,803 $(1,829,608) $(12,678,333)
Interest Expenses....... 167,124 262,750 192,122 13,214 12,059 1,178,783
TCAM Write-Off.......... 1,962,856 -- --
Partnership
Income/(Loss).......... $(1,154,006) $(1,389,365) $2,373,442 $ 8,263,789 $ 2,806,947 $(1,841,667) $(13,857,117)
=========== =========== ========== =========== =========== =========== ============
Capital Expenditures.... $ 460,844 $ 0 $ 5,372 $ 1,433,454 $ 701,000 $ 8,488,000 $ 26,962,000
C-3-5
EXHIBIT 1(b)
CERES TRADING LIMITED PARTNERSHIP
HISTORICAL STATEMENT OF FINANCIAL CONDITION--ELECTRONIC TRADING DIVISION
[Enlarge/Download Table]
1996 1997 1998 2000
1994 Actual 1995 Actual Actual Actual Actual 1999 Actual Actual
YEAR ----------- ----------- ---------- ---------- ---------- ----------- ------------
Assets:
Cash and Cash
Equivalents........... $ 15,190 $ 45,430 $4,237,145 $4,613,000 $ 685,524 $ 2,354,835
Accounts Receivable.... $ 24,026 129,194 600,642 992,856 1,800,000 993,558 1,704,872
Capital Contributions
Receivable............ 2,817
Prepaid Expenses....... 102,000 1,435
Deferred Organization
and Development
Costs................. 70,977 45,928 20,880
Computer Software and
Systems............... 1,411,769 903,964 400,791 1,433,885 8,329,668 30,953,934
Investment in &
Advances to
CBOT/Eurex Alliance,
LLC................... 500,000
Other Fixed Assets--
Net................... 694,000 345,338 513,845
----------- ----------- ---------- ---------- ---------- ----------- ------------
Total Assets......... $ 1,506,772 $ 1,094,276 $1,067,743 $6,768,703 $7,107,000 $10,355,523 $ 36,027,486
=========== =========== ========== ========== ========== =========== ============
Liabilities and
Partners' Equity:
Accounts Payable and
Accrued Expenses...... $ 34,353 $ 907 $ 115,624 $1,022,247 $5,209,000 $ 9,476,000 $ 313,323
Due to CBOT/Eurex
Alliance LLC.......... 9,152,623
Notes Payable.......... 9,069,252
Advances from General
Partner............... 2,757,899 3,768,212 1,253,520 1,012,000 31,481,963
Partners' Equity....... (1,285,480) (2,674,843) (301,401) 5,746,456 1,898,000 (132,000) (13,989,674)
----------- ----------- ---------- ---------- ---------- ----------- ------------
Total Liabilities and
Partners' Equity.... $ 1,506,772 $ 1,094,276 $1,067,743 $6,768,703 $7,107,000 $10,356,000 $ 36,027,486
=========== =========== ========== ========== ========== =========== ============
C-3-6
EXHIBIT 2
CERES TRADING LIMITED PARTNERSHIP
ELECTRONIC TRADING DIVISION
Restated Balance Sheet as of December 31, 2000
[Download Table]
Book Fair Market
Value Value (2)
------------ -----------
Assets:
Cash and Cash Equivalents.......................... $ 2,354,835 $ 2,354,835
Accounts Receivable................................ 1,704,872 1,704,872
Capital Contributions Receivable................... 0 0
Prepaid Expenses................................... 0 0
Deferred Organization and Development Costs........ 0 0
Computer Software and Systems...................... 30,953,934 30,953,934
Investment in and Advances to CBOT/Eurex Alliance,
LLC............................................... 500,000 500,000
Previously Incurred, Non-Capitalized Eurex-Related
Expenses (1)...................................... 43,346,257
Other Fixed Assets--Net............................ 513,845 513,845
------------ -----------
Total Assets..................................... $ 36,027,486 $79,373,743
============ ===========
Liabilities and Partners' Equity:
Accounts Payable and Accrued Expenses.............. $ 313,323 $ 313,323
Due to CBOT/Eurex Alliance LLC..................... 9,152,623 9,152,623
Notes Payable...................................... 9,069,252 9,069,252
Advances from General Partner...................... 31,481,963 31,481,963
Partners' Equity................................... (13,989,674) 29,356,583
------------ -----------
Total Liabilities and Partners' Equity........... $ 36,027,486 $79,373,743
============ ===========
Concluded Value of Partnership (rounded)............. $29,400,000
--------
(1) Previously Incurred, Non-Capitalized Eurex-Related Expenses:
[Download Table]
FY '98........................................................ $10,874,753
FY '99........................................................ 11,024,878
YTD '00....................................................... 21,446,626
-----------
Total..................................................... $43,346,257
===========
(2) For assets and liabilities other than the Eurex Modification Expenses,
Arthur Andersen has relied on book value as being representative of their
fair market value.
C-3-7
APPENDIX D
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
BOARD OF TRADE OF THECITY OF CHICAGO, INC.
(Originally incorporated in the State of Delaware under the name
Delaware CBOT, Inc. on May 12, 2000)
ARTICLE I
NAME
The name of the corporation is Board of Trade of the City of Chicago, Inc.
(hereinafter referred to as the "Corporation").
ARTICLE II
REGISTERED AGENT
The address of the registered office of the Corporation in the State of
Delaware is 9 Loockerman Street, in the City of Dover, County of Kent, Delaware
19901. The name of the registered agent of the Corporation at such address is
National Registered Agents, Inc.
ARTICLE III
CORPORATE PURPOSES
The nature of the business or purposes to be conducted or promoted by the
Corporation are to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of the State of Delaware (as
amended from time to time, the "DGCL").
ARTICLE IV
CAPITAL STOCK
A. Authorized Shares.
The total number of shares of stock which the Corporation shall have the
authority to issue is 110,000,000, which shares shall be divided into classes
and series as follows:
99,996,273 shares of Class A Common Stock, par value $0.001 per share
(the "Class A Common Stock");
3,727 shares of Class B Common Stock, par value $0.001 per share (the
"Class B Common Stock" and, together with the Class A Common Stock, the
"Common Stock"), of which:
1,402 shares shall be Class B Common Stock, Series B-1 (the "Series
B-1");
866 shares shall be Class B Common Stock, Series B-2 (the "Series B-
2");
D-1
174 shares shall be Class B Common Stock, Series B-3 (the "Series B-
3");
643 shares shall be Class B Common Stock, Series B-4 (the "Series B-
4"); and
642 shares shall be Class B Common Stock, Series B-5 (the "Series B-
5"); and
10,000,000 shares of Preferred Stock, par value $0.001 per share (the
"Preferred Stock").
The powers, preferences and rights of the shares of such classes and series,
and the qualifications, limitations and restrictions thereof, are as set forth
hereinafter in this Amended and Restated Certificate of Incorporation
(hereinafter referred to as the "Certificate of Incorporation"). The number of
authorized shares of Preferred Stock may be increased or decreased (but not
below the number of shares thereof then outstanding) from time to time by the
affirmative vote of the holders of a majority of the stock of the Corporation
entitled to vote.
B. Common Stock.
1. Voting Rights and Powers. Except as otherwise provided in this
Certificate of Incorporation or required by law, with respect to all matters
upon which stockholders are entitled to vote generally, the holders of the
outstanding shares of Class A Common Stock shall vote together with the holders
of any other outstanding shares of stock of the Corporation entitled to vote
thereon, without regard to class, and each holder of outstanding shares of
Class A Common Stock shall be entitled to one (1) vote per such share;
provided, however, that the holders of Class A Common Stock shall not be
entitled to vote, either with the holders of Series B-1 and Series B-2 or
otherwise, on the matters to be voted on by the holders of Series B-1 and
Series B-2 set forth in Section C(2) of this Article IV. Except as otherwise
provided in this Certificate of Incorporation or required by law, the holders
of outstanding shares of Class B Common Stock shall not be entitled to vote on
any matter. On any matter on which the holders of Series B-1 and Series B-2 are
entitled to vote together as a class pursuant to Section C(2) of this Article
IV, or are otherwise required to vote together with other holders of
outstanding shares of Class B Common Stock as a class pursuant to the DGCL,
each holder of outstanding shares of Series B-1 shall be entitled to one (1)
vote per such share and each holder of outstanding shares of Series B-2 shall
be entitled to one-sixth ( 1/6) of one (1) vote per such share. On any matter
on which the holders of Series B-3, Series B-4 and Series B-5 are required to
vote together with other holders of outstanding shares of Class B Common Stock
as a class pursuant to the DGCL, each holder of outstanding shares of Series B-
3, Series B-4 and Series B-5 shall be entitled to one-tenth ( 1/10) of one (1)
vote per such share.
2. Dividends. Subject to such rights and preferences of the Preferred Stock
as are set forth herein or in any resolution or resolutions authorizing the
issuance of such Preferred Stock pursuant to Section D of this Article IV, the
holders of Class A Common Stock and Class B Common Stock shall be entitled to
receive such dividends as may from time to time be declared by the Board of
Directors on the shares of such classes out of funds legally available
therefor; provided that dividends may only be declared ratably on the shares of
both such classes of Common Stocks.
3. Distribution of Assets Upon Liquidation. In the event the Corporation
shall be liquidated, dissolved or wound up, whether voluntarily or
involuntarily, after there shall have been paid or set aside for the holders of
all shares of the Preferred Stock then outstanding the full preferential
amounts to which they are entitled hereunder or under the resolution or
resolutions authorizing the issuance of such Preferred Stock pursuant to
Section D of this Article IV, the net assets of the Corporation remaining
thereafter shall be distributed ratably among the holders of Common Stock.
4. Initial Restriction on Transfer. For a period of one hundred eighty (180)
days following the initial issuance of Class A Common Stock by the Corporation,
no share of Class A Common Stock may be sold, transferred or otherwise disposed
of except (a) by operation of law, (b) in a transaction specifically approved
by the Board of Directors of the Corporation or (c) in a transaction
consummated in connection with and conditioned upon the sale, transfer or
disposal of Class B Common Stock that results in the number of shares of Class
A Common Stock associated with the series of such Class B Common Stock being
simultaneously
D-2
sold, transferred or disposed of to the same transferee of such Class B Common
Stock (i.e., 25,000 shares of Class A Common Stock may be transferred with one
share of Series B-1 Class B Common Stock; 5,000 shares of Class A Common Stock
may be transferred with one share of Series B-2 Class B Common Stock; 2,500
shares of Class A Common Stock may be transferred with one share of Series B-3
Class B Common Stock; 300 shares of Class A Common Stock may be transferred
with one share of Series B-4 Class B Common Stock and 350 shares of Class A
Common Stock may be transferred with one share of Series B-5 Class B Common
Stock). Any purported sale, transfer or other disposition of Common Stock not
in accordance with the preceding sentence shall be void and shall not be
recorded on the books of or otherwise recognized by the Corporation.
Notwithstanding the foregoing provisions of this Section B(4) of Article IV,
the Board of Directors may remove some or all of the foregoing restrictions on
transfer if it determines, in its sole and absolute discretion, that such
removal is appropriate.
5. Conversion Rights of Series B-3.
(a) Conversion. Subject to, and upon compliance with, the provisions of
this Section B(5) of Article IV, any two (2) shares of Series B-3 shall be
convertible at the option of the holder into one (1) fully paid and
nonassessable share of Series B-2. If any odd number of shares of Series B-
3 are submitted for conversion, the Corporation shall not be obligated to
issue any fractional share of Series B-2 but shall instead be entitled to
issue scrip in lieu of such fraction in accordance with Section 155 of the
DGCL.
(b) Mechanics of Conversion. A holder of shares of Series B-3 may
exercise the conversion right specified in Section B(5)(a) of Article IV as
to such holder's shares by surrendering to the Corporation or any transfer
agent of the Corporation the certificate or certificates representing, or
other evidence of ownership of, the shares to be converted, accompanied by
written notice stating that the holder elects to convert all of the shares
represented thereby. Conversion shall be deemed to have been effected on
the date when delivery of such written notice and share certificate or
certificates (or other evidence of ownership) is made, and such date is
referred to herein as the Conversion Date. As promptly as practicable after
the Conversion Date, the Corporation shall issue and deliver to or upon the
written order of such holder a certificate or certificates representing, or
other evidence of ownership of, the number of whole shares of Series B-2 to
which such holder is entitled as a result of the exercise of such
conversion right. The person in whose name the certificate or certificates
representing Series B-2, or other evidence of ownership of, are to be
issued shall be deemed to have become the holder of record of such Series
B-2 on the applicable Conversion Date.
(c) Status of Converted Shares. Shares of Series B-3 that are converted
into shares of SeriesB-2 shall not be reissued.
(d) Shares Reserved for Issuance. In connection with any conversion
pursuant to this Section B(5) of Article IV, the Corporation shall take all
actions necessary to make available out of its authorized but unissued
shares of Series B-2, solely for the purpose of issuance upon the
conversion of the Series B-3, such number of shares of Series B-2 issuable
upon the conversion of all outstanding Series B-3.
C. Class B Common Stock.
The holders of each series of Class B Common Stock shall have the membership
rights and voting rights, and shall be subject to the restrictions, terms and
conditions, set forth below.
1. Series Membership Rights.
(a) Series B-1. Each holder of a share of Series B-1 who satisfies the
qualifications for and requirements of Full Membership in the Corporation
as set forth in the Rules and Regulations of the Corporation (hereinafter
referred to collectively, and as amended from time to time, as the "Rules,"
a copy of which will be furnished to any record holder of Class B Common
Stock upon request) shall be entitled to the rights and privileges of, and
shall be subject to the restrictions, conditions and limitations on, a Full
Member as set forth in this Certificate of Incorporation, the Amended and
Restated Bylaws of the Corporation (as amended from time to time, the
"Bylaws") and the Rules.
(b) Series B-2. Each holder of a share of Series B-2 who satisfies the
qualifications for and requirements of Associate Membership in the
Corporation as set forth in the Rules shall be entitled to the
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rights and privileges of, and shall be subject to the restrictions,
conditions and limitations on, an Associate Member as set forth in this
Certificate of Incorporation, the Bylaws and the Rules.
(c) Series B-3. Each holder of a share of Series B-3 who satisfies the
qualifications for and requirements of being a holder of a GIM Membership
Interest in the Corporation as set forth in the Rules shall be entitled to
the rights and privileges of, and shall be subject to the restrictions,
conditions and limitations on, a holder of a GIM Membership Interest as set
forth in this Certificate of Incorporation, the Bylaws and the Rules.
(d) Series B-4. Each holder of a share of Series B-4 who satisfies the
qualifications for and requirements of being a holder of a IDEM Membership
Interest in the Corporation as set forth in the Rules shall be entitled to
the rights and privileges of, and shall be subject to the restrictions,
conditions and limitations on, a holder of a IDEM Membership Interest as
set forth in this Certificate of Incorporation, the Bylaws and the Rules.
(e) Series B-5. Each holder of a share of Series B-5 who satisfies the
qualifications for and requirements of being a holder of an COM Membership
Interest in the Corporation as set forth in the Rules shall be entitled to
the rights and privileges of, and shall be subject to the restrictions,
conditions and limitations on, a holder of an COM Membership Interest as
set forth in this Certificate of Incorporation, the Bylaws and the Rules.
(f) In addition to the membership rights and privileges set forth above,
each holder of a share of any series of Class B Common Stock shall be
entitled to all trading rights and privileges with respect to those
products that such holder is entitled to trade on the open outcry exchange
system of the Corporation on any electronic trading system maintained by
the Corporation or any of its affiliates or any of their respective
successors or successors-in-interest.
2. Series Voting Rights. In addition to any vote of the holders of any class
or series of stock of the Corporation required by law, the affirmative vote of
the holders of a majority of the voting power of the then-outstanding shares of
the Series B-1 and the Series B-2, voting together as a class based on their
respective voting rights, shall be required to adopt any amendment or make any
change to this Certificate of Incorporation, the bylaws of the Corporation or
the Rules that, in the sole and absolute determination of the Board of
Directors, adversely affects (a) the allocation of products that the holders of
any series of Class B Common Stock are permitted to trade on the exchange
facilities of the Corporation (including both the open outcry trading system
and the electronic trading system), (b) the requirement that holders of shares
of Class B Common Stock who meet the applicable membership and eligibility
requirements will be charged transaction fees for trades of For-Profit CBOT's
products for their accounts that are lower than the transaction fees charged to
any participant who is not a holder of Class B Common Stock for the same
products, whether trading utilizing the open outcry trading system or the
electronic trading system, (c) the authorized number of shares of any series of
Class B Common Stock, (d) the membership qualifications or eligibility
requirements for holding shares of any series of Class B Common Stock or
exercising any of the membership rights and privileges associated with such
series or (e) the Commitment to Maintain Open Outcry Markets set forth in
Section E of Article IV of this Certificate of Incorporation.
D. Preferred Stock.
The Board of Directors is authorized, subject to any limitations prescribed
by law, to provide for the issuance of shares of Preferred Stock in series, and
by filing a certificate pursuant to the applicable law of the State of Delaware
(such certificate being hereinafter referred to as a "Preferred Stock
Designation"), to establish from time to time the number of shares to be
included in each such series, and to fix the designation, powers, preferences
and rights of the shares of each such series and any qualifications,
limitations or restrictions thereof. The number of authorized shares of
Preferred Stock may be increased or decreased (but not below the number of
shares thereof then outstanding) by the affirmative vote of the holders of a
majority of the Class A Common Stock, without a vote of the holders of the
Preferred Stock, or of any series thereof, unless a vote of any such holders is
required pursuant to the terms of any Preferred Stock Designation.
E. Commitment to Maintain Open Outcry Markets. Subject to the terms and
conditions of this Section E of Article IV, the Corporation shall maintain open
outcry markets operating as of the date of the filing of this
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Certificate of Incorporation with the State of Delaware 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 or any other provision of this Certificate of
Incorporation, the Board of Directors may discontinue any open outcry market at
such time and in such manner as it may determine if (1) the Board of Directors
determines, in its sole and absolute discretion, that a market is no longer
"liquid" or (2) the holders of a majority of the voting power of the then
outstanding shares of the Series B-1 and the Series B-2, voting together as a
single class based on their respective voting rights, approve the
discontinuance of such open outcry market.
For purposes of the foregoing, an open outcry market will be deemed "liquid"
for so long as it meets either of the following tests, in each case as measured
on a quarterly basis:
(a) if a comparable exchange-traded product exists, the open outcry
market has maintained at least 30 percent of the average daily volume of
such comparable product (including for calculation purposes, volume from
Exchange-For-Physicals transactions in such open outcry market); or
(b) if no comparable exchange-traded product exists, the open outcry
market has maintained at least 40 percent of the average quarterly volume
in that market as maintained by the Corporation in 2000 (including, for
calculation purposes, volume from Exchange-For-Physicals transactions in
such open outcry market).
ARTICLE V
MANAGEMENT OF AFFAIRS
The following provisions are inserted for the management of the business and
the conduct of the affairs of the Corporation, and for further definition,
limitation and regulation of the powers of the Corporation and of its Directors
and stockholders:
A. In accordance with Section 141(a) of the DGCL, the business and
affairs of the Corporation shall be managed by or under the direction of a
governing body, which shall be known as the "Board of Directors," the
composition of which shall be as set forth in Article VI of this
Certificate of Incorporation. In addition to the powers and authority
expressly conferred upon them by statute or by this Certificate of
Incorporation, the Bylaws or the Rules, the directors are hereby empowered
to adopt, amend or repeal the Rules of the Corporation, subject to Section
C(2) of Article IV of this Certificate of Incorporation, and to exercise
all powers and do all acts and things as may be exercised or done by the
Corporation. The stockholders of the Corporation shall have no power to
adopt, amend or repeal the Rules of the Corporation, except to the extent
that the approval of the holders of Series B-1 and Series B-2 is expressly
required under Section C(2) of Article IV for the Board of Directors to
adopt certain amendments and changes specified therein.
B. The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
C. Any action required or permitted to be taken by the stockholders of
the Corporation must be effected at a duly called annual or special meeting
of stockholders of the Corporation and may not be effected by any consent
in writing by such stockholders.
D. Special meetings of stockholders of the Corporation may be called
only by the Chairman of the Board or the President of the Corporation, or
by the Board of Directors acting pursuant to a resolution adopted by a
majority of the Whole Board. For purposes of this Certificate of
Incorporation, the term "Whole Board" shall mean the total number of
authorized directors whether or not there exist any vacancies in previously
authorized directorships.
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ARTICLE VI
BOARD OF DIRECTORS
A. The effectiveness of the amendment and restatement of this Certificate of
Incorporation giving the Corporation the authority to issue stock (the "Stock
Conversion") shall not change the size or composition of the Board of
Directors. Commencing with the election of directors at the first annual or
special meeting of stockholders following the Stock Conversion (the "Initial
Meeting"), the number of directors shall be nine (9), plus any directors who
the holders of any series of Preferred Stock may be entitled to elect under
specified circumstances (hereinafter referred to as "Preferred Stock
Directors"), and the directors, other than any Preferred Stock Directors, shall
be divided into three (3) classes, with the term of office of the first class
to expire at the Corporation's first annual meeting of stockholders following
the Initial Meeting, the term of office of the second class to expire at the
Corporation's second annual meeting of stockholders following the Initial
Meeting and the term of office of the third class to expire at the
Corporation's third annual meeting of stockholders following the Initial
Meeting. At each annual meeting of stockholders following the Initial Meeting,
directors elected to succeed those directors whose terms expire shall be
elected for a term of office to expire at the third succeeding annual meeting
of stockholders after their election. Commencing with the Initial Meeting, the
following qualifications for directors, other than Preferred Stock Directors,
shall apply: two (2) directors, on the date of the first of their nomination or
selection as nominees for the Board of Directors, shall be "independent
directors" as such term is defined in the Bylaws (the "Independent Directors");
five (5) directors, on the date of the first of their nomination or selection
as nominees for the Board of Directors, shall be holders of Class B Common
Stock and shall satisfy the qualifications for and requirements of the
applicable class of membership as set forth in the Rules (the "Class B
Directors"); one (1) director, not subject to any qualifications (the "At-large
Director"), and one director, not subject to any qualifications, who shall
serve as Chairman of the Board of Directors (the "Chairman Director"). The
class of directors whose term expires at the first annual meeting of
stockholders following the Initial Meeting shall be comprised of one (1)
Independent Director and two (2) Class B Directors. The class of directors
whose term expires at the second annual meeting of stockholders following the
Initial Meeting shall be comprised of one Independent Director, one (1) Class B
Director and the Chairman Director. The class of directors whose term expires
at the third annual meeting of stockholders following the Initial Meeting shall
be comprised of the At-large Director and two (2) Class B Directors.
Notwithstanding anything else set forth in this Certificate of Incorporation,
pursuant to Section 141(a) of the DGCL, the position of Chairman Director
shall, from and after the Initial Meeting and until the second annual meeting
of stockholders following the Initial Meeting, be held by the person who held
the office of Chairman of the Board of Directors immediately prior to the
Initial Meeting, and such person shall not be elected by the stockholders of
the Corporation but rather shall hold the position of Chairman Director by
virtue of his holding of the office of Chairman of the Board of Directors
immediately prior to the Initial Meeting. Commencing with the second annual
meeting of stockholders following the Initial Meeting, the Chairman Director
shall be elected by the stockholders entitled to vote thereon. The person
serving as Chairman Director shall be Chairman of the Board of Directors.
B. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, newly created directorships resulting from any increase in
the authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause shall, unless otherwise required by law or by resolution
of the Board of Directors, be filled only by a majority vote of the directors
then in office, though less than a quorum (and not by stockholders), and
directors so chosen shall hold office for a term expiring at the annual meeting
of stockholders at which the term of office of the class to which they have
been chosen expires. No decrease in the authorized number of directors shall
shorten the term of any incumbent director.
C. Advance notice of stockholder nominations for the election of directors
and of business to be brought by stockholders before any meeting of the
stockholders of the Corporation shall be given in the manner provided in the
Bylaws of the Corporation.
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ARTICLE VII
AMENDMENT OF BYLAWS
Subject to Section C(2) of Article IV of this Certificate of Incorporation,
the Board of Directors is expressly empowered to adopt, amend or repeal the
Bylaws and the Rules. Any adoption, amendment or repeal of the Bylaws by the
Board of Directors shall require the approval of a majority of the Whole Board.
The stockholders shall also have power to adopt, amend or repeal the Bylaws;
provided, however, that, in addition to any vote of the holders of any class or
series of stock of the Corporation required by law or by this Certificate of
Incorporation, any adoption, amendment or repeal of the Bylaws by the
stockholders shall require the affirmative vote of the holders of at least
sixty six and two-thirds percent (66 2/3%) of the voting power of all of the
then-outstanding shares of stock of the Corporation entitled to vote generally
in the election of directors, voting together as a single class based on their
respective voting rights.
ARTICLE VIII
LIMITATION OF LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any
transaction from which the director derived an improper personal benefit. If
the DGCL is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a director
of the Corporation shall be eliminated or limited to the fullest extent
permitted by the DGCL, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of
the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or
modification.
ARTICLE IX
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation reserves the right to amend or repeal any provision
contained in this Certificate of Incorporation in the manner prescribed by the
laws of the State of Delaware and all rights conferred upon stockholders are
granted subject to this reservation.
ARTICLE X
ISSUANCE OF RIGHTS
In addition to and not in limitation of any powers conferred upon the Board
of Directors by the DGCL, the Board of Directors is hereby authorized to create
and issue, whether or not in connection with the issuance and sale of any stock
of the Corporation or other securities or property, rights entitling any
holders of stock of the Corporation to purchase or receive from the Corporation
shares of Preferred Stock. Common Stock or other securities or assets of the
Corporation or any other entity. The times at which and the terms upon which
such rights are issued, are exercisable and are to remain outstanding shall be
determined by the Board of Directors. The authority of the Board of Directors
with respect to such rights shall include, without limitation, determination of
the following:
(A) The initial purchase price per share or other unit of the stock or
other securities or property to be purchased upon exercise of such rights;
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(B) Provisions relating to the times at which and the circumstances
under which such rights may be exercised or sold or otherwise transferred,
either together with or separately from, any other stock or other
securities of the Corporation;
(C) Provision which adjust the number or exercise price of such rights
or amount or nature of the stock or other securities or property receivable
upon exercise of such rights in the event of a combination, subdivision or
reclassification of any stock of the Corporation, a change in ownership of
the Corporation's stock or other securities or a reorganization, merger,
consolidation, sale of assets or other occurrence relating to the
Corporation or any stock of the Corporation, and provisions restricting the
ability of the Corporation to enter into any such transaction absent an
assumption by the other party or parties thereto of the obligations of the
Corporation under such rights;
(D) Provisions which deny the holder of a specified percentage of the
outstanding stock or other securities of the Corporation the right to
exercise such rights and/or cause the rights held by such holder to become
void;
(E) Provisions which permit the Corporation to redeem or to exchange
such rights; and
(F) The appointment of a rights agent with respect to such rights.
ARTICLE XI
SECTION 203
The Corporation hereby elects to be governed by Section 203 of the DGCL.
* * *
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APPENDIX E
BOARD OF TRADE OF THE CITY OF CHICAGO, INC.
BYLAWS
ARTICLE I--STOCKHOLDERS
Section 1. Annual Meeting.
(1) An annual meeting of the stockholders of Board of Trade of the City of
Chicago, Inc. (the "Corporation"), for the election of directors to succeed
those whose terms expire and for the transaction of such other business as may
properly come before the meeting, shall be held at such place, on such date,
and at such time as the Board of Directors of the Corporation (the "Board of
Directors") shall each year fix, which date shall be within thirteen (13)
months of the last annual meeting of stockholders.
(2) Nominations of persons for election to the Board of Directors and the
proposal of business to be transacted by the stockholders may be made at an
annual meeting of stockholders (a) pursuant to the Corporation's notice with
respect to such meeting, (b) by or at the direction of the Board of Directors
or (c) by any stockholder of record of the Corporation who was a stockholder of
record at the time of the giving of the notice provided for in the following
paragraph, who is entitled to vote at the meeting and who has complied with the
notice procedures set forth in this section.
(3) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (c) of the foregoing
paragraph, (1) the stockholder must have given timely notice thereof in writing
to the Secretary of the Corporation, (2) such business must be a proper matter
for stockholder action under the General Corporation Law of the State of
Delaware (as amended from time to time, the "DGCL"), (3) if the stockholder, or
the beneficial owner on whose behalf any such proposal or nomination is made,
has provided the Corporation with a Solicitation Notice, as that term is
defined in subclause (c)(iii) of this paragraph, such stockholder or beneficial
owner must, in the case of a proposal, have delivered a proxy statement and
form of proxy to holders of at least the percentage of the Corporation's voting
shares required under applicable law to carry any such proposal, or, in the
case of a nomination or nominations, have delivered a proxy statement and form
of proxy to holders of a percentage of the Corporation's voting shares
reasonably believed by such stockholder or beneficial holder to be sufficient
to elect the nominee or nominees proposed to be nominated by such stockholder,
and must, in either case, have included in such materials the Solicitation
Notice and (4) if no Solicitation Notice relating thereto has been timely
provided pursuant to this section, the stockholder or beneficial owner
proposing such business or nomination must not have solicited a number of
proxies sufficient to have required the delivery of such a Solicitation Notice
under this section. To be timely, a stockholder's notice shall be delivered to
the Secretary at the principal executive offices of the Corporation not less
than forty-five (45) or more than seventy-five (75) days prior to the first
anniversary (the "Anniversary") of the date on which the Corporation first
mailed its proxy materials for the preceding year's annual meeting of
stockholders; provided, however, that if the date of the annual meeting is
advanced more than thirty (30) days prior to or delayed by more than thirty
(30) days after the anniversary of the preceding year's annual meeting, notice
by the stockholder to be timely must be so delivered not later than the close
of business on the later of (i) the 90th day prior to such annual meeting or
(ii) the 10th day following the day on which public announcement of the date of
such meeting is first made. Such stockholder's notice shall set forth (a) as to
each person whom the stockholder proposes to nominate for election or
reelection as a director (x) all information relating to such person as would
be required to be disclosed in solicitations of proxies for the election of
such nominees as directors pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), (y) whether the
stockholder proposes to nominate such person to be an Independent Director (as
defined in Section 1 of Article II of these Bylaws), a Class B Director, the
At-large Director or the Chairman Director (as such terms are defined in
Section (A) of Article VI of the Amended and Restated
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Certificate of Incorporation of the Corporation (as amended from time to time,
the "Certificate of Incorporation")) and, if applicable, a statement that such
person satisfies the applicable criteria for Independent Directors or Class B
Directors, as applicable, and (z) such person's written consent to serve as a
director if elected and, if applicable, a written undertaking to promptly
provide to the Secretary of the Corporation upon request any information that
the Corporation deems to be relevant to the determination of whether such
person satisfies the applicable criteria for Independent Directors or Class B
Directors, as applicable; (b) as to any other business that the stockholder
proposes to bring before the meeting, a brief description of such business, the
reasons for conducting such business at the meeting and any material interest
in such business of such stockholder and the beneficial owner, if any, on whose
behalf the proposal is made; (c) as to the stockholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is
made (i) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner, (ii) the class and number of
shares of the Corporation that are owned beneficially and of record by such
stockholder and such beneficial owner, and (iii) whether either such
stockholder or beneficial owner intends to deliver a proxy statement and form
of proxy to holders of, in the case of a proposal, at least the percentage of
the Corporation's voting shares required under applicable law to carry the
proposal or, in the case of a nomination or nominations, a sufficient number of
holders of the Corporation's voting shares to elect such nominee or nominees
(an affirmative statement of such intent, a "Solicitation Notice").
(4) Notwithstanding anything in the second sentence of the third paragraph
of this Section 1 to the contrary, in the event that the number of directors to
be elected to the Board of Directors is increased and there is no public
announcement naming all of the nominees for director or specifying the size of
the increased Board of Directors made by the Corporation at least fifty-five
(55) days prior to the Anniversary, a stockholder's notice required by this
Bylaw shall also be considered timely, but only with respect to nominees for
any new positions created by such increase, if it shall be delivered to the
Secretary at the principal executive offices of the Corporation not later than
the close of business on the 10th day following the day on which such public
announcement is first made by the Corporation.
(5) Only persons nominated in accordance with the procedures set forth in
this Section 1 shall be eligible to serve as directors and only such business
shall be conducted at an annual meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set forth in this
section. The chairman of the meeting shall have the power and the duty to
determine whether a nomination or any business proposed to be brought before
the meeting has been made in accordance with the procedures set forth in these
Bylaws and, if any proposed nomination or business is not in compliance with
these Bylaws, to declare that such defectively proposed business or nomination
shall not be presented for stockholder action at the meeting and shall be
disregarded.
(6) For purposes of these Bylaws, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service,
Associated Press or a comparable national news service or in a document
publicly filed by the Corporation with the Securities and Exchange Commission
pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(7) Notwithstanding the foregoing provisions of this Section 1, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to matters set forth
in this Section 1. Nothing in this Section 1 shall be deemed to affect any
rights of stockholders to request inclusion of proposals in the Corporation's
proxy statement pursuant to Rule 14a-8 under the Exchange Act.
Section 2. Special Meetings.
(1) Special meetings of the stockholders, other than those required by
statute, may be called only by the Chairman of the Board or the President of
the Corporation or by the Board of Directors acting pursuant to a resolution
adopted by a majority of the Whole Board. For purposes of these Bylaws, the
term "Whole Board" shall mean the total number of authorized directors whether
or not there exist any vacancies in previously authorized directorships. The
Board of Directors may postpone or reschedule any previously scheduled special
meeting.
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(2) Only such business shall be conducted at a special meeting of
stockholders as shall have been brought before the meeting pursuant to the
Corporation's notice of meeting. The chairman of the meeting shall have the
power and the duty to determine whether a nomination or any business proposed
to be brought before the meeting has been made in accordance with the
procedures set forth in these Bylaws and, if any proposed nomination or
business is not in compliance with these Bylaws, to declare that such
defectively proposed business or nomination shall not be presented for
stockholder action at the meeting and shall be disregarded. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected pursuant to the
Corporation's notice of meeting (a) by or at the direction of the Board of
Directors or (b) by any stockholder of record of the Corporation who is a
stockholder of record at the time of giving of notice provided for in this
paragraph, who shall be entitled to vote at the meeting and who complies with
the notice procedures set forth in Section 1 of this Article I. Nominations by
stockholders of persons for election to the Board of Directors may be made at
such a special meeting of stockholders if the stockholder's notice required by
the third paragraph of Section 1 of this Article I shall be delivered to the
Secretary at the principal executive offices of the Corporation not later than
the close of business on the later of the 90th day prior to such special
meeting or the 10th day following the day on which public announcement is first
made of the date of the special meeting and of the nominees proposed by the
Board of Directors to be elected at such meeting.
(3) Notwithstanding the foregoing provisions of this Section 2, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to matters set forth
in this Section 2. Nothing in this Section 2 shall be deemed to affect any
rights of stockholders to request inclusion of proposals in the Corporation's
proxy statement pursuant to Rule 14a-8 under the Exchange Act.
Section 3. Notice of Meetings.
Notice of the place, if any, date, and time of all meetings of the
stockholders, and the means of remote communications, if any, by which
stockholders and proxy holders may be deemed to be present in person and vote
at such meeting, shall be given, not less than ten (10) nor more than sixty
(60) days before the date on which the meeting is to be held, to each
stockholder entitled to vote at such meeting, except as otherwise provided
herein or required by law (meaning, here and hereinafter, as required from time
to time by the DGCL or the Certificate of Incorporation).
When a meeting is adjourned to another time or place, notice need not be
given of the adjourned meeting if the time and place, if any, thereof, and the
means of remote communications, if any, by which stockholders and proxy holders
may be deemed to be present in person and vote at such adjourned meeting are
announced at the meeting at which the adjournment is taken; provided, however,
that if the date of any adjourned meeting is more than thirty (30) days after
the date for which the meeting was originally noticed, or if a new record date
is fixed for the adjourned meeting, notice of the place, if any, date, and time
of the adjourned meeting and the means of remote communications, if any, by
which stockholders and proxy holders may be deemed to be present in person and
vote at such adjourned meeting, shall be given in conformity herewith. At any
adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 4. Quorum.
At any meeting of the stockholders, the holders of a majority of the voting
power of all of the shares of the stock entitled to vote at the meeting,
present in person or by proxy, shall constitute a quorum for all purposes,
unless or except to the extent that the presence of a larger number may be
required by law. Where a separate vote by a class or classes or series is
required, the holders of a majority of the voting power of all of the shares of
such class or classes or series entitled to participate in such separate vote,
present in person or by proxy, shall constitute a quorum entitled to take
action with respect to that vote on that matter.
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If a quorum shall fail to attend any meeting, the chairman of the meeting
may adjourn the meeting to another place, if any, date, or time.
Section 5. Organization.
Such person as the Board of Directors may have designated or, in the absence
of such a person, the Chairman of the Board or, in his or her absence, the
President of the Corporation or, in his or her absence, such person as may be
chosen by the holders of a majority of the voting power of the shares entitled
to vote who are present, in person or by proxy, shall call to order any meeting
of the stockholders and act as chairman of the meeting. In the absence of the
Secretary of the Corporation, the secretary of the meeting shall be such person
as the chairman of the meeting appoints.
Section 6. Conduct of Business.
The chairman of any meeting of stockholders shall determine the order of
business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of discussion as seem to him or her in order.
The chairman shall have the power to adjourn the meeting to another place, if
any, date and time. The date and time of the opening and closing of the polls
for each matter upon which the stockholders will vote at the meeting shall be
announced at the meeting.
Section 7. Proxies and Voting.
At any meeting of the stockholders, every stockholder entitled to vote may
vote in person or by proxy authorized by an instrument in writing or by a
transmission permitted by law filed in accordance with the procedure
established for the meeting. Any copy, facsimile telecommunication or other
reliable reproduction of the writing or transmission created pursuant to this
paragraph may be substituted or used in lieu of the original writing or
transmission for any and all purposes for which the original writing or
transmission could be used, provided that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction of the
entire original writing or transmission.
The Corporation may, and to the extent required by law, shall, in advance of
any meeting of stockholders, appoint one or more inspectors to act at the
meeting and make a written report thereof. The Corporation may designate one or
more alternate inspectors to replace any inspector who fails to act. If no
inspector or alternate is able to act at a meeting of stockholders, the person
presiding at the meeting may, and to the extent required by law, shall, appoint
one or more inspectors to act at the meeting. Each inspector, before entering
upon the discharge of his or her duties, shall take and sign an oath faithfully
to execute the duties of inspector with strict impartiality and according to
the best of his or her ability. Every vote taken by ballots shall be counted by
a duly appointed inspector or inspectors.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law, all other matters shall be determined by a
majority of the votes cast affirmatively or negatively.
Section 8. Stock List.
A complete list of stockholders entitled to vote at any meeting of
stockholders, arranged in alphabetical order for each class of stock and
showing the address of each such stockholder and the number of shares
registered in his or her name, shall be open to the examination of any such
stockholder for a period of at least ten (10) days prior to the meeting in the
manner provided by law.
The stock list shall also be open to the examination of any stockholder
during the whole time of the meeting as provided by law. This list shall
presumptively determine the identity of the stockholders entitled to vote at
the meeting and the number of shares held by each of them.
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ARTICLE II--BOARD OF DIRECTORS
Section 1. Number, Election, Term and Qualifications of Directors.
The effectiveness of the amendment and restatement of these Bylaws shall not
change the size or composition of the Board of Directors. Commencing with the
election of directors at the first annual or special meeting of stockholders
following the Stock Conversion (as defined in the Certificate of
Incorporation), the number of directors shall be nine (9), plus any directors
who the holders of any series of preferred stock may be entitled to elect under
specified circumstances (hereinafter referred to as "Preferred Stock
Directors"). The directors, other than any Preferred Stock Directors, shall be
divided into three (3) classes and shall serve for such terms and be subject to
such qualifications and requirements as are set forth in the Certificate of
Incorporation.
For purposes of these Bylaws and the Certificate of Incorporation,
"independent director" means a person other than an officer or employee of the
Corporation or it subsidiaries or any other individual having a relationship
which, in the opinion of the Board of Directors, would interfere with the
exercise of independent judgement in carrying out the responsibilities of a
director. The following persons shall not be considered independent:
(A) a director who is employed by the Corporation or any of its
affiliates for the current year or any of the past three (3) years;
(B) a director who accepts any compensation from the corporation or any
of its affiliates in excess of $60,000 during the previous fiscal year,
other than compensation for board service, benefits under a tax-qualified
retirement plan, or non-discretionary compensation;
(C) a director who is a member of the immediate family of an individual
who is, or has been in any of the past three years, employed by the
Corporation or any of its affiliates as an executive officer. Immediate
family includes a person's spouse, parents, children, siblings, mother-in-
law, father-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-
law and anyone who resides in such person's home;
(D) a director who is a partner in, or a controlling stockholder or an
executive officer of, any for-profit business organization to which the
Corporation made, or from which the Corporation received, payments (other
than those arising solely from investments in the Corporation's securities)
that exceed 5% of the Corporation's or business organization's consolidated
gross revenues for that year, or $200,000, whichever is more, in any of the
past three years; and
(E) a director who is employed as an executive of another entity where
any of the Corporation's executives serve on that entity's compensation
committee.
Section 2. Chairman of the Board.
The Chairman of the Board shall be the presiding officer at all meetings of
the Board of Directors and shall exercise such other powers and perform such
other duties as are delegated to him or her by the Board of Directors.
Section 3. Newly Created Directorships and Vacancies.
Subject to the rights of the holders of any series of preferred stock then
outstanding, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause shall, unless otherwise required by law or by resolution
of the Board of Directors, be filled only by a majority vote of the directors
then in office, though less than a quorum (and not by stockholders), and
directors so chosen shall hold office for a term expiring at the annual meeting
of stockholders at which the term of office of the class to which they have
been elected expires and until such director's successor shall have been duly
elected and qualified. No decrease in the number of authorized directors shall
shorten the term of any incumbent director.
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Section 4. Regular Meetings.
Regular meetings of the Board of Directors shall be held at such place or
places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all directors. A
notice of each regular meeting shall not be required.
Section 5. Special Meetings.
Special meetings of the Board of Directors may be called only by the
Chairman of the Board, the President of the Corporation or by a majority of the
Whole Board and shall be held at such place, on such date, and at such time as
they or he or she shall fix. Notice of the place, date, and time of each such
special meeting shall be given to each director by whom it is not waived by
mailing written notice not less than five (5) days before the meeting or by
telephone or by telegraphing or telexing or by facsimile or electronic
transmission of the same not less than twenty-four (24) hours before the
meeting. Unless otherwise indicated in the notice thereof, any and all business
may be transacted at a special meeting.
Section 6. Quorum.
At any meeting of the Board of Directors, a majority of the total number of
the Whole Board shall constitute a quorum for all purposes. If a quorum shall
fail to attend any meeting, a majority of those present may adjourn the meeting
to another place, date, or time, without further notice or waiver thereof.
Section 7. Participation in Meetings By Conference Telephone.
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board of Directors or committee by means of
conference telephone or other communications equipment by means of which all
persons participating in the meeting can hear each other and such participation
shall constitute presence in person at such meeting.
Section 8. Conduct of Business.
At any meeting of the Board of Directors, business shall be transacted in
such order and manner as the Board of Directors may from time to time
determine, and all matters shall be determined by the vote of a majority of the
directors present, except as otherwise provided herein or required by law.
Action may be taken by the Board of Directors without a meeting if all members
thereof consent thereto in writing or by electronic transmission, and the
writing or writings or electronic transmission or transmissions are filed with
the minutes of proceedings of the Board of Directors. Such filing shall be in
paper form if the minutes are maintained in paper form and shall be in
electronic form if the minutes are maintained in electronic form.
Section 9. Compensation of Directors.
Unless otherwise restricted by the certificate of incorporation, the Board
of Directors shall have the authority to fix the compensation of the directors.
The directors may be paid their expenses, if any, of attendance at each meeting
of the Board of Directors and may be paid a fixed sum for attendance at each
meeting of the Board of Directors or paid a stated salary or paid other
compensation as director. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed compensation
for attending committee meetings.
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ARTICLE III--COMMITTEES
Section 1. Committees of the Board of Directors.
The Board of Directors may from time to time designate committees of the
Board of Directors, with such lawfully delegable powers and duties as it
thereby confers, to serve at the pleasure of the Board of Directors. The Board
of Directors shall elect a director or directors to serve as the member or
members of any such committee, designating, if it desires, other directors as
alternate members who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of any member of
any committee and any alternate member in his or her place, the member or
members of the committee present at the meeting and not disqualified from
voting, whether or not he or she or they constitute a quorum, may by unanimous
vote appoint another member of the Board of Directors to act at the meeting in
the place of the absent or disqualified member.
Section 2. Conduct of Business.
Each committee may determine the procedural rules for meeting and conducting
its business and shall act in accordance therewith, except as otherwise
provided herein or required by law. Except as otherwise determined by the Board
of Directors, adequate provision shall be made for notice to members of all
meetings; one-third ( 1/3) of the members shall constitute a quorum unless the
committee shall consist of one (1) or two (2) members, in which event one (1)
member shall constitute a quorum; and all matters shall be determined by a
majority vote of the members present. Action may be taken by any committee
without a meeting if all members thereof consent thereto in writing or by
electronic transmission, and the writing or writings or electronic transmission
or transmissions are filed with the minutes of the proceedings of such
committee. Such filing shall be in paper form if the minutes are maintained in
paper form and shall be in electronic form if the minutes are maintained in
electronic form.
Section 3. Additional and Standing Committees.
In addition to such committees of the Board of Directors as may be
authorized from time to time, the Corporation shall have such additional and
standing committees, which shall be comprised of such persons having such
powers and duties, as provided in the Rules and Regulations of the Corporation
(as amended from time to time, the "Rules") or otherwise determined by the
Board of Directors. Any person may be disqualified from serving on or
participating in the affairs of any committee to the extent provided in the
Rules.
ARTICLE IV--OFFICERS
Section 1. Generally.
The officers of the Corporation shall consist of a President (who shall also
be Chief Executive Officer), one or more Vice Presidents, a Secretary, a
Treasurer and such other officers as may from time to time be appointed by the
Board of Directors. Officers shall be elected by the Board of Directors, which
shall consider that subject at its first meeting after every annual meeting of
stockholders. Each officer shall hold office until his or her successor is
elected and qualified or until his or her earlier resignation or removal. Any
number of offices may be held by the same person. The salaries of officers
elected by the Board of Directors shall be fixed from time to time by the Board
of Directors or by such officers as may be designated by resolution of the
Board of Directors.
Section 3. President.
The President shall be the Chief Executive Officer of the Corporation.
Subject to the provisions of these Bylaws and to the direction of the Board of
Directors, he or she shall have the responsibility for the general management
and control of the business and affairs of the Corporation and shall perform
all duties and have all
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powers which are commonly incident to the office of chief executive or which
are delegated to him or her by the Board of Directors. He or she shall have
power to sign all stock certificates, contracts and other instruments of the
Corporation which are authorized and shall have general supervision and
direction of all of the other officers (other than Chairman of the Board),
employees and agents of the Corporation.
Section 4. Vice President.
Each Vice President shall have such powers and duties as may be delegated to
him or her by the Board of Directors. One (1) Vice President shall be
designated by the Board of Directors to perform the duties and exercise the
powers of the President in the event of the President's absence or disability.
Section 5. Treasurer.
The Treasurer shall have the responsibility for maintaining the financial
records of the Corporation. He or she shall make such disbursements of the
funds of the Corporation as are authorized and shall render from time to time
an account of all such transactions and of the financial condition of the
Corporation. The Treasurer shall also perform such other duties as the Board of
Directors may from time to time prescribe.
Section 6. Secretary.
The Secretary shall issue all authorized notices for, and shall keep minutes
of, all meetings of the stockholders and the Board of Directors. He or she
shall have charge of the corporate books and shall perform such other duties as
the Board of Directors may from time to time prescribe.
Section 7. Delegation of Authority.
The Board of Directors may from time to time delegate the powers or duties
of any officer to any other officers or agents, notwithstanding any provision
hereof.
Section 8. Removal.
Any officer of the Corporation may be removed at any time, with or without
cause, by the Board of Directors.
Section 9. Action with Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the President or any
officer of the Corporation authorized by the President shall have power to vote
and otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other Corporation in which this Corporation may hold securities and otherwise
to exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other Corporation.
ARTICLE V--STOCK
Section 1. Certificates of Stock.
The shares of the Corporation shall be represented by certificates unless
the Board of Directors shall by resolution provide that some or all of any
class or series of stock shall be uncertificated shares. Any such resolution
shall not apply to shares represented by a certificate until the certificate is
surrendered to the Corporation. Notwithstanding the adoption of any resolution
providing for uncertificated shares, every holder of stock represented by
certificates and upon request every holder of uncertificated shares shall be
entitled to have a certificate signed by, or in the name of the Corporation by,
the Chairperson or Vice Chairperson of the Board of Directors, or the President
or Vice President, and by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary, representing the number of shares
registered in certificate form. The form of such certificates and the
signatures thereon shall comply with the requirements of the DGCL. Any or all
of the signatures on the certificate may be by facsimile.
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Section 2. Transfers of Stock.
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these
Bylaws, an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefor.
Section 3. Record Date.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise
any rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may, except as
otherwise required by law, fix a record date, which record date shall not
precede the date on which the resolution fixing the record date is adopted and
which record date shall not be more than sixty (60) nor less than ten (10) days
before the date of any meeting of stockholders, nor more than sixty (60) days
prior to the time for such other action as hereinbefore described; provided,
however, that if no record date is fixed by the Board of Directors, the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
day on which notice is given or, if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held, and, for
determining stockholders entitled to receive payment of any dividend or other
distribution or allotment of rights or to exercise any rights of change,
conversion or exchange of stock or for any other purpose, the record date shall
be at the close of business on the day on which the Board of Directors adopts a
resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for
the adjourned meeting.
Section 4. Lost, Stolen, Mutilated or Destroyed Certificates.
In the event of the loss, theft, mutilation or destruction of any
certificate of stock, another may be issued in its place pursuant to such
regulations as the Board of Directors may establish concerning proof of such
loss, theft, mutilation or destruction and concerning the giving of a
satisfactory bond or bonds of indemnity.
Section 5. Regulations.
The issue, transfer, conversion and registration of certificates of stock
shall be governed by such other regulations as the Board of Directors may
establish.
ARTICLE VI--NOTICES
Section 1. Notices.
If mailed, notice to stockholders shall be deemed given when deposited in
the mail, postage prepaid, directed to the stockholder at such stockholder's
address as it appears on the records of the Corporation. Without limiting the
manner by which notice otherwise may be given effectively to stockholders, any
notice to stockholders may be given by electronic transmission in the manner
provided in Section 232 of the DGCL.
Section 2. Waivers.
A written waiver of any notice, signed by a stockholder or director, or
waiver by electronic transmission by such person, whether given before or after
the time of the event for which notice is to be given, shall be deemed
equivalent to the notice required to be given to such person. Neither the
business nor the purpose of any meeting need be specified in such a waiver.
Attendance at any meeting shall constitute waiver of notice except attendance
for the sole purpose of objecting to the timeliness of notice.
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ARTICLE VII--MISCELLANEOUS
Section 1. Facsimile Signatures.
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these Bylaws, facsimile signatures of any officer or
officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
Section 2. Corporate Seal.
The Board of Directors may provide a suitable seal, containing the name of
the Corporation, which seal shall be in the charge of the Secretary. If and
when so directed by the Board of Directors or a committee thereof, duplicates
of the seal may be kept and used by the Treasurer or by an Assistant Secretary
or Assistant Treasurer.
Section 3. Reliance upon Books, Reports and Records.
Each director, each member of any committee designated by the Board of
Directors, and each officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation and upon such information,
opinions, reports or statements presented to the Corporation by any of its
officers or employees, or committees of the Board of Directors so designated,
or by any other person as to matters which such director or committee member
reasonably believes are within such other person's professional or expert
competence and who has been selected with reasonable care by or on behalf of
the Corporation.
Section 4. Fiscal Year.
The fiscal year of the Corporation shall be as fixed by the Board of
Directors.
Section 5. Time Periods.
In applying any provision of these Bylaws which requires that an act be done
or not be done a specified number of days prior to an event or that an act be
done during a period of a specified number of days prior to an event, calendar
days shall be used, the day of the doing of the act shall be excluded, and the
day of the event shall be included.
ARTICLE VIII--INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. Right to Indemnification.
Each person who was or is made a party or is threatened to be made a party
to or is otherwise involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a director, officer, committee
member or employee of the Corporation or is or was serving at the request of
the Corporation as a director, officer, trustee, committee member or employee
of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such proceeding is alleged
action in an official capacity as a director, officer or trustee or in any
other capacity while serving as a director, officer or trustee, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the DGCL, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment permits
the Corporation to provide broader indemnification rights than such law
permitted the Corporation to provide prior to such amendment), against all
expense, liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid in settlement) reasonably incurred
or suffered by such indemnitee in connection
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therewith; provided, however, that, except as provided in Section 3 of this
ARTICLE VIII with respect to proceedings to enforce rights to indemnification,
the Corporation shall indemnify any such indemnitee in connection with a
proceeding (or part thereof) initiated by such indemnitee only if such
proceeding (or part thereof) was authorized by the Board of Directors.
Section 2. Right to Advancement of Expenses.
In addition to the right to indemnification conferred in Section 1 of this
ARTICLE VIII, an indemnitee shall also have the right to be paid by the
Corporation the expenses (including attorney's fees) incurred in defending any
such proceeding in advance of its final disposition (hereinafter an
"advancement of expenses"); provided, however, that, if the DGCL requires, an
advancement of expenses incurred by an indemnitee in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such indemnitee, including, without limitation, service to an
employee benefit plan) shall be made only upon delivery to the Corporation of
an undertaking (hereinafter an "undertaking"), by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal (hereinafter a "final adjudication") that such indemnitee is not
entitled to be indemnified for such expenses under this Section 2 or otherwise.
Section 3. Right of Indemnitee to Bring Suit.
If a claim under Section 1 or 2 of this ARTICLE VIII is not paid in full by
the Corporation within sixty (60) days after a written claim has been received
by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty (20) days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in
any such suit, or in a suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the indemnitee
shall be entitled to be paid also the expense of prosecuting or defending such
suit. In (i) any suit brought by the indemnitee to enforce a right to
indemnification hereunder (but not in a suit brought by the indemnitee to
enforce a right to an advancement of expenses) it shall be a defense that, and
(ii) in any suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the Corporation shall be
entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met any applicable standard for indemnification set forth in
the DGCL. Neither the failure of the Corporation (including its directors who
are not parties to such action, a committee of such directors, independent
legal counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the DGCL, nor an actual determination by the Corporation
(including its directors who are not parties to such action, a committee of
such directors, independent legal counsel, or its stockholders) that the
indemnitee has not met such applicable standard of conduct, shall create a
presumption that the indemnitee has not met the applicable standard of conduct
or, in the case of such a suit brought by the indemnitee, be a defense to such
suit. In any suit brought by the indemnitee to enforce a right to
indemnification or to an advancement of expenses hereunder, or brought by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the burden of proving that the indemnitee is not entitled to be
indemnified, or to such advancement of expenses, under this ARTICLE VIII or
otherwise shall be on the Corporation.
Section 4. Non-Exclusivity of Rights.
The rights to indemnification and to the advancement of expenses conferred
in this ARTICLE VIII shall not be exclusive of any other right which any person
may have or hereafter acquire under any statute, the Corporation's Certificate
of Incorporation, Bylaws, agreement, vote of stockholders or directors or
otherwise.
Section 5. Insurance.
The Corporation may maintain insurance, at its expense, to protect itself
and any director, officer, employee or agent of the Corporation or another
corporation, partnership, joint venture, trust or other enterprise
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against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the DGCL.
Section 6. Indemnification of Employees and Agents of the Corporation.
The Corporation may, to the extent authorized from time to time by the Board
of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article with respect to the indemnification and
advancement of expenses of directors and officers of the Corporation.
Section 7. Nature of Rights.
The rights conferred upon indemnitees in this ARTICLE VIII shall be contract
rights and such rights shall continue as to an indemnitee who has ceased to be
a director, officer or trustee and shall inure to the benefit of the
indemnitee's heirs, executors and administrators. Any amendment, alteration or
repeal of this ARTICLE VIII that adversely affects any right of an indemnitee
or its successors shall be prospective only and shall not limit or eliminate
any such right with respect to any proceeding involving any occurrence or
alleged occurrence of any action or omission to act that took place prior to
such amendment or repeal.
ARTICLE IX--RULES AND REGULATIONS
The Corporation shall have such Rules governing the business and affairs of
the Corporation as shall be determined by the Board of Directors from time to
time. Except as otherwise provided in the Certificate of Incorporation of the
Corporation, the Board of Directors shall have the power to adopt, amend or
repeal such Rules.
ARTICLE X--AMENDMENTS
Subject to Section C(2) of Article IV of the Certificate of Incorporation,
the Board of Directors is expressly empowered to adopt, amend or repeal the
Bylaws of the Corporation. Any adoption, amendment or repeal of the Bylaws of
the Corporation by the Board of Directors shall require the approval of a
majority of the Whole Board. The stockholders shall also have power to adopt,
amend or repeal the Bylaws of the Corporation; provided, however, that subject
to Sections B(1) and C(2) of Article IV of the Certificate of Incorporation,
pursuant to which only holders of Series B-1 and Series B-2 Class B common
stock are entitled to vote on certain matters, any adoption, amendment or
repeal of the Bylaws of the Corporation by the stockholders shall require the
affirmative vote of the holders of at least sixty six and two-thirds percent
(66 2/3%) of the voting power of all of the then-outstanding shares of stock of
the Corporation entitled to vote generally in the election of directors, voting
together as a single class based on their respective voting rights.
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APPENDIX F
STATUS OF CERTAIN CURRENT CBOT RULES AND REGULATIONS AFTER THE RESTRUCTURING
TRANSACTIONS
The following summary provides the status of certain CBOT rules and
regulations that will either be amended and restated, restated in their
entirety or repealed in connection with the completion of the restructuring
transactions. Where an existing rule or regulation will be either modified and
restated or restated in its entirety, the location of the new provision in the
Amended and Restated Certificate of Incorporation of For-Profit CBOT, the form
of which is attached to the proxy statement and prospectus as Appendix D,
and/or the Bylaws of For-Profit CBOT, the form of which is attached to the
proxy statement and prospectus as Appendix E, has been identified for your
information and reference. However, because changes are being made to many of
the restated provisions, you should review and consider carefully the new
provisions before voting on the restructuring transactions. In addition, the
CBOT's current rules and regulations and the form of the rules and regulations
of For-Profit CBOT have been filed as exhibits to the registration statement of
which this document is a part. We urge you to review carefully all of these
materials in connection with your consideration of the restructuring
transactions.
We currently anticipate that For-Profit CBOT will publish an amended and
restated Rulebook as soon as reasonably practicable following completion of the
restructuring transactions. We currently plan to make copies of this new
Rulebook available to Class B common stockholders in accordance with our past
practice and procedures.
110.00 Petition Ballot Vote Communications--In the event that a ballot vote is
forced by petition, all official communications, either written or
presented at a Member meeting, will be accompanied by the views of both
the Board and the petitioners. The Exchange will provide to the
petitioners a minimum of 10 days from the receipt of notice to prepare
written or presentation materials to accompany Exchange official
communications. The petitioners will be represented by a registered
sponsor (an individual who submits the original petitions and who
chooses to register as the sponsor) or his designee. If there is no
registered sponsor for the petition, the views of the Board and the
petitioners should be equitably represented by the Chief Legal Counsel
of the Exchange. (01/01/00)
Rule 110.00 will be repealed.
134.00 Board Member Voting Records--The voting record (except those involving
strategic planning or disciplinary issues) of each individual Board
member should be recorded and available the day following the vote at
the Secretary's office to any interested Full or Associate Member.
(01/01/00)
Rule 134.00 will be repealed.
144.00 Assistant Secretaries--Assistant Secretaries shall perform such duties
as the Secretary or the Board may require, and shall act as Secretary in
the absence or disability of the Secretary. 78 (08/01/94)
Rule 144.00 will be repealed.
156.00 Nominating Committee--Until the first business day of January, 2001, the
Nominating Committee shall consist of seven members: six elected members
and one elected Associate Member whose terms of office shall be three
years. Beginning on the first business day of January, 2001, the
Nominating Committee shall consist of five members: four elected Full
Members and one elected Associate Member whose terms of office shall be
three years, except as provided in the Certificate of Incorporation
Exhibit B, Section 7. The Committee members shall elect their own
Chairman who shall be a Full Member. The Associate Member shall serve as
a full voting member of the Committee. No member of the Nominating
Committee shall be eligible for re-election or reappointment for a
period of three years after his term expires. 51 (11/01/00)
Rule 156.00 will be repealed. See the Bylaws; Article III.
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162.01 Standing Committees--Standing Committees may be made up of full and
associate members of the Association and members of the staff of the
Association, unless otherwise specifically provided for in the Rules and
Regulations. In addition, holders of GIM, IDEM or COM Membership
Interests may be appointed by the Chairman of the Board to serve as non-
voting advisors to any Committee. The Chairman of the Board and the
President shall be ex-officio (non-voting) members of all committees of
which they are not regular members. The Chairman of the Board, with the
approval of the Board of Directors, may appoint full or associate
members to both committees and subcommittees. (08/01/94)
Regulation 162.01 will be repealed. See the Bylaws; Article III.
162.03 Executive Committee--The Executive Committee shall consist of the
Chairman of the Board, the Vice Chairman of the Board, the President,
who shall be a non-voting member of the Committee, and three member
Directors. Two such Directors may be nominated by the Chairman of the
Board, subject to the approval of the Board. The other shall be elected
by the Board in the following manner: Nominations may be made only by
Directors who are members of the Exchange but every member of the Board,
except the President, who is a non-voting member of the Board of
Directors may vote. A majority of all votes cast shall be necessary for
election. If no nominee shall receive a majority on three ballots, a
fourth ballot shall be taken when a plurality shall elect. To be
eligible to serve on the Executive Committee, a Director must have
served at least one year as a Director. The Chairman of the Board shall
be the Chairman of the Executive Committee. (08/01/94)
Regulation 162.03 will be repealed. See the Bylaws; Article III.
162.05 Additional Committees--In addition to those appointed by the Chairman of
the Board, the Board may appoint such committees as it sees fit and
prescribe the duties thereof. 1023 (08/01/94)
Regulation 162.05 will be repealed. See the Bylaws; Article III;
Section 3.
162.09 Strategy Committee--The Strategy Committee shall consist of no more than
eleven members of the Board. A Vice Chairman of the Board will be
Chairman of the Strategy Committee. The Chairman of the Board, with the
approval of the Board of Directors, may fill any vacancy on the
Committee by appointing another member of the Board to serve on the
Committee. The responsibilities of the Strategy Committee shall be as
follows; (a) to review and recommend a strategic plan for the Exchange;
(b) to develop and track performance milestones implied in the strategic
plan; (c) to ensure that subcommittee activities are consistent with the
strategic plan; (d) to establish policies and priorities for addressing
member proposals; and (e) to understand the competitive position of the
Exchange. (03/01/99)
Regulation 162.09 will be repealed. See the Bylaws; Article III.
164.00 Finance Committee--The Chairman of the Board, with the approval of the
Board, shall appoint a Finance Committee, which shall consist of seven
members of the Board. All Finance Committee members shall be Full
Members, except that one Finance Committee member may be an Associate
Member. Each year the Chairman of the Board shall appoint the Chairman
of the Committee for a one-year term provided that the Chairman of the
Board upon the effective date of this Rule shall appoint the Chairman of
the Committee for a term that shall expire in January 1995. The Chairman
of the Board, with the approval of the Board, shall fill any vacancy in
the Committee by appointing another member of the Board to serve on the
Committee.
The responsibilities of the Finance Committee shall be as follows: (a) to
oversee the monetary affairs of the Exchange, including cash flow,
balance sheet, financing activities and investment of member capital; (b)
to review and recommend annual budgets and capital expenditure plans for
Board approval; (c) to review and recommend specific capital expenditures
over an amount to be determined by the Board; (d) to establish revenue-
sharing policies for joint ventures and alliances; (e) to review
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and recommend service, transaction processing and other service fee
structures; and (f) to review and recommend membership dues policy.
(08/01/94)
Rule 164.00 will be repealed. See the Bylaws; Article III.
165.02 Audit Committee--The Audit Committee shall be composed of four members
of the Board nominated by the Chairman of the Board and approved by the
majority vote of the Board. The Audit Committee shall be responsible for
(a) recommending the outside auditor to conduct an annual audit of the
financial affairs of the Association; (b) approving the scope of such
audits; (c) ensuring that adequate financial reporting systems and
controls are in place; (d) reviewing the audit findings and management's
response to those findings; and (e) ensuring the effectiveness of
outside auditors and the internal financial audit staff. (08/01/94)
Regulation 165.02 will be repealed. See the Bylaws; Article III.
165.03 Human Resources Committee--The Human Resources Committee shall be
composed of five members of the Board, including the Chairman of the
Board. The Chairman of the Committee shall be the Chairman of the Board.
The other members of the Committee shall be nominated by the Chairman of
the Board and approved by the Board.
The Human Resources Committee shall be responsible for (a) establishing
human resource policies; (b) approving, up to certain specified levels
which the Board from time to time shall establish, senior management
compensation specifically as follows: officer salaries (excluding the
salary of the President) and, in conjunction with the President, non-
officer salaries; (c) reviewing and recommending senior management
appointments; (d) reviewing senior management evaluations, development
and succession plans; (e) reviewing and recommending basic organizational
structure; and (f) evaluating the performance of the President.
(03/01/98)
Regulation 165.03 will be repealed. See the Bylaws; Article III.
170.00 Departments--The Board, or the President with the approval of the Board,
is authorized to establish and maintain such departments as may be
deemed necessary from time to time, and the Board shall make all needful
Regulations applicable thereto. All such departments shall be under the
supervision of the President, who shall be responsible to the Board. 81
(08/01/94)
Rule 170.00 will be repealed.
181.00 Retirement--The Board is authorized to adopt, maintain, amend, and
terminate, from time to time, a plan or plans for the retirement of
employees of the Association and its wholly owned subsidiary
corporations and for the payment of pensions to such retired employees;
provided, however that no such plan or plans shall be applicable to
employees who are covered by a collective bargaining agreement pension
plan; and provided, further, that no retired employee now receiving
retirement compensation shall have his combined Government assistance
and retirement compensation which was in effect prior to September 1,
1950, reduced as a result of any such plan or plans. 76 (08/01/94)
Rule 181.00 will be repealed.
184.00 Appropriations--There shall be no appropriation of money or property of
the Association except for the purpose of its legitimate business or to
promote the purposes of its organization. 601 (08/01/94)
Rule 184.00 will be repealed.
185.00 Repealing Clause--These Rules shall be effective upon such days as may
be proclaimed by the Board. Upon the taking effect of these Rules, all
former Rules and Regulations shall be repealed, except as herein
provided, and except that prior transactions shall be governed by the
Rules previously in effect. 606 (08/01/94)
Rule 185.00 will be repealed.
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186.00 Liability Under Previous Rules and Regulations--The provisions of the
Rules and Regulations in force immediately prior to the adoption of
these Rules and Regulations shall be superseded hereby, except that such
adoption shall not affect the liability of any member of the Association
for any offense theretofore committed, or any rights or liabilities
theretofore acquired or incurred. 607 (08/01/94)
Rule 186.00 will be repealed.
190.00 Compensation Information--Information enumerating all compensation and
gifts (over a value of $1,000) from the Exchange of any kind and nature,
including, but not limited to, salaries, deferred payments, bonuses,
retirement benefits, trusts, and potential severance payments to the
President, Executive Vice-Presidents, members of the Board of Directors,
or to any organizations, corporations, partnerships, or associations
with which the above individuals are associated either as shareholders,
partners, or by other means will be made available on a quarterly basis
at the Secretary's office to any interested Full or Associate Member
requesting this information. (01/01/00) OF FORMAL INTERPRETATION CBOT
RULE 190.00-COMPENSATION INFORMATION (Adopted by Board of Directors
February 15, 2000)
Pursuant to Rule 190.00, the following information will be made available
on a quarterly basis by the Secretary's Office to any Full or Associate
member requesting this information:
Compensation
Information enumerating all direct compensation and gifts (over a value
of $1,000) from the Exchange of any kind and nature since the beginning
of the CBOT's last fiscal year, including but not limited to, salaries,
deferred payments, bonuses, retirement benefits, trusts and potential
severance payments to the President, Executive Vice-Presidents, and
members of the Board of Directors.
Transactions
Information about any transaction or series of similar transactions to
which the Exchange or any of its subsidiaries was or is a party, and in
which the President, any Executive Vice-President, any member of the
Board of Directors, or any immediate family member of such persons, had
or has a material interest. An interest shall not be deemed "material"
within the meaning of this rule:
(a) Where the interest arises only (i) from such person's
position as a director of another corporation or
organization which is a party to the transaction; or (ii)
from the direct or indirect ownership by such person of less
than a ten percent (10%) equity interest in another person
(other than a partnership) which is a party to the
transaction; or (iii) from both such position and ownership.
(b) Where the interest arises only from such person's position
as a limited partner in a partnership in which the person
and all other persons specified in the above paragraph have
an interest of less than ten percent (10%); or
(c) Where the interest arises solely from the holding of an
equity interest (including a limited partnership interest,
but excluding a general partnership interest) or a creditor
interest in another person that is a party to the
transaction with the Exchange or any of its subsidiaries,
and the transaction in question represents five percent (5%)
or less of the other entity's consolidated gross revenues
for its last full fiscal year. (04/01/00)
Rule 190.00 will be repealed.
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Interpretation--The Board of Directors adopted the following on April 17,
1990 as a formal rule interpretation which confirms established Exchange
practice: "For purposes of all petition provisions in Rules 102.00 "Nominations
for Elective Office' and 107.00 "Amendment of Rules', the signature of an
Associate Member shall count for 1/6th of the signature of a Full Member."
(08/01/94)
The above Interpretation will be repealed.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Delaware General Corporation Law
Under Section 145 of the Delaware General Corporation Law, For-Profit CBOT
is empowered to indemnify its directors and officers in the circumstances
therein provided. Certain portions of Section 145 are summarized below:
Section 145(a) of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation) by reason of the fact
that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe such person's conduct was unlawful.
Section 145(b) of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the corporation to procure a judgment in its favor by reason of
the fact that such person is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if such person acted in good faith and in
a manner such person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent
that the Delaware Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the
Delaware Court of Chancery or such other court shall deem proper.
Section 145(c) of the Delaware General Corporation Law provides that to the
extent that a present or former director or officer of a corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 145(a) and (b), or in defense of any claim,
issue or matter therein, such person shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection therewith.
Section 145(d) of the Delaware General Corporation Law provides that any
indemnification under Section 145(a) and (b) (unless ordered by a court) shall
be made by the corporation only as authorized in the specific case upon a
determination that indemnification of the present or former director, officer,
employee or agent is proper in the circumstances because such person has met
the applicable standard of conduct set forth in Section 145(a) and (b). Such
determination shall be made, with respect to a person who is a director or
officer at the time of such determination, (1) by a majority vote of the
directors who were not parties to such action, suit or proceeding, even though
less than a quorum, or (2) by a committee of such directors designated by
majority vote of such directors, even though less than a quorum, or (3) if
there are no such directors, or if such directors so direct, by independent
legal counsel in a written opinion, or (4) by the stockholders.
II-1
Section 145(e) of the Delaware General Corporation Law provides that
expenses (including attorneys' fees) incurred by an officer or director in
defending any civil, criminal, administrative or investigative action, suit or
proceeding may be paid by the corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall ultimately
be determined that such person is not entitled to be indemnified by the
corporation as authorized in Section 145. Such expenses (including attorneys'
fees) incurred by former directors and officers or other employees and agents
may be so paid upon such terms and conditions, if any, as the board of
directors deems appropriate.
Section 145(f) of the Delaware General Corporation Law provides that the
indemnification and advancement of expenses provided by, or granted pursuant
to, Section 145 shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise.
Section 145(g) of the Delaware General Corporation Law provides that a
corporation shall have the power to purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of such
person's capacity as such, whether or not the corporation would have the power
to indemnify such person against such liability under Section 145.
Amended and Restated Certificate of Incorporation
The amended and restated certificate of incorporation, as amended, provides
that a director of For-Profit CBOT shall not be personally liable to For-Profit
CBOT or its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to For-Profit CBOT or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law ("DGCL"),
or (iv) for any transaction from which the director derived an improper
personal benefit. If the DGCL is amended to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the For-Profit CBOT shall be eliminated or limited to the
fullest extent permitted by the DGCL, as so amended.
Bylaws
Each person who was or is made a party or is threatened to be made a party
to or is otherwise involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a director or an officer of For-
Profit CBOT or is or was serving at the request of For-Profit CBOT as a
director, officer or trustee of another corporation or of a partnership, joint
venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a director, officer or
trustee or in any other capacity while serving as a director, officer or
trustee, shall be indemnified and held harmless by For-Profit CBOT to the
fullest extent authorized by the DGCL, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits For-Profit CBOT to provide broader indemnification rights
than such law permitted For-Profit CBOT to provide prior to such amendment),
against all expense, liability and loss (including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid in settlement)
reasonably incurred or suffered by such indemnitee in connection therewith;
provided, however, that, except as otherwise provided in the bylaws with
respect to proceedings to enforce rights to indemnification, For-Profit CBOT
shall indemnify any such indemnitee in connection with a proceeding (or part
thereof) initiated by such indemnitee only if such proceeding (or part thereof)
was authorized by the board of directors.
In addition, an indemnitee shall also have the right to be paid by For-
Profit CBOT the expenses (including attorney's fees) incurred in defending any
such proceeding in advance of its final disposition (hereinafter an
II-2
"advancement of expenses"); provided, however, that, if the DGCL requires, an
advancement of expenses incurred by an indemnitee in his or her capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by such indemnitee, including, without limitation, service to an
employee benefit plan) shall be made only upon delivery to For-Profit CBOT of
an undertaking (hereinafter an "undertaking"), by or on behalf of such
indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal (hereinafter a "final adjudication") that such indemnitee is not
entitled to be indemnified for such expenses.
If a claim for indemnification is not paid in full by For-Profit CBOT within
sixty (60) days after a written claim has been received by For-Profit CBOT,
except in the case of a claim for an advancement of expenses, in which case the
applicable period shall be twenty (20) days, the indemnitee may at any time
thereafter bring suit against For-Profit CBOT to recover the unpaid amount of
the claim. If successful in whole or in part in any such suit, or in a suit
brought by For-Profit CBOT to recover an advancement of expenses pursuant to
the terms of an undertaking, the indemnitee shall be entitled to be paid also
the expense of prosecuting or defending such suit. In (i) any suit brought by
the indemnitee to enforce a right to indemnification hereunder (but not in a
suit brought by the indemnitee to enforce a right to an advancement of
expenses) it shall be a defense that, and (ii) in any suit brought by For-
Profit CBOT to recover an advancement of expenses pursuant to the terms of an
undertaking, For-Profit CBOT shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the DGCL. Neither the failure of For-Profit CBOT
(including its directors who are not parties to such action, a committee of
such directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification of
the indemnitee is proper in the circumstances because the indemnitee has met
the applicable standard of conduct set forth in the DGCL, nor an actual
determination by For-Profit CBOT (including its directors who are not parties
to such action, a committee of such directors, independent legal counsel, or
its stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or brought by For-Profit CBOT to recover an advancement of expenses pursuant to
the terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under the
bylaws or otherwise shall be on For-Profit CBOT.
The rights to indemnification and to the advancement of expenses conferred
in the bylaws shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, For-Profit CBOT's certificate of
incorporation, agreement, vote of stockholders or directors or otherwise.
Insurance
For-Profit CBOT may maintain insurance, at its expense, to protect itself
and any director, officer, employee or agent of For-Profit CBOT or another
corporation, partnership, joint venture, trust or other enterprise against any
expense, liability or loss, whether or not For-Profit CBOT would have the power
to indemnify such person against such expense, liability or loss under the
DGCL.
II-3
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
[Download Table]
Exhibit
Number Description
------- -----------
2.1 Form of Agreement and Plan of Merger between Ceres Trading
Limited Partnership, CBOT and a CBOT wholly-owned merger
subsidiary.*
3.1 Amended and Restated Certificate of Incorporation of the
Board of Trade of the City of Chicago, Inc.
3.2 Form of Amended and Restated Certificate of Incorporation
of the for-profit Board of Trade of the City of Chicago,
Inc. (Reference is hereby made to Appendix D of the Proxy
Statement and Prospectus).
3.3 Amended and Restated Bylaws of the Board of Trade of the
City of Chicago, Inc.
3.4 Form of Amended and Restated Bylaws of the for-profit
Board of Trade of the City of Chicago, Inc. (Reference is
hereby made to Appendix E of the Proxy Statement and
Prospectus).
3.5 Form of Certificate of Designation relating to Series A
Cumulative Convertible Preferred Stock.*
4.1 Form of Class A Common Stock Certificate for the Board of
Trade of the City of Chicago, Inc.*
4.2 Form of Class B Common Stock Certificate for the Board of
Trade of the City of Chicago, Inc.*
4.3 Form of Series A Cumulative Convertible Preferred Stock
Certificate for the Board of Trade of the City of
Chicago, Inc.*
4.4 Rules and Regulations of the Board of Trade of the City of
Chicago, Inc.
4.5 Form of Rules and Regulations of the for-profit Board of
Trade of the City of Chicago, Inc.
5 Opinion of Morris, Nichols, Arscht & Tunnell as to
legality of the securities being registered.*
8 Form of Opinion of Kirkland & Ellis concerning certain tax
matters.
10.1 Agreement, dated April 14, 2000, between CBOT and Thomas
R. Donovan.
10.2 Letter Agreement, dated April 18, 2000, between CBOT and
Dennis A. Dutterer.
10.3 Letter Agreement, dated April 18, 2000, between CBOT and
BOTCC.
10.4 Executive Employment Agreement, dated May 18, 1999,
between CBOT and Patrick J. Catania.
10.5 Amendment to Executive Employment Agreement, dated
February 28, 2001, between CBOT and Patrick J. Catania.
10.6 Executive Employment Agreement, dated May 18, 1999,
between CBOT and Carol A. Burke.
10.7 Amendment to Executive Employment Agreement, dated
February 28, 2001, between CBOT and Carol A. Burke.
10.8 Note Purchase Agreement, dated as of March 1, 1997, among
CBOT and each of the purchasers limited in Schedule A
attached thereto.
10.9 Credit Agreement, dated as of August 11, 2000, between
CBOT and Bank One, N.A.
10.10 Security Agreement, dated as of August 11, 2000, between
CBOT and Bank One, N.A.
10.11 Second Amended and Restated Limited Partnership Agreement
of Ceres Trading Limited Partnership, dated September 8,
1997.
10.12 Executive Employment Agreement, dated as of February 20,
2001, between CBOT and David J. Vitale.
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[Download Table]
Exhibit
Number Description
------- -----------
10.13 License Agreement, dated as of June 5, 1997, between Dow
Jones & Company, Inc. and CBOT (certain confidential
portions have been omitted and filed separately with the
SEC pursuant to a request for confidential treatment).
10.14 Amendment to License Agreement, dated as of September 9,
1997, between Dow Jones & Company, Inc. and CBOT.
10.15 Second Amendment to License Agreement, dated as of
February 18, 1998, between Dow Jones & Company, Inc. and
CBOT (certain confidential portions have been omitted and
filed separately with the SEC pursuant to a request for
confidential treatment).
10.16 Third Amendment to License Agreement, dated as of May,
1998, between Dow Jones & Company, Inc. and CBOT.
10.17 Alliance Agreement, dated October 1, 1999, among CBOT,
Ceres, Ceres Alliance LLC, Deutsche Borse AG, Swiss Stock
Exchange, Eurex Zurich AG, Eurex Frankfurt AG and Eurex
Deutschland.
10.18 Software License Agreement, dated October 1, 1999, among
Deutsche Borse AG, Swiss Stock Exchange, Ceres Trading
Limited Partnership and CBOT (certain confidential
portions have been omitted and filed separately with the
SEC pursuant to a request for confidential treatment).
10.19 Master Software Development Agreement, dated July 20,
2000, among Deutsche Borse Aktiengesellschaft, Swiss
Stock Exchange, CBOT, Ceres, Ceres Alliance L.L.C., Eurex
Frankfurt AG, Eurex Zurich AG, Eurex Clearing AG and
CBOT/Eurex Alliance, L.L.C. (certain confidential
portions have been omitted and filed separately with the
SEC pursuant to a request for confidential treatment).
10.20 Confirmation of Rights Agreement, dated July 27, 2000,
among Deutsche Borse AG, the Swiss Stock Exchange, Ceres
and CBOT (certain confidential portions have been omitted
and filed separately with the SEC pursuant to a request
for confidential treatment).
10.21 Systems Operations Agreement, dated July 20, 2000, between
Deutsche Borse Systems AG and Deutsche Borse
Aktiengesellschaft, Swiss Stock Exchange, CBOT, Ceres,
Ceres Alliance L.L.C., Eurex Frankfurt AG, Eurex Zurich
AG, Eurex Clearing AG and CBOT/Eurex Alliance, L.L.C.
(certain confidential portions have been omitted and
filed separately with the SEC pursuant to a request for
confidential treatment).
10.22 Second Amended and Restated License Agreement, dated as of
August 25, 2000, between CBOT and Ceres (certain
confidential portions have been omitted and filed
separately with the SEC pursuant to a request for
confidential treatment).
10.23 ISDA Master Agreement and related foreign exchange forward
contracts, dated as of September 27, 2000, between Bank
of America, N.A. and Ceres.
21 Subsidiaries of For-Profit CBOT.
23.1 Consent of Deloitte & Touche, LLP.
23.2 Consent of Morris, Nichols, Arscht & Tunnell (included in
Exhibit 5).
23.3 Consent of Kirkland & Ellis (included in Exhibit 8).
23.4 Consent of William Blair & Company, L.L.C.
23.5 Consent of Arthur Andersen LLP.
24 Powers of Attorney (included in signature page).**
99.1 Form of Proxy Card for Special Meeting of Members of the
CBOT.
--------
* To be filed by amendment.
**Previously filed.
II-5
(b) Financial Statement Schedules
Schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the financial statements or
notes thereto.
Item 22. Undertakings.
Insofar as the indemnification for liabilities arising under the Securities
Act of 1933 may be permitted as to directors, officers and controlling persons
of the Registrant pursuant to the provisions described in Item 20, or
otherwise, the Registrant has been advised that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payments by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the document pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request. The undersigned Registrant hereby
further undertakes to supply by means of a post-effective amendment all
information concerning a transaction and the company being acquired involved
therein, that was not the subject of or included in the registration statement
when it became effective.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
The registrant undertakes that every prospectus (i) that is filed pursuant
to the immediately preceding paragraph, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the document any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes
in
II-6
volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) that is incorporated by reference in the
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide thereof.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment no. 1 to the registration statement to be signed
on its behalf by the undersigned, hereunto duly authorized, in the City of
Chicago, State of Illinois, on March 6, 2001.
BOARD OF TRADE OF THE CITY OF
CHICAGO, INC.
/s/ Nickolas J. Neubauer
By: _________________________________
Nickolas J. Neubauer
Chairman of the Board
* * *
Pursuant to the requirements of the Securities Act of 1933, this amendment
no. 1 to the registration statement has been signed by the following persons on
March 6, 2001 in the capacities indicated.
[Download Table]
Signature Title
--------- -----
/s/ David J. Vitale President and Chief Executive Officer
___________________________________________ (Principal Executive Officer)
David J. Vitale
*Glen M. Johnson Chief Financial Officer (Principal
___________________________________________ Financial Officer)
Glen M. Johnson
*Jill A. Harley Treasurer (Principal Accounting Officer)
___________________________________________
Jill A. Harley
/s/ Nickolas J. Neubauer Chairman of the Board
___________________________________________
Nickolas J. Neubauer
*Charles P. Carey Vice Chairman of the Board
___________________________________________
Charles P. Carey
*Raymond Cahnman Director
___________________________________________
Raymond Cahnman
*James E. Cashman Director
___________________________________________
James E. Cashman
*Mark E. Cermak Director
___________________________________________
Mark E. Cermak
*Robert F. Corvino Director
___________________________________________
Robert F. Corvino
II-8
[Download Table]
Signature Title
--------- -----
*James F. Curley Director
___________________________________________
James F. Curley
*Andrew J. Filipowski Director
___________________________________________
Andrew J. Filipowski
*Douglas M. Kurzydlo Director
___________________________________________
Douglas M. Kurzydlo
*Veda Kaufman Levin Director
___________________________________________
Veda Kaufman Levin
*James P. McMillin Director
___________________________________________
James P. McMillin
*Joseph Niciforo Director
___________________________________________
Joseph Niciforo
*James R. Thompson Director
___________________________________________
James R. Thompson
*J. Andrew Wallace Director
___________________________________________
J. Andrew Wallace
*Michael D. Walter Director
___________________________________________
Michael D. Walter
*Ralph H. Weems Director
___________________________________________
Ralph H. Weems
/s/ Nickolas J. Neubauer
*By: ___________________________
Nickolas J. Neubauer
Attorney-in-fact
II-9
EXHIBIT INDEX
[Download Table]
Exhibit
Number Description
------- -----------
2.1 Form of Agreement and Plan of Merger between Ceres Trading
Limited Partnership, CBOT and a CBOT wholly-owned merger
subsidiary.*
3.1 Amended and Restated Certificate of Incorporation of the Board
of Trade of the City of Chicago, Inc.
3.2 Form of Amended and Restated Certificate of Incorporation of
the for-profit Board of Trade of the City of Chicago, Inc.
(Reference is hereby made to Appendix D of the Proxy
Statement and Prospectus).
3.3 Amended and Restated Bylaws of the Board of Trade of the City
of Chicago, Inc.
3.4 Form of Amended and Restated Bylaws of the for-profit Board of
Trade of the City of Chicago, Inc. (Reference is hereby made
to Appendix E of the Proxy Statement and Prospectus).
3.5 Form of Certificate of Designation relating to Series A
Cumulative Convertible Preferred Stock.*
4.1 Form of Class A Common Stock Certificate for the Board of
Trade of the City of Chicago, Inc.*
4.2 Form of Class B Common Stock Certificate for the Board of
Trade of the City of Chicago, Inc.*
4.3 Form of Series A Cumulative Convertible Preferred Stock
Certificate for the Board of Trade of the City of Chicago,
Inc.*
4.4 Rules and Regulations of the Board of Trade of the City of
Chicago, Inc.
4.5 Form of Rules and Regulations of the for-profit Board of Trade
of the City of Chicago, Inc.
5 Opinion of Morris, Nichols, Arscht & Tunnell as to legality of
the securities being registered.*
8 Form of Opinion of Kirkland & Ellis concerning certain tax
matters.
10.1 Agreement, dated April 14, 2000, between CBOT and Thomas R.
Donovan.
10.2 Letter Agreement, dated April 18, 2000, between CBOT and
Dennis A. Dutterer.
10.3 Letter Agreement, dated April 18, 2000, between CBOT and
BOTCC.
10.4 Executive Employment Agreement, dated May 18, 1999, between
CBOT and Patrick J. Catania.
10.5 Amendment to Executive Employment Agreement, dated February
28, 2001, between CBOT and Patrick J. Catania.
10.6 Executive Employment Agreement, dated May 18, 1999, between
CBOT and Carol A. Burke.
10.7 Amendment to Executive Employment Agreement, dated February
28, 2001, between CBOT and Carol A. Burke.
10.8 Note Purchase Agreement, dated as of March 1, 1997, among CBOT
and each of the purchasers limited in Schedule A attached
thereto.
10.9 Credit Agreement, dated as of August 11, 2000, between CBOT
and Bank One, N.A.
10.10 Security Agreement, dated as of August 11, 2000, between CBOT
and Bank One, N.A.
10.11 Second Amended and Restated Limited Partnership Agreement of
Ceres Trading Limited Partnership, dated September 8, 1997.
10.12 Executive Employment Agreement, dated as of February 20, 2001,
between CBOT and David J. Vitale.
[Download Table]
Exhibit
Number Description
------- -----------
10.13 License Agreement, dated as of June 5, 1997, between Dow Jones
& Company, Inc. and CBOT (certain confidential portions have
been omitted and filed separately with the SEC pursuant to a
request for confidential treatment).
10.14 Amendment to License Agreement, dated as of September 9, 1997,
between Dow Jones & Company, Inc. and CBOT.
10.15 Second Amendment to License Agreement, dated as of February
18, 1998, between Dow Jones & Company, Inc. and CBOT (certain
confidential portions have been omitted and filed separately
with the SEC pursuant to a request for confidential
treatment).
10.16 Third Amendment to License Agreement, dated as of May, 1998,
between Dow Jones & Company, Inc. and CBOT.
10.17 Alliance Agreement, dated October 1, 1999, among CBOT, Ceres,
Ceres Alliance LLC, Deutsche Borse AG, Swiss Stock Exchange,
Eurex Zurich AG, Eurex Frankfurt AG and Eurex Deutschland.
10.18 Software License Agreement, dated October 1, 1999, among
Deutsche Borse AG, Swiss Stock Exchange, Ceres Trading
Limited Partnership and CBOT (certain confidential portions
have been omitted and filed separately with the SEC pursuant
to a request for confidential treatment).
10.19 Master Software Development Agreement, dated July 20, 2000,
among Deutsche Borse Aktiengesellschaft, Swiss Stock
Exchange, CBOT, Ceres, Ceres Alliance L.L.C., Eurex Frankfurt
AG, Eurex Zurich AG, Eurex Clearing AG and CBOT/Eurex
Alliance, L.L.C. (certain confidential portions have been
omitted and filed separately with the SEC pursuant to a
request for confidential treatment).
10.20 Confirmation of Rights Agreement, dated July 27, 2000, among
Deutsche Borse AG, the Swiss Stock Exchange, Ceres and CBOT
(certain confidential portions have been omitted and filed
separately with the SEC pursuant to a request for
confidential treatment).
10.21 Systems Operations Agreement, dated July 20, 2000, between
Deutsche Borse Systems AG and Deutsche Borse
Aktiengesellschaft, Swiss Stock Exchange, CBOT, Ceres, Ceres
Alliance L.L.C., Eurex Frankfurt AG, Eurex Zurich AG, Eurex
Clearing AG and CBOT/Eurex Alliance, L.L.C. (certain
confidential portions have been omitted and filed separately
with the SEC pursuant to a request for confidential
treatment).
10.22 Second Amended and Restated License Agreement, dated as of
August 25, 2000, between CBOT and Ceres (certain confidential
portions have been omitted and filed separately with the SEC
pursuant to a request for confidential treatment).
10.23 ISDA Master Agreement and related foreign exchange forward
contracts, dated as of September 27, 2000, between Bank of
America, N.A. and Ceres.
21 Subsidiaries of For-Profit CBOT.
23.1 Consent of Deloitte & Touche, LLP.
23.2 Consent of Morris, Nichols, Arscht & Tunnell (included in
Exhibit 5).
23.3 Consent of Kirkland & Ellis (included in Exhibit 8).
23.4 Consent of William Blair & Company, L.L.C.
23.5 Consent of Arthur Andersen LLP.
24 Powers of Attorney (included in signature page).**
99.1 Form of Proxy Card for Special Meeting of Members of the CBOT.
--------
* To be filed by amendment.
**Previously filed.
Dates Referenced Herein and Documents Incorporated by Reference
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