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Board of Trade of the City of Chicago Inc – ‘S-4’ on 1/26/01

On:  Friday, 1/26/01, at 1:59pm ET   ·   Accession #:  950131-1-457   ·   File #:  333-54370

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

 1/26/01  Board of Trade of the City o..Inc S-4                    4:756K                                   Donnelley R R & S..03/FA

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

Document/Exhibit                   Description                      Pages   Size 

 1: S-4         Registration of Securities Issued in a               211   1.08M 
                          Business-Combination Transaction                       
 2: EX-23.1     Consent of Deloitte & Touche                           1      5K 
 3: EX-23.4     Consent of William Blair & Company, LLC                1      6K 
 4: EX-23.5     Consent of Arthur Andersen LLP                         1      6K 


S-4   —   Registration of Securities Issued in a Business-Combination Transaction
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
6Summary
7Our Business
"Electronic Trading
9The Restructuring Transactions
12Series A Convertible Preferred Stock
14Ceres Valuation
19Board of Directors
"U.S. Federal Income Tax Consequences
20Accounting Matters
"Regulatory Matters
"Conditions to Completing the Restructuring Transactions
21Risk Factors
"Absence of Appraisal Rights
23Risks Relating to the Restructuring Transactions
24Certain Members Have Filed a Complaint in Illinois State Court Challenging the Proposed Allocation of Shares in For-Profit CBOT
25The Allocation of the Equity in For-Profit CBOT Contains an Element of Uncertainty
29Risks Relating to Our Business
"We May Be Unable to Meet Our Future Capital and Liquidity Requirements
32Our Decision Not to Fund the Development of Certain Upgrades to the a/c/e System Could Significantly Harm Our Electronic Trading Operations
"Intense Competition Could Materially Adversely Affect Our Market Share and Financial Performance
37Risks Relating to Changes in Our Corporate Governance
40Overview
"Background of the Restructuring Transactions
"Development of the Restructuring Strategy
46Reasons for the Restructuring Strategy
47Strategic Alternatives Considered
48Description of the Restructuring Transactions
49Demutualization
"Amendment of Our Certificate of Incorporation
51Modernization of Our Corporate Governance
53Reorganization of Our Electronic Trading Business
55Independent Allocation Committee of the Board
57Opinion of the Financial Advisor to the Independent Allocation Committee of the Board
62Opinion of Arthur Andersen to the Board of Directors Regarding Fairness of the Ceres Merger
65Ceres Valuation Analysis of Arthur Andersen
71Capitalization
72Selected Consolidated Financial Data
"Revenues
74Management's Discussion and Analysis of Financial Condition and Results of Operations
"Net Income/(Loss)
79Liquidity and Capital Resources
83Chicago Board of Trade
91Building Services
92Competition
95IDEMs
"COMs
98Regulation
"Changes in Existing Laws and Rules
100Legal Proceedings
"Minority Member Litigation
102Patent Rights Litigation
"Soybean Antitrust Litigation
103Management and Executive Compensation
"Directors and Executive Officers
107Committees of the Board of Directors
109Executive Compensation
115Description of Capital Stock
"General
"Description of Common Stock
116Voting
"Class A Common Stock
117Class B Common Stock
"Special Class and Series Voting Rights
118Conversion Rights of Series B-3 Shares
119Description of Additional Provisions of Class B Common Stock
120Voting on Core Rights
"Commitment to Maintain Open Outcry Markets
121Preferred Stock
122Dividends
125Other Provisions
"Advance Notice
128Shares Eligible for Future Sale
130Comparison of the Rights of Members of the CBOT and Stockholders of For-Profit CBOT
131Authorized Capital
133Voting Rights
137Special Meetings
140Material U.S. Federal Income Tax Consequences of the Restructuring Transactions
141Special Meeting and Proxy Information
"Available Votes; Required Vote
142Legal Matters
"Experts
143Where You Can Find More Information
145Independent Auditors' Report
146Current assets
"Current liabilities
147Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997
148Consolidated Statements of Members' Equity for the Years Ended December 31, 1999, 1998 and 1997
150Notes to Consolidated Financial Statements
167Appendix B Pro Forma Financial Information of For-Profit CBOT
185Appendix E Board of Trade of the City of Chicago, Inc. Bylaws
"Bylaws
197Appendix F Status of Certain Current CBOT Rules and Regulations After the Restructuring Transactions
"Status of Certain Current CBOT Rules and Regulations After the Restructuring Transactions
202Item 20. Indemnification of Directors and Officers
205Item 21. Exhibits and Financial Statement Schedules
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As filed with the Securities and Exchange Commission on January 26, 2001 Registration No. 333- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM S-4 REGISTRATION STATEMENT Under The 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 Identification Number) incorporation or Classification Code organization) Number) 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. [_] CALCULATION OF REGISTRATION FEE -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- [Enlarge/Download Table] Maximum offering Maximum aggregate Title of each class of Amount to be price per offering price Amount of securities to be registered registered share (1) (1) registration fee ----------------------------------------------------------------------------------------------------------------------- Class A Common Stock, $0.001 par value (2).................................... 39,797,650 ----------------------------------------------------------------------------------------------------------------------- Class B Common Stock, Series B-1, $0.001 par value. 1,402 ----------------------------------------------------------------------------------------------------------------------- Class B Common Stock, Series B-2, $0.001 par value.............................. 866(3) ----------------------------------------------------------------------------------------------------------------------- Class B Common Stock, Series B-3, $0.001 par value.............................. 174 ----------------------------------------------------------------------------------------------------------------------- Class B Common Stock, Series B-4, $0.001 par value.............................. 642 ----------------------------------------------------------------------------------------------------------------------- Class B Common Stock, Series B-5, $0.001 par value.............................. 643 ----------------------------------------------------------------------------------------------------------------------- Rights to receive Common Stock (4)...... N/A ----------------------------------------------------------------------------------------------------------------------- Series A Cumulative Convertible Preferred Stock, $0.001 par value....................... 500,000(5) ----------------------------------------------------------------------------------------------------------------------- Total................................... $562,602,100 $140,650.53 ----------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------- (1) Estimated solely for purposes of calculating the registration fee under Rule 457(f)(1). The securities to be registered are to be offered in connection with the restructuring transactions, a series of transactions in which such securities will be issued pursuant to rights distributed to the members in respect of their existing memberships in the Board of Trade of the City of Chicago, Inc., a Delaware not-for-profit corporation. Such memberships have an aggregate market value equal to $562,602,100, determined as provided by Rule 457(c) based upon the average of the bid and asked prices of each class of membership as of January 23, 2001. The shares of Series A Cumulative Convertible Preferred Stock will be issued in exchange for limited partnership interests that are currently "stapled to" and only transferable with the memberships. Because the value of these limited partnership interests is reflected in the value of the associated memberships, no additional value is being attributed to such Series A Cumulative Convertible Preferred Stock for purposes of calculating the registration fee. (2) Registrant is also registering pursuant to this Registration Statement such currently indeterminate number of shares of Class A common stock as may be required for issuance upon conversion or redemption of the Series A Cumulative Convertible Preferred Stock. (3) Includes up to 87 shares of Class B Common Stock, Series B-2, that may be required for issuance upon conversion of Class B Common Stock, Series B-3. (4) Evidencing the rights to receive Class A Common Stock and Class B Common Stock in connection with the restructuring transactions. Pursuant to Rule 457(g), no separate registration fee is required for the rights because they are being registered in the same registration statement as the common stock issuable pursuant to such rights. (5) Includes 279,000 shares of Series A Cumulative Convertible Preferred Stock that would be issuable in connection with the Ceres merger if based upon the November 30, 2000 valuation of Ceres and 221,000 additional shares of Series A Cumulative Convertible Preferred Stock that are estimated to be necessary to be available for issuance in the event that the valuation of Ceres increases as of the date of the consummation of the Ceres merger. The actual maximum number of shares to be issued in the Ceres merger will depend on the facts as they exist on the date of the consummation of the Ceres merger. --------------- 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 JANUARY 26, 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 to approve 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. As described more fully in this document, in connection with the restructuring transactions, each member will receive shares of Class A common stock in accordance with the allocation methodology developed and recommended by our Independent Allocation Committee and adopted by our board of directors 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 carry trading rights and privileges that correspond to the trading rights and privileges associated with your current membership. Additional information regarding the common stock you will receive is included in this document under "Description of Capital Stock" beginning on page 110. 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. A description of the changes to our corporate governance structure, which will significantly affect your rights and obligations, is included in this document under "Comparison of the Rights of Members of the CBOT and Stockholders of For-Profit CBOT" beginning on page 125. 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. Additional information regarding the Series A convertible preferred stock is included in this document under "Description of Capital Stock--Preferred Stock" beginning on page 116. 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 18. Our board of directors has approved the restructuring transactions and recommends that you vote "FOR" the restructuring transactions. The board believes 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.
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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 proxy statement and prospectus, including the demutualization of the CBOT, the adoption of the amended and restated certificate of incorporation, the adoption of the amended and restated bylaws, the related changes to our rules and regulations and 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. A proxy ballot is enclosed for your use in voting on the proposition 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 proposition described in this document is 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 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 proposition. 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 proposition. 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
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TABLE OF CONTENTS [Download Table] Page ---- Summary................................................................... 1 Risk Factors.............................................................. 18 The Restructuring Transactions............................................ 35 Capitalization............................................................ 66 Selected Consolidated Financial Data...................................... 67 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 69 Our Business ............................................................. 77 Management and Executive Compensation..................................... 98 Description of Capital Stock.............................................. 110 Shares Eligible for Future Sale........................................... 125 Comparison of the Rights of Members of the CBOT and Stockholders of For- Profit CBOT.............................................................. 125 Material U.S. Federal Income Tax Consequences of the Restructuring Transactions ............................................................ 135 Special Meeting and Proxy Information..................................... 136 Legal Matters............................................................. 137 Experts................................................................... 137 Where You Can Find More Information....................................... 138 [Download Table] Page ---- 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 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 This document describes a proposed series of transactions that 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 common stock of the for-profit corporation to our current 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 Trading Limited Partnership, into Electronic Chicago Board of Trade, Inc., our wholly owned subsidiary formed for that purpose. In connection with this reorganization of our electronic trading business, the for-profit corporation 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 sometimes refer to these transactions collectively in this document as the "restructuring transactions." For ease of reference in this document, we sometimes refer to our organization, in its current form as a nonstock not-for-profit corporation, as the "CBOT" and the Delaware stock, for-profit corporation, which will result from completion of the restructuring transactions, as "For-Profit CBOT." References to "we," "us" or "our" refer to either the CBOT or For-Profit CBOT, as the context requires, together with its consolidated subsidiaries in either case. In addition, we sometimes refer to the Ceres Trading Limited Partnership as "Ceres," and our wholly owned subsidiary, Electronic Chicago Board of Trade, Inc., as "eCBOT." We sometimes refer to the Board of Trade Clearing Corporation as "BOTCC." The term "Eurex Group" refers to our alliance partners in the a/c/eSM system and includes Deutsche Borse AG, the Swiss Stock Exchange and Eurex Zurich AG. i
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Unless the context requires otherwise, when we refer to "members" or the "membership" we are referring to members of the CBOT or For-Profit CBOT, as the context requires, including Full Members and Associate Members as well as members entitled to trade in the following three market categories: Government Instruments Market, or "GIM," Index, Debt and Energy Market, or "IDEM," and Commodity Options Market, or "COM," which members may sometimes be referred to as "GIMs," "IDEMs" and "COMs," respectively. We are currently phasing out GIM memberships by converting each GIM membership into a one-half Associate Membership upon the transfer 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 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 December 31, 2000, 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. 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. ii
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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 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, into 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. 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 value-enhancing transactions in the future, such as one or more public offerings of shares of stock of For-Profit CBOT and/or eCBOT, or a complete separation of For-Profit CBOT and eCBOT. 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 transaction 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, or "IRS," and any required regulatory approvals from the Commodity Futures Trading Commission, or "CFTC." 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." 1
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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. According to industry data, we ranked second worldwide among major futures exchanges on the basis of volume of contracts traded in 2000, when we transacted about 40% of global listed agricultural futures and options on futures contracts, e.g., wheat, corn and soybeans, and 19% of global listed financial futures and options on futures contracts, e.g., U.S. Treasury bonds and notes. 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. We operate markets for the trading of commodity and financial futures contracts, as well as options on futures contracts. We developed these contracts based upon our extensive research and development efforts and through relationships with market participants and other financial institutions. We operate 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. Our traditional open outcry and electronic trade execution services provide market participants the ability to determine current market prices, or "price discovery," and trade matching services that offer market participants price transparency, anonymity and immediacy. 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. Let us tell you more about our business: Open Outcry Trading Our open outcry trading occurs in individual trading pits on our two trading floors. Open outcry trading represented about 93% of our total contract volume in 2000. The trading pits are centralized meeting places for floor brokers and independent traders to trade contracts. Orders for market participants not present on the 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 their customers regarding current market activity and prices and can receive orders either electronically or by telephone. In addition, our trading floors display current market information and news on electronic wallboards hung above the trading pits. 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. Project A, which was operated through the electronic trading division of Ceres, provided access to the CBOT's financial and index products through workstations located in the United States, Europe and Asia. Project A was replaced in August 2000 with the a/c/e system, which is operated by CBOT/Eurex Alliance, L.L.C., a joint venture owned by Ceres and Eurex Zurich AG. The a/c/e system maintains an electronic, centralized order book and trade execution algorithm for futures and options on futures contracts and allows users to enter their orders directly on the a/c/e system. About 7% of our 2000 volume was traded on the Project A system and the a/c/e system. Since the a/c/e system became operational on 2
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August 27, 2000, the percentage of our volume traded electronically has increased to about 12% of total contract volume. At its 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 the a/c/e system surpassed an aggregate of about 8.6 million contracts traded since it became operational. 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 will receive an appropriate number of shares of Class A common stock based upon the allocation methodology developed and recommended by our board's Independent Allocation Committee and approved by our board of directors and a share of one of the five series of Class B common stock of For-Profit CBOT in respect of each membership held by such member. 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. 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 rules and regulations 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. Each series of Class B common stock will represent a membership as described above, 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 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. 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 generally have the right to vote on all matters submitted for a vote of stockholders. 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 the trading rights and privileges conferred by 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; 3
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. 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; . 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, the approval of a majority of the votes cast by the holders of Series B-1 and Series B-2 shares, voting together as a single class based on their respective per share voting power, will be required in order to approve any such change to a core right. These special voting rights associated with the Series B-1 and Series B-2 shares of Class B common stock are designed to preserve certain important rights of such Class B common stockholders relating specifically to their trading rights and privileges as members of For-Profit CBOT. 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 that are designed to demutualize our organization, modernize our corporate governance 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. 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 4
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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 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. Since these changes will significantly affect your rights and obligations, you should carefully review the changes before voting on the restructuring transactions. 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 the trading rights and privileges held by Class B common stockholders. 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 common 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 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 to the largest extent permitted under applicable law. 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 classified into three classes of directors. 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 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, we urge you to give careful consideration to these aspects of the restructuring transactions before voting on the restructuring transactions. 5
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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." Reorganizing Our Electronic Trading Business In connection with the restructuring transactions, our electronic trading business 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. This will be accomplished pursuant to a series of transactions involving Ceres, which currently operates part of the electronic trading business of the 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. 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 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. 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 (x) that partnership interest's allocable portion of the value of Ceres as presented in Arthur Andersen's final valuation report regarding the value of Ceres and the partnership interests in Ceres, to be delivered as of a date reasonably proximate to the completion of the Ceres merger, by (y) the liquidation preference of $100 per share of Series A convertible preferred stock. We engaged Arthur Andersen LLP to determine the fair market value of Ceres and the limited partnership interests and then subsequently engaged Arthur Andersen to 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 November 30, 2000 as described above. 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-1 139.7432 Class A-2 22.5077 Class A-3 15.4345 Class A-4 0.6755 Class B limited partnership interests are held only by our clearing members and, according to the terms of the Ceres 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 6
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issued with respect to that limited partnership interest, varies by holder. Based upon the November 30, 2000 valuation of Ceres, a total of 62,000 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 merger of Ceres into eCBOT, 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 and in preference to the 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, equal to the liquidation value of such share of Series A convertible preferred stock, plus accrued but unpaid dividends thereon. 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, 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 similar 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, 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. 7
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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 "outside" 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. As described in the opinion, William Blair considered various methodologies for allocating the shares of common stock in For-Profit CBOT, and concluded that an allocation methodology that takes into account a combination of factors rather than a single factor is appropriate. William Blair also concluded 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 class of membership 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. In its analysis, William Blair attached greater importance to liquidation rights, voting rights and the allocation made in respect of each class of membership in connection with the formation of Ceres. 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 LLP 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. 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. For information regarding Arthur Andersen's valuation of Ceres, see "--Ceres Valuation" below. The assessment of the value of the Series A convertible preferred stock 8
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included a consideration of the rights and investment features of the preferred stock relative to similar preferred stock issues of publicly traded companies and their current market-derived yields. 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. In developing its valuation methodology, 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, among other things, the Ceres limited partnership agreement. Arthur Andersen considered valuation approaches, including an income approach, market approach and net asset approach. As described in more detail elsewhere in this document, Arthur Andersen determined that the cost or net asset approach is the best method of determining the value of Ceres and its partnership interests for purposes of the Ceres merger. Using this methodology, Arthur Andersen determined the value of Ceres to be $31,000,000 as of November 30, 2000. 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 terms of the Ceres partnership agreement. 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," as defined in the Ceres limited partnership agreement, with respect to contracts traded on the CBOT. 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. These include the requirement under Delaware law that holders of Class A common stock and Class B common stock vote as separate classes and series on certain amendments to For- Profit CBOT's certificate of incorporation. Other differences arise from choices that we have made in designing the certificate of incorporation and bylaws of For-Profit CBOT. These differences include the addition of change of 9
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control provisions in the certificate of incorporation and bylaws of For-Profit CBOT; changes in the size and composition of the board of directors; changes reducing the ability of members to participate in the day-to-day management and operations of For-Profit CBOT, including substantial elimination of the petition process; and changes to liquidation rights. Set forth below is a brief summary of 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. This means that holders of Class A common stock and Class B common stock will share in all dividends equally, based on the number of shares held. 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 the Full Members will be diluted relative to the voting rights of Associate Members, GIMs, IDEMs and COMs. . 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 the following core rights associated with the trading rights and privileges of Class B common stockholders: . 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 open outcry and electronic trading systems; . the requirement that holders of shares of Class B common stock who meet the membership and eligibility requirements of For-Profit CBOT will be charged transaction fees for trades of For-Profit CBOT's products for their accounts that are lower than 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 any 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 under the terms of the certificate of incorporation of For-Profit CBOT 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. 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 10
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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. These per share voting powers replicate the current voting powers of the CBOT membership. . 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 any proposed amendment to the certificate of incorporation that 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 addition, if any proposed amendment to the certificate of incorporation of For-Profit CBOT 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. 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 . Board of Directors. The For-Profit CBOT certificate of incorporation will provide that the current 18-director board will continue until the special election to be held following the completion of the restructuring transactions. We currently anticipate that this special election will occur 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 three independent or "outside" directors, five directors who are holders of Class B common stock and who meet the membership and eligibility requirements of For-Profit CBOT and the chairman of the board. In addition, the board 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 expiring in successive years over a three-year period. . Committees. The number of committees of For-Profit CBOT will be reduced in order to further streamline its corporate governance. We currently expect that For Profit CBOT will have a nominating committee of the board of directors to review the qualifications of potential candidates and propose nominees for the board, an executive committee of the board of directors to exercise the authority of the full board when the board is not in session, an audit committee of the board of directors to review the results and scope of the audit and other services provided by the company's independent auditors and a compensation committee of the board of directors to oversee the compensation and benefits provided to For- Profit CBOT's management and employees. 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. 11
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. 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 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. As a result of the substantial elimination of the petition process, the ability of the stockholders of For-Profit CBOT to participate in the day-to-day management and operations of For-Profit CBOT will be significantly reduced. In sharp contrast to the significant 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. . "Blank-Check" Preferred Stock. For-Profit CBOT will be authorized to issue up to 10,000,000 shares of preferred stock. The certificate of incorporation will authorize the board of directors of For-Profit CBOT, 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 and to fix the rights, preferences and privileges of the shares of each wholly unissued series as well as any qualifications, limitations or restrictions. The shares of Series A convertible preferred stock to be issued to the limited partners of Ceres pursuant to the Ceres merger will be issued out of these authorized shares. . 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, it is currently anticipated 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. . 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. 12
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Accordingly, there is substantial uncertainty as to whether the priority of payments provision would be enforced in accordance with its terms. 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 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. Generally speaking, the Class A common stock will not be subject to any restriction on transfer after the expiration of the 180-day period, in whole or in part, with or without the associated share of Class B common stock. You should understand that the Chicago Board Options Exchange, or "CBOE," has publicly stated its view that, if consummated, the restructuring transactions would extinguish the exercise right of our Full Members under certain circumstances. For more information about the CBOE exercise right, see "Risk Factors--Risks Relating to the Restructuring Transactions--The CBOE Could Be Successful in Challenging the "Exercise Right," Which Allows Our Full Members to Obtain Trading Privileges at the CBOE, and the Exercise Right Could Be Extinguished or Terminated." In particular, the CBOE has stated most recently 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 CBOE's position is legally valid, we cannot predict the outcome of the CBOE's SEC proceeding seeking approval of its proposed rule change concerning its position on extinguishment of the exercise right. 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. 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. 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 provisions of the For-Profit CBOT certificate of incorporation, bylaws and rules and regulations adopted by the board with respect to those rights and privileges. 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. 13
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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 currently expect to 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. The Class A common stockholders will elect eight members of the new nine-member board of directors, consisting of three 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 the chairman of the board of directors. The chairman will not 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. 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 of directors will be divided into three classes of directors, with the term of each class 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 . one independent 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. 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. 14
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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." 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 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 shall have approved the restructuring transactions; . 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 of Class B common stock will not result in the recognition of gain to our members under federal law; . we shall have received any approvals required by the CFTC in connection with 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 current contract market designations to For-Profit CBOT, and we shall have received any other necessary governmental or regulatory approvals and authorizations; . 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; . there shall be no court order 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, 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. 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 Full, Associate, 15
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GIM, IDEM and COM 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 in a manner that will enhance stockholder value. 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 18 below. Matters To Be Approved; Vote Required You are being asked to approve the restructuring transactions described more fully in this document, including the demutualization of the CBOT, the adoption of the amended and restated certificate of incorporation, the adoption of the amended and restated bylaws, the related changes to our rules and regulations and the reorganization of our electronic trading business. The restructuring transactions will be approved if voting members of the CBOT 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. 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. Appraisal rights, if they had been available, would have allowed a member who voted against the proposition and followed a prescribed statutory process, to receive a cash payment equal to the fair value of the member's membership in the CBOT. 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. 16
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CBOT Summary Consolidated Historical and 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, 1999 and 1998 and operating data for each of the three years in the period ended December 31, 1999, 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, 1997, 1996 and 1995 and operating data for each of the two years ended December 31, 1996 and 1995 have been derived from the audited consolidated financial statements and related notes not included in this document. The balance sheet and operating data as of, and for each of, the nine months ended September 30, 2000 and 1999 are unaudited but include, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of such data. The results of operations for the nine months ended September 30, 2000 are not necessarily indicative of the results that may be expected for the entire year. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements and the related notes and other financial information included elsewhere in this document. [Enlarge/Download Table] Nine Months Ended September 30, Year Ended December 31, ------------------ ----------------------------------------------- 2000 1999 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- -------- -------- (dollars in thousands, except per seat data) Operating Data Total revenues......... $158,647 $158,891 $202,896 $205,238 $175,385 $154,578 $136,802 Operating expenses..... 158,517 153,263 214,529 188,320 148,186 123,808 113,122 -------- -------- -------- -------- -------- -------- -------- Income (loss) from operations........ 130 5,628 (11,633) 16,918 27,199 30,770 23,680 Other income and expenses Interest income...... 884 645 1,052 1,947 2,090 1,986 2,547 Interest expense..... 4,704 5,035 6,774 7,170 6,483 -- -- -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes and cumulative effect of change in accounting principle......... (3,690) 1,238 (17,355) 11,695 22,806 32,756 26,227 Provision (benefit) for income taxes...... 1,690 512 (2,895) 5,051 6,147 13,109 10,684 -------- -------- -------- -------- -------- -------- -------- Income (loss) before cumulative effect of change in accounting principle........... (5,380) 726 (14,460) 6,644 16,659 19,647 15,543 Cumulative effect of change in accounting principle--net of tax benefit of $2,026(1)........... -- 2,920 2,920 -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Income (loss) before minority interest.......... (5,380) (2,194) (17,380) 6,644 16,659 19,647 15,543 Minority interest in (income) loss of subsidiaries... -- (204) 6,933 (38) (6,995) -- -- -------- -------- -------- -------- -------- -------- -------- Net income (loss).. $ (5,380) $ (2,398) $(10,447) $ 6,606 $ 9,664 $ 19,647 $ 15,543 ======== ======== ======== ======== ======== ======== ======== Balance Sheet Data Total Assets........... $372,276 $378,927 $373,379 $400,971 $397,449 $355,585 $273,137 Total Liabilities...... 176,400 166,190 172,405 183,396 193,538 160,765 98,243 Short-term borrowings.. 18,014 11,500 6,500 -- 1,662 14,357 5,834 Long-term debt......... 64,286 87,500 87,500 99,000 105,000 76,166 27,411 Total equity .......... 195,876 208,898 200,974 211,047 203,911 194,820 174,894 Other Data Current ratio (2)...... 0.66 1.49 1.02 1.41 1.42 1.15 1.36 Working capital (deficit)............. $(23,145) $ 19,697 $ 1,067 $ 18,574 $ 18,457 $ 7,729 $ 14,364 Capital expenditures... 29,301 13,901 24,775 24,160 48,529 90,393 51,512 Times interest earned (3)................... N/A 1.25 N/A 2.63 4.52 N/A N/A Number of full time employees at end of period................ 728 834 846 853 805 811 773 Sales price per Full CBOT seat High................. $642,000 $632,500 $632,000 $780,000 $857,500 $690,000 $710,000 Low.................. 328,000 490,000 400,000 384,000 660,000 531,000 525,000 -------- (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) Equals current assets divided by current liabilities. (3) Equals the sum of income (loss) before provision (benefit) for income taxes plus interest expense, divided by interest expense. 17
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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, it is intended that For-Profit CBOT will be operated for the long-term benefit of its stockholders rather than 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 CBOE Could Be Successful in Challenging the "Exercise Right," Which Allows Our Full Members to Obtain Trading Privileges at the CBOE, and the Exercise Right Could Be Extinguished or Terminated Since 1972, when we created the CBOE, our Full Members have had a legal right to become members of CBOE at no additional cost. We sometimes refer to this right in this document as the "exercise right." Over the last year, the CBOE has stated publicly its view that, if consummated, the restructuring transactions would extinguish the exercise right under certain circumstances. In particular, the CBOE has stated most recently in a proposed rule change filed with the SEC that the exercise right will be terminated: 18
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. 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 CBOE members are able to trade all of the CBOT's products and the CBOE's products simultaneously. Because we believe that the CBOE's position violates a 1992 agreement between us and the CBOE, which addresses the exercise right, and because the exercise right is valuable to our Full Members, we initiated litigation against the CBOE intended to protect the exercise right. 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 CBOE 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 CBOE's position breaches the 1992 agreement. Under this ruling, however, the SEC will determine whether CBOE can impose new conditions on the exercise right under its proposed rule change filed with the SEC. The SEC is conducting a proceeding to determine whether, under the federal securities laws, the CBOE 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 CBOE's position is legally valid, we cannot predict the outcome of that SEC proceeding. If the SEC were to approve the CBOE's 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. The CBOE has historically been extremely aggressive in challenging the validity of the exercise right of our Full Members. We cannot assure you that the CBOE will not take other actions in the future to interfere with the exercise right or that the CBOE will not otherwise be successful in preventing Full Members from exercising such right in the future. Furthermore, because the CBOE 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. 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 at the expense 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. 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 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." 19
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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, 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 current certificate of incorporation and bylaws provide that the Full Members are entitled to one vote and Associate Members are entitled to one- sixth of one vote 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." 20
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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 persons who are now Associate Members, IDEMs and COMs and will reduce in a corresponding manner the relative liquidation rights of 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 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 21
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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 restructuring transactions. We filed a request for a ruling from the IRS on , 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, the CFTC will be asked to approve changes to our certificate of incorporation, bylaws and rules and 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 22
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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, and 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 by the perceived value, and the demand for, the related trading rights and privileges including, among other things, the CBOE 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 23
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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, 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 or redemption right or 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 redeemable, 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 substantially lower cash reserves as of September 30, 2000 as compared to September 30, 1999 and a working capital deficit for year-end 2000 of about $23 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. We May Not be Able to Engage A New President and Chief Executive Officer to Run For-Profit CBOT Our future success depends in significant part on the ability of our management, including our president and chief executive officer, to utilize new and existing staff and other employees in the context of a for-profit corporation. We had been operating our corporation under the leadership of an interim president and chief executive officer from April 2000 until his resignation, which became effective on January 15, 2001. As a result, we currently have no president and chief executive officer. We are currently engaged in a search for a new president and chief executive officer for our corporation. However, we cannot assure you that we will successfully engage a new president and chief executive officer to operate For-Profit CBOT. Moreover, if we do engage a new president and chief executive officer, we cannot assure you that such person will be successful in operating our corporation in the future. 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 24
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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, but not limited to, 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 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 25
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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 which have been created to the present date. 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. 26
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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; 27
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. 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 BOTCC. BOTCC 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 BOTCC has agreed to provide its services to our clearing members, you should be aware that the loss of any of BOTCC's services with respect to transactions on the CBOT may have a material adverse effect on our operations. In addition, BOTCC 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 BOTCC'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 BOTCC 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 BOTCC that would obligate BOTCC to continue to provide its clearing services to our clearing members. Although we intend to enter into such a contract with BOTCC, 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; 28
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. delays in trade execution; . decreased customer satisfaction; . incomplete or inaccurate accounting, recording or processing of trades; . financial losses; . security breaches; . litigation or other customer claims; and . regulatory sanctions. 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." 29
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Declines in the Global Financial Markets May Materially Adversely Affect Our Business Adverse economic and political conditions may cause declines in global financial markets and may affect our operating results. The global financial services business is, by its nature, risky and volatile and is directly affected by many national and international factors that are beyond our control. Any one of these factors may cause a substantial decline in the 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 11% of our operating revenue in 1999. 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 30
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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 CFTC under the authority provided under the Commodity Exchange Act and by other federal agencies. The CFTC is a "sunset agency." This means that it must be periodically 31
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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, or the "CFMA." The CFMA 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 CFMA 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 32
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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. 33
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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. 34
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THE RESTRUCTURING TRANSACTIONS Overview As a result of rapidly evolving changes in the futures industry, principally the increasing importance of electronic trading, we have determined that it is necessary to restructure our organization in order to enhance 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 accomplish the following objectives: . 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 will be operated as a wholly owned subsidiary of the CBOT 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 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. 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 IRS and any required regulatory approvals from the CFTC. 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 35
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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 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, aided 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. 36
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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 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 37
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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. 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. 38
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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 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 CBOE exercise right in making any determination that the restructuring transactions remain in the best interests of the CBOT and its members. 39
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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 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." 40
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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 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 most active derivatives exchange based on contract volume. 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, or "OTC," 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 OTC 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, or "Nasdaq," are under pressure from Electronic Communications Networks, or "ECNs." About one dozen ECNs have been established in the United States, many during the last three years, by leading investment banks, broker-dealers and market 41
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markers, which are aligning themselves with multiple alternative systems. For example, according to Internet Trading Magazine, Goldman Sachs currently has an investment in four ECNs. According to a special study on ECNs and after-hours trading prepared by the SEC's Division of Market Regulation, ECNs 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 OTC derivatives trades for large OTC 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. 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 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 NYSE, 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 42
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. 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, 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 mechanism 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 43
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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 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 to 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 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--Amendment of Our Certificate of Incorporation." 44
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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 to our certificate of incorporation. This amendment will authorize us to issue stock, but will not effect the actual distribution of shares of stock to the members. In connection with the amendment and restatement of our certificate of incorporation, 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. In order to effect this distribution, 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." 45
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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 For more information on 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 about this litigation, see "Our Business--Legal Proceedings--Minority Member Litigation." Modernization of Our Corporate Governance An important objective of the restructuring transactions is the modernization of the corporate governance structure of CBOT. After the restructuring transactions, it is intended that For-Profit CBOT will be operated for the long-term benefit of its stockholders rather than 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 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. 46
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Amendment 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 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. 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 , 2001 and no later than , 2001. 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. 47
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The rules and regulations will also implement certain other changes that are designed to modernize certain aspects of our corporate governance. 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. 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," which summarizes the changes to current rules and regulations. 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, 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, which we sometimes refer to in this document as 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 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. 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 (x) 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 completion of the Ceres merger, by (y) 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 November 30, 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-1 139.7432 Class A-2 22.5077 Class A-3 15.4345 Class A-4 0.6755 48
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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 November 30, 2000, a total of 62,000 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 January 2001, Arthur Andersen prepared a preliminary valuation analysis that concluded the fair market value of Ceres as of November 30, 2000 was $31,000,000. According to this analysis, the allocation of value of Ceres among the general partner and the limited partner classes as of November 30, 2000 was as follows: [Download Table] Partnership Interest Valuation -------------------- --------- General Partner $ 3,100,000 Class A-1 Limited Partners $19,592,000 Class A-2 Limited Partners $ 1,751,097 Class A-3 Limited Partners $ 270,103 Class A-4 Limited Partners $ 86,800 Class B Limited Partners $ 6,200,000 Total $31,000,000 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. The Ceres merger has already been 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 implementing the transactions, see "--Regulatory Matters" and "--Conditions to Completing the Restructuring Transactions." 49
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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 "outside" 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 50
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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 CBOE 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 CBOE; 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. 51
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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 CBOE 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, 52
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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. 53
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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 documents, including the CBOT's certificate of incorporation, bylaws, rules and regulations; . 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; . information regarding the historical trading prices of memberships; and . certain other information about us and our operations. 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 CBOE; William Blair had been advised that prior discussions around the time of its May 5 opinion between the CBOT and CBOE of a possible business combination had terminated; and . all existing trading privileges and the CBOE 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; . the market values of memberships; and . the contract volumes for which each class of membership has been responsible on a historical basis. 54
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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. 55
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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. 56
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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 LLP 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 on 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. 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 57
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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 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 58
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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. 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. 59
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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." Based upon these analyses, Arthur Andersen estimated that the value of Ceres as of November 30, 2000 is calculated as follows: [Download Table] Total Assets including investment in a/c/e modifications... $ 76,014,745 Total Liabilities and claims against the partnership (including Advances from General Partner)................. $(45,018,382) ------------ Total Net Asset Value (rounded)............................ $ 31,000,000 ============ 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 Trading Limited Partnership 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 LLP 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 60
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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 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 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. 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. 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. Arthur Andersen's valuation analysis as of 2001, as well as its final valuation report, to be dated as of a date reasonably proximate to the date of the completion of the Ceres merger, is available or will be made available, as applicable, for inspection and copying at our principal executive offices located at 141 West Jackson Boulevard, Chicago, Illinois 60604, during regular business hours by any CBOT member or Ceres limited partner or his or her representative who has been so designated in writing. 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 software and in CBOT/Eurex Alliance, L.L.C. and its various licensing agreements related to electronic trading support for the CBOT. 61
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In arriving at its conclusions, Arthur Andersen made the following assumptions: . The CBOT transitioned from the Project A platform to the a/c/e platform on or about August 27, 2000. . The a/c/e electronic trading platform 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 platform 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 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 modifications and, through November 30, 2000, these expenditures totaled $42,143,039. Additionally, purchases of computer software and systems related to the a/c/e system in the amount of $28,295,638 were capitalized by Ceres, as of November 30, 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. . 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 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 November 30, 2000 was: [Download Table] Assets: Cash and cash equivalents...................................... $ 327,896 Accounts receivable............................................ 3,427,790 Capital contributions receivable............................... 0 Prepaid expenses............................................... 120 Deferred organization and development costs.................... 0 Computer software and systems.................................. 28,295,638 Investment in and advances to CBOT/Eurex Alliance, L.L.C....... 0 Previously incurred Eurex-related expenses (1)................. 42,143,038 Other fixed assets--net........................................ 1,820,262 ----------- Total assets................................................... $76,014,744 =========== 62
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[Download Table] Liabilities and Partners' Equity: Accounts payable and accrued expenses........................ $ 157,724 Due to CBOT/Eurex Alliance L.L.C............................. 11,591,818 Notes payable................................................ 7,420,483 Advances from general partner................................ 25,848,357 Partners' equity............................................. 30,996,362 ----------- Total liabilities and partners' equity....................... $76,014,744 =========== Concluded value of partnership (rounded)..................... $31,000,000 =========== -------- (1) Previously Incurred Eurex-Related Expenses not capitalized: [Download Table] Fiscal year 1998............. $10,874,753 Fiscal year 1999............. 11,024,878 Fiscal year to date 2000..... 20,243,408 ----------- Total........................ $42,143,038 =========== 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 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. 63
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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; . 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 necessary governmental or regulatory approvals and authorizations; . 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. 64
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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. Matters To Be Approved; Required Vote You are being asked to approve the restructuring transactions described more fully in this document, including: . the demutualization of the CBOT; . the adoption of the amended and restated certificate of incorporation; . the adoption of the amended and restated bylaws; . the related changes to our rules and regulations; and . the reorganization of our electronic trading business. The restructuring transactions will be approved if, at the special meeting called for the purpose of considering the restructuring transactions, voting members cast at least 300 votes, in person or by proxy, and at least a majority of those votes are cast in favor of the restructuring transactions. For more information about the special meeting and the vote required, see "Special Meeting and Proxy Information." Board Recommendation The board of directors recommends that members vote "FOR" approval of the restructuring transactions. 65
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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 attached as Appendix A: [Download Table] As of September 30, 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........................ 195,876 Stockholders' Equity: Series A Cumulative Convertible Preferred stock, $0.001 par value, 10,000,000 shares authorized, 279,000 issued and outstanding...... -- -- 27,900 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.................... -- 195,832 167,932 -------- -------- -------- Total Stockholders' equity......... -- 195,876 195,876 -------- -------- -------- Total Capitalization............... $260,162 $260,162 $260,162 ======== ======== ======== -------- *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 279,000 shares of Series A convertible preferred stock valued at $27,900,000 to the limited partners of Ceres in exchange for their limited partnership interests based on the November 30, 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 attached hereto. 66
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SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial and other data for the CBOT. The balance sheet data as of December 31, 1999 and 1998 and operating data for each of the three years in the period ended December 31, 1999, 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, 1997, 1996 and 1995 and operating data for each of the two years ended December 31, 1996 and 1995 have been derived from the audited consolidated financial statements and related notes not included in this document. The balance sheet and operating data as of, and for each of, the nine months ended September 30, 2000 and 1999 are unaudited but include, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of such data. The results of operations for the nine months ended September 30, 2000 are not necessarily indicative of the results that may be expected for the entire year. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the financial statements and related notes and other financial information included elsewhere in this document. [Enlarge/Download Table] Nine Months Ended September 30, Year Ended December 31, ------------------ ----------------------------------------------- 2000 1999 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- -------- -------- Operating Data (dollars in thousands, except per seat data) Revenues Exchange fees.......... $ 75,642 $ 81,787 $102,545 $112,115 $ 88,932 $ 76,566 $ 64,728 Market data (1)........ 45,321 41,278 54,028 53,100 47,242 44,459 42,526 Building (2)........... 18,844 16,996 22,653 21,876 21,896 21,117 20,924 Services (3)........... 14,392 15,607 20,279 16,907 15,776 10,975 7,810 Other (4).............. 4,448 3,223 3,391 1,240 1,539 1,461 814 -------- -------- -------- -------- -------- -------- -------- Total revenues....... 158,647 158,891 202,896 205,238 175,385 154,578 136,802 -------- -------- -------- -------- -------- -------- -------- Expenses: Salaries and Benefits.. 39,459 44,375 64,133 57,991 49,384 46,064 41,510 General and administrative expenses.............. 40,443 36,471 50,988 45,267 28,174 20,295 21,790 Building operating costs................. 17,076 17,045 23,171 22,572 21,023 18,763 17,276 Depreciation and amortization.......... 28,135 27,021 36,140 33,764 27,681 16,433 14,809 Programs (5)........... 2,611 4,875 7,280 8,802 9,974 9,305 9,397 Professional services.. 22,517 23,476 32,490 19,924 11,950 12,948 8,340 Other operating expense (6)........... 8,276 -- 327 -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Operating expenses... 158,517 153,263 214,529 188,320 148,186 123,808 113,122 -------- -------- -------- -------- -------- -------- -------- Income (loss) from operations.......... 130 5,628 (11,633) 16,918 27,199 30,770 23,680 Other income and expenses Interest income........ 884 645 1,052 1,947 2,090 1,986 2,547 Interest expense....... 4,704 5,035 6,774 7,170 6,483 -- -- -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes and cumulative effect of change in accounting principle........... (3,690) 1,238 (17,355) 11,695 22,806 32,756 26,227 Provision (benefit) for income taxes...... 1,690 512 (2,895) 5,051 6,147 13,109 10,684 -------- -------- -------- -------- -------- -------- -------- Income (loss) before cumulative effect of change in accounting principle............. (5,380) 726 (14,460) 6,644 16,659 19,647 15,543 Cumulative effect of change in accounting principle--net of tax benefit of $2,026 (7)................... -- 2,920 2,920 -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Income (loss) before minority interest..... (5,380) (2,194) (17,380) 6,644 16,659 19,647 15,543 Minority interest in (income) loss of subsidiaries.......... -- (204) 6,933 (38) (6,995) -- -- -------- -------- -------- -------- -------- -------- -------- Net income (loss)...... $ (5,380) $ (2,398) $(10,447) $ 6,606 $ 9,664 $ 19,647 $ 15,543 ======== ======== ======== ======== ======== ======== ======== Balance Sheet Data Total assets............ $372,276 $378,927 $373,379 $400,971 $397,449 $355,585 $273,137 Total liabilities....... 176,400 166,190 172,405 189,924 193,538 160,765 98,243 Short-term borrowings... 18,014 11,500 6,500 -- 1,662 14,357 5,834 Long-term debt.......... 64,286 87,500 87,500 99,000 105,000 76,166 27,411 Total equity............ 195,876 208,898 200,974 211,047 203,911 194,820 174,894 Other Data Current ratio (8)....... 0.66 1.49 1.02 1.41 1.42 1.15 1.36 Working capital (deficit).............. (23,145) 19,697 1,067 18,574 18,457 7,729 14,364 Capital expenditures.... 29,301 13,901 24,775 24,160 48,529 90,393 51,512 Times interest earned (9).................... N/A 1.25 N/A 2.63 4.52 N/A N/A Number of full time employees at end of period................. 728 834 846 853 805 811 773 Sales price per full CBOT seat--High........ $642,000 $632,500 $632,000 $780,000 $857,500 $690,000 $710,000 Low..................... 328,000 490,000 400,000 384,000 660,000 531,000 525,000 67
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-------- (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) Equals current assets divided by current liabilities. (9) Equals the sum of income (loss) before provision (benefit) for income taxes plus interest expense divided by interest expense. 68
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This document contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of 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 50.5% of our total revenues in 1999. 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 26.6% of our total revenue in 1999. 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 1999, total revenues from our real estate operations represented about 11.2% 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 Period ended September 30, 2000 compared to period ended September 30, 1999. Net Income/(Loss). For the period ended September 30, 2000, we had a net loss of $5.4 million compared to a net loss of $2.4 million for the period ended September 30, 1999. This increased loss was 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 in 2000 of about $8.0 million on a pre-tax basis. 69
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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. Revenues from exchange fees decreased 7.6% from $81.8 million in 1999 to $75.6 million in 2000, principally as a result of lower trading volume. In 2000, 179.8 million contracts were traded, which represented a 10.9% decrease from the 201.9 million contracts traded in 1999. The largest component of total exchange fees, non-member fees, decreased from $60.4 million in 1999 to $57.3 million in 2000, a decline of 5.1%. The decreased trading volume was partially offset by the increased sale of market data. In 2000 and 1999, we received $45.3 million and $41.3 million, respectively, in revenue from the sale of market data. 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 increased to $18.8 million in 2000, or 10.6%, above our rental revenue in 1999 of $17.0 million. Our per square foot rental rate increased in this same period. The amount of leased space remained steady from 1999 to 2000. Service revenues decreased 7.7% from $15.6 million in 1999 to $14.4 million in 2000. Service revenues consist of telephone charges, badge fees, booth space and member services-related fees. This decrease was primarily attributable to decreased revenues from our trading floor communication system and from the elimination of Project A terminal leasing in September, 2000. Dues received from the memberships were $3.2 million in 2000, compared to the 1999 dues of $0.3 million. This increase was a result of the resumption of dues for all CBOT members in June, 2000. Other operating revenues of $1.2 million in 2000 decreased $1.7 million from $2.9 million in 1999. This decrease is attributable to a one-time fine levied by the CBOT's Board of Directors in 1999 and a favorable settlement of a lawsuit in 1999. Interest income, which is not a component of operating income, was $0.9 million in 2000, representing an increase of 37.0% from 1999 interest income of $0.6 million. Offsetting the interest income, was interest expense of $4.7 million in 2000. Interest expense decreased $0.3 million, or 6.6%, from $5.0 million, in 1999 due to our reduced debt balance in 2000. Expenses. Operating expenses totaled $158.6 million in 2000, compared to $153.3 million in 1999, which was an increase of 3.5%. Salaries and benefits decreased 11.0%, to $39.5 million, in 2000 from $44.4 million in 1999. The decrease in salary and benefits expenses was due to lower staffing levels in 2000 compared to 1999. Our general and administrative expenses increased $4.0 million to $40.5 million in 2000, an 11.0% increase from $36.5 million in general and administrative expenses in 1999. These expenses represented our general operating costs, such as telecommunications expenses, the cost of the use of the information machines on the trading floor and data processing expenses. The expenses associated with the communications lines for Project A workstations were also included in general and administrative expenses. In addition, operating expenses of CBOT/Eurex Alliance, L.L.C. were reflected in this number. Building operating expenses in 2000 remained essentially the same, at $17.1 million, as 1999. Program costs decreased 46.9% from $4.9 million in 1999 to $2.6 million in 2000. This decrease in costs was primarily attributable to a change in the marketing efforts of the Market and Product Development Department and the Communications Department. The provision for income taxes increased $1.2 million, from $0.5 million at September 30, 1999, to $1.7 million at September 30, 2000. This increase was primarily due to the increase in non-deductible 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. 70
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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 largest component of exchange fees, non-member fees, decreased from $80.7 million in 1998 to $76.7 million in 1999, a decline of 4.9%. 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 of $3.0 million in 1999 increased $2.2 million from $0.8 million in 1998. This increase was due primarily to a one-time disciplinary fine levied by the CBOT's board of directors in 1999 and a favorable settlement of a lawsuit in 1999. 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 was due to increased staffing levels relative to 1998, as well as non-cash changes to our pension plan assumptions. 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. The expenses associated with the communications lines for the increased number of Project A workstations 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. 71
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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. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Net Income/(Loss). For the year ended December 31, 1998, the CBOT had net income of $6.6 million compared to $9.7 million in 1997, a decrease of $3.1 million or 32.0%. Revenues. Consolidated operating revenues increased from $175.4 million in 1997 to $205.2 million in 1998, an increase of $29.8 million or 17.0%. Revenues from exchange fees increased $23.2 million or 26.1% from $88.9 million in 1997 to $112.1 million in 1998. Non-member fees, the largest component of total exchange fees, increased from $64.5 million in 1997 to $80.7 million in 1998, an increase of $16.2 million or 25.0%. This increase was due to an increase of 38.5 million contracts, or 15.9% from 242.7 million contracts traded in 1997 to 281.2 million contracts traded in 1998. Our revenues from sales of market data increased from $47.2 million in 1997 to $53.1 million in 1998, which represented a change of $5.9 million or 12.5%. Revenue from renting office space in our building remained relatively unchanged at $21.9 million for both 1998 and 1997. Neither the number of square feet leased nor the rental revenue per square foot changed significantly from 1997. Revenues from services increased $1.1 million or 7.0% from $15.8 in 1997 to $16.9 million in 1998. Services revenues consist of telephone charges, badge fees, booth space, and member services-related fees. This category has increased over the past several years due to the new trading floor communication system. Other revenues of $1.2 million were down $0.3 million from $1.5 million in 1997. Other revenues are primarily from fines, dues on memberships and miscellaneous items. Interest income, which is not a component of operating income, was $1.9 million in 1998, down $0.2 million or 9.5% from $2.1 million in 1997. The decline in interest income was due to our overall decrease in cash. Offsetting interest income was interest expense of $7.2 million in 1998. Interest expense increased $0.7 million or 10.8% from $6.5 million in 1997. The increase in interest expense resulted from the capitalization of a portion of interest in 1997 as a part of the cost of our new trading facility. The total amount of capitalized interest in 1997 was $1.1 million. Expenses. Operating expenses totaled $188.3 million in 1998, compared to $148.2 million in 1997, which represented an increase of $40.1 million or 27.1%. Our salaries and benefits increased $8.6 million or 17.4%, from $49.4 million in 1997 to $58.0 million in 1998. A portion of this increase resulted from increased salaries, which were $2.4 million or 6.4% above 1997 levels due to additional staff. Professional services increased $8.0 million or 66.7% from $12.0 million in 1997 to $20.0 million in 1998. This increase resulted mainly from increased usage of outside programmers to meet critical development project deadlines in several key areas. General and administrative expenses of $45.3 million were 60.6% above 1997 expenses of $28.2 million. General and administrative expenses consist of the general operating costs of the exchange such as telecommunications expenses, including the cost of data lines on the Project A system network (for which there is offsetting revenue), the cost of information machines on the trading floors and data processing operation and maintenance expenses. In addition, general and administrative expenses in 1998 included costs of $11.1 million incurred in establishing the initial alliance with Eurex. Depreciation and amortization expense increased $6.1 million in 1998 primarily due to the full year effect of depreciation on the new trading facility, increased trading floor expenditures and computer equipment additions. Building operating expenses increased $1.6 million or 7.6% from $21.0 million in 1997 to $22.6 million in 1998. Increased building operating expenses resulted from scheduled maintenance projects in 1998 and real estate taxes above 1997 levels. Program costs decreased $1.2 million or 12% from $10.0 million in 1997 to $8.8 million in 1998, which was primarily attributable to a change in the marketing efforts of the Market and Product Development Department and Communications Departments. 72
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Minority interest in net income of subsidiaries decreased $7.0 million in 1998 from 1997. This decline was primarily attributable to the expenses incurred by Ceres in 1998 associated with the alliance with Eurex. The provision for income taxes decreased $1.1 million, from $6.1 million in 1997 to $5.0 million in 1998. While income before taxes is significantly lower in 1998 compared to 1997, the 1997 income tax provision reflects a one time adjustment resulting from a favorable tax court ruling. Financial Condition For the period ended September 30, 2000, total assets were $372.3 million, a decrease of $1.1 million from $373.4 million at December 31, 1999. Current assets decreased $4.6 million from $49.3 million at December 31, 1999 to $44.7 million at September 30, 2000, due primarily to a decrease in cash and cash equivalents in the amount of $9.3 million primarily as a result of a paydown of debt obligations. Property and equipment, net of accumulated depreciation, was $276.2 million at September 30, 2000, a decrease of $20.2 million from $296.4 million at December 31, 1999, primarily due to purchases of computer equipment more than offset by depreciation. Other assets of $51.3 million at September 30, 2000 increased $23.7 million from $27.6 million at December 31, 1999. This was primarily due to a reclassification of certain tenant improvements from other assets to building and equipment offset by the capitalization of software for the a/c/e platform as required to be capitalized under Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." At December 31, 1999, the CBOT held $22.4 million in cash and cash equivalents, compared to $13.1 million at September 30, 2000. This decrease consisted primarily of net cash generated by operating activities of $31.6 million less net cash flows primarily for capital expenditures and investment in the a/c/e system of $29.5 million and net repayment of debt of $11.4 million. The working capital deficit at September 30, 2000 was $23.1 million compared to working capital of $1.1 million at December 31, 1999. The decrease in working capital was primarily the result of an increase in the current portion of long-term debt of $11.5 million and an amount due to the a/c/e alliance of $12.8 million. At September 30, 2000, total liabilities increased $4.0 million to $176.4 million from $172.4 million at December 31, 1999. This increase in total liabilities consisted primarily of increases in deferred taxes and contract settlement payable offset by a $11.7 million reduction in outstanding debt. Total debt of the CBOT at September 30, 2000 was $82.3 million and included $75.0 million of privately placed notes and $7.3 million of a revolving credit line with a lending institution. The net loss for the first nine months of 2000 reduced members' equity to $195.9 million at September 30, 2000 from $201.0 million at December 31, 1999. For the year ended December 31, 1999, total assets were $373.4 million, a decrease of $27.6 million from $401.0 million in 1998. Current assets decreased $14.5 million from $63.9 million in 1998 to $49.4 million in 1999, due primarily to a decrease in cash and cash equivalents in the amount of $11.8 million and . Property and equipment, net of accumulated depreciation, was $296.4 million in 1999, a decrease of $5.8 million from $302.2 million in 1998, primarily due to purchases of computer equipment more than offset by depreciation. Other assets of $27.6 million decreased by $7.2 million from $34.9 million in 1998. At December 31, 1999, the CBOT held $22.4 million in cash and cash equivalents, compared to $34.2 million at December 31, 1998. This decrease consisted primarily of net cash generated by operating activities of $19.2 million less net cash flows used primarily for capital expenditures and investments of $24.8 million and net repayment of debt of $6.3 million. Working capital at December 31, 1999 was $1.1 million compared to $18.6 million at December 31, 1998, a decrease that was primarily due to the reduced cash noted above. For the year ended December 31, 1998, cash and cash equivalents decreased $4.5 million to $34.2 million from $38.7 million in 1997. This decrease consisted primarily of net cash generated by operating activities of $30.6 million offset by net cash flows used primarily for capital expenditures and investments of $50.0 million and net repayment of debt of $16.3 million. 73
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At December 31, 1999, total liabilities decreased $11.0 million to $172.4 million from $183.4 million at December 31, 1998. This decrease consisted primarily of a $6.7 million reduction in outstanding debt and reductions in other liabilities of $1.1 million. Total debt of the CBOT at December 31, 1999 was $94.0 million and included $75.0 million of privately placed notes and $19.0 million of a revolving credit line with four local banks. Members' equity was $201.0 million at December 31, 1999 compared to $211.0 million at December 31, 1998. Liquidity and Capital Resources For the nine months ended September 30, 2000, cash and cash equivalents decreased $9.3 million from $22.4 million at December 31, 1999 to $13.1 million at September 30, 2000. Net cash flows from operating activities were $31.6 million in the first nine months of 2000, which reflected increases in certain liabilities, including the amount due to a/c/e Alliance of $12.8 million. Net cash flows used in investing activities for the first nine months of 2000 was $29.5 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 $11.4 million for the nine months ended September 30, 2000 which was attributable to a net reduction in the principal outstanding on our lines of credit. For the year ended December 31, 1999, cash and cash equivalents decreased $11.8 million from $34.2 million in 1998 to $22.4 million in 1999. The CBOT expects that the principal use of funds will continue to be for operating expenses, capital expenditures and repayment of debt. For the year ended December 31, 1999, net cash flows from operating activities were $17.3 million, a decrease of $13.2 million from $30.5 million in 1998. This decrease was primarily due to expenditures relating to computer and systems readiness for the Year 2000 in the amount of $8.0 million for professional services. For the year ended December 31, 1998, net cash flows from operating activities were $30.5 million, an increase of $2.2 million from $28.3 million in 1997. For the year ended December 31, 1999, net cash used in investing activities was $24.8 million, a decrease of $2.2 million from $27.0 million in 1998. Purchases of computer equipment and building improvements increased $0.6 million from 1998 to 1999. The remaining decrease of $2.8 million relates to proceeds from the sale of fixed assets in 1998. From the year ended December 31, 1998, net cash used in investing activities was $27 million, a decrease of $21.5 million from $48.5 million in 1997. This decrease was due to a reduction in capital expenditures due to the completion of the new trading facility in 1997. Net cash flows used in financing activities for the year ended December 31, 1999 were $4.3 million, compared to $8.0 million in 1998, a decrease of $3.7 million. This amount was primarily comprised of the $5.0 million debt repayment offset by transfer fees from membership sales of $0.4 million. 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 September 30, 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 September 30, 2000, the CBOT had a working capital deficit of about $23.1 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 74
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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. 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 impact of rate increases to exchange fees 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. You should be aware that our assumed revenues for 2001 are based upon certain assumptions, including assumptions relating to our annual volumes next year. Futures trading volumes have 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; however, it does not trade derivatives 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 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. 75
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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. 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 accumulated 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. 76
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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. 77
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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 78
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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 79
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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 80
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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 81
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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 electronic trading system. 82
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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 88% 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. For more information, see "Risk Factors--Risks Relating to Our Business--Our Decision Not to Fund the Development of Certain Upgrades to the a/c/e System Could Significantly Harm Our Electronic Trading Operations." 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. 83
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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, or "FCMs," 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 FCM offices have the capability to access the network in order to communicate with other offices and the floor. Most FCMs 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 eCBOT 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 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: 84
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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 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. In addition, we have retained Eurex Frankfurt AG to provide market supervision services for 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. The alliance may provide services to us, Eurex and to other exchanges. The 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. The 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. We currently limit direct access to our electronic trading markets 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 a/c/e. Eurex member firms have been given the right to obtain electronic access to our markets by leasing 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 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 CBOE with respect to the exercise right. For more information, see "Risk Factors--Risks Relating to the Restructuring Transactions--The CBOE Could Be Successful in Challenging the "Exercise Right,' Which Allows Our Full Members to Obtain Trading Privileges at the CBOE, 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. 85
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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 30% of our total revenue during 1999. Our revenue from market data has grown from less than $45 million in 1996 to more than $54 million in 1999. 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 12.4% of our total revenue for 1999. 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 86
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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, 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 BOTCC. 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. 87
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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. Memberships are purchased from existing members at prevailing market prices. There are five classes of memberships: . Full; . Associate; . GIM; . 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 pursuant to transfer mechanisms we maintain. Set forth below is a table listing the high and low prices for each type of membership from January 1, 1998 through January 19, 2001. 88
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Price Range for Memberships The following table contains, for the periods indicated, the high and low sales prices 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 January 19, 2001)............ 350 330 85 62 35 35 4 1 14 12 -------- *Indicates no sales in the quarter. **Indicates a sale price of less than $1,000. Source: CBOT records. Individual Members Our membership committee currently 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 December 31, 2000, 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 December 31, 2000, there were 779 Associate Members. GIMs/One-Half Associate Members. The holder of a GIM membership is 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 89
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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 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 December 31, 2000, 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 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 December 31, 2000, there were 642 IDEMs. COMs. The holder of a COM membership is 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 December 31, 2000, there were 643 COMs. Clearing Members Under our rules, all CBOT contracts must be cleared through the Board of Trade Clearing Corporation, or "BOTCC," or such other clearing entity as the CBOT board of directors designates. Such contracts are subject to the bylaws of BOTCC, and our rules provide that BOTCC may not change its bylaws without the consent of the CBOT board of directors. However, BOTCC 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 BOTCC until approved by the CBOT. BOTCC 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, BOTCC 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, BOTCC has designed risk management policies and practices for the CBOT and its members. We anticipate entering into a contract regarding clearing-related services with BOTCC 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 BOTCC, 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. 90
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Our wholly owned subsidiary, eCBOT, is the general partner of Ceres. In addition, Ceres has 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 units held by the CBOT members: 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 Group's 50% interest in CBOT/Eurex Alliance, L.L.C., a Delaware limited liability company. The other member of the a/c/e alliance is Eurex Beteiligungen AG, a Swiss company owned by Deutsche Borse AG and the Swiss Stock Exchange. The alliance does not presently employ its own staff, and operates with personnel seconded to it by the CBOT and the Eurex Group. The voting rights, percentage interests and profits of the a/c/e alliance are shared equally between the Ceres Alliance L.L.C. and the Eurex Group. The following chart illustrates the ownership structure of our a/c/e alliance: [Enlarge/Download Table] [Swiss Stock Exchange] [Deutsch Borse AG] [CBOT Non-Clearing Members] [CBOT Clearing Members] [Eurex Zurich AG] [Deutsche Borse Systems AG] [CBOT] [BOTCC] [Eurex Clearing AG] [Eurex Frankfurt AG] [Eurex Beteiligungen AG] [MIDAM] [E-CBOT] [C-B-T] [Ceres Trading Limited Partnership] [Ceres Alliance LLC] [CBOT/Eurex Alliance LLC ("a/c/e")] 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 a/c/e alliance. 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." 91
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MidAmerica Commodity Exchange. The MidAmerica Commodity Exchange, or "MidAm," is currently a wholly owned subsidiary of the CBOT and became affiliated with the CBOT in 1986. The MidAm is an Illinois not-for-profit corporation formed to act as a contract market for futures and options products. The MidAm 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. 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 in the aggregate. 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 NW in Washington, D.C. This space houses our government relations operations. The current lease on the Washington office space expires on January 31, 2001. We currently expect that this lease will be renewed. 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. 92
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Regulation Regulation of the U.S. Futures Exchange Industry Our operations are subject to extensive regulation by the CFTC 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, or "FCM," member firms. In addition we operate and maintain systems to: . ensure that FCM members maintain capital in excess of the Risk Based Capital Requirement adopted by BOTCC; . require that all clearing FCM member firms electronically file a financial statement each month. All other FCM members must electronically file quarterly financial statements. Firms are placed on additional reporting, i.e., daily, weekly or monthly reporting, when necessary; . analyze FCM member firms financial statements with a state-of-the computer system designed to immediately detect financial violations and unfavorable financial trends; . require that all FCM 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 93
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regulations to permit privately negotiated swap contracts to be transacted in the over-the-counter market. At the end of 1999, according to data from the Bank for International Settlements, the total estimated notional amount of outstanding over-the-counter derivative contracts was $88 trillion compared to $13.5 trillion for exchange-traded futures and options contracts. 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, or the "PWG". The PWG 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 PWG 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 PWG recommended equivalent treatment for the existing electronic markets operated by regulated exchanges or their affiliates. The PWG 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 PWG 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 PWG recommended permitting banks and broker-dealers, and their affiliates, to operate currency futures markets for retail customers without being subject to regulation under the CEA. All of the PWG proposals, 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 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 PWG 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, or the "CFMA". The CFMA 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 CFMA 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 CFMA 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. 94
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The CFMA'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. 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. Although we believe that the plaintiffs' position is without merit, we cannot assure you 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 CBOE 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 95
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. 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 CBOE 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 CBOE has challenged this position. On June 30, 2000, we filed a complaint against the CBOE 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 CBOE 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 CBOE filed a proposed rule change with the SEC. The CBOE filed an amended proposed rule change on October 10, 2000, and is seeking SEC approval of its position. In its proposed rule change, the CBOE attempts to impose new conditions on the exercise right not included in Article Fifth(b) of CBOE's certificate of incorporation or in the 1992 agreement. In particular, the CBOE has stated most 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 CBOE members are able to trade all of the CBOT's products and the CBOE'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 CBOE 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 CBOE 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 CBOE's position breaches the 1992 agreement. Under this ruling, however, the SEC will determine whether CBOE can impose new conditions on the exercise right under its proposed rule change filed with the SEC. On November 17, 2000, the SEC requested public comment on the CBOE'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. While we do not believe that the CBOE's position is legally valid, we cannot predict the outcome of that SEC proceeding. If the SEC were to approve the CBOE'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 CBOE has historically been extremely aggressive in challenging the validity of the exercise right of our Full Members. We cannot assure you that the CBOE will not take other actions in the future to interfere with the exercise right or will not otherwise be successful in preventing Full Members from exercising such right in the future. 96
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Furthermore, because the CBOE 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 CBOE Could Be Successful in Challenging the "Exercise Right,' Which Allows Our Full Members to Obtain Trading Privileges at the CBOE, 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 4,901,201, entitled "Automated Futures Trade Exchange." We believe that the complaint against the CBOT relates only to Project A, which we decommissioned in August 2000, but we can give no assurance in this regard. 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. 97
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MANAGEMENT AND EXECUTIVE COMPENSATION Directors and Executive Officers The board of directors currently consists of 18 directorships, 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 are two vacant directorships: one non-member directorship and the non-voting directorship of the president and chief executive officer. Following the completion of the restructuring transactions, the board of directors of For-Profit CBOT will be reduced to nine members, consisting of: . three 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 . 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. The chairman will not 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, as will the chairman, commencing with the second annual meeting of stockholders following completion of the restructuring transactions. Dennis A. Dutterer, our interim president and chief executive officer beginning in April 2000 resigned from that position in December 2000 effective as of January 15, 2001. The CBOT is currently searching for and intends to hire a replacement to serve as president and chief executive officer as soon as reasonably practicable. However, we can give you no assurances that we will be successful in this regard. 98
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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* ---- --- --------------- Chairman of the Board of Nickolas J. Neubauer 55 Directors 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 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 -------- *As described above, from April 2000 until January 15, 2001 the CBOT operated under the leadership of an interim president and chief executive officer. The interim president and chief executive officer resigned effective as of January 15, 2001. As a result of the vacancy created by the resignation of our interim president and chief executive officer, the board of directors has designated the chairman of the board of directors as our "principal executive officer" solely for purposes of filing the registration statement of which this document is a part with the SEC. 99
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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. 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. 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. 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. 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. 100
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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. 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 101
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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 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. 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. 102
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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. For a general discussion of these bodies, see "Our Business--General." 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. 103
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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 BOTCC Mr. Dutterer's salary was paid by BOTCC but CBOT was obligated to reimburse BOTCC 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, 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 104
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CBOT will have a long-term equity 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. 105
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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 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. On April 18, 2000, Mr. Dutterer entered into a letter agreement with the CBOT and the CBOT entered into a letter agreement with BOTCC, which agreements provided for (1) Mr. Dutterer's employment as Interim President and Chief Executive Officer of the CBOT and (2) Mr. Dutterer's retention of his position as President and Chief Executive Officer of BOTCC under the terms of his existing employment agreement with BOTCC, 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 BOTCC 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 BOTCC. 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 BOTCC. 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. 106
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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. Each agreement provides that annual increases to the executive's base salary are to be 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 executive's disability, the executive will receive his or her base compensation for the first year during which the executive is under the disability. After the first year, the executive will 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 will be reduced to the extent the executive receives payments from other sources such as insurance as a result of the disability. We may terminate the executive if the disability is total and permanent, in which case executive will be entitled to his or her base compensation through the end of the employment term. Pursuant to the agreements, the executives agree to certain non-competition provisions during the employment term and for one year after thereafter. The executives also agree not to engage in any transaction on an exchange or market regulated by the Commodity Exchange Act. 107
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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-1 279.4864 David P. Brennan................ 25,000 1 share of Series B-1 139.7432 Carol A. Burke.................. -- -- -- Patrick J. Catania.............. -- -- -- James P. Amaral................. -- -- -- Philip P. Hannigan.............. -- -- -- Charles P. Carey................ 25,000 1 share of Series B-1 139.7432 Raymond Cahnman(2).............. 127,900 3 shares of Series B-1 683.8313 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-1 139.7432 Mark E. Cermak.................. 25,000 1 share of Series B-1 139.7432 Robert F. Corvino............... 25,000 1 share of Series B-1 139.7432 James F. Curley................. 30,000 1 share of Series B-1 162.2509 1 share of Series B-2 Andrew J. Filipowski............ -- -- -- Douglas M. Kurzydlo............. 25,000 1 share of Series B-1 139.7432 Veda Kaufman Levin.............. 25,000 1 share of Series B-1 139.7432 James P. McMillin............... 5,000 1 share of Series B-2 22.5077 Joseph Niciforo................. 30,000 1 share of Series B-1 162.2509 1 share of Series B-2 James R. Thompson............... -- -- -- J. Andrew Wallace(3)............ 55,000 2 shares of Series B-1 301.9941 1 share of Series B-2 Michael D. Walter(4)............ 25,000 1 share of Series B-1 139.7432 Ralph H. Weems.................. -- -- -- Directors and Executive Officers as a group (23 persons)(5)................ 497,900 17 shares of Series B-1 2,730.2669 10 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 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 108
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to such persons pursuant to the Ceres merger allocation formula are included in the above table using a valuation of Ceres as of November 30, 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 2/3 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. 109
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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, which we sometimes refer to in this document as our "certificate of incorporation," and For-Profit CBOT's amended and restated bylaws, which we sometimes refer to in this document as our "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 as stockholders will differ from your current rights 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 November 30, 2000, 279,000 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; 110
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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, including 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. 111
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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 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 112
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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. 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: . three independent directors; . five directors who are holders of Class B common stock and who meet the membership and eligibility requirements of For-Profit CBOT; and . the chairman of the board of directors. The chairman will not 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 . one independent 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 113
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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 CBOE after the restructuring transactions, the CBOE has challenged this position and, accordingly, we cannot assure you 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 CBOE Could Be Successful in Challenging the "Exercise Right,' Which Allows Our Full Members to Obtain Trading Privileges at the CBOE, 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 associated with that series. This right is intended to protect the holders of those shares from subsequent 114
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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. 115
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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 (a) 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 (b) 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. Among the specific matters that may be determined by the board 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, 116
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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 November 30, 2000, 279,000 shares would be designated as Series A convertible preferred stock and 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 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. 117
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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 of payment, 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. Conversion. 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 customary antidilution protections in the event of certain changes affecting the Class A common stock. No fractional common shares of Class A common stock will be issued upon any conversion of the Series A convertible preferred stock and For- Profit CBOT will pay cash instead of issuing any fractional shares. 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. 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 118
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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, 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 CBOE 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 CBOE has stated most 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 CBOE's position is legally valid, we cannot predict the outcome of the CBOE's SEC proceeding seeking approval of its proposed rule change. If the CBOE 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. For more information, see "Risk Factors--Risks Relating to the Restructuring--The CBOE Could Be Successful in Challenging the "Exercise Right,' Which Allows Our Full Members to Obtain Trading Privileges at the CBOE, and the Exercise Right Could Be Extinguished or Terminated." 119
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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. 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 , 2001 and no later than , 2001. 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 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. 120
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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 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 the provisions of Section 203 of the Delaware General Corporation Law, which is an anti-takeover law. Subject to certain exceptions, the 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 (1) by persons who are directors and also officers and (2) 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 Section 203, 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 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 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 121
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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 Section 102(b)(7) of the DGCL, 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 in Section 174 of the DGCL; 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 B common stock and the Series A convertible preferred stock. For-Profit CBOT will initially serve as the transfer agent for the Class A common stock. However, we currently expect to select 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. 122
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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 CBOE 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 CBOE'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 CBOE Could Be Successful in Challenging the "Exercise Right,' Which Allows Our Full Members to Obtain Trading Privileges at the CBOE, 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. 123
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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. 124
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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, it is intended that For-Profit CBOT will be operated for the long-term benefit of its stockholders rather than 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 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 125
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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 126
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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 November 30, 2000, 279,000 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 November 30, 2000 as described elsewhere in this document, 279,000 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 9,721,000 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 127
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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 CBOE 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 CBOE has stated most 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 CBOE's position is legally valid, we cannot predict the outcome of the CBOE's SEC proceeding seeking approval of its proposed rule change. If the CBOE 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 CBOE Could Be Successful in Challenging the "Exercise Right,' Which Allows Our Full Members to Obtain Trading Privileges at the CBOE, 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 128
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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 129
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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. 130
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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" 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 common stockholders 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 significant 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- 131
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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" 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. 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 thirteen 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 132
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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 three 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 and the chairman of the board of directors. The chairman will not 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; 133
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. 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. 134
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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 IRS 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 interest in the CBOT. In this connection, the IRS may take the position that the CBOE 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 , 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 135
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transactions described herein, in particular with respect to either capitalization or the CBOE 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. Eligibility to Vote 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 voting members 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. 136
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Our directors and officers hold memberships entitling them to cast an aggregate of 18 2/3 votes on the proposal, representing 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. 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. 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 and Subsidiaries as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999 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 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. 137
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WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission, or "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. 138
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APPENDIX A BOARD OF TRADE OF THE CITY OF CHICAGO AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS [Download Table] Page ---- Independent Auditors' Report.............................................. A-2 Consolidated Statements of Financial Condition as of December 31, 1999 and 1998..................................................................... A-3 Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997............................................................ A-4 Consolidated Statements of Members' Equity for the Years Ended December 31, 1999, 1998 and 1997.................................................. A-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997...................................................... A-6 Notes to Consolidated Financial Statements................................ A-7 Condensed Consolidated Statements of Financial Condition as of September 30, 2000 (Unaudited) and December 31, 1999............................... A-16 Condensed Consolidated Statements of Income for the Nine Months Ended September 30, 2000 and 1999 (Unaudited).................................. A-17 Condensed Consolidated Statements of Members' Equity for the Nine Months Ended September 30, 2000, and 1999 (Unaudited)........................... A-18 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999 (Unaudited).................................. A-19 Notes to Condensed Consolidated Financial Statements for the Nine Months Ended September 30, 2000 and 1999 (Unaudited)............................ A-20 A-1
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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, 1999 and 1998 and the related consolidated statements of income, members' equity and cash flows for each of the three years ended December 31, 1999, 1998, and 1997. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 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. Chicago, Illinois January 31, 2000 (December 12, 2000 as to the second paragraph of Note 1) A-2
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BOARD OF TRADE OF THE CITY OF CHICAGO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1999 and 1998 (in thousands) [Download Table] ASSETS 1999 1998 ------ -------- -------- Current assets Cash and cash equivalents: Held under deposit and membership transfers.............. $ 4,458 $ 5,320 Unrestricted............................................. 17,991 28,898 -------- -------- Total cash and cash equivalents........................ 22,449 34,218 Accounts receivable........................................ 16,733 19,284 Prepaid expenses and other................................. 2,927 2,955 Income taxes receivable.................................... 7,234 7,475 -------- -------- Total current assets................................... 49,343 63,932 -------- -------- Property and equipment Land....................................................... 34,234 34,234 Buildings and equipment.................................... 293,416 287,203 Furnishings and fixtures................................... 173,677 153,243 Construction in progress................................... 826 4,462 -------- -------- Total property and equipment........................... 502,153 479,142 Less accumulated depreciation and amortization............. 205,751 176,968 -------- -------- Property and equipment--net............................ 296,402 302,174 Other assets................................................. 27,634 34,865 -------- -------- Total assets................................................. $373,379 $400,971 ======== ======== LIABILITIES AND MEMBERS' EQUITY ------------------------------- Current liabilities Accounts payable........................................... $ 20,087 $ 26,380 Accrued real estate taxes.................................. 8,650 8,553 Accrued non-qualified pension obligation................... 2,732 1,983 Accrued exchange fee refunds............................... 2,205 757 Accrued liabilities........................................ 3,236 1,928 Funds held for deposit and membership transfers............ 4,458 5,320 Current portion of long-term debt.......................... 6,500 -- Other current liabilities.................................. 408 437 -------- -------- Total current liabilities.............................. 48,276 45,358 -------- -------- Deferred income taxes........................................ 26,755 28,452 Long-term debt............................................... 87,500 99,000 Other liabilities............................................ 9,874 10,568 -------- -------- Total long-term liabilities............................ 124,129 138,038 -------- -------- Total liabilities...................................... 172,405 183,396 Minority interest in subsidiaries............................ -- 6,528 Members' equity.............................................. 200,974 211,047 -------- -------- Total liabilities and members' equity.................. $373,379 $400,971 ======== ======== See notes to consolidated financial statements A-3
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BOARD OF TRADE OF THE CITY OF CHICAGO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 1999, 1998 and 1997 (in thousands) [Download Table] 1999 1998 1997 -------- -------- -------- Revenues: Exchange fees.................................. $102,545 $112,115 $ 88,932 Market data.................................... 54,028 53,100 47,242 Building....................................... 22,653 21,876 21,896 Services....................................... 20,279 16,907 15,776 Dues........................................... 389 414 439 Other operating revenue........................ 3,002 826 1,100 -------- -------- -------- Total revenues............................... 202,896 205,238 175,385 -------- -------- -------- Expenses: Salaries and benefits.......................... 64,133 57,991 49,384 Depreciation and amortization.................. 36,140 33,764 27,681 Professional services.......................... 32,490 19,924 11,950 General and administrative expenses............ 50,988 45,267 28,174 Building operating costs....................... 23,171 22,572 21,023 Programs....................................... 7,280 8,802 9,974 Other operating expenses....................... 327 -- -- -------- -------- -------- Total expenses............................... 214,529 188,320 148,186 -------- -------- -------- Income (loss) from operations.................... (11,633) 16,918 27,199 Interest income.................................. 1,052 1,947 2,090 Interest expense................................. 6,774 7,170 6,483 -------- -------- -------- Income (loss) before income taxes and cumulative effect of change in accounting principle........ (17,355) 11,695 22,806 Provision (benefit) for income taxes Current........................................ (1,198) 3,160 5,799 Deferred....................................... (1,697) 1,891 348 -------- -------- -------- Total provision (benefit) for income taxes... (2,895) 5,051 6,147 Income (loss) before cumulative effect of change in accounting principle......................... (14,460) 6,644 16,659 Cumulative effect of change in accounting principle--net of tax benefit of $2,026......... 2,920 -- -- -------- -------- -------- Income (loss) before minority interest........... (17,380) 6,644 16,659 Minority interest in (income) loss of subsidiaries.................................... 6,933 (38) (6,995) -------- -------- -------- Net income (loss)................................ $(10,447) $ 6,606 $ 9,664 ======== ======== ======== See notes to consolidated financial statements A-4
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BOARD OF TRADE OF THE CITY OF CHICAGO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY For the Years Ended December 31, 1999, 1998 and 1997 (in thousands) [Download Table] 1999 1998 1997 -------- -------- -------- BALANCE--Beginning of year......................... $211,047 $203,911 $194,820 Net income (loss).................................. (10,447) 6,606 9,664 Capital contributions.............................. 374 530 227 Distribution to members............................ -- -- (800) -------- -------- -------- BALANCE--End of year............................... $200,974 $211,047 $203,911 ======== ======== ======== See notes to consolidated financial statements A-5
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BOARD OF TRADE OF THE CITY OF CHICAGO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1999, 1998 and 1997 (in thousands) [Download Table] 1999 1998 1997 -------- -------- -------- Cash flows from operating activities Net income (loss)............................... $(10,447) $ 6,606 $ 9,664 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................. 36,140 33,764 27,681 Loss on disposition of property and equipment. 220 1,421 -- Deferred income taxes (benefit)............... (1,697) 1,891 348 Minority interest in income (loss) of subsidiaries................................. (6,933) 38 6,995 Interest rate swap adjustment................. -- -- (1,116) Other......................................... (19) (5) 26 Changes in assets and liabilities: Accounts receivable........................... 2,551 (1,411) (3,728) Prepaid expenses and other.................... 28 249 (1,815) Income taxes receivable....................... 241 (4,489) (2,986) Other assets.................................. (4,187) (5,328) (15,007) Accounts payable.............................. (6,058) 4,824 (1,244) Accrued real estate taxes..................... 97 307 1,096 Accrued non-qualified pension obligation...... 749 178 1,805 Accrued exchange fee refunds.................. 1,448 (114) 871 Accrued liabilities........................... 1,308 (263) 224 Funds held for deposit and membership transfers.................................... (862) (2,208) 5,592 Other current liabilities..................... (29) 19 (942) Other liabilities............................. (187) (3,152) 800 -------- -------- -------- Net cash flows from operating activities.... 17,309 32,327 28,264 -------- -------- -------- Cash flows from investing activities Acquisition of property and equipment........... (25,165) (26,985) (48,529) Proceeds from sale of property and equipment.... 390 -- -- -------- -------- -------- Net cash flows from investing activities.... (24,775) (26,985) (48,529) -------- -------- -------- Cash flows from financing activities Payments of mortgage note and unsecured note.... -- (1,662) (13,439) Payment of 1994 revolving credit agreement...... -- -- (84,934) Payment of 1997 revolving credit agreement...... (5,000) (6,000) -- Proceeds from 1994 revolving credit agreement... -- -- 9,512 Proceeds from private placement senior notes.... -- -- 75,000 Proceeds from 1997 revolving credit agreement... -- -- 30,000 Distribution to members......................... -- -- (800) Capital contributions from members.............. 374 530 227 Capital contributions from minority interest in subsidiaries................................... 723 3,280 3,000 Distributions to minority interest in subsidiaries................................... (400) (5,943) (2,219) -------- -------- -------- Net cash flows from financing activities.... (4,303) (9,795) 16,347 -------- -------- -------- Net decrease in cash and cash equivalents........ (11,769) (4,453) (3,918) Cash and cash equivalents--Beginning of year..... 34,218 38,671 42,589 -------- -------- -------- Cash and cash equivalents--End of year........... $ 22,449 $ 34,218 $ 38,671 ======== ======== ======== Cash paid for: Interest (net of capitalized interest of $1,127, in 1997)............................... $ 6,797 $ 6,943 $ 6,484 Income taxes.................................... -- 8,917 7,765 See notes to consolidated financial statements A-6
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BOARD OF TRADE OF THE CITY OF CHICAGO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 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, its wholly owned subsidiaries, and its controlled subsidiary, Ceres Trading Limited Partnership (the "Partnership") (collectively, the "CBOT"). 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 the Partnership from the equity method to reporting the Partnership in its consolidated financial statements as a consolidated subsidiary. As a result of this accounting change to consolidation, the consolidated financial statements for all periods presented have been adjusted to reflect the Partnership as a consolidated subsidiary. The 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 Income (in thousands): [Enlarge/Download Table] 1999 1998 1997 -------------------- -------------------- -------------------- As As As As As As Previously Reported Previously Reported Previously Reported Reported Currently Reported Currently Reported Currently ---------- --------- ---------- --------- ---------- --------- Current assets.......... $ 49,838 $ 49,343 $ 56,729 $ 63,932 Total assets............ 366,101 373,379 387,602 400,971 Current liabilities..... 40,998 48,276 40,243 45,358 Total liabilities....... 165,127 172,405 176,555 183,396 Members' equity......... 200,974 200,974 211,047 211,047 Revenues................ 182,905 202,896 181,978 205,238 $162,518 $175,385 Net income (loss)....... (10,447) (10,447) 6,606 6,606 9,664 9,664 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. 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 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 at the CBOT. A-7
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The CBOT provides real time and delayed market data information to subscribers regarding the prices of the futures and options contracts traded at the CBOT. Fees for market data are remitted to the CBOT by market data vendors on behalf of the subscribers. The CBOT accrues revenue for market data based on quotation services provided on a monthly basis. These revenues are included in Quotations 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. 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 that which relates 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. 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 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. A-8
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Recent accounting pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which 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 comprehensive income depending on the intended use of the derivatives. SFAS No. 133 is required to be adopted by the Board effective January 1, 2001. The Board has not determined the impact of adoption of SFAS No. 133 on its financial condition or results of operations. Prior year reclassifications Certain reclassifications have been made in prior year amounts to conform to current year presentations. 2. Minority Interests in Subsidiaries The Partnership was formed by CBOT, as general partner, for the purpose of engaging in activities related to financial and futures markets. CBOT, as general partner, holds a 10% interest in the Partnership. CBOT members are the limited partners of the Partnership. Under the terms of the 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 the CBOT as general partner. In 1997, the Partnership 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 the Partnership and the minority interest in CBB. 3. Debt Long-term debt at December 31, consisted of the following (in thousands): [Download Table] 1999 1998 ------- ------- Private placement senior notes, due in 2007, at annual interest rate of 6.81%.................................. $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 ------- ------- Total................................................ 94,000 99,000 Less current portion..................................... 6,500 -- ------- ------- Total................................................ $87,500 $99,000 ======= ======= During 1999, the CBOT increased the borrowing capacity under its line of credit agreement to $30,000,000 with a floating interest rate. At December 31, 1999 and 1998 there were no amounts borrowed under this line of credit. In March 1997, the CBOT issued through a private placement, $75,000,000 in 6.81% senior notes due in 2007. Also in March 1997, 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 A-9
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under the unsecured revolving credit agreement reduces by 25% each year beginning in March 1998. Proceeds from the 6.81% senior notes and the unsecured revolving credit agreement were primarily used to pay the outstanding borrowings. The unsecured revolving credit agreement contains covenants that require, among other things, that the CBOT maintain specified levels of minimum net worth and meet defined financial ratios. Additionally, the CBOT must pay a commitment fee equal to 1/10 of 1% per annum on the daily unborrowed amount under the agreement. The aggregated amount of principal repayment requirements of the unsecured revolving credit agreement and the private placement senior notes as of December 31, 1999 are as follows (in thousands): [Download Table] 2000............................. $ 6,500 2001............................. 23,214 2002............................. 10,714 2003............................. 10,714 2004............................. 10,714 2005 and thereafter.............. 32,144 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, 1999 and 1998 are as follows (in thousands): [Download Table] 1999 1998 ------- ------- Deferred tax liabilities: Depreciation........................................... $29,988 $30,765 Capitalized interest................................... 2,146 2,197 Other.................................................. 335 53 ------- ------- Total deferred tax liabilities....................... 32,469 33,015 Deferred tax assets: Employee and retiree benefit plans..................... 4,032 3,735 Other.................................................. 1,682 828 Total deferred tax assets............................ 5,714 4,563 ------- ------- Net deferred tax liabilities............................. $26,755 $28,452 ======= ======= The CBOT has not established a valuation reserve at December 31, 1999 and 1998 as it 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] 1999 1998 1997 ----- ---- ---- Statutory federal income tax rate.................... (35.0)% 35.0% 35.0% State income tax rate, net of federal income tax effect.............................................. (3.4) 5.1 4.9 Corporate restructuring costs........................ 5.9 -- -- Non-deductible expenses.............................. 4.5 3.3 4.0 Other, net........................................... 0.2 (0.1) (3.9) ----- ---- ---- Effective income tax rate............................ (27.8)% 43.3% 40.0% ===== ==== ==== A-10
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5. Membership At December 31, 1999, 1998 and 1997, the membership consisted of the following: [Download Table] 1999 1998 1997 ----- ----- ----- Full memberships........................................ 1,402 1,402 1,402 Associate memberships................................... 770 768 761 GIMs, IDEMs and CDMs.................................... 1,476 1,480 1,491 Dues on CBOT memberships were waived for each quarter in 1999, 1998 and 1997. 6. Benefit Plans In 1998, the Financial Accounting Standards Board issued SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits". The provisions of SFAS No. 132 revised employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of costs for pension or other postretirement 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, 1999 and 1998 (in thousands): [Download Table] 1999 1998 ------- ------- Change in benefit obligation: Benefit obligation, beginning of year................ $22,676 $16,817 Service cost......................................... 1,575 1,073 Interest cost........................................ 1,604 1,327 Actuarial loss (gain)................................ (758) 4,019 Benefits paid........................................ (1,298) (560) ------- ------- Benefit obligation, end of year........................ $23,799 $22,676 ======= ======= Change in plan assets: Fair value of plan assets at January 1............... $14,521 $13,181 Actual return on plan assets......................... 550 1,073 Company contributions................................ 368 827 Benefits paid........................................ (1,298) (560) ------- ------- Fair value of plan assets at December 31............... $14,141 $14,521 ======= ======= Funded status: Funded status of the plan at December 31............. $(9,658) $(8,155) Unrecognized cost: Actuarial and investment net losses.................. 4,870 5,150 Prior service cost................................... 9 24 Transition obligation................................ (409) (613) ------- ------- Accrued benefit cost................................... $(5,188) $(3,594) ======= ======= A-11
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[Download Table] 1999 1998 1997 ------ ------ ------ The components of net periodic benefit cost are as follows: Service cost................................. $1,575 $1,073 $ 960 Interest cost................................ 1,604 1,327 1,143 Expected return on plan assets............... (1,306) (1,139) (942) Net amortization: Transition asset............................. (204) (204) (204) Unrecognized prior service cost.............. 15 15 15 Unrecognized net loss........................ 278 -- -- ------ ------ ------ Net periodic benefit expense................. $1,962 $1,072 $ 972 ====== ====== ====== 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] 1999 1998 1997 ---- ---- ---- Weighted average discount rate.......................... 7.25% 6.5% 7.5% Expected return on plan assets.......................... 9.0 9.0 8.25 Rate of compensation increase........................... 5.0 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 $57,500 and $52,000 for the years ended December 31, 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] 1999 1998 ------- ------- Change in benefit obligation: Benefit obligation, beginning of year................ $ 3,468 $ 2,630 Service cost......................................... 238 169 Interest cost........................................ 250 212 Actuarial loss (gain)................................ (408) 525 Benefits paid........................................ (58) (68) ------- ------- Benefit obligation, end of year........................ $ 3,490 $ 3,468 ======= ======= Change in plan assets: Fair value of plan assets at January 1............... $ -- $ -- Company contributions................................ 58 68 Benefits paid........................................ (58) (68) ------- ------- Fair value of plan assets at December 31............... $ -- $ -- ======= ======= Funded status: Funded status of the plan at December 31............. $(3,490) $(3,468) Unrecognized net gain................................ (1,252) (873) Unrecognized transition obligation................... 1,688 1,817 ------- ------- Accrued benefit cost................................... $(3,054) $(2,524) ======= ======= A-12
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[Download Table] 1999 1998 1997 ---- ---- ----- The components of net periodic benefit cost are as follows: Service cost...................................... $238 $169 $ 160 Interest cost..................................... 250 212 191 Expected return on plan assets.................... -- -- -- Net amortization: Transition liabilities............................ 130 130 130 Net gain.......................................... (31) (96) (107) ---- ---- ----- Net periodic benefit cost........................... $587 $415 $ 374 ==== ==== ===== Accrued benefit costs are included in other long-term liabilities on the Consolidated Statement of Financial Condition. The assumptions used in the measurement of the postretirement obligation as of December 31 are as follows: 1999 1998 1997 ---- ---- ---- Weighted average discount rate...................... 7.25% 6.5% 7.5% Rate of compensation increase....................... 5.0 5.0 5.0 The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 11% in 1999 and 1998 (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, 1999 would be increased by 9%. 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, 1999 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 $1,370,000 and $1,268,000 for the years ended December 31, 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, 1999, 1998 and 1997 was $2,461,000, $2,902,000 and $3,209,000, respectively. The future minimum rental payments under noncancelable leases in effect as of December 31, 1999, in the aggregate and for the next five years, are as follows (in thousands): [Download Table] 2000.............................. $ 738 2001.............................. 164 2002.............................. 152 2003.............................. 126 2004.............................. 54 ------ Total......................... $1,234 ====== A-13
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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, 1999, in the aggregate and for the next five years, are as follows (in thousands): [Download Table] 2000............................. $19,134 2001............................. 17,043 2002............................. 14,640 2003............................. 8,766 2004............................. 4,102 2005 and thereafter.............. 2,924 ------- Total........................ $66,609 ======= In June 1997, Dow Jones & Company; ("Dow Jones") agreed to license certain indexes and trademark rights to the CBOT. The agreement prohibits the disclosure of financial terms and requires the CBOT to pay Dow Jones and initial license fee and annual royalties based on trading volumes with a minimum annual requirement. During 1998 and 1997, all required payments of the initial license fee were remitted to Dow Jones and are included in other assets on the Consolidated Statements of Financial Condition. The CBOT has employment agreements with certain members of management. 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. On October 1, 1999, the CBOT through the Partnership 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 the Partnership. The License calls for payments totaling 8 million Euros at varying dates with the final payment due no later than May 31, 2000. The Partnership has paid 5 million Euros ($5,309,700) under the License as of December 31, 1999. The remaining liability of 3 million euros (approximately $3,000,000) as of December 31, 1999 is included in accounts payable on the Consolidated Statements of Financial Condition. 8. 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. 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. 9. 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 $15,019,000 and $4,425,000 as of December 31, 1999 and 1998, respectively. A-14
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10. Operating Segments The CBOT has three reportable operating segments, the Chicago Board of Trade ("Exchange Trading"), CBT Corporation ("Building Services," a wholly owned real estate subsidiary) and the Partnership's Electronic Trading Division ("Electronic Trading") which maintains the electronic trading system. The CBOT evaluates segment performance based on revenues and income from operations. Sales for each segment are based on the type of trading used by the external customers, or from tenants of the CBOT buildings. All 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, 1999 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 4,527 (14,974) (1,988) 802 (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 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 35,374 (15,361) 2,448 (5,543) 16,918 Total assets 130,585 250,620 7,107 12,659 400,971 Capital expenditures 11,975 4,122 701 10,187 26,985 Year Ended December 31, 1997 Total revenues 140,622 21,896 12,139 728 175,385 Depreciation and amortization 14,781 12,343 421 136 27,681 Income (loss) from operations 31,666 (12,084) 8,264 (647) 27,199 Total assets 128,498 258,635 6,769 3,547 397,449 Capital expenditures 15,093 31,407 1,433 596 48,529 11. 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, 1999 and 1998. 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. * * * * * A-15
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BOARD OF TRADE OF THE CITY OF CHICAGO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands) (Unaudited) [Download Table] September 30, December 31, 2000 1999 ------------- ------------ Current Assets Cash and cash equivalents: Held under deposit and membership transfers...... $ 2,622 $ 4,458 Unrestricted..................................... 10,478 17,991 -------- -------- Total cash and cash equivalents.................. 13,100 22,449 Accounts receivable................................ 24,335 16,733 Prepaid expenses................................... 1,566 2,927 Income taxes receivable............................ 5,746 7,234 -------- -------- Total current assets........................... 44,747 49,343 -------- -------- Property and equipment Land............................................... 34,234 34,234 Buildings and equipment............................ 304,916 293,416 Furnishings and fixtures........................... 167,376 173,677 Construction in progress........................... -- 826 -------- -------- Total property and equipment................... 506,526 502,153 Less accumulated depreciation and amortization..... 230,340 205,751 -------- -------- Property and equipment--net.................... 276,186 296,402 Other assets......................................... 51,343 27,634 -------- -------- Total assets................................... $372,276 $373,379 ======== ======== Current liabilities Accounts payable................................... $ 10,753 $ 20,087 Accrued real estate taxes.......................... 6,375 8,650 Accrued non-qualified pension obligation........... 2,145 2,732 Accrued exchange fee rebates....................... 1,845 2,205 Accrued liabilities................................ 4,083 3,236 Funds held for deposit and membership transfers.... 2,215 4,458 Current portion of long-term debt.................. 18,014 6,500 Due to a/c/e Alliance.............................. 12,756 -- Other current liabilities.......................... 9,706 408 -------- -------- Total current liabilities...................... 67,892 48,276 Deferred income taxes................................ 29,443 26,755 Long-term debt....................................... 64,286 87,500 Other liabilities.................................... 14,779 9,874 -------- -------- Total liabilities.............................. 176,400 172,405 Members' equity...................................... 195,876 200,974 -------- -------- Total liabilities and members' equity.......... $372,276 $373,379 ======== ======== See notes to condensed consolidated financial statements A-16
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BOARD OF TRADE OF THE CITY OF CHICAGO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands) (Unaudited) [Download Table] Nine Months Ended September 30, ------------------ 2000 1999 -------- -------- Revenues Exchange fees............................................ $ 75,642 $ 81,787 Market data.............................................. 45,321 41,278 Building................................................. 18,844 16,996 Services................................................. 14,392 15,607 Dues..................................................... 3,214 293 Other operating revenue.................................. 1,234 2,930 -------- -------- Total revenue.......................................... $158,647 $158,891 -------- -------- Expenses Salaries and benefits.................................... 39,459 44,375 Depreciation and amortization............................ 28,135 27,021 Professional services.................................... 22,517 23,476 General and administrative expenses...................... 40,443 36,471 Building operating costs................................. 17,076 17,045 Programs................................................. 2,611 4,875 Other operating expenses................................. 8,276 -- -------- -------- Total expenses......................................... 158,517 153,263 -------- -------- Income from operations..................................... 130 5,628 Interest income.......................................... 884 645 Interest expense......................................... 4,704 5,035 -------- -------- Income (loss) before income taxes and cumulative effect of change in accounting principle............................ (3,690) 1,238 Provision (benefit) for income taxes Current.................................................. (998) (654) Deferred................................................. 2,688 1,166 -------- -------- Total provision (benefit) for income taxes............. 1,690 512 Income (loss) before cumulative effect of change in accounting principle ..................................... (5,380) 726 Cumulative effect of change in accounting principle--net of tax benefit of $2,026..................................... -- 2,920 -------- -------- Loss before minority interest.............................. (5,380) (2,194) Minority interest in (income) loss of subsidiaries......... -- (204) -------- -------- Net loss................................................... $ (5,380) $ (2,398) ======== ======== See notes to condensed consolidated financial statements A-17
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BOARD OF TRADE OF THE CITY OF CHICAGO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY (in thousands) (Unaudited) [Download Table] Nine Months Ended September 30, ------------------ 2000 1999 -------- -------- Balance--Beginning of period................................ $200,974 $211,047 Net loss.................................................... (5,380) (2,398) Capital contributions....................................... 282 249 -------- -------- Balance--End of Period...................................... $195,876 $208,898 ======== ======== See notes to condensed consolidated financial statements A-18
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BOARD OF TRADE OF THE CITY OF CHICAGO, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) [Download Table] Nine Months Ended September 30, -------------------- 2000 1999 --------- --------- Cash Flows from Operating Activities Net loss............................................... $ (5,380) $ (2,398) Adjustments to reconcile net loss to net cash flows from operating activities: Cumulative effect of change in accounting principle.. -- 4,946 Depreciation and amortization........................ 28,135 27,021 Deferred income taxes (benefit)...................... 2,688 (455) Minority interest in income (loss) of subsidiaries... -- 204 Loss on disposition of other assets.................. 418 261 Changes in assets and liabilities: Accounts receivable.................................. (5,404) (1,729) Prepaid expenses..................................... 1,361 1,397 Income tax receivable................................ 1,488 2,404 Other assets......................................... (2,554) (4,575) Accounts payable..................................... (11,290) (22,866) Accrued liabilities.................................. 383 6,672 Funds held for deposit and membership transfers...... (2,243) 115 Due to a/c/e Alliance................................ 12,756 -- Other current liabilities............................ 6,298 (10) Other liabilities.................................... 4,905 446 --------- --------- Net cash flows from operating activities........... 31,561 11,433 --------- --------- Cash Flows from Investing Activities Acquisition of property and equipment.................. (29,301) (13,901) Proceeds from sale of property and equipment........... 309 416 Investment in a/c/e Alliance........................... (500) -- --------- --------- Net cash flows from investing activities........... (29,492) (13,485) --------- --------- Cash Flows from Financing Activities Payment of 1997 revolving credit agreement............. (19,000) -- Proceeds from 2000 revolving credit agreement.......... 7,300 -- Distribution to minority interest in subsidiaries...... -- (400) Capital contributions from members..................... 282 249 Capital contributions from minority interest in subsidiaries.......................................... -- 812 --------- --------- Net cash flows from financing activities........... (11,418) 661 --------- --------- Net decrease in cash and cash equivalents................ (9,349) (1,391) Cash and cash equivalents--Beginning of period........... 22,449 34,218 --------- --------- Cash and cash equivalents--End of period................. $ 13,100 $ 32,827 ========= ========= Cash paid during the period for: Interest............................................... $ 6,019 $ 6,391 Income taxes........................................... -- -- See notes to condensed consolidated financial statements A-19
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BOARD OF TRADE OF THE CITY OF CHICAGO, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Summary of significant accounting policies Basis of presentation The accompanying unaudited condensed consolidated financial statements of the Board of Trade of the City of Chicago, Inc., its wholly owned subsidiaries, and its controlled subsidiary, Ceres Trading Limited Partnership (the "Partnership") (collectively, the "CBOT") have been prepared in accordance with Accounting Principles Board Opinion No. 28 and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (the "SEC"). These are condensed consolidated financial statements and do not include all the necessary disclosures required for complete financial statements. The condensed consolidated financial statements include the accounts of the CBOT. All significant intercompany balances and transactions have been climinated in consolidation. On January 19, 2000, CBOT's Board of Directors (the "Board") approved a restructuring plan, which called for the CBOT to be divided into two fully demutualized, for-profit entities. During 1999, the CBOT incurred costs of approximately $1.9 million in connection with the development of the restructuring plan which are included in professional services expenses. Effective August 8, 2000, the CBOT was reincorporated as a Delaware corporation and was renamed Board of Trade of the City of Chicago, Inc. On August 31, 2000, the Board approved a revised restructuring strategy, which involved demutualizing CBOT but not restructuring CBOT into two separate, competing companies. The revised restructuring plan will be submitted for a membership vote and will require approval by majority of the membership. As a result of the CBOT's proposed restructuring strategy, the CBOT has changed its method of accounting for its investment in the Partnership from the equity method to reporting the Partnership in its consolidated financial statements as a consolidated subsidiary. As a result of this accounting change to consolidation, the financial statements for all periods presented have been adjusted to reflect the Partnership as a consolidated subsidiary. The 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 Condensed Consolidated Statements of Financial Condition and Income (in thousands): [Download Table] September 30, 2000 September 30, 1999 ------------------------- ------------------------- As Previously As Reported As Previously As Reported Reported Currently Reported Currently ------------- ----------- ------------- ----------- Current assets........ $ 42,701 $ 44,747 Total assets.......... 351,862 372,276 Current liabilities... 47,478 67,892 Total liabilities..... 155,986 176,400 Members' equity....... 195,876 195,876 Revenues.............. 144,714 158,647 $142,748 $158,891 Net Loss.............. (5,380) (5,380) (2,398) (2,398) A-20
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In the opinion of the CBOT's management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the CBOT's financial position as of September 30, 2000 and December 31, 1999 and its results of operations and cash flows for the nine month interim periods ended September 30, 2000 and 1999. Interim period operating results may not be indicative of the operating results for a full year. This information should be read in conjunction with the audited consolidated financial statements and notes thereto as of December 31, 1999 and 1998 and for each year in the three year period ended December 31, 1999, 1998 and 1997 included elsewhere herein. For a summary of significant accounting policies (which have not significantly changed from December 31, 1999 with the exception of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," see recent accounting pronouncement to the unaudited condensed consolidated financial statements) and additional information, see note 1 to the audited December 31, 1999 financial statements. 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. Management developed, and the board of directors has approved, the CBOT's operating budget for 2001. This plan reflects the full year impact of rate increases to exchange fees 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. Use of estimates The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States, hereafter referred to as "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 as of 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. Recent accounting pronouncements Financial Accounting Standards Board Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, will be effective for the CBOT's fiscal year beginning January 1, 2001. SFAS No. 133 requires that all derivative instruments be recorded on the consolidated balance sheet 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 in net income or, if the derivative is designated as a cash flow hedge, in other comprehensive income. On adoption of these new accounting standards, the CBOT is not expected to have any material transition adjustments, or changes in recorded assets and liabilities as a result of recording all derivative financial instruments on the Consolidated Statement of Financial Condition at fair value. A-21
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2. Debt Long-term debt at September 30, 2000 and December 31, 1999 consisted of the following (in thousands): [Download Table] September 30, 2000 December 31, 1999 ------------------ ----------------- Private placement senior notes, due in 2007 at an annual interest rate of 6.81%.......................... $75,000 $75,000 Unsecured revolving credit agreement, due in 2001 at an annual interest rate based on LIBOR (6.13% at December 31, 1999) plus .3%.......................... -- 19,000 Secured revolving credit agreement, due in 2001 at an annual interest rate based on LIBOR (6.625% at September 30, 2000), plus .625%... 7,300 -- ------- ------- Total.......................... 82,300 94,000 Less current portion............... 18,014 6,500 ------- ------- Total.......................... $64,286 $87,500 ======= ======= In August 2000, the CBOT entered into a secured revolving credit agreement, under which the CBOT has borrowed $7,300,000. The borrowing base, secured by the CBOT receivables, will fluctuate based on receivable balances. The CBOT used these 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 met defined financial ratios. 3. Commitments Effective in 2000, the Partnership entered into an alliance with Deutsche Borse AG and the Swiss Stock Exchange, (collectively "Eurex"), for the trading of financial derivative products on an electronic platform, a/c/e. The Partnership and Eurex each own 50% of CBOT/Eurex Alliance, LLC (the "Alliance"). The Alliance and the Partnership have commitments with Eurex and Eurex Zurich AG for approximately 120 million euros as of September 30, 2000 for 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 September 30, 2000 (in thousands): [Download Table] remainder of 2000 $26,946 2001 38,337 2002 28,682 2003 11,971 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 for certain medical, insurance and pension benefits. The present value of these costs is included in other operating expenses in the Condensed Consolidated Statement of Income. 4. Foreign Currency Forward Contracts On September 27, 2000, CBOT entered into foreign exchange foward 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. Any gain or loss on the forward contracts which are hedging commitments are deferred. A-22
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At September 30, 2000 the spot rate was .8837 as compared to .8805 on September 27, 2000. 5. Litigation 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. 6. Operating Segments The CBOT through the Partnership has changed from its Project A electronic trading platform to the a/c/e Electronic Trading Platform on August 27, 2000. Previously reported operating segments are not materially different as a result of this change. 7. Subsequent Events In December 2000, the CBOT decided not to pursue, at this time, certain software enhancements for the a/c/e system. See Note 3. The CBOT then entered into about $9.8 million of foreign exchange forward contracts offsetting certain of the contracts entered into in September. See Note 4. A-23
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APPENDIX B PRO FORMA FINANCIAL INFORMATION OF FOR-PROFIT CBOT B-1
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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 September 30, 2000, for purposes of the unaudited pro forma condensed consolidated statement of financial condition, and as of the beginning of the nine month period ending September 30, 2000 and the beginning of the year ended December 31, 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 279,000 shares of Series A Cumulative Convertible Preferred Stock, par value $.001 per share for $27,900,000 which represents the value of the limited partners' interest as of November 30, 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. Ceres Trading Limited Partnership will be liquidated after the proposed transaction has been completed. As of September 30, 2000, there were 3,639 Class A limited partnership units and 62 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Our Business". B-2
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BOARD OF TRADE OF THE CITY OF CHICAGO, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION September 30, 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. $ 2,622 $ 2,622 $ 2,622 Unrestricted................................ 10,478 10,478 10,478 -------- -------- -------- Total cash and cash equivalents........... 13,100 13,100 13,100 Accounts receivable........................... 24,335 24,335 24,335 Prepaid expenses.............................. 1,566 1,566 1,566 Income taxes receivable....................... 5,746 5,746 5,746 -------- -------- -------- Total current assets...................... 44,747 44,747 44,747 -------- -------- -------- Property and equipment Land.......................................... 34,234 34,234 34,234 Buildings and equipment....................... 304,916 304,916 304,916 Furnishings and fixtures...................... 167,376 167,376 167,376 -------- -------- -------- Total property and equipment.............. 506,026 506,026 506,026 Less accumulated depreciation and amortization................................. 230,340 230,340 230,340 -------- -------- -------- Property and equipment--net............... 276,186 276,186 276,186 Other Assets.................................... 51,343 51,343 51,343 -------- -------- -------- Total assets.............................. $372,276 $372,276 $372,276 ======== ======== ======== LIABILITIES, STOCKHOLDERS' EQUITY AND MEMBERS' EQUITY ---------------------------------------------- Current liabilities Accounts payable.............................. $ 10,753 $ 10,753 $ 10,753 Accrued real estate taxes..................... 6,375 6,375 6,375 Accrued non-qualified pension obligation...... 2,145 2,145 2,145 Accrued exchange fee rebates.................. 1,845 1,845 1,845 Accrued liabilities........................... 4,083 4,083 4,083 Funds held for deposit and membership transfers.................................... 2,215 2,215 2,215 Current portion of long-term debt............. 18,014 18,014 18,014 Due to a/c/e Alliance......................... 12,756 12,756 12,756 Other current liabilities..................... 9,706 9,706 9,706 -------- -------- -------- Total current liabilities................. 67,892 67,892 67,892 Deferred income taxes........................... 29,443 29,443 29,443 Long-term debt.................................. 64,286 64,286 64,286 Other liabilities............................... 14,779 14,779 14,779 -------- -------- -------- Total liabilities......................... 176,400 176,400 176,400 Cumulative convertible preferred stock.......... -- -- 27,900 Common stock.................................... -- 44 44 Retained earnings............................... -- 195,832 167,932 Members' equity................................. 195,876 -- -- -------- -------- -------- Total liabilities, stockholders' equity and members' equity...................... $372,276 $372,276 $372,276 ======== ======== ======== The accompanying introduction is an integral part of this Unaudited Pro FormaCondensed Consolidated Statement of Financial Condition B-3
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BOARD OF TRADE OF THE CITY OF CHICAGO, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME For the Nine Months Ended September 30, 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............................... $ 75,642 $ 75,642 $ 75,642 Market data................................. 45,321 45,321 45,321 Building.................................... 18,844 18,844 18,844 Services.................................... 14,392 14,392 14,392 Dues........................................ 3,214 3,214 3,214 Other operating revenue..................... 1,234 1,234 1,234 -------- -------- ----------- Total revenue............................. $158,647 $158,647 $ 158,647 -------- -------- ----------- Expenses Salaries and benefits....................... 39,459 39,459 39,459 Depreciation and amortization............... 28,135 28,135 28,135 Professional services....................... 22,517 22,517 22,517 General and administrative expenses......... 40,443 40,443 40,443 Building operating costs.................... 17,076 17,076 17,076 Programs.................................... 2,611 2,611 2,611 Other operating expenses.................... 8,276 8,276 8,276 -------- -------- ----------- Total expenses............................ 158,517 158,517 158,517 -------- -------- ----------- Income from operations........................ 130 130 130 Interest income............................. 884 884 884 Interest expense............................ 4,704 4,704 4,704 -------- -------- ----------- Loss before income taxes...................... (3,690) (3,690) (3,690) Provision (benefit) for income taxes Current..................................... (998) (998) (998) Deferred.................................... 2,688 2,688 2,688 -------- -------- ----------- Total provision for income taxes.......... 1,690 1,690 1,690 -------- -------- ----------- Net loss...................................... $ (5,380) $ (5,380) $ (5,380) ======== ======== =========== Net loss per share............................ $ (0.18) =========== Shares used in the calculation of net loss per share........................................ 39,801,290 =========== The accompanying introduction is an integral part of this Unaudited Pro Forma Condensed Consolidated Statement of Income B-4
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BOARD OF TRADE OF THE CITY OF CHICAGO, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS 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 operating revenue..................... 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 operating expenses.................... 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 is an integral part of this Unaudited Pro Forma Condensed Consolidated Statement of Income B-5
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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
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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
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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
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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
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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