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Chicago Mercantile Exchange Inc – ‘S-4/A’ on 3/10/00

On:  Friday, 3/10/00   ·   Accession #:  950131-0-1695   ·   File #:  333-95561

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

 3/10/00  Chicago Mercantile Exchange Inc   S-4/A                  8:625K                                   Donnelley R R & S..03/FA

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

Document/Exhibit                   Description                      Pages   Size 

 1: S-4/A       Amendment No. 2 to Form S-4                          142    611K 
 2: EX-2.2      Form of Agrmnt & Plan - Cme Trans Co & Registrant      8     29K 
 3: EX-3.3      By-Laws of the Registrant                             20     82K 
 4: EX-5.1      Opinion of Sidley & Austin                             2     12K 
 5: EX-10.1     Exchange Omnibus Stock Plan                           20     73K 
 6: EX-10.13    License Agreement Effective September 24, 1997        28    107K 
 7: EX-21.1     Subsidiaries of the Registrant                         1      5K 
 8: EX-27.1     Financial Data Schedule                                2      7K 


S-4/A   —   Amendment No. 2 to Form S-4
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Registration Statement
8Election of Directors
9Differences in Ownership Rights
10Transfer Restrictions
"Board of Directors
11Risk Factors
22Demutualization Proposal
25Cme Transitory Co
33Unaudited Pro Forma Condensed Consolidated Financial Statements
38Description of Capital Stock of New CME
"Description of Common Stock
39Description of Additional Provisions of Class B Common Stock
42Preferred Stock
"Other Charter Provisions
44Management
"Directors and Executive Officers
57Employment-Related Agreements
63Business
71Open Outcry Trading
77Market Data
79Our Members
85Management's Discussion and Analysis of Financial Condition and Results of Operations
95Report of Independent Public Accountants
100Notes to Consolidated Financial Statements
101Software development costs
105Deferred tax assets
137Item 20. Indemnification of Directors and Officers
"Item 21. Exhibits and Financial Statement Schedules
138Item 22. Undertakings
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As filed with the Securities and Exchange Commission on March 10, 2000 Registration No. 333-95561 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ___________ Amendment No.2 to FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ___________ CHICAGO MERCANTILE EXCHANGE INC. (Exact name of registrant as specified in its charter) ___________ [Enlarge/Download Table] Delaware 6231 36-4340266 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number) 30 South Wacker Drive Chicago, Illinois 60606 (312) 930-1000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Craig S. Donohue, Esq. Senior Vice President and General Counsel 30 South Wacker Drive Chicago, Illinois 60606 (312) 930-1000 (Name, address, including zip code, and telephone number, including area code, of agent for service) copies to: Richard W. Astle, Esq. Sidley & Austin Bank One Plaza -- 10 South Dearborn Street Chicago, Illinois 60603 (312) 853-7270 ___________ Approximate date of commencement of proposed sale to the public: As promptly as practicable after this Registration Statement becomes effective and the satisfaction or waiver of certain other conditions under the Agreement and Plan of Merger described herein. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================
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The information in this proxy statement and prospectus is not complete and may be changed. We may not issue these securities until the registration statement filed with the Securities and Exchange Commission is effective. This proxy statement and prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED MARCH __, 2000 [LOGO] CHICAGO MERCANTILE EXCHANGE CHICAGO MERCANTILE EXCHANGE 30 SOUTH WACKER DRIVE CHICAGO, ILLINOIS 60606 March ___, 2000 Dear Member: I would like to invite you to attend a special members' meeting at which we will consider a proposed "demutualization" of our organization in which we will change from a not-for-profit membership corporation to a for-profit stock corporation. As a result of the demutualization, shares of Class B common stock will be issued to our members in series corresponding to our present membership divisions. Each series will confer the trading privileges associated with the membership interests that are converted into that series along with the traditional features of common stock. In addition, shares of Class A common stock will be issued only to CME, IMM and IOM members and will contain only the traditional features of common stock. We have no current plans to list these shares on an exchange. Additional information regarding the Class A and Class B common stock is provided in this document under "Description of Capital Stock of New CME." Our board unanimously approved the proposed demutualization and unanimously recommends that you vote for its approval. The board believes that the demutualization will better position us to compete in the rapidly changing and consolidating financial services industry. We will have greater organizational flexibility and will be able to raise additional equity capital, if needed. In addition, we will be better able to grow and to continue to provide high quality products and services to all of our customers. Please review the attached document which provides important information regarding the proposed demutualization. You should consider the matters discussed under "Risk Factors" commencing on page 15 of the attached document. Sincerely, Scott Gordon Chairman of the Board The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this proxy statement and prospectus is truthful or complete. Any representation to the contrary is a criminal offense. This proxy statement and prospectus is dated March __, 2000 and was first mailed to members on or about March __, 2000.
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CHICAGO MERCANTILE EXCHANGE 30 SOUTH WACKER DRIVE CHICAGO, ILLINOIS 60606 NOTICE OF SPECIAL MEMBERS MEETING TO BE HELD ON APRIL ____, 2000 To the Members of the Chicago Mercantile Exchange: We will hold a special meeting of the members of the Chicago Mercantile Exchange on ____________, April _____, 2000 at _____ p.m., Central Standard Time, at 30 South Wacker Drive, Chicago, Illinois 60606, to consider and vote on an agreement and plan of merger whereby we would become a Delaware stock corporation by merging into a Delaware nonstock corporation and then merging into a Delaware stock corporation. We will not transact any other business at the special meeting. Only members owning memberships at the close of business on ______________, 2000, the record date for the special meeting, are entitled to notice of, and to vote at, the special meeting and any adjournments or postponements of it. The merger agreement requires approval by the affirmative vote of two-thirds of the votes present and voted, either in person or by proxy, at the special meeting. For more information about the demutualization, please review the attached document. The merger agreement is attached as Exhibit B. Whether or not you plan to attend the special meeting, please complete, sign and date the enclosed proxy and return it promptly in the enclosed postage- paid envelope. The giving of a proxy does not affect your right to vote in person in the event that you attend the special meeting. In the absence of specific direction, proxies will be voted "FOR" approval of the merger agreement. Proxies that are marked both "FOR" and "AGAINST" will not count and will not be treated as votes cast. Unsigned proxies will not be counted. Proxies must be received at the Chicago Mercantile Exchange, Membership Department, 30 South Wacker Drive, Chicago, Illinois 60606 prior to the start of the meeting in order to be counted. Your Board of Directors has carefully considered the proposed demutualization and unanimously recommends that you vote "FOR" its approval. By Order of the Board of Directors, Craig S. Donohue Senior Vice President and General Counsel March ___, 2000
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TABLE OF CONTENTS Page Page ---- ---- Exhibits
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This document describes a proposed series of mergers in which the existing Chicago Mercantile Exchange would be converted from a membership organization into a Delaware stock corporation. For ease of reference in this document, the existing membership organization has been referred to as the "Exchange" or "Existing CME," and the Delaware stock corporation as "New CME." The Exchange has four membership divisions, which are referred to in this document as "CME," meaning members of the Chicago Mercantile Exchange division; "IMM," meaning members of the International Monetary Market division; "IOM," meaning members of the Index and Option Market division; and "GEM," meaning members of the Growth and Emerging Markets division. These membership divisions, and their relative trading rights, are described under the subheading "Our Members" in "Business." Finally, members of the GEM division hold both full and fractional membership interests. These fractional interests must be combined into full interests by November 3, 2000 or, under the Exchange's rules, they will be combined by the Exchange and sold for cash. Because of this provision, fractional GEM membership interests have been treated differently in the proposed demutualization than have full GEM membership interests.
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SUMMARY OF DEMUTUALIZATION PROPOSAL This summary highlights information contained elsewhere in this document. It is not complete. It does not contain all of the information which you should consider before voting on the proposed demutualization and may not contain all of the information that is important to your individual situation. Consequently, you should read this entire document carefully. Proposed Mergers We are proposing to convert Existing CME from an Illinois not-for-profit membership corporation into a Delaware for-profit stockholder corporation. As a result, you would become a stockholder of New CME. The demutualization would be effected in a two-step process. First, our existing corporation would be merged into an intermediate Delaware nonstock membership corporation, which we have formed called "CME Transitory Co." Second, CME Transitory Co. would be merged into a Delaware stock corporation. These steps are depicted in the following chart. [Graphic: Three rectangular boxes aligned from left to right, with an arrow silhouette pointing from the first to the second box and pointing from the second to the third box. Inscribed in the first box is "Chicago Mercantile Exchange (Illinois not-for-profit corporation)", inscribed in the second is "CME Transitory Co. (Delaware nonstock corporation)", and inscribed in the third is "Chicago Mercantile Exchange Inc. (Delaware stock corporation)". The phrase "Membership Interests for Membership Interests" appears below the first arrow and the phrase "Membership Interests for series of Class B shares and, in the case of CME, IMM and IOM members, Class A shares" appears below the second arrow.] Immediately after the demutualization is completed, Exchange members will be the only stockholders of New CME. Conversion of Membership Interests into Shares of Stock Existing memberships will be converted into shares of Class B common stock of New CME and, in the cases of the CME, IMM and IOM memberships, shares of Class A common stock. Both Class A and Class B shares will have the traditional features of common stock; however, the primary purpose of the Class B shares is to confer the trading privileges associated with the memberships in Existing CME. Consequently, the Class B shares will be issued in four series corresponding to those existing membership divisions, with a fifth series corresponding to the GEM fractional membership interests. Each series will confer the trading privileges associated with the membership interest that is converted into that series. These conversions are illustrated below:
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[Enlarge/Download Table] Distribution of Class A and B Shares By Individual Membership Interest -------------------------------------------------------------------------------------------- Number of Shares to Be Received Per Membership Interest Class B Shares Membership ----------------------------------------- Division Class A Shares Number Series ---------- -------------- ------ ------ CME 16,200 1 B-1 IMM 10,800 1 B-2 IOM 5,400 1 B-3 GEM 1 B-4 GEM Fractions 1 B-5 The following table indicates the number of outstanding memberships and members in each membership division of the Exchange. The tables below that table indicate the relative distribution of shares of Class A and B common stock following the demutualization: [Download Table] Membership Divisions ------------------------------------------------------------------------------------ Membership Number of Number of Percentage of Division Memberships Members Total Members ---------- ----------- --------- -------------- CME 625 512 15.3% IMM 813 676 20.3 IOM 1,287 1,026 30.8 GEM* 253 217 6.5 GEM Fractions* 2,140 902 27.1 ------------------------------------------------------------------------------------ 5,118 3,333 100.0% ============================================================== [Enlarge/Download Table] Distribution of Class A and B Shares By Membership Division ---------------------------------------------------------------------------------------- Membership Aggregate Class A Class A Aggregate Class B Division Shares Percentage Shares --------- ----------------- ---------- ----------------- CME 10,125,000 39.1% 625 IMM 8,780,400 34.0 813 IOM 6,949,800 26.9 1,287 GEM* 253 GEM fractions* 2,140 -------------------------------------------------------------------------------------- 25,855,200 100.0% 5,118 ========== ===== ===== [Enlarge/Download Table] Distribution of Relative Equity by Membership Division -------------------------------------------------------------------------------------------------------- Equivalent Total Equity Percentage of Class A Shares (expressed in Equity Membership Class A Class B Represented by equivalent Distributed Division Shares Series Class B Shares Class A shares) to Members ---------- ------- ------- --------------- --------------- ------------- CME 10,125,000 B-1 1,125,000 11,250,000 39.1% IMM 8,780,400 B-2 975,600 9,756,000 33.9% IOM 6,949,800 B-3 772,200 7,722,000 26.8% GEM* B-4 25,300 25,300 0.2% GEM Fractions* B-5 21,400 21,400 ----------------------------------------------------------------------------------------------------------- Total 25,855,200 2,919,500 28,774,700 100% ========== ========= ========== =========== -------------------------------------- * Based upon outstanding GEM fractions as of December 31, 1999. The conversion of additional GEM fractions into full GEM membership interests prior to the effectiveness of the demutualization will reduce the number of series B-5 shares issued and increase the number of series B-4 shares actually issued. 2
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Description of Class B Shares to be Received The following table summarizes several features of the Class B shares that will be issued to members in the demutualization: [Enlarge/Download Table] Number of Votes Equivalent Class A Shares "Core Rights" Represented by Series --------------------- --------------------------- Number of As Percentage Maximum Directors As Percentage of Aggregate Number of Trading Series Per of Aggregate Number of Class A Series Shares Privileges Can Elect Share Class B Vote* Shares Equivalents ------ --------- ---------- --------- ----- ------------- --------- ------------- B-1 625 CME 3 6 55.7% 1,125,000 3.9% B-2 813 IMM 2 2 24.1 975,600 3.4 B-3 1,287 IOM 1 1 19.1 772,200 2.7 B-4 253 GEM* 0 1/6 0.6 25,300 0.1 B-5 2,140 GEM 0 1/60 0.5 21,400 0.1 Fractions* ---------------------------------------------------------------------------------------------------- 5,118 6 100.0% 2,919,500 10.2 ===== - ===== ========= ==== ---------------------- * Based upon outstanding GEM fractions as of December 31, 1999. The conversion of additional GEM fractions into full GEM membership interests prior to the effectiveness of the demutualization will reduce the number of series B-5 shares issued and increase the number of series B-4 shares actually issued. Election of Directors. As described below in this summary under "Board of Directors," New CME's board of directors will ultimately consist of 19 directors. Holders of series B-1, B-2 and B-3 shares will have the right to elect the number of directors set forth in the table. Holders of all series of Class B shares will have the right, voting together with holders of the Class A shares, to elect the remaining 13 directors. "Core Rights." New CME's charter grants solely to holders of Class B shares the right to approve changes to specified "rights" associated with the trading privileges conferred by those shares. Those rights, referred to as "Core Rights" in the charter and this document, consist of: . the allocation of products which a holder of a series of Class B shares is permitted to trade on New CME's exchange facilities . the trading floor access rights and privileges which a holder of a series of Class B shares has, including the circumstances under which New CME can determine that an existing open outcry-traded product will no longer be traded by means of open outcry . the number of authorized and issued shares of any series of Class B shares . the eligibility requirements to hold shares of a series of Class B shares or to exercise the associated trading rights or privileges As indicated in the table, votes on changes to Core Rights are weighted by series. Changes to Core Rights must be approved by a majority of the votes cast by the holders of the Class B shares. Holders of Class A shares do not have the right to vote on changes to Core Rights. Class A Equivalence. Each Class B share is treated as representing the number of Class A shares specified in the table for purposes of: 3
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. voting on matters on which holders of Class A and B shares vote together, including the election of 13 directors . the receipt of dividends if, and when, declared by the board . the receipt of liquidating distributions if New CME is liquidated and dissolved Shares of Class B common stock will represent approximately 10% of the outstanding equity of New CME following the demutualization. Consequently, the voting privileges of the Class B shares will not have any significant impact on matters put to a vote that includes both the Class A and B stockholders. Class A stockholders do not have the right to vote on Core Rights or in the election of the six directors to be elected by the series of Class B shares. Series B-5 Shares. The series B-5 shares will be issued to holders of GEM fractional membership interests. Each GEM fractional membership interest represents one-tenth of a full GEM membership interest and will be converted into one series B-5 share. There were 2,140 GEM fractional membership interests outstanding as of December 31, 1999 held by 902 members. Series B-5 shares may be converted into series B-4 shares by their holders at the ratio of ten series B-5 shares for one series B-4 share. Individuals holding less than the necessary ten shares may either sell their shares to another holder so that holder will obtain the necessary ten shares, or purchase additional shares from other holders to obtain the necessary ten shares. In the event that a holder does not convert his or her shares on or before November 3, 2000, those shares will be converted automatically into shares of Class A common stock at the rate of ten Class A shares for each series B-5 share. Differences in Ownership Rights Following the demutualization, you will become a stockholder in a Delaware corporation as opposed to a member in an Illinois not-for-profit corporation. There are differences in your ownership rights that will result from this change in structure that you should consider. Some of these differences arise from differences between the corporate law applicable to Illinois not-for-profit corporations versus Delaware stock corporations. Some of these differences arise from choices that we have made in drafting the charter and by-laws for New CME. These differences are described under the subheading "Differences in Ownership Rights" under "Demutualization Proposal." Market for Shares; Stock Exchange Listing No market presently exists for either the Class A shares or the Class B shares. We expect a market for the Class B shares will develop that is similar to the current market for corresponding membership interests. The current markets for CME, IMM, IOM and GEM membership interests, and for GEM fractional membership interests, should facilitate the development of new markets for each series of Class B shares. We expect that, over time, a market for Class A shares will develop. We will undertake educational and promotional efforts to communicate the value of Class A shares to holders of those shares and to potential investors. We have no current plans to list either the Class A or B shares on a stock exchange. 4
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Transfer Restrictions Class B shares will be subject to the same transfer process as applies to your current membership interest. Class A shares will be subject to transfer restrictions, which will fall away over time. For the first six months, Class A shares may be transferred only with the associated Class B shares. Each three months thereafter, a portion of the Class A shares (in 25% increments) will become transferable. After fifteen months, the shares will not be subject to the transfer restrictions. Board of Directors Following the demutualization, the size of the board of directors will be reduced from 39 to 30 directors at the December 2000 annual meeting of stockholders, and further reduced to 19 at the December 2001 annual meeting of stockholders. In addition, the manner in which the directors are nominated and elected will change. These changes are illustrated in the table below. [Enlarge/Download Table] Nomination and Election of Board of Directors Current Provisions After Demutualization --------------------------------------------------------------------------------------------------------------------- Number of Candidates Nominated Number of Candidates Directors By Elected By Directors Nominated By Elected By --------------------------------------------------------------------------------------------------------------------- 12 CME Nominating Committee CME members 3 Series B-1 Nominating Series B-1 Committee holders 8 IMM Nominating Committee IMM members 2 Series B-2 Nominating Series B-2 Committee holders 4 IOM Nominating Committee IOM members 1 Series B-3 Nominating Series B-3 Committee holders 1 GEM Nominating Committee GEM members 0 12 Chairman of the Board Board of 0 Directors 2 * * 13 Board Nominating Class A and B Committee stockholders --------- ---------- Total 39 Total 19 ========= ========== * The Exchange's President serves as a non-voting member of the board. Leo Melamed serves as a non-voting member of the board. The Exchange's directors serve staggered two-year terms and will continue to serve as directors of New CME for the remainder of their present terms. Directors of New CME will also serve staggered two-year terms. The reduction in the size of the board will be implemented by electing fewer directors than the directors whose terms expire. A listing of the present directors and when their terms expire is set forth under the subheading "Directors and Executive Officers" under "Management." The right of series B-1, B-2 and B-3 stockholders and Class A and B 5
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stockholders to elect directors will be phased-in as the terms of the existing directors expire. This phase-in is described in a table under the subheading "Description of Class B Common Stock" under "Description of Capital Stock of New CME." Federal Income Tax Consequences We are seeking a ruling from the Internal Revenue Service to the effect that, for federal income tax purposes, you will not recognize any gain or loss strictly as a result of receiving Class A common stock and Class B common stock (or Class B common stock only for holders of GEM memberships or GEM fractional membership interests) in exchange for your membership interest. Assuming this nonrecognition treatment, the tax basis in your membership interest would carryover to the stock received in exchange. If you received both Class A and Class B common stock, your membership basis would be allocated between the two classes in proportion to the relative fair market values of those shares at the time of the demutualization. Accounting Treatment The demutualization transaction will be treated in a manner similar to "pooling-of-interests" accounting. Under this method of accounting, no gain or loss will be recognized, and the assets and liabilities of Existing CME will appear on the books of New CME at their same recorded amounts. Risk Factors There are risks associated with the proposed demutualization that you should consider. These and other risks are discussed under "Risk Factors" below. These risks include our ability to implement in a timely and successful manner changes to our organizational and managerial structure that are required in order to operate in a manner that will enhance stockholder value. Although the Exchange has a long history of operating as a successful member-owned institution, changes will be required in the manner in which activities are evaluated and undertaken. Reasons for Demutualization Your board believes that the change in our structure resulting from demutualization will accomplish the following objectives: . Improve our governance and managerial structure to facilitate more accelerated decision-making . Change our financial decision-making model to emphasize stockholder value . Create a catalyst for pursuing new business strategies . Unlock members' equity values by allowing them to sell a portion of their interest in the Exchange, should they so desire . Provide a signal and currency for working with strategic partners Conditions to Demutualization 6
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The completion of the demutualization is subject to: . Receipt of a favorable ruling from the Internal Revenue Service regarding the federal income tax consequences to our members and the Exchange of the contemplated transactions. The ruling request was filed December 30, 1999. . Completion of the cash purchase by Existing CME of the assets and business of P-M-T Limited Partnership, which requires the approval of the holders of two-thirds of the 4,786 Class A limited partnership units of that partnership, not including the 321 units held by the Exchange. P-M-T Limited Partnership provides electronic trading services for the Exchange and owns GLOBEX [Registered Trademark Symbol] servicemark. . Approval by the Commodity Futures Trading Commission of changes to our rules to reflect the demutualization. These approvals will be sought after the special meeting of members. These changes generally relate to the changes in our structure resulting from the conversion to a stock corporation and the fact that our existing rules will be reflected in the charter, by-laws and rules of New CME. Our Business Founded in 1898, the Exchange provides facilities so that our members may trade futures and options on futures contracts. These facilities include physical floor trading facilities where our members may come together to trade in a process known as "open outcry" and, through P-M-T Limited Partnership, electronic trading facilities known as GLOBEX2. Members are able to trade futures and options on futures contracts based upon interest rates, stock indices, foreign currencies, agricultural commodities and other underlying instruments and risk-based activities. We also match, clear, settle and guarantee all transactions executed on the Exchange through the CME Clearing House, and we engage in extensive regulatory, compliance, market surveillance and financial supervision activities designed to ensure market integrity and provide financial safeguards for users of our markets. Our offices are located at 30 South Wacker Drive, Chicago, Illinois 60606, and our telephone number is (312) 930-1000. Absence of Appraisal or Dissenters' Rights Members who object to the demutualization will have no appraisal or dissenters' rights under applicable law. Appraisal or dissenters' rights, if available, would allow a member who voted against the proposal and followed a prescribed statutory process, to receive a cash payment equal to the fair value of the member's membership interest in the Exchange. If the demutualization transaction is completed, your membership interest will be converted into stock of New CME. 7
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Selected Consolidated Financial Information Selected consolidated financial data is set forth below. The income statement and balance sheet data are taken from the audited consolidated financial statements of the Exchange. The results of prior periods are not necessarily indicative of future results. This data should be read in conjunction with the audited consolidated financial statements of the Exchange and related notes, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included toward the end of this document. [Enlarge/Download Table] Selected Consolidated Financial Data (amounts in thousands) As of or for the Year Ended December 31, ------------------------------------------------------- 1999 1998 1997 1996 1995 --------- ---------- --------- ---------- --------- Income Statement Data: Total revenues $208,488 $195,216 $177,644 $164,212 $164,459 Operating expenses 201,844 181,023 158,586 151,803 149,689 Other income (1) -- -- -- 15,717 -- Limited partners' interest in earnings of P-M-T Limited Partnership 2,126 2,849 -- -- -- Net income 2,663 7,029 8,667 15,068 8,631 Balance Sheet Data: Total assets 301,703 293,205 348,732 243,754 199,733 Current assets 176,728 203,301 270,081 161,272 114,395 Current liabilities 109,953 110,670 180,210 83,584 57,780 Long-term obligations and limited partners' interest in P-M-T 11,150 14,747 8,968 9,539 7,845 Members' equity 168,663 166,897 159,554 150,631 134,108 Other Data: Total trading volume (round turn trades) 200,737 226,619 200,742 177,042 181,806 GLOBEX trading volume 16,135 9,744 4,388 2,018 1,326 Open interest at period-end 6,412 7,282 6,479 5,361 5,254 (1) Consists of a 1996 return of contributions and interest from the CME Trust resulting from an agreement reached with the Internal Revenue Service over the deductibility of contributions made by the Exchange. 8
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RISK FACTORS Upon demutualization your existing membership interest will be converted into shares of New CME. Although New CME will succeed to our existing business, demutualization will change our business model from a membership-owned non-stock organization to an investor-owned stock corporation. We expect that this change in form will have a significant impact on us and on the risks of owning us. You should carefully consider the following risk factors, together with the other information in this document, before casting your vote or executing your proxy. Risks Related to Demutualization . We have always operated as a not-for-profit enterprise and have no operating history as a for-profit enterprise. We have no operating history as a for-profit corporation upon which to evaluate our ability to operate as a for-profit entity. For this reason, we will be subject to risks, expenses and difficulties associated with changing and implementing our business model that are not typically encountered by established for-profit companies. . There is little experience upon which to draw among U.S. futures exchanges operating as for-profit enterprises. The major U.S. futures exchanges have operated historically as mutual, membership organizations. There is little history or experience of U.S. futures exchanges with for-profit operations upon which we can draw to guide our operations or business strategy. . Our new managers and staff may not be successful in running a for-profit entity. Our future success depends, in significant part, on our new chief executive officer and on his ability to utilize new and existing management and staff in the context of a for-profit corporation. Our success also depends on their ability to successfully operate an exchange and, in particular, an exchange that is transitioning to a for-profit structure. We can provide no assurance that our CEO, other members of management, and our employees, will be successful in running a for-profit entity. The new CEO may desire or need to recruit additional management or staff. We can provide no assurance that we can successfully recruit these persons. . Our board's role will be changing over a long transition period which may delay operational changes needed to operate as a for-profit enterprise. Our board has historically been involved actively in the day-to-day functioning of our business. Following the demutualization, management of New CME will assume greater responsibility for operations and the board will assume a lesser role. The long transition period could slow changes in operations and procedures needed to operate a for-profit enterprise. . The change in the board election process may reduce the direct influence of our 9
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members on the action of our board. As non-members acquire Class A shares of New CME, the influence of members on the actions of our board may be reduced. Holders of Class B shares will be entitled to elect 6 of 19 directors. Although they are entitled to vote with holders of Class A shares in the election of the remaining directors, the voting power associated with the Class B shares will represent only about 10% of the overall vote available to be cast for those directors. Members of the Exchange will own 100% of the Class A shares following the demutualization; however, subsequent sales of Class A shares by their holders, as well as subsequent issuances and sales by New CME, will cause that percentage to fall. . Other changes in our operating structure may also diminish the influence of members. We are currently served by a large number of member-dominated committees. Our professional staff provides support to these committees but members generally retain decision-making authority. This structure will change because of demutualization. Many of these committees will be eliminated or converted into advisory bodies. The membership of some committees may also change. Our professional staff will be given greater decision-making responsibilities. Management will generally make decisions designed to enhance stockholder value, which may lead to decisions or outcomes with which members disagree. These changes may make us less attractive to our current members and clearing members and encourage them to conduct their business at, or seek membership in, another exchange. A loss or material diminishment of member trading activity could negatively impact liquidity and trading volumes in our products. A loss or material reduction in the number of our clearing member firms and the capital they provide to guarantee their trades and the trades of their customers could diminish the strength and attractiveness of our Clearing House and our markets. . The absence of a prior public market limits our ability to predict the level of public interest, if any, in our shares. Prior to demutualization, there will be no public holders of capital stock of New CME. There is no current market for that capital stock. Further, because we are not offering any shares to outside investors, we have not undertaken the traditional marketing activities associated with bringing a company to the public markets. We have no current plans to list our shares on a stock exchange. We do not know whether third parties will find our shares to be attractive or whether firms will be interested in making a market in our stock. Consequently, we cannot assure you that a trading market will develop or, if it develops, how strong it may be. . We can give no assurance that an orderly market in our common stock will develop. We have adopted transfer restrictions for the Class A shares, which will gradually expire over a fifteen-month period following the demutualization, in order to foster the development of an orderly market in our common stock. We cannot guarantee that these restrictions will achieve their intended purpose. If our stockholders sell a large number of Class A shares upon the expiration of some or 10
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all of the transfer restrictions, the market prices for our common stock could decline significantly. Additionally, the transfer restrictions that we have adopted will not restrict a sale to a single purchaser of Class A shares in conjunction with a simultaneous sale of the related Class B share, in part, to allow a clearing member firm to liquidate the full value of a member's interest in New CME if that member is in a deficit position. Any forced sales of Class A or B shares during the time in which an orderly market is being developed could negatively impact the market price for the shares. . The market prices for our shares may fluctuate widely and trade at prices below the recent price of the membership that the shares replace. The market price of Class A and B shares received by you in the demutualization may fluctuate widely. Factors causing these fluctuations will include our perceived prospects, and the prospects of the financial industry and exchanges in general, differences between our actual financial and operating results and those expected by investors and analysts, and changes in analysts' recommendations or projections. In addition, changes in general economic or market conditions and broad market fluctuations may influence the market prices for our stock. As a result, Class A and B shares may trade at prices significantly below the price of the membership for which they were exchanged. The value of Class B shares is likely to be driven primarily by the perceived value, and the demand for, the related trading privileges. . The issuance of additional shares may dilute the market value of the shares we issue to you. New CME will have authorized but unissued Class A shares that may be issued at the discretion of New CME's Board. If we issue a large number of Class A shares in connection with future acquisitions or otherwise, which fail to increase our overall value, your equity could be diluted and the market price of your shares could decline significantly. The board of New CME will consider the potential dilutive effects of any subsequent issuance of Class A shares in relation to the value generated or expected to be generated in connection with their issuance. . Decisions made by management or the board of New CME, or changes in the business or operations of New CME, may negatively impact Class B stockholders or affect Class A and B stockholders differently. The conversion to a stockholder owned for-profit corporation will require management to make decisions and take actions designed to maximize profits and stockholder value. While holders of Class B shares will have protections with respect to Core Rights that may limit management's decision-making authority, management will nonetheless acquire substantial decision-making responsibility compared to Existing CME. It is possible that decisions or changes which benefit the value of Class A shares will negatively impact the value of Class B shares or, conversely, that decisions or changes which benefit the value of Class B shares will negatively impact the value of Class A shares. . Class B stockholders will have a right to approve changes to Core Rights and will be entitled to elect six directors. The market price of the Class A shares may be adversely 11
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affected by the exercise of these rights. Class B stockholders will have the ability to preserve their trading rights by means of special approval rights. In addition, holders of series B-1, B-2 and B-3 shares will be entitled to elect 6 of 19 directors, even though those holders only represent approximately 10% of the overall equity interest. Those directors will also participate in the nomination of additional directors and the election of a chairman. These provisions could be used to block changes that management might want to make to enhance stockholder value, including the value of Class A shares. . Delaware law may protect decisions of New CME's board that have a different effect on Class A and B stockholders. Delaware law generally provides that a board of directors owes an equal duty to all stockholders, regardless of class or series and does not have separate or additional duties to either group of stockholders, subject to applicable provisions set forth in a company's charter. With respect to decisions not involving the Core Rights of Class B stockholders, you may not be able to challenge decisions that have an adverse effect on the value of your Class A or B shares if our Board acts in a disinterested, informed manner with respect to these decisions, in good faith and in the belief that it is acting in the best interests of our stockholders. . Effects of antitakeover provisions could enable the board of directors to prevent or delay a change of control of New CME and adversely affect market value. We have inserted antitakeover provisions into the charter and by-laws of New CME. These provisions are described under the subheading "Other Charter Provisions" under "Description of Capital Stock of New CME." These provisions, along with provisions of Delaware law, could, together or separately: . discourage potential acquisition proposals; . delay or prevent a change in control; and . limit the price that investors might be willing to pay in the future for shares of our common stock. As a result, these provisions could limit the price some investors might be willing to pay in the future for Class A and B shares. . Not paying dividends can have an adverse effect on our stock price. The payment and amount of dividends, if any, may have an adverse effect on the market value of our shares. We do not anticipate paying dividends on our shares in the foreseeable future. Risks Related to Our Business . The business model we have adopted - the simultaneous operation of pit-based, open outcry trading and electronic trading systems - may produce less liquid markets than 12
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pure electronic trading markets of competitors and adversely affect our business. We have elected in the demutualization to preserve both open outcry and electronic trading and have included provisions in our charter documents to protect open outcry trading. If both trading methods continue, liquidity on each may be less than the liquidity on a competitive unified trading platform. . Our business may be adversely affected if maintaining pit-based and electronic trading systems results in higher costs or otherwise impairs efficiency. It may be expensive to continue operating two trading systems for the same product. Substantial expenses and delays may be caused by efforts to create trading links between the separate trading platforms. Any loss of efficiency or increase in time to market of new or improved products could be detrimental to our business plans in a highly competitive market. . Our trading volumes could be adversely affected if our customers prefer conducting business on a mutual exchange. The success of our business depends, in part, on our ability to maintain and increase our trading volume by maintaining and expanding our product offering and our customer base. Our success also depends on our ability to offer competitive prices and services in an increasingly price sensitive business. We cannot assure you that we will be able to continue to expand our product lines, or that we will be able to retain our current customers. We also cannot assure you that we will not lose customers to low-cost competitors with comparable or potentially superior products. If we fail to expand our product line or lose current customers, our ability to realize our financial objectives will be adversely affected. . Despite demutualization, we will face intense competition from other companies. The financial services industry is highly competitive. Many of our competitors and potential competitors are more established and have greater financial resources than we do. We expect that competition will intensify in the future. Many of our competitors also have greater marketing capabilities and technological and personnel resources. These factors may enable them to develop similar products, to provide better transaction costs and execution, and to carry out their business strategies faster. . The number and quality of companies providing electronic transaction services in competition with us may increase significantly. Our current and prospective competitors are numerous and include securities exchanges, futures exchanges, market data and information vendors, electronic communications networks, crossing systems and similar entities, consortia of large customers and some of our clearing member firms, and interdealer brokerage firms. Two other significant U.S. futures exchanges are in the process of demutualizing, which may intensify competition for electronic transaction services. Securities exchanges are planning to expand into derivative transaction services. The existing option exchanges may expand their electronic transaction services. A new electronic 13
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option exchange has been licensed by the SEC. We may also face competition from computer software companies, and media and technology companies. The number of businesses providing Internet-related financial services is rapidly growing, and other companies have entered into or are forming joint ventures or consortia to provide services similar to those provided by us. . We may not effectively manage our growth. We expect to grow our business. 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 cannot predict our future capital needs or our ability to secure additional financing. We anticipate, based on management's experience and current industry trends, that our existing cash resources will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least the next twelve months. However, we may need to raise additional funds to: . support more rapid growth; . develop new or enhanced services and products; . respond to competitive pressures; . acquire or develop complementary technologies; and . respond to unanticipated requirements. We cannot assure you that we will be able to obtain additional financing on acceptable terms. Risks Related to Regulation and Litigation . We may not be able to maintain our self regulatory responsibilities. Some financial services regulators have publicly stated their concerns about the ability of a financial exchange, organized as a for-profit corporation, to discharge adequately its self-regulatory responsibilities. We believe our regulatory programs and capabilities contribute significantly to our brand name and reputation. Although we believe that we will retain these responsibilities, we cannot assure you that we will not be required to modify or restructure our regulatory functions in order to address these concerns. If we are required to rely on a third party to perform regulatory and oversight functions, we may incur substantial expenses and suffer severe harm to our reputation if the regulatory services are inadequate. 14
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. Litigation risks are significant to financial service providers. 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 ("CEA") and our Commodities Futures Trading Commission ("CFTC")-approved disclaimer and limitation of liability rules offer us some protections, an adverse resolution of any lawsuits or claims against us could have a material adverse effect on our reputation, business, financial condition and operating results. In addition, we may also become subject to legal proceedings and claims as a result of the demutualization transactions. INFORMATION REGARDING SPECIAL MEETING Person Making the Solicitation The proxy solicitation represented by this document is being made on behalf of the board of directors of the Exchange. Time and Place of Special Meeting The special meeting will be held on __________, April __, 2000 at _____ p.m., Central Standard Time, at 30 South Wacker Drive, Chicago, Illinois 60606. Eligibility to Vote You are eligible to vote at the special meeting only if you owned a membership in the Exchange at the close of business on ___________, 2000, which is the record date for the special meeting. Available Votes; Quorum Required for Meeting On the record date for the special meeting, we had 625 CME memberships, 813 IMM memberships, 1,287 IOM memberships, 253 GEM memberships and 2,140 GEM fractional memberships. Under our rules, CME members will have six votes for each CME membership owned, IMM members will have two votes for each IMM membership owned, IOM members will have one vote for each IOM membership owned, GEM members will have one-sixth vote for each full GEM membership owned, and owners of GEM fractional membership interests will have one-sixtieth vote for each GEM fractional membership interest owned. The presence in person or by proxy of members holding a majority of the votes entitled to be cast on the demutualization proposal shall constitute a quorum for the consideration of the proposal at the meeting. Manner of Voting 15
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You may vote on the demutualization proposal by attending, in person or by proxy, the special meeting and registering your vote. You may also complete the enclosed proxy to register your vote on the proposal. You may revoke your proxy at any time before it is voted at the meeting. You may revoke it in any of three ways: . By sending written notice to Ms. Ann Cresce, Acting Director, CME Membership Department, 30 South Wacker Drive, Chicago, Illinois 60606; . By signing a later dated proxy; or . By attending the meeting and voting in person. Attendance at the meeting will not automatically revoke your proxy. All membership interests represented by properly executed and unrevoked proxies received in the accompanying form in time for the meeting will be voted at the meeting or at any adjournment of the meeting. You may vote for, against or abstain on the demutualization proposal, although an abstention has the legal effect of voting against the proposal. To vote using the enclosed proxy, you should indicate your vote on the demutualization proposal by checking FOR, AGAINST or ABSTAIN. A proxy received without an indication of the manner in which it is to be voted will be voted FOR approval of the demutualization proposal. A ballot which has more than one box marked will not be valid and will not be regarded as a vote cast. You must sign and date your proxy, and return it in the postage-paid envelope enclosed with this mailing. You can also mail or deliver your completed proxy to Ms. Ann Cresce, Acting Director, CME Membership Department, 30 South Wacker Drive, Chicago, Illinois 60606. Your proxy must be received prior to the start of the meeting in order to be counted. To obtain a replacement ballot, please call Ms. Ann Cresce, Acting Director, CME Membership Department, at (312) 930-3488, between the hours of 7:00 a.m. and 5:00 p.m., Central Standard Time. Required Vote The proposal will require the affirmative vote of at least two-thirds of the votes present and voted either in person or by proxy for approval. Directors and officers of the Exchange hold memberships entitling them to cast an aggregate of 143.63 votes on the proposal, representing 2.13% of the total membership votes that may be cast. Board Recommendation Your board unanimously recommends that you vote FOR the demutualization. Methods of Solicitation of Proxies; Costs The cost of soliciting proxies will be borne by the Exchange. In addition to solicitation 16
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by mail, our directors, officers and employees may solicit proxies in person or by telephone. DEMUTUALIZATION PROPOSAL Your board of directors unanimously believes that it is in the best interests of the Exchange and its members to change its corporate structure from a member-owned not-for-profit corporation to a stockholder-owned for-profit corporation. This belief is founded on the results of a year-long process in which demutualization was examined. Last year, the board adopted a five-point plan to improve the operation of the Exchange -- including an element regarding demutualization. Since that time, the Strategic Planning Committee of the board has studied the structure of possible transactions to effect the conversion to a for-profit corporation and considered a number of the issues posed by those transactions. Based upon those studies and considerations, the Strategic Planning Committee developed and recommended to the board a plan to effect the demutualization. This plan was then unanimously approved by the board. It is intended that the demutualization transaction will not have any adverse federal income tax consequences to our members. We have applied for a ruling from the Internal Revenue Service to confirm these intentions, and the completion of the demutualization transaction is conditioned, among other conditions, upon the receipt of this ruling. No gain or loss will be recognized by the Exchange for Federal income tax purposes as a result of the demutualization. Reasons for Demutualization The financial and risk management markets in which we operate are experiencing significant and rapid changes. These changes are largely due to advances in technology, a relaxation of regulatory barriers and resultant cost efficiencies. Computer and telecommunications systems today can efficiently and economically bring buyers and sellers together in ways that present new challenges to the traditional exchange model of centralized physical auction markets. The Internet and proprietary networks are changing investor behavior and revolutionizing how investors interface with financial markets. Other technological innovations are reducing the costs and barriers to entry for alternative exchange-type systems. The traditional exchange model is undergoing a significant transformation with the emergence of electronic trading technologies. Technological innovations and reduced regulatory burdens in the global financial markets have lowered barriers to entry, have created new competitors, and are encouraging traditional exchanges to modernize their operations. In order to achieve the necessary economies of scale and remain competitive in a low-price/high-volume environment, consolidation among exchanges and financial intermediaries is likely to continue. With respect to exchanges, large market users are expected to continue to seek more efficient trading, processing and clearing facilities. Although these users currently justify membership in multiple exchanges and clearing organizations, they are likely to concentrate their business activity in those exchanges and clearing organizations that offer standardized systems, a full spectrum of financial products that can be traded and cleared through a single entity, and low operating costs and capital efficiencies for member intermediaries. 17
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Notwithstanding these changes and increased competitive activity, the board believes that Existing CME is well-positioned in today's marketplace to preserve and enhance our position. The Board also believes, however, that we will be better able to respond to this competition if we are reorganized as a commercially-operated enterprise with a true oversight board and a team of professional business managers. These managers will leverage the substantial existing assets and strengths of Existing CME into new business strategies designed to maximize stockholder returns. Objectives of Demutualization. We have identified five major objectives to be achieved by demutualization: . Improved Governance and Managerial Structure The traditional distinctions between our activities and the activities of our members and clearing members are becoming increasingly blurred. On the one hand, members and clearing members decide our affairs; while on the other hand, some of them compete directly with us by developing off-exchange products and business and by joining alternative market initiatives. Our board believes that demutualization will enable management to reduce the impact of these conflicts and to increase our enterprise value for the benefit of our equity owners. Increasingly, our competitors are for-profit companies operating with a singular purpose to maximize stockholder value. Our board believes that demutualization will create a governance and management structure that is more agile and swift in its ability to respond to competition. Management of the demutualized entity will be free to make decisions regarding listing contracts electronically if they will be more successful in that forum, changing clearing and transaction fees when appropriate, or expanding our existing product and service offerings. . Improved Financial Decision-Making Model Our board believes that changing to a for-profit model will result in improved financial decision-making to enhance stockholder value. For example, management of the demutualized entity will judge investments and expenditures on, among other reasons, the basis of stockholder return. Commercial decision-making will diminish political member influences. Commercial pricing of services and a profit-making objective will ensure that resources are allocated to those business initiatives and ventures that enhance, or have the potential to enhance, stockholder value. Our ability to obtain financing at favorable rates will depend on whether lenders believe we are investing prudently. . Create a Catalyst for Pursuing New Business Strategies Continuing financial innovation and demand for new risk management and derivative products are fueling global growth in exchange-traded and over- the-counter products. To capitalize on this potential, we may need to attract outside investment, further expand our current technology platforms, and broaden our product and service offerings. . Unlock Members' Equity Values 18
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Our owners are a heterogeneous group with different economic interests. During the last several years, and prior to the recent increases in seat prices and lease rates, many of our retired owners experienced substantial declines in their seat values and, hence, income from leasing. These owners are generally less interested in member opportunity on the floor and more interested in maintaining their asset values and deriving income from their assets. In this sense, many of these owners already have begun to look more like traditional stockholders than exchange members. Demutualization will unlock the equity value in a membership and allow our management to provide stockholder returns to these members. Many of our members are interested in selling only a portion of their interest in the Exchange. Under the existing structure, these members have been unable to do so because they cannot sell less than an entire membership or seat. Demutualization will allow members to sell only a portion of their interest in New CME (i.e., all of their Class B shares or all or a portion of their Class A shares). . Provide a Signal and a Currency for Working with Strategic Partners Our board believes that technology firms, as well as firms interested in acquiring an equity stake in us, will have a strong preference for working with a demutualized corporation, rather than a member-owned mutual organization. The board believes that we will benefit from entering into strategic alliances with partners or investors who can provide technology and capital resources. Demutualization and conversion of memberships into shares will create a valuable currency for working with these partners, facilitating our ability to enter into these transactions in the future. Factors Considered in Arriving at Allocation Methodology. The board approved the allocation of equity, as represented by the Class A shares and the equity component of the Class B shares, in connection with its approval of the demutualization. This approval was based upon the recommendation delivered by the Strategic Planning Committee as well as the board's own consideration of possible allocation scenarios. Both the Strategic Planning Committee and the board considered various allocation methods in arriving at their decision. In these considerations, the directors took into account historical membership prices, trading volume and open interest information regarding products traded by the membership divisions, and relative contributions by the membership divisions. The board believed that setting an allocation based entirely on seat prices was not entirely fair inasmuch as those prices reflected the value of trading rights which were being captured, at least to some degree, in the Class B shares. Other factors, including trading volume, governance and relative voting power, did not necessarily reflect the relative contribution that the various membership divisions had made, or could in the future make, to the Exchange. Ultimately, the board found the mechanism for the allocation of equity in the P-M-T Limited Partnership, followed in 1987 in connection with the organization of that partnership, to be a useful precedent to the allocation of equity in the demutualization. Description of Demutualization Transaction The proposed demutualization transaction will be effected through a two- step merger 19
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which is illustrated below: [Graphic: Three rectangular boxes aligned from left to right, with an arrow silhouette pointing from the first to the second box and pointing from the second to the third box. Inscribed in the first box is "Chicago Mercantile Exchange (Illinois not-for-profit corporation)", inscribed in the second is "CME Transitory Co. (Delaware nonstock corporation)", and inscribed in the third is "Chicago Mercantile Exchange Inc. (Delaware stock corporation)". The phrase "Membership Interests for Membership Interests" appears below the first arrow and the phrase "Membership Interests for series of Class B shares and, in the case of CME, IMM and IOM members, Class A shares" appears below the second arrow.] First Step: Illinois to Delaware. In the first step, Existing CME will merge with and into a recently formed, membership Delaware nonstock corporation for the purpose of reincorporating us in Delaware. No substantive change will occur in the members' current rights as a result of the merger, except for changes that result from being incorporated as a membership corporation in Delaware as opposed to Illinois. Under Illinois law, an Illinois not-for-profit corporation cannot merge directly into a for-profit corporation; however, a merger with a Delaware not-for-profit corporation is permissible. This merger will be effected under an agreement and plan of merger between Existing CME and the nonstock corporation, which is named "CME Transitory Co." Under this merger agreement, each membership interest in Existing CME will be converted into an equivalent membership interest in CME Transitory Co. The completion of the merger is subject to several conditions, which are described below under "Conditions to Effectiveness." A copy of the merger agreement is attached to this document as Exhibit B. CME Transitory Co. was formed by the Exchange for the sole purpose of effecting the demutualization transaction. It has no present assets or any business operations, other than activities associated with preparing for the demutualization transaction. Existing CME is its sole present member, and that membership interest will be cancelled upon the effectiveness of the merger. Your board of directors has approved this first step merger. CME Transitory Co.'s board of directors and Existing CME, as its sole member, have also approved this merger. The merger agreement grants the board the authority to amend its provisions as long as those changes do not materially and adversely affect the members. It is not expected that this authority will be used; however, it may be used if minor changes are required as a condition to receiving a favorable ruling from the Internal Revenue Service. Second Step: Delaware Nonstock to Delaware Stock Corporation. In the second step, CME Transitory Co. will merge with and into a recently formed, for- profit Delaware stock corporation. There will be changes in the rights of members as a result of this merger, which are described below under the subheading "Differences in Ownership Rights." This merger will be effected under an agreement and plan of merger between CME Transitory Co. and New CME. Under this merger agreement, the membership interests in CME Transitory Co. will be converted into shares of the capital stock of New CME as described in the following section. This merger is conditioned upon the completion of the first step merger of our existing corporation into CME Transitory Co. A copy of this merger agreement is filed as an exhibit to the registration statement that we filed with the SEC. 20
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New CME was formed by Existing CME solely for the purpose of effecting the demutualization transaction. It has no present assets or any business operations, other than activities associated with preparing for the demutualization transaction. CME Transitory Co. is its sole present stockholder, and that stock interest will be cancelled upon the effectiveness of the merger. CME Transitory Co.'s Board of Directors and Existing CME, as its sole member, have approved this second step merger. New CME's Board of Directors and CME Transitory Co., as its sole stockholder, have also approved this merger. The merger agreement grants the board the authority to amend its provisions as long as those changes do not materially and adversely affect the members. It is not expected that this authority will be used; however, it may be used if minor changes are required as a condition to receiving a favorable ruling from the Internal Revenue Service. Conversion of Membership Interests into Shares As a result of the consummation of the mergers described above, membership interests in Existing CME will be converted into shares of the capital stock of New CME. Specifically, each membership interest in Existing CME will be converted into shares of a series of Class B common stock and, in the cases of the CME, IMM and IOM membership interests, shares of Class A common stock, as indicated below: [Enlarge/Download Table] Number of Shares to Be Received Per Membership Interest (or Fraction) Class B Shares Membership Division Class A Shares Number Series -------------------- -------------- ------ ------ CME 16,200 1 B-1 IMM 10,800 1 B-2 IOM 5,400 1 B-3 GEM 1 B-4 GEM Fractions 1 B-5 The principal purpose of the Class B shares is to confer the trading privileges associated with the membership interests in Existing CME. Those shares will also have traditional equity rights. The Class A shares will represent solely equity rights. A description of the rights of the various series of Class B shares and the Class A shares is set forth below under "Description of Capital Stock of New CME." The following tables illustrate the relative equity that will be received by an Exchange member in respect of each membership division in the demutualization. As discussed below, several series of Class B shares will have the right to elect one or more members of the board, and all of the Class B shares have the right to vote, as a single class or group, on changes to Core Rights. These special voting rights are not illustrated in the following tables. 21
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Distribution to Individual Members [Enlarge/Download Table] Total Equity per Membership Membership Class A Class B Equivalent Class A Shares (expressed in equivalent Division Shares Series Represented by Class B Shares Class A shares) ----------------------------------------------------------------------------------------------------------------------- CME 16,200 B-1 1,800 18,000 IMM 10,800 B-2 1,200 12,000 IOM 5,400 B-3 600 6,000 GEM B-4 100 100 GEM Fractions B-5 10 10 Distribution of Relative Equity by Membership Division [Enlarge/Download Table] Total Equity Percentage Equivalent Class A (expressed in of Equity Membership Number of Class A Class B Shares Represented equivalent Class Distributed Division Memberships Shares Series by Class B Shares A shares) to Members --------------------------------------------------------------------------------------------------------------------------- CME 625 10,125,000 B-1 1,125,000 11,250,000 39.1% IMM 813 8,780,400 B-2 975,600 9,756,000 33.9% IOM 1,287 6,949,800 B-3 772,200 7,722,000 26.8% GEM* 253 B-4 25,300 25,300 0.2% GEM Fractions* 2,140 B-5 21,400 21,400 ----- ---------- --------- ---------- ----- Total 5,118 25,855,200 2,919,500 28,774,700 100% ===== ========== ========= ========== ===== * Based on full and fractional GEM memberships as of December 31, 1999. The conversion of additional GEM fractions into full GEM membership interests prior to the effectiveness of the demutualization will reduce the number of series B-5 shares issued and increase the number of series B-4 shares actually issued. Rights of Class B Common Stock Each series of Class B shares will carry traditional equity rights and also will confer the trading rights of the associated membership division. Holders of shares of each series of Class B common stock will have special voting rights, consisting of the right (of B-1, B-2 and B-3 stockholders) to elect a total of six members of the board of directors of New CME and the right to approve actions that affect Core Rights. Holders of Class B shares will also have the right to vote with holders of Class A shares in the election of the remaining members of the board of directors of New CME, as well as on other matters for which a vote of stockholders is required. These concepts are explained below under the subheading "Description of Additional Provisions of Class B Common Stock" under "Description of Capital Stock of New CME." Election of Board of Directors Board Size. The size of our board, and the manner in which directors are elected, will be changed in the demutualization. Initially, New CME's board will consist of 39 directors; and the existing directors of the Exchange will continue as directors of New CME. The size of New CME's board will be reduced in two steps: first by nine members at the December 2000 annual meeting of stockholders; and second by eleven members at the December 2001 annual meeting of stockholders. These reductions will be effected by electing fewer directors that the number of directors whose terms expire. Board Selection. We also have changed the manner in which directors will be elected to 22
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the board. Under New CME's charter and by-laws, members of the board will be nominated and elected as follows: [Enlarge/Download Table] Number of Directors Candidates Nominated By Directors Elected By ------------------------------------------------------------------------------------------------------------------ 13 Board Nominating Committee, elected by the board Holders of Class A and B shares, voting together 3 Series B-1 Nominating Committee, elected by holders Holders of series B-1 shares of series B-1 shares 2 Series B-2 Nominating Committee, elected by holders Holders of series B-2 shares of series B-2 shares 1 Series B-3 Nominating Committee, elected by holders Holders of series B-3 shares of series B-3 shares All directors will serve for two-year terms. Terms have been staggered so that approximately one-half of the directors will be elected each year. The following table indicates the number of directors to be elected at the annual stockholders meeting each year, and who has the right to vote on their election: [Download Table] Number of Directors to be Elected At Annual Stockholders Meeting ------------------------------------------------------------------------- Even Years Odd Years Directors To Be Elected By (Starting (Starting December 2000) December 2001) ------------------------------------------------------------------------- Holders of Class A and Class B 6 7 shares, voting together Holders of series B-1 shares 1 2 Holders of series B-2 shares 1 1 Holders of series B-3 shares 1 Total 9 10 Board Nominations. A nominating committee, composed of members of New CME's board, will nominate the slate of candidates for the thirteen directors to be elected by the holders of the Class A and Class B shares, voting together. This committee will be responsible for assessing the qualifications of candidates as well as ensuring that regulatory requirements with respect to the composition of New CME's board are met. Candidates nominated by this committee could include New CME's President and CEO, other executive staff members, representatives from the futures commission merchants community, and public directors from outside the industry as required by regulations of the CFTC. Consistent with our current practice, the series B-1, B-2 and B-3 holders will have the right to elect members of nominating committees for their respective series, which would be responsible for nominating candidates for election by their series. Each committee will be responsible for assessing the qualifications of candidates to serve as directors to be elected by that series. In accordance with our current practice, New CME's charter requires that director-candidates for election by a series of Class B shares own, or be recognized under its rules as a permitted transferee (other than temporary lease-type transfers) of, at least one share of that 23
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series. For purposes of the elections to be held in December 2000, the members of the series B-1, B-2 and B-3 nominating committees will be the members of the present corresponding CME, IMM and IOM nominating committees of Existing CME. Differences in Ownership Rights The demutualization will cause changes in your ownership rights. Some of these differences arise from differences that exist between the corporate law governing Illinois not-for-profit corporations and Delaware stock corporations. The remainder of the differences result from changes that we have made in drafting the charter and by-laws for New CME. These differences are described in the following table: [Enlarge/Download Table] New CME Existing CME ------------------------------------------ ------------------------------------------ Dividends Stockholders may receive dividend Members are not allowed to receive distributions based on current or dividends based on earnings. accumulated earnings. ------------------------------------------------------------------------------------------------------------------- Authorized Capital Charter authorizes issuance of up to (i) Charter and by-laws authorize the 100,000,000 shares of Class A common issuance of (i) 625 CME memberships, stock, (ii) 5,332 shares of Class B (ii) 813 IMM memberships, (iii) 1,287 common stock in five series and (iii) IOM memberships and (iv) 467 GEM 10,000,000 shares of preferred stock. memberships. ------------------------------------------------------------------------------------------------------------------- Transfer Restrictions Class B share transfers will be subject Membership transfer subject to compliance to compliance with rules, which will be with rules, which require purchasers of essentially identical to the process membership interests to apply for applicable to the transfer of membership membership. Applicants must be adults of interests in Existing CME. good moral character, reputation and business integrity and have adequate Class A share transfers will be subject financial resources and credit. to restrictions during the first 15 months following the demutualization. See "Transfer Restrictions" under "Description of Capital Stock of New CME." ------------------------------------------------------------------------------------------------------------------- Voting: Directors Holders of Class B shares will have the Members have the right to elect an right to elect an aggregate of 6 aggregate of 25 directors as follows: directors as follows: Associated Membership Number of Membership Number of Division Directors Series Division Directors ------------------------------------------ ------ ---------- ------------- CME 12 B-1 CME 3 IMM 8 B-2 IMM 2 IOM 4 B-3 IOM 1 GEM 1 Class B stockholders in each series Members in a division have the right to entitled to elect a director will have elect individuals to a nominating the right to elect individuals to a committee, which slates candidates for nominating committee, which slates election by members of that division. candidates for election by stockholders of that series. 24
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[Enlarge/Download Table] ------------------------------------------ ------------------------------------------ New CME Existing CME ------------------------------------------ ------------------------------------------ The Chairman is empowered to appoint up Holders of Class A and B shares will have to 12 directors, who must be approved by the right to vote in the election of the the Board. remaining 13 directors, who will be nominated by the Nominating Committee of the board of New CME. ------------------------------------------------------------------------------------------------------------------- Rule Changes Charter and by-laws do not pick-up the Members have the right, in what is called "referendum" process. Class B a "referendum," to initiate rule changes, stockholders will be given the right including adopting new rules and amending under the charter to approve changes to or repealing existing rules of the (i) products permitted to be traded by Exchange. If the board does not approve each series, (ii) floor access rights and a member-initiated proposal, members have privileges, including commitment to the right, in essence, to override that maintain open outcry trading, (iii) the action by vote - provided at least authorized and issued shares of each one-half of the votes eligible to be cast series and (iv) eligibility to hold on the matter are cast and it is approved shares of a series. See "Description of by a majority of the votes cast. Additional Provisions of Class B Common Weighted voting by membership division is Stock" under "Description of Capital required on matters related to voting, Stock of New CME." Voting will be on a board or executive committee weighted basis, with series B-1 holders representation, trading rights, rights (CME) having 6 votes per share, series upon dissolution or any other issue for B-2 holders (IMM) having 2 votes per which the board determines weighted share, series B-3 holders (IOM) having 1 voting to be appropriate. Under weighted vote per share, series B-4 holders (GEM) voting, CME members have 6 votes per having 1/6th vote per share, and series membership, IMM members have 2 votes per B-5 holders (GEM fractions) having 1/60th membership, IOM members have 1 vote per vote per share. membership, GEM members have 1/6th vote per membership, and holders of GEM fractions have 1/60th vote per faction. ------------------------------------------------------------------------------------------------------------------- Extraordinary Approval of a majority of the outstanding Approval of two-thirds of votes present Transactions shares will be required to authorize and voting is required to authorize charter amendments, mergers, sales of all charter amendments, mergers, sales of all of the corporate assets or a dissolution. of the corporate assets or a dissolution. ------------------------------------------------------------------------------------------------------------------- Class/Series Holders of a class or series of stock No comparable statutory provision. Voting will have the right by statute to vote as a separate class or series on charter amendments that would adversely affect their rights granted by the charter. ------------------------------------------------------------------------------------------------------------------- Dissenters' Rights In transactions involving a merger or No dissenters' rights. sale of all of the assets, stockholders will have the right to dissent and, by following a statutory procedure, receive a cash payment equal to the appraised fair value of their shares. ------------------------------------------------------------------------------------------------------------------- Liquidation Rights Liquidating distributions will be made to Liquidating distributions are based on stockholders based on the number of Class aggregate amounts originally paid-in for A shares they hold or are considered to memberships. hold. The charter treats each series of Class B shares as ------------------------------------------------------------------------------------------------------------------- 25
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[Enlarge/Download Table] ------------------------------------------ ------------------------------------------ New CME Existing CME ------------------------------------------ ------------------------------------------ representing a specified number of Class A shares. See "Description of Common Stock" under "Description of Capital Stock of New CME." ------------------------------------------------------------------------------------------------------------------- Board of Directors 19 members (after December 2001). 39 members. ------------------------------------------------------------------------------------------------------------------- Ability to Limit Personal Allowed. Charter will contain provision Not allowed. Liability of Directors adopting the maximum permitted limitation. ------------------------------------------------------------------------------------------------------------------- Antitakeover Provisions Charter will contain antitakeover None provisions. See "Other Charter Provisions" under "Description of Capital Stock of New CME." ------------------------------------------------------------------------------------- Required Regulatory Approvals Many of the terms of the demutualization transaction relating to Board composition and elections, membership privileges and voting rights, and trading rights and access, will either require new rules or amendments to existing rules, or will be required to comply with provisions of the Commodity Exchange Act or the regulations issued by the CFTC. We intend to make any necessary submissions to the CFTC following member approval of the demutualization proposal. In addition, the registration statement that New CME filed with the SEC, which contains this document, must be declared effective by the SEC. Amendment or Termination Our board may amend any of the terms of the first step merger agreement at any time before or after its approval by our members, but not after the time that the merger of the Exchange into CME Transitory Co. has been effected. No amendment may, in the sole judgment of the board, materially and adversely affect the rights of our members. The second step merger agreement may be similarly amended. The merger agreements may be terminated, and the demutualization transaction abandoned, at any time before or after our members have approved the demutualization transaction, by action of our board if it determines that consummation of the transactions provided for in the merger agreements would, for any reason, be inadvisable or not in the best interests of the Exchange or its members. However, the board may not terminate the second step merger agreement between CME Transitory Co. and New CME unless the first step merger agreement between the Exchange and CME Transitory Co. is also terminated. Conditions to Effectiveness of the Demutualization Transactions Consummation of the first step merger of Existing CME into CME Transitory Co. is subject to the following conditions: . Approval of the demutualization transaction by our members 26
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The first step merger must be approved by our members by the affirmative vote of at least two-thirds of the votes present and voted, either in person or by proxy. . The Class A limited partners in P-M-T Limited Partnership shall have approved the sale of all of the assets and business of that partnership to New CME An offer by New CME to purchase all of the assets and business of P-M-T Limited Partnership for cash shall have been approved by the holders of two-thirds of the 4,786 outstanding P-M-T Class A limited partnership units, excluding the 321 units held by the Exchange. The purchase will be consummated concurrently with the consummation of the demutualization transaction. . Receipt of a favorable ruling from the Internal Revenue Service We have asked the Internal Revenue Service to confirm that our proposed demutualization transaction will not cause our members to recognize a gain or loss upon the conversion of their membership interests into Class A and Class B shares. The ruling request was filed December 30, 1999. We do not expect to receive that ruling until several months after the special meeting. . Receipt of regulatory approvals We will need to receive the approval of the CFTC to rule changes that we need to make to recognize the change in our structure that will occur as a part of the demutualization. These changes relate to the fact that our existing rules will be reflected in New CME's charter, by-laws and rules and that membership interests will be represented by shares of stock. Effectiveness of the Demutualization Transactions After the conditions described above have been satisfied, we will cause the necessary documents to be filed with the Secretaries of State of Illinois and Delaware in order to effect the first step merger of the Exchange into CME Transitory Co., whereupon it will become effective. Promptly following that effectiveness, we will cause the necessary documents to be filed with the Delaware Secretary of State in order to cause the merger of CME Transitory Co. into New CME. Upon the effectiveness of that filing, the demutualization will have been effected and members will become stockholders of New CME. Federal Income Tax Consequences One of the conditions to the closing of the demutualization transaction is our receipt of a private letter ruling from the Internal Revenue Service generally to the effect that, for federal income tax purposes, no gain or loss will be recognized by a member on the exchange of his or her membership interest in the Exchange for Class A common stock and Class B common stock or for Class B common stock only. Assuming this nonrecognition treatment, the members would have the following additional federal income tax consequences: 27
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. The aggregate basis of the shares of New CME received by a member in exchange for a membership interest will equal the basis of the membership interest. In the case of a member who receives both Class A common stock and Class B common stock, that basis will be allocated in proportion to the fair market value of each on the date of the mergers. . The holding period of the Class A common stock and Class B common stock received by a member in exchange for a membership interest will include the period for which the membership interest has been held, provided that the membership interest is held as a capital asset on the date of the exchange. No gain or loss will be recognized by the Exchange as a result of the transfer of its assets to New CME and the assumption by New CME of the liabilities of the Exchange. We filed a request for the foregoing ruling with the Internal Revenue Service on December 30, 1999. Because of the novelty of the demutualization transactions, it is unclear at this time whether the Internal Revenue Service will issue a favorable ruling or, if the Internal Revenue Service is willing to issue a ruling, when the ruling will be received. Any such ruling would generally be binding on the Internal Revenue Service. Although an Internal Revenue Service ruling can be revoked or modified retroactively under some extraordinary circumstances, we are not aware of any such circumstances that would cause the Internal Revenue Service to revoke or modify any such ruling with respect to the demutualization transactions. Because of the complexity of the tax laws, and because the tax consequences of the demutualization to you may be affected by matters not discussed herein, you are urged to consult your own tax advisor with respect to your own particular circumstances and with respect to the specific tax consequences of the demutualization to you, including the applicability and effect of state, local and foreign tax laws and any proposed changes in applicable tax laws. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma condensed consolidated financial statements give effect to (i) the proposed acquisition of the limited partners' interest in P-M-T Limited Partnership and (ii) the issuance of 25,855,200 shares of Class A common stock and 5,118 shares of Class B common stock in connection with the proposed demutualization and conversion of membership interests as described elsewhere in this document as if they had occurred as of December 31, 1999, for purposes of the unaudited pro forma consolidated balance sheet, and as of the beginning of the year for purposes of the unaudited pro forma consolidated statement of income for the year ended December 31, 1999. The unaudited pro forma information reflects the acquisition of the limited partners' interest in P-M-T Limited Partnership through a cash payment equal to the carrying value of the limited partners' interest, which amounted to $3,018,000 at December 31, 1999. This acquisition will be effected through the purchase of the assets and business of P-M-T Limited Partnership at fair market value on the date of the transaction. Because the purchase price, market value and 28
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carrying value are approximately the same, there will be no goodwill or other purchase accounting adjustments resulting from this transaction. P-M-T Limited Partnership, for which the Exchange has acted as the sole general partner since its inception, will be liquidated, with proceeds distributed to its partners, after the proposed transaction has been completed. As of December 31, 1999, there were 4,786 Class A limited partnership units and 90 Class B limited partnership units outstanding in P-M-T. As of that date, the Exchange held 321 Class A units and 34 Class B units, representing 6.7% and 37.7%, respectively, of the outstanding units of those classes. The unaudited pro forma information also reflects the issuance of 25,855,200 Class A shares and 5,118 Class B shares in exchange for previously existing membership interests. No cash will be paid or received. The Class B shares are considered the equivalent of 2,919,500 Class A shares for purposes of calculating pro forma earnings per share. The unaudited pro forma condensed consolidated financial statements are based on available information and on assumptions management believes are reasonable and that reflect the effects of the transactions described above. These unaudited pro forma condensed consolidated financial statements are provided for informational purposes only and should not be construed to be indicative of the Exchange's consolidated financial position or results of operations had these transactions been consummated on the dates assumed and do not in any way represent a projection or forecast of the Exchange's consolidated financial position or results of operations for any future date or period. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Exchange, together with the related notes and report of independent public accountants, and with the information set forth under "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Business." 29
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CHICAGO MERCANTILE EXCHANGE Unaudited Pro Forma Condensed Consolidated Balance Sheet December 31, 1999 [Enlarge/Download Table] Pro Forma After -------------------------- Acquisition Issuance of of Interest Class A and Historical in P-M-T B Shares ---------- ----------- ----------- (dollars in thousands) Assets Current assets: Cash and cash equivalents $ 14,249 $ 11,231 $ 11,231 Investments 60,156 60,156 60,156 Accounts receivable and prepaid expenses 29,189 29,189 29,189 Cash performance bonds and security deposits 73,134 73,134 73,134 -------- -------- -------- Total current assets 176,728 173,710 173,710 Property, net of accumulated depreciation and amortization 93,531 93,531 93,531 Other assets 31,444 31,444 31,444 -------- -------- -------- Total Assets $301,703 $298,685 $298,685 ======== ======== ======== Liabilities and Equity Current liabilities: Accounts payable $ 15,569 $ 15,569 $ 15,569 Other current liabilities 21,250 21,250 21,250 Cash performance bonds and security deposits 73,134 73,134 73,134 -------- -------- -------- Total current liabilities 109,953 109,953 109,953 Limited Partners' interest in P-M-T Limited Partnership 3,018 - - Other liabilities 20,069 20,069 20,069 -------- -------- -------- Total liabilities 133,040 130,022 130,022 Members' and Stockholders' equity: Preferred stock, $.01 par value, - 10,000,000 shares authorized, none issued and outstanding Class A common stock, $.01 par value, 100,000,000 shares authorized, 25,855,200 shares issued and outstanding 259 Class B common stock, $.01 par value, 5,332 shares authorized, 5,118 shares issued and outstanding - Additional paid-in capital 43,346 Retained earnings 125,421 125,421 125,421 Proceeds from issuance of memberships 43,605 43,605 - Accumulated unrealized losses on securities (363) (363) (363) -------- -------- Total members' equity $168,663 $168,663 - -------- -------- -------- Total stockholders' equity $168,663 -------- Total Liabilities and Equity $301,703 $298,605 $298,605 ======== ======== ======== The accompanying introduction is an integral part of this Unaudited Pro Forma Condensed Consolidated Balance Sheet. CHICAGO MERCANTILE EXCHANGE 30
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Unaudited Pro Forma Condensed Statement of Operations For the Year Ended December 31, 1999 [Enlarge/Download Table] Pro Forma After ----------------------------- Acquisition Issuance of of Interest Class A and Historical in P-M-T B Shares ---------- ----------- ----------- (amounts in thousands, except per share amount) Revenues: Clearing fees $138,526 $138,526 $138,526 Quotation data fees 43,005 43,005 43,005 Communication fees 8,165 8,165 8,165 Investment income 9,091 9,038 9,038 Other operating revenue 9,701 9,701 9,701 -------- -------- -------- Total revenues 208,488 208,435 208,435 -------- -------- -------- Expenses: Salaries and benefits 80,957 80,957 80,957 Occupancy 17,773 17,773 17,773 Professional fees, outside services and licenses 28,319 28,319 28,319 Communications and computer and software maintenance 28,443 28,443 28,443 Depreciation and amortization 25,274 25,274 25,274 Public relations and promotion 7,702 7,702 7,702 Other operating expense 13,376 13,376 13,376 -------- -------- -------- Total expenses 201,844 201,844 201,844 -------- -------- -------- Income before limited partners' interest in P-M-T and provision for income taxes 6,644 6,591 6,591 Limited partners' interest in earnings of P-M-T (2,126) -- -- Provision for income taxes (1,855) (2,684) (2,684) -------- -------- -------- Net income $ 2,663 $ 3,907 $ 3,907 ======== ======== ======== Net income per share $ 0.14 ======== Shares used in the calculation of net income per share 28,775 ======== The accompanying introduction is an integral part of this Unaudited Pro Forma Condensed Consolidated Statement of Operations. 31
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CAPITALIZATION The following table sets forth the capitalization of the Exchange as of December 31, 1999 (i) on an historical basis, (ii) on a pro forma basis giving effect to the proposed acquisition of the limited partners' interest in P-M-T Limited Partnership, and (iii) on a pro forma basis as adjusted to give effect to the issuance by New CME of 25,855,200 Class A shares and 5,118 Class B shares in connection with the demutualization transactions. The table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements and related notes of the Exchange included elsewhere in this document and "Unaudited Pro Forma Condensed Consolidated Financial Statements." [Enlarge/Download Table] As of December 31, 1999 --------------------------------------------------- Pro Forma After -------------------------------- Acquisition Issuance of of Interest in Class A and Historical P-M-T B Shares ---------- -------------- ----------- (in thousands) Limited partners' interest in P-M-T $ 3,018 $ -- $ -- Capitalized lease obligations 8,132 8,132 8,132 Other long-term debt -- -- -- -------- -------- -------- Total limited partners' interest and long-term debt 11,150 8,132 8,132 -------- -------- -------- Equity: Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued and outstanding -- Class A common stock, $.01 par value, 100,000,000 shares authorized, 25,855,200 shares issued and outstanding 259 Class B common stock, $.01 par value, 5,332 shares authorized, 5,118 shares issued and outstanding -- Additional paid-in capital 43,346 Retained earnings 125,421 125,421 125,421 Proceeds from issuance of memberships 43,605 43,605 -- Accumulated unrealized losses on securities (363) (363) (363) -------- -------- Total members' equity 168,663 168,663 -- -------- -------- -------- Total stockholders' equity 168,663 -------- Total Capitalization $179,813 $176,795 $176,795 ======== ======== ======== 32
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DESCRIPTION OF CAPITAL STOCK OF NEW CME The authorized capital stock of New CME will consist of 100,000,000 shares of Class A common stock, $.01 par value, 5,332 shares of Class B common stock, $.01 par value and 10,000,000 shares of preferred stock, $.01 par value. The shares of Class A common stock and Class B common stock issued in connection with the demutualization will be fully paid and non-assessable. Description of Common Stock Dividend Rights. Dividends on shares of common stock may be paid only if holders of Class A and B shares receive dividends. If, and when, the board declares any dividends on the outstanding shares of common stock, it is expected that an amount per Class A share will be declared and paid. A holder of a Class B share will be entitled to receive an amount equal to that amount per Class A share multiplied by the number of shares of Class A stock which the holder's Class B share represents, as shown in the table under "Description of Additional Provisions of Class B Common Stock" below. For example, if a dividend of $.25 per Class A share is declared, a holder of a Series B-2 share, which represents 1,200 Class A shares, would be entitled to receive $300. Voting. Holders of Class A and B shares will have the right to vote in the election of 13 directors to New CME's 19-member board of directors. See "Election of Directors" under Demutualization Proposal" above for additional information. Holders of common stock do not have the right to cumulate votes in the election of directors. Under cumulative voting, a holder would have a number of votes equal to the votes to which his or her shares are entitled, multiplied by the number of directors to be elected, and may cast those votes for a single nominee or allocate them among several nominees. The nominees receiving the greatest number of votes would, under cumulative voting, be elected to fill the available positions. A New CME common stockholder may not allocate his or her aggregate votes among candidates but may vote only all or none. The nominees receiving a plurality of the votes cast at a meeting at which a quorum is present shall be elected to the board. With the exception of the matters discussed below under "Description of Additional Provisions of Class B Common Stock," holders of common stock will vote together on all matters for which a vote of common stockholders is required. In these votes, a holder of Class A shares has one vote per share and a holder of Class B shares has a number of votes equal to the number of Class A shares represented by his or her share. No Conversion, Preemptive or Subscription Rights. Holders of common stock have no conversion, preemptive or subscription rights. Liquidation Rights. Upon liquidation of New CME and subject to the rights of any outstanding series of preferred stock, holders of common stock are entitled to receive a distribution of the remaining assets. The amount to be distributed per Class A share will be determined by dividing the aggregate amount available for distribution to common stockholders by the total of the number of outstanding Class A shares plus the number of Class A shares represented by the outstanding Class B shares. The amount to be distributed per Class B share will be determined by multiplying the amount to be distributed per Class A share by the number 33
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of Class A shares represented by that Class B share. Class A Equivalence of Class B Shares. Each Class B share represents a specified number of Class A shares for purposes of determining its rights to vote for directors to be elected by both the Class A and Class B stockholders, to vote on matters submitted to a vote by both the Class A and Class B stockholders, to receive dividends or to receive liquidating distributions. These numbers, which are shown in the table below under "Description of Additional Provisions of Class B Common Stock," are set forth in the charter. The charter provides for an adjustment of these numbers in the event of a stock split or stock dividend affecting the number of outstanding Class A shares. For example, a 2 - for - 1 split of the outstanding Class A shares, which would have the effect of doubling the number of outstanding Class A shares, would cause a doubling of the number of Class A shares represented by each series of Class B shares. In addition, an adjustment is provided if New CME issues shares of Class A common stock (including options and rights for, and securities convertible into, shares of Class A common stock) at a price below their fair market value at the time of issuance or grant. No adjustment is provided in respect of specified issuances or grants, such as the issuance of shares of Class A common stock upon any conversion of the series B-5 shares, any dividend on the Class B shares payable in shares of Class A common stock, or shares issuable to employees, officers, directors or consultants to New CME. Description of Additional Provisions of Class B Common Stock The authorized shares of Class B common stock will be divided into five series, having the following characteristics: [Enlarge/Download Table] Equivalent Class Number of Votes Per A Shares Maximum Number Number of Directors Share on "Core Represented by Series of Shares Trading Privileges Series Can Elect Rights" Class B Shares ------------------------------------------------------------------------------------------------------------------- B-1 625 CME 3 6 1,800 B-2 813 IMM 2 2 1,200 B-3 1,287 IOM 1 1 600 B-4 467 GEM 0 1/6 100 B-5 2,140 GEM Fractions 0 1/60 10 Trading Privileges. Each series of Class B shares will have the trading privileges currently encompassed in the existing membership interest associated with that series. New CME's rules will provide as follows: . Floor Access. A holder of a series of Class B shares who meets New CME's membership and eligibility criteria will be entitled to appear upon the floor of New CME and to act as a floor broker and/or trader for the contracts assigned to that series. The current product allocation rules applicable to a particular membership division will be associated with the corresponding series of Class B shares. . Electronic Trading Rights. A holder of a series of Class B shares who meets New CME's membership and eligibility criteria will have the right to trade electronically through the GLOBEX2 system. This right is restricted, when accessing GLOBEX2 34
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terminals from the trading floors, to trading only contracts assigned to that series. Otherwise, the holder may trade any product listed on the GLOBEX2 system. . Use and Leasing of Trading Privileges. The trading privileges associated with a Class B share may be used by the owner of the Class B share or may be leased out to another person who satisfies the membership and eligibility requirements imposed by New CME. These requirements are expected to be substantially the same as the requirements set forth in our current rules. . Clearing fees. New CME will continue to differentiate fees on cleared trades based on the trader for whom the trades are being cleared. In recognition of the importance of the liquidity provided by holders of Class B shares, New CME will continue to charge a lower clearing fee on Exchange products for trades made for their own accounts by a holder of a Class B share or by a lessee of the trading privileges of a Class B share. New CME will not charge a higher clearing fee for any trade executed in the open outcry environment than charged for the execution of the same trade in another trading environment. New CME's management may lower clearing fees or provide other incentives with respect to trades of other persons, including persons considered to be especially important as providers of market liquidity. . Clearing Memberships. The right to be a clearing member will require an ownership interest in New CME equivalent to the requirements under our current rules. In addition, New CME's charter sets forth a commitment to maintain open outcry floor trading for a particular traded product as long as the open outcry market is "liquid." The commitment requires New CME to maintain a facility for conducting business, for disseminating price information, and for clearing and delivery, and to provide reasonable financial support (consistent with 1999 budget levels) for technology, marketing and research for open outcry markets. An open outcry market will be deemed liquid for these purposes if it meets any of the following tests on a quarterly basis: . if a comparable exchange-traded product exists, the New CME open outcry market has maintained at least 30 percent of the average daily volume of the comparable product (including, for calculation purposes, volume from Exchange-For-Physicals transactions in the open outcry market); or . if a comparable exchange-traded product exists and New CME's product trades exclusively by open outcry, New CME's open outcry market has maintained at least 30 percent of the open interest of the comparable product; or . if no comparable exchange-traded product exists, New CME's open outcry market has maintained at least 40 percent of the average quarterly volume in that market in 1999 (including, for calculation purposes, volume from Exchange-For-Physicals transactions in the open outcry market); or . if no comparable exchange-traded product exists and New CME's product trades exclusively by open outcry, New CME's open outcry market has maintained at least 40 percent of the average open interest in that market in 1999. 35
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If a market is deemed illiquid as a result of a failure to meet any of the foregoing tests, management of New CME will make commercial decisions consistent with the best interests of the stockholders. Voting for Directors. Holders of series B-1, B-2 and B-3 shares will have the right to elect the number of directors set forth in the table on page 34. See "Election of Directors" under "Demutualization Proposal" for additional information regarding the size of the board and the process for selecting and electing candidates to the board. Voting on Core Rights. Holders of Class B shares will have the right to approve changes to specified "rights" associated with the trading privileges conferred by those shares. These "Core Rights" consist of: . the allocation of products which a holder of a series of Class B shares is permitted to trade on New CME's exchange facilities; . the trading floor access rights and privileges which a holder of a series of Class B shares has, including the circumstances under which New CME can determine that an existing open outcry-traded product will no longer be traded by means of open outcry; . the number of authorized and issued shares of any series of Class B shares (other than the issuance of series B-4 shares upon the conversion of series B-5 shares); and . the eligibility requirements to hold shares of a series of Class B shares or to exercise the associated trading rights or privileges. As indicated in the table, votes on changes to Core Rights are weighted by series. The approval of a majority of the votes cast by the holders of Class B shares is required in order to approve any changes to Core Rights. Holders of Class A shares do not have the right to vote on changes to Core Rights. Under Delaware law, changes to the number of authorized shares of a series also will require the approval of the holders of a majority of the outstanding shares of that series. Otherwise, changes may be effected upon the approval of a majority of the votes cast by the holders of Class B shares. Due to the weighted voting, this statement means that a change to Core Rights may be effected by the approval of the holders of the series B-1 shares even though the holders of the other series voted against the change. This result is consistent with the result that would be obtained under the Exchange's existing rules and procedures. Shares Not Convertible in Class A Shares. Class B shares are not convertible into Class A shares except to the limited extent otherwise provided with respect to series B-5 shares. Conversion Rights of Series B-5 Shares. Series B-5 shares will be convertible at the option of their holder, at any time on or before November 3, 2000, into whole shares of series B-4 stock at the ratio of ten series B-5 shares for each series B-4 share. These shares also are subject to mandatory conversion into Class A shares at the close of business on November 3, 2000, if not previously converted into whole shares of series B-4 stock. In any mandatory conversion, one series B-5 share is converted into ten Class A shares. 36
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Preferred Stock New CME will be authorized to issue up to 10,000,000 shares of preferred stock. The charter authorizes the board to issue these shares in one or more series, to establish from time to time the number of shares to be included in each series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and any of its qualifications, limitations or restrictions. The board may increase or decrease the number of shares of any series, but not below the number of shares of that series then outstanding, without any further vote or action by the stockholders of New CME. The board may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of Class A shares and Class B shares. We have no current plans to issue any shares of preferred stock. Transfer Restrictions Class B and Class A shares will be subject to transfer restrictions following the completion of the demutualization transaction. Class B shares will be subject to the same transfer process as applies to your current membership interest. Under that process, any adult of good moral character, reputation and business integrity, with adequate financial resources and credit to assume the responsibilities and privileges of membership, is eligible for election to membership in the Exchange. Our Membership Committee reviews applicants and conducts proceedings to determine whether candidates meet our membership criteria. Consistent with our present practice, a purchaser of Class B shares will be required to agree to be bound by the rules and regulations adopted by the board with respect to the shares. Class A shares will be subject to transfer restrictions, which will fall away over time. For the first six months following completion of the demutualization transaction, those shares may only be transferred with the associated Class B shares. Each three months thereafter, a portion of the Class A shares (in 25% increments) will become transferable. After fifteen months, the Class A shares would not be subject to these transfer restrictions. Other Charter Provisions New CME's charter and by-laws will, upon consummation of the demutualization transactions, include a number of antitakeover provisions that may have the effect of encouraging persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with New CME's board of directors rather than pursue non-negotiated takeover attempts. These provisions include: Classified Board of Directors; Removal for Cause; Filling Vacancies. New CME's charter will provide for a board of directors divided into two classes, with one class to be elected each year to serve for a two-year term. The terms of the initial classes of directors will terminate on the date of the annual meetings of stockholders in December 2000 and 2001. As a result, at least two annual meetings of stockholders may be required for the stockholders to change a majority of the board. Directors elected by Class A and Class B stockholders may be removed for cause only by the affirmative vote of the holders of not less than two-thirds of the outstanding votes entitled to vote in the election. Vacancies resulting from that removal or any other reason shall be filled by the board. Directors elected by the Class B stockholders may be removed for 37
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cause only by the affirmative vote of the holders of two-thirds of the shares entitled to vote in the election of the director to be removed. Vacancies resulting from that removal or any other reason shall be filled by the board of directors from the candidates who ran in the previous election for the directorship and received the next highest number of votes for election. The classification of directors and the inability of stockholders to remove directors without cause and to fill vacancies on the board will make it more difficult to change the composition of the board, but will promote a continuity of existing management. Advance Notice Requirements. New CME's by-laws will establish advance notice procedures with regard to stockholder proposals relating to the nomination of candidates for election as directors or new business to be brought before meetings of stockholders. These procedures provide that notice of stockholder proposals must be timely given in writing to the Secretary of New CME prior to the meeting at which the action is to be taken. Generally, to be timely, notice must be received at the principal executive offices of New CME not less than 90 days nor more than 120 days prior to the first anniversary date of the annual meeting for the preceding year. The notice must contain the information required by the by-laws, including information regarding the proposal and the proponent. Special Meetings of Stockholders. The charter and by-laws deny stockholders the right to call a special meeting of stockholders. The charter and by-laws provide that special meetings of the stockholders may be called only by the Chairman of the Board or by a majority of the board of directors. No Written Consent of Stockholders. The charter requires all stockholder actions to be taken by a vote of the stockholders at an annual or special meeting, and does not permit the stockholders to act by written consent, without a meeting. Amendment of By-Laws and Charter. The charter generally requires the approval of not less than two-thirds of the voting power of all outstanding shares of capital stock entitled to vote to amend any by-laws by stockholder action or the charter provisions described in this section. Provisions in the by-laws regarding the trading rights and privileges available to the Class B stockholders may only be amended with the approval of the Class B stockholders as described above under the subheading "Description of Additional Provisions of Class B Common Stock." Those provisions will make it more difficult to dilute the antitakeover effects of our by-laws and our charter. Stockholder Rights Provisions. The charter authorizes the board of directors to create and issue rights entitling their holders to purchase shares of New CME's stock or other securities. Those rights might be used to affect the ability of a third party to initiate a transaction designed to takeover New CME. The board is considering the adoption of a plan that would create these rights. These plans typically provide for dividend distributions of rights to holders of common stock that is, or subsequently becomes, outstanding. The rights entitle their holders to purchase a specified fraction of a newly-issued share of a series of stock (typically preferred stock) at a specified exercise price. The rights become exercisable, and transferable apart from the common stock, upon the earlier to occur of (i) the date that a person or group (an "Acquiring Person") acquires beneficial ownership of at least a specified percentage (possibly 15%) of New CME's common stock or (ii) the commencement of, or announcement of an intent to begin, a tender offer or exchange offer for a similar specified percentage of New CME's common stock. If a person becomes an Acquiring Person and the rights are not redeemed, each right would entitle its 38
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holder to receive, upon payment of the exercise price, that number of shares of common stock of the issuing entity which have a market value typically equal to twice the exercise price. If the issuer of the rights is acquired by an Acquiring Person in a merger or other business combination, or fifty percent or more of its assets or earning power are transferred to a third party, each right would entitle its holder to receive, upon payment of the exercise price, common stock of the Acquiring Person or third party with a market value equal to twice the exercise price. The rights are typically redeemable by the issuing company at a nominal price at any time, but not after a specified limited period following the existence of an Acquiring Person. The potential economic dilution inherent in the rights is intended to cause potential acquirers to approach and negotiate with the board so that, assuming a satisfactory transaction is negotiated, the rights will be redeemed. The rights would have an expiration date. The actual terms of any rights plan adopted by the board may vary from the foregoing description and would be forwarded to stockholders following any plan adoption. To the extent that the adoption of a rights plan would make more difficult or discourage a proposed takeover of New CME, its adoption would increase the likelihood that the then incumbent directors and management of New CME would retain their positions. However, a rights plan, in combination with the existing provisions of New CME's charter, should provide meaningful assurance that the board, if confronted by a surprise proposal from a third party, will have sufficient time to review the proposal, as well as appropriate alternatives to it, and thereby will be in a more favorable position to protect the best interest of New CME and its stockholders. A rights plan is intended to encourage persons seeking to acquire control of the Company to engage in arms-length negotiations with the board and New CME's management. However, a rights plan, if adopted, might also have the effect of discouraging a person from making a tender offer (even at a premium over the then prevailing market price) for shares of New CME's common stock or otherwise attempting to obtain control, even though an attempt could be beneficial to New CME and its stockholders. Transfer Agent New CME will serve as transfer agent for Class B shares. New CME expects to select a third party to serve as transfer agent and registrar for the Class A shares. MANAGEMENT Directors and Executive Officers The Exchange's Board of Directors currently consists of thirty-nine persons. There is presently one vacancy. With the exceptions of Leo Melamed and James J. McNulty, directors serve two-year terms, which are staggered so approximately one-half of the board is elected at each annual meeting. Mr. Melamed, who is our Chairman Emeritus and Senior Policy Advisor, serves as a permanent, non-voting member of the Exchange's board. Mr. McNulty, who is our President and Chief Executive Officer, serves as a non-voting member of our board under the Exchange's rules. The Exchange's directors are elected in one of two ways. Twenty-five directors are elected by the members as follows: 12 directors are elected by the CME members from 39
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candidates nominated by the CME Nominating Committee; 8 directors are elected by the IMM members from candidates nominated by the IMM Nominating Committee; 4 directors are elected by the IOM members from candidates nominated by the IOM Nominating Committee; and one member is elected by the GEM members from candidates nominated by the GEM Nominating Committee. The members of these nominating committees are elected by the respective CME, IMM, IOM and GEM members. Twelve directors are elected by the members of the board who were elected by the Exchange's members, from persons appointed by the Chairman of the Board. As noted, Messrs. Melamed and McNulty round-out the remaining members of the board. Following the effectiveness of the demutualization transactions, our Board will consist of the same people who were directors immediately before the demutualization. At the annual meeting of stockholders in 2000, the size of our board will be reduced by nine members; and at the annual meeting in 2001, the size of our board will be further reduced by eleven members. Thereafter, the size of the board will be nineteen. See "Election of Directors" under "Demutualization Proposal" for more information. Set forth below is information about our current board of directors and executive officers. [Enlarge/Download Table] Name Age Positions Held Term Ends ---- --- -------------- --------- Scott Gordon 47 Chairman of the Board and Director 12/01 Terrence A. Duffy 41 Vice Chairman of the Board and Director 12/00 James E. Oliff 51 Second Vice Chairman of the Board and Director 12/00 Martin J. Gepsman 47 Secretary of the Board and Director 12/01 Thomas A. Kloet 41 Treasurer and Director 12/01 Leo Melamed 67 Chairman Emeritus, Senior Policy Advisor and Non-Voting * Member of the Board John F. Sandner 58 Special Policy Advisor and Director 12/00 James J. McNulty 48 President and Chief Executive Officer and Non-Voting Member ** of the Board H. Jack Bouroudjian 38 Director 12/01 Timothy R. Brennan 58 Director 12/01 Leslie Henner Burns 44 Director 12/01 Jeffrey R. Carter 37 Director 12/00 E. Gerald Corrigan 58 Director *** Rahm Emanuel 40 Director 12/00 Yra G. Harris 46 Director 12/00 Robert L. Haworth 52 Director 12/00 Bruce F. Johnson 57 Director 12/01 ------------------------------ * Mr. Melamed currently serves as a non-voting member of the board. Mr. Melamed will continue as a non-voting member of the board of New CME until the annual meeting in December 2001. ** Mr. McNulty is a non-voting member of the board as long as he is President and Chief Executive Officer of the Exchange. Mr. McNulty will continue as a non-voting member of the board of New CME until the annual meeting in December 2001. *** A director appointed by the Chairman of the Board. Each of the indicated persons was appointed for a term ending on the later of December 1999 or the date on which his successor is appointed by the Chairman of the Board and elected to office by the board. 40
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[Enlarge/Download Table] Name Age Positions Held Term Ends ---- --- -------------- --------- Gary M. Katler 53 Director 12/00 Paul Kimball 48 Director 12/00 John W. Lacey 61 Director *** Merton H. Miller 76 Director *** William P. Miller II 44 Director 12/00 Laurence E. Mollner 58 Director *** Patrick J. Mulchrone 42 Director 12/01 John D. Newhouse 54 Director 12/01 Ward Parkinson 54 Director *** Mark G. Papadopoulos 27 Director 12/01 Robert J. Prosi 52 Director 12/01 David M. Pryde 50 Director 12/00 Irwin Rosen 61 Director 12/00 William G. Salatich, Jr. 48 Director 12/00 Verne O. Sedlacek 45 Director 12/00 Leon C. Shender 45 Director 12/00 William R. Shepard 53 Director 12/00 Howard J. Siegel 43 Director 12/01 Paul Simon 71 Director 12/00 David I. Silverman 40 Director 12/00 Jeffrey L. Silverman 53 Director 12/01 Gerald D. Beyer 52 Executive Vice President and Chief Operating Officer Craig S. Donohue 38 Senior Vice President and General Counsel Phupinder Gill 39 President, Clearing House Division David G. Gomach 41 Senior Vice President and Chief Financial Officer William W. Jenks 47 Executive Vice President, Management Information Systems Donald D. Serpico 54 Executive Vice President, Operations Carol B. Sexton 60 Executive Vice President, Corporate Relations Scott Gordon has been Chairman of our board since 1988 and an IMM director since 1982. He also served as Vice Chairman from 1995 to 1997 and our Secretary in from 1984-85 and 1999-94. Mr. Gordon has been President and Chief Operating Officer of Tokyo-Mitsubishi Futures (USA), Inc., a CME clearing member firm wholly owned by the Bank of Tokyo-Mitsubishi, Ltd., since 1999, having previously served as its Executive Vice President and Director. Mr. Gordon also serves on the CFTC's Global Markets Advisory Committee and the Advisory Committee to the Illinois Institute of Technology Center for the Study of Law and Financial Markets. He is a director of the National Futures Association and of the Futures Industry Institute. A member of the Exchange for more than twenty-two years, Mr. Gordon has one IMM membership in a trust. 41
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Terrence A. Duffy has been Vice Chairman of our board since 1998 and a CME Director since 1995. He has been President of TDA Trading, Inc. for the past five years and an independent floor broker and trader since 1981. A member of the Exchange for more than seventeen years, Mr. Duffy owns one CME membership and one GEM membership interest. James E. Oliff has been Second Vice Chairman of our board since 1998 and an IMM Director since 1996. Mr. Oliff previously served on the Board from 1985 to 1992, and as Second Vice Chairman from 1989 to 1992 and Secretary in 1996. He has been Executive Director of International Futures and Options Associates and President of FILO Corp, a floor brokerage business, since 1982, and he is a visiting lecturer in Financial Market Ethics at the Lemberg School of International Finance and Economics at Brandeis University in Waltham, Massachusetts. Mr. Oliff serves on the board of directors of Matla Group Holdings. A member of the Exchange for more than twenty-two years, Mr. Oliff owns one IMM membership interest. Martin J. Gepsman has been Secretary of our board since 1998 and an IOM Director since 1994. He has been an independent floor broker and trader since 1985 and a member of the Exchange for more than fifteen years. Mr. Gepsman owns one IOM membership and six fractional GEM membership interests. Thomas A. Kloet has been our Treasurer since 1999 and an IMM Director since January 1996. He also served as our Treasurer in 1997 and in December 1998. Mr. Kloet has been Senior Managing Director of ABN AMRO Incorporated and Senior Vice President ABN AMRO Bank, N.V. since 1997. From 1990 to 1997, he was the Chief Operating Officer, Chief Financial Officer and Corporate Secretary of Credit Agricole Futures, Inc. and was Chief Financial Officer and Secretary of Segesper Capital Markets, Inc., the parent of Credit Agricole Futures, Inc. He also serves as Director of ABN AMRO Futures (UK), Ltd. and of ABN AMRO Futures Singapore Ltd. He is a certified public accountant and a member of both the American Institute of Certified Public Accountants and the Illinois CPA Society. Mr. Kloet is also a member of the Board of Governors of Elmhurst Memorial Hospital and Trustee of the Elmhurst Memorial Health System. A member of the Exchange for more than eleven years, Mr. Kloet owns one IMM membership and has voting/investment power over one IMM membership in the name of ABN AMRO Bank, N.V. Leo Melamed is our Chairman Emeritus and Senior Policy Advisor. Mr. Melamed is currently appointed as a permanent non-voting member of the Board, but was previously elected and appointed for twenty-six years. He is a founding member of and was Chairman of the International Monetary Market, was Special Counsel to the board from 1977 until 1991, and was Special Counsel and Chairman of the Exchange's Executive Committee from 1985 until 1991. Mr. Melamed previously served as Chairman of the Exchange for four years and has been a member of the Exchange for more than forty-five years. For more than five years, he has been Chairman and CEO of Sakura Dellsher, Inc., one of our clearing member firms. Mr. Melamed owns one CME membership, one IMM membership, two IOM membership and six fractional GEM membership interests. John F. Sandner has been the Special Policy Advisor since January 1998 and a CME Director since 1977. Mr. Sandner previously served as Chairman of the Exchange for thirteen years and was appointed chairman of GLOBEX in 1993. He has been President and CEO of RB&H Financial Services L.P., a futures commission merchant and one of our clearing member 42
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firms, for more than five years. A member of the Exchange for more than twenty- seven years, Mr. Sandner owns three CME membership, two IMM membership, four IOM membership and fourteen fractional GEM membership interests. He also has voting power over two IOM membership interests. James J. McNulty became our President and Chief Executive Officer on February 7, 2000, having previously served as Managing Director and Co-Head of the Corporate Analysis and Structuring Team in the Corporate Finance Division at Warburg Dillon Read, an investment banking firm, for over the past five years. H. Jack Bouroudjian has been an elected IOM Director since 1996. He has been Senior Vice President of Equity Futures with Commerz Futures since 1999. Prior to that time, he was Vice President of Equity Futures with Nikko Securities from 1997 until 1990 and with Credit Agricole Futures, Inc. from 1995 until 1997. A member of the Exchange for more than twelve years, Mr. Bouroudjian owns one IOM membership. Timothy R. Brennan has been a CME Director since 1990. He has been a floor broker and trader since 1974 and Vice President of RB&H Financial Services, L.P., one of our clearing member firms, for more than five years. A member of the Exchange for more than twenty-four years, Mr. Brennan owns one CME membership, one IOM membership and two fractional GEM membership interests. Leslie Henner Burns has been a CME Director since January 2000. She has been a self-employed floor trader since 1978 and was President of Leslie A. Henner, Inc., a floor brokerage business, from 1981 until 1999. A member of the Exchange for more than twenty-two years, Ms. Burns owns one CME membership and two fractional GEM membership interests. Jeffrey R. Carter has been a CME Director since 1999. He has been a Market Maker-Local Trader since 1988. A member of the Exchange for more than ten years, Mr. Carter owns one CME membership and one IOM membership interest in a self- directed IRA. E. Gerald Corrigan has been a director since October 1998. He has been Managing Director at Goldman, Sachs & Co., an investment banking firm, for more than five years. He has also served as co-chairman of its Risk Committee and Global Compliance and Controls Committee. Prior to his employment by Goldman, Sachs & Co., he was President and Chief Executive Officer of the Federal Reserve Bank of New York and a member of the Federal Open Market Committee. Rahm Emanuel has been a director since May 1999. He has been Managing Director of Wasserstein Perella & Co., Inc., an investment banking firm since January 1999. Prior to March 1998, he was Senior Advisor to the President for Policy and Strategy in the Clinton Administration and Executive Assistant to the Chief of Staff. Mr. Emanuel also serves as a director of RxDrugstore. Yra G. Harris has been an IMM Director since 1997. He has been a self- employed floor trader since 1977. A member of the Exchange for more than twenty- two years, Mr. Harris owns two IMM memberships and one IOM membership interest, and he has sole voting power over one IMM membership for which he does not disclaim beneficial ownership. 43
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Robert L. Haworth has been a CME Director since 1998. He served as our Treasurer in 1998 and was Vice President of the CME Audit Department in 1979. Mr. Haworth has been a self-employed floor trader since 1979. He is a certified public accountant and a member of both the American Institute of Certified Public Accountants and the Illinois CPA Society. A member of the Exchange for more than twenty years, Mr. Haworth owns one CME membership and one GEM membership interest. Bruce F. Johnson has been a CME Director since 1998. He has been President and part owner of Packers Trading Company, a futures commission merchant and former clearing member firm, for over the past five years. A member of the Exchange for more than twenty-nine years, Mr. Johnson owns one CME membership and one GEM membership. Gary M. Katler has been an IOM Director since 1993. He has been Senior Vice President of ING Barings Futures and Options Inc. since 1994. Mr. Katler has voting power over one IOM membership and one GEM membership interest, both of which are owned by his employer and of which he disclaims beneficial interest. Paul Kimball has been a director since February 1999. He has been Managing Director and Global Co-Head of the Foreign Exchange Department of Morgan Stanley Dean Witter, an investment banking firm, for over the past five years. Mr. Kimball is also Chairman of the Foreign Exchange Committee, an industry oversight group that advises the Federal Reserve Bank of New York on issues related to foreign exchange markets. John W. Lacey has been a director since February 1998. He has been a Partner in the Lacey Ranches, a family cow-calf operation, the Margarita Cattle Company in Santa Margarita, California, and the Centennial Livestock. Mr. Lacey is also Director of the National Cattlemen's Beef Association and Chairman of the California Beef Council and past president of the California Cattlemen's Association and the National Cattlemen's Association. He serves on the Advisory Council of the College of Agriculture at California Polytechnic and is its immediate past chairman. Merton H. Miller has been a director since January 1990. He has been the Robert R. McCormick Distinguished Service Professor of Finance Emeritus at the Graduate School of Business, University of Chicago for more than five years. Professor Miller is also Director of Dimensional Fund Advisors, located in Santa Monica, California. Professor Miller was awarded the Nobel Memorial Prize in Economic Science in 1990 for his work in the area of corporate finance. William P. Miller II has been a director since February 1999. He has been Senior Vice President and Independent Risk Oversight Officer for the Common Fund Group, an investment management firm for educational institutions, since September 1996. Prior to that, he was Director, Trading Operations and Asset Mix Management with General Motors Investment Management Corporation. He is also a director of the Association for Financial Professionals and of the Investment Risk Institute, and Chairman, Executive Committee, End Users of Derivatives Council. Laurence E. Mollner has been a director since February 1991. He has been President of Mariah Investment Company, a futures, equities and real estate investment firm, since 1998. He was President of Carr Futures from August 1997 through January 1998 and was responsible for 44
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the sale and transition of the Institutional Futures Division of Dean Witter Reynolds Inc. to Carr Futures. Prior to that, he was Executive Vice President for Dean Witter Reynolds Inc., Director of its Futures Markets Division, and a member of the Board of Directors of Dean Witter International Limited in London. He joined Dean Witter Reynolds Inc. in 1979. Mr. Mollner is the former Chairman of the Futures Industry Association, and he currently serves as a director of both the Futures Industry Association and National Futures Association. Patrick J. Mulchrone has been an IMM Director since 1998. He was previously a director from 1991 to 1996, and served as our Second Vice Chairman from 1993 to 1996. Mr. Mulchrone has been owner of P.J. Mulchrone Co. and a floor broker and trader since 1979. A member of the Exchange for more than twenty years, Mr. Mulchrone owns one CME membership, one IMM membership, one IOM membership and one GEM membership interest. John D. Newhouse has been an IMM Director since 1996 and was previously a director from 1987 to 1988. He has been a floor broker and trader since 1974 and President of Euro Spread Brokers, a broker association filling orders in Eurodollars, since 1980. A member of the Exchange for more than twenty-five years, Mr. Newhouse owns three IMM membership, one IOM membership and four fractional GEM membership interests. Ward Parkinson has been a director since February 1998. He is Founder of Micron Technology, a manufacturer of computer and memory chips, and he was its Chairman and Chief Executive Officer from 1978 to 1986 and Vice Chairman until 1989. He has been consulting in the electronics field for more than five years. Mr. Parkinson has also been a partner in and director of PYCO, which invests in commercial real estate, and a board member of Parkinson-Yanke Real Estate and Parkinson-Nelson Real Estate for over the past five years. Mr. Parkinson serves on the board of Ovonyx, sign-me-up.com and Odessy Computers. Mark G. Papadopoulos has been a GEM Director since January 2000. He was Vice Chairman of the Mexican Peso Futures Pit Committee, a position with the CME, from 1998-1999, and has been an independent floor trader since 1996. Prior to that, he was an Arbitrage Clerk with several independent floor trades from 1994 to 1996. A member of the Exchange for more than three years, Mr. Papadopoulos owns two GEM membership interests. Robert J. Prosi has been a CME Director since January 1998. He has been First Vice President, Salomon Smith Barney Inc., an investment banking firm, for more than five years. Mr. Prosi is also a member of the Chicago Council on Foreign Relations. A member of the Exchange for more than twenty-three years, Mr. Prosi owns one CME membership and one IOM membership interest, and he has voting/investment power over one IOM membership interest for which he has not disclaimed beneficial interest. David M. Pryde has been a director since February 1997. He has been Managing Director at J. P. Morgan & Co. Inc., an investment banking firm, with global responsibility for its futures and options business. Prior to assuming his current role, he was Head of Global Commodities for Morgan Guaranty Trust Company. He is currently a member of the Executive Committee of the Futures Industry Association and the National Futures Association. Mr. Pryde was formerly Vice Chairman of the Commodity Exchange Inc. in New York and was a member of the Executive Committee of its Board of Governors. Mr. Pryde has voting/investment power over one CME membership, three IMM membership, nine IOM membership and seventeen GEM fractional membership interests owned by various J. P. Morgan Futures Inc. employees and 45
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for which he has not disclaimed beneficial interest. Irwin Rosen has been a CME Director since January 1997. He is an attorney, and has represented clients before the CME tribunal, for more than five years and has been an independent floor broker and trader since 1970. A member of the Exchange for more than twenty-nine years, Mr. Rosen owns one CME membership, one IOM membership and one fractional GEM membership interest all held in trust. William G. Salatich, Jr. has been a CME Director January 1997. He has been an independent floor broker and trader since 1970. A member of the Exchange for more than twenty-four years, Mr. Salatich owns one CME membership and two fractional GEM membership interests. Verne O. Sedlacek has been a director since February 1997. He has been President and Chief Operating Officer of John W. Henry & Company, Inc., a commodity trading advisor, and member of its Investment Policy Committee; and President and Director of Westport Capital Management Corporation and Global Capital Management Limited, both investment management firms since 1998. Prior to that, he was the Executive Vice President and Chief Financial Officer of the Harvard Management Company, Inc., a wholly owned subsidiary of Harvard University, since 1983. He is a member of the Global Markets Advisory Committee of the Commodity Futures Trading Commission and a member of the Board of Trustees of Commonfund Capital, Inc. Mr. Sedlacek is a director of the Futures Industry Association and is a certified public accountant. Leon C. Shender has been an IOM Director since January 1999. He has been a floor trader since 1976. A member of the Exchange for more than twenty-three years, Mr. Shender owns one IOM membership. William R. Shepard has been an IMM Director since January 1997. He is the founder of and has been President of Shepard International, Inc., a futures commission merchant, for more than five years. A member of the Exchange for more than twenty-six years, Mr. Shepard owns one CME membership, one IMM membership, one IOM membership and five fractional GEM membership interests. Howard J. Siegel has been a CME Director since January 2000. He has been a floor trader since 1977. A member of the Exchange for more than twenty-two years, Mr. Siegel owns one CME membership, one IOM membership and three fractional GEM membership interests. Paul Simon has been a director since February 1997. He has been a Professor at Southern Illinois University since 1997. He also serves on the board of Penn- American Insurance Co. Mr. Simon was a U.S. Senator from Illinois from 1984 through 1997. Prior to that, he was a U.S. Congressman. David I. Silverman has been an IMM Director since 1995 and was previously a director from 1990 to 1991. He was chairman of GFX Corporation, a subsidiary of the Exchange, from 1997 until 2000. He has been an independent trader since 1982. A member of the Exchange for more than seventeen years, Mr. Silverman owns one IMM membership interest. Jeffrey L. Silverman has been a CME Director since 1994 and was our Secretary in 1995. 46
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He has been a floor trader since 1979. A member of the Exchange for more than twenty years, Mr. Silverman owns one CME membership and two fractional GEM membership interests, and his wife owns one CME membership and one fractional GEM membership interest. Gerald D. Beyer has been our Executive Vice President and Chief Operating Officer since February 1997 and prior to that he was our Chief Administrative Officer from 1994 to 1997. He has also served as our Chief Financial Officer, Senior Vice President - Legal and Regulatory Affairs, Senior Vice President - Clearing House, Vice President - Legal, and In House Counsel. Craig S. Donohue has been our Senior Vice President and General Counsel since October 1998. Prior to that he was Vice President, Market Regulation from 1997 to 1998 and Vice President and Associate General Counsel from 1995 to 1997. Phupinder Gill has been our President, Clearing House Division since July 1998, having previously served as its Senior Vice President since May 1997 and its Vice President since May 1994. Mr. Gill has held numerous other positions with the Exchange since 1988. David G. Gomach has been our Senior Vice President and Chief Financial Officer since January 1998, having previously served as Vice President, Administration and Finance since December 1996. He is a certified public accountant. William W. Jenks has been our Executive Vice President, Management Information Systems since May 1998, having previously served as our Senior Vice President and Chief Information Officer from July 1997. For more than five years prior to that, he was employed by Space Systems/LORAL, where he was a Vice President. Donald D. Serpico has been our Executive Vice President, Operations since July 1994, having previously served as our Senior Vice President, Operations from 1988, Senior Vice President of the Clearing House from 1987, and Vice President of Management Information Systems from 1985. Carol B. Sexton has been our Executive Vice President, Corporate Relations since December 1995, having previously served in the position of Senior Vice President, Corporate Relations in January 1994. Director Compensation Each director of New CME will receive an annual directors fee of $20,000, plus a meeting attendance fee of $1,000 for each regular meeting of the board that they attend, excluding special administrative meetings. Directors also receive reimbursement of expenses for travel to board meetings. The Chairman of the Board receives an annual stipend of $350,000, plus reimbursement of other board-related expenses. The four additional board officers each receive an annual stipend of $50,000 and a meeting attendance fee of $1,000 for each regular meeting of the board that they attend, plus reimbursement of other board-related expenses. The Chairman Emeritus and Senior Policy Advisor, and the Special Policy Advisor, each receive an annual stipend of $200,000, plus reimbursement of other board- 47
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related expenses. Committees of the Board of Directors New CME's board of directors will have an Executive Committee, an Audit Committee, a Compensation Committee and a Nominating Committee. It is expected that members of these committees will be elected by New CME's board following the effectiveness of the demutualization transactions. These committees will have the following functions: Executive Committee. This committee has and may exercise the authority of the board of directors, when the board is not in session, except in cases where action of the entire board is required by the charter, the by-laws or applicable law. Audit Committee. New CME will have an Audit Committee, composed of directors who are not employees, which will review the results and scope of the audit and other services provided by our independent auditors as well as our accounting and internal control procedures and policies. Compensation Committee. New CME will have a Compensation Committee composed of directors who are not employees. It will oversee the compensation and benefits of New CME's management and employees. Nominating Committee. This committee will review the qualifications of potential candidates and will propose nominees for the thirteen positions on the board of directors that are nominated by the board. This committee will be comprised of five directors selected by the board. The board will strive to have a Nominating Committee that reflects the diversity of the board. It is expected that seven of the thirteen positions to be filled by the Nominating Committee will be filled with candidates who satisfy the public participation regulatory requirements to which the Exchange is subject. This committee will consider nominees recommended by stockholders if the recommendations are submitted in writing, accompanied by a description of the proposed nominee's qualifications and other relevant biographical information and evidence of the consent of the proposed nominee. The recommendations should be addressed to the Nominating Committee, in care of the Corporate Secretary. Under New CME's by-laws, nominations may not be made at the annual meeting. Limitation of Liability and Indemnification Matters New CME's charter limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for: . any breach of their duty of loyalty to the corporation or its stockholders; . acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . unlawful payments of dividends or unlawful stock repurchases or redemptions; or 48
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. any transaction from which the director derived an improper personal benefit. This limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies (i.e., injunctive relief or rescission). New CME's charter and by-laws provide that it shall indemnify its directors and executive officers and may indemnify its other officers and employees and other agents to the fullest extent permitted by law. We believe that indemnification under the provisions of the by-laws covers at least negligence and gross negligence on the part of the indemnified parties. The by-laws also permit New CME to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in that capacity, regardless of whether the by-laws would permit indemnification. Executive Compensation The following table sets forth information relating to the compensation paid to, accrued or earned by our chief executive officers and each of the next four most highly compensated executive officers for services rendered during the year ended December 31, 1999. Summary Compensation Table [Enlarge/Download Table] ------------------------------------------------------------------------------------------------------------ Annual Compensation ---------------------------------------------- Other Annual All Other Name and Principal Position Salary Bonus Compensation Compensation (3) ------------------------------------------------------------------------------------------------------------- T. Eric Kilcollin (1) $143,000 $ 0 $ 0 $1,063,890 President and Chief Executive Officer (CEO) Scott Gordon (2) 0 0 350,000 0 Chairman of the Board of Directors (CEO) Fred D. Arditti 522,500 260,000 0 140,599 Senior Executive Vice President, Planning & Development Gerald D. Beyer 522,500 210,000 0 132,796 Executive Vice President and Chief Operating Officer Phupinder S. Gill 400,000 160,000 0 80,914 President, Clearing House Division William W. Jenks 270,000 120,000 0 65,111 Executive Vice President, Management Information Systems ----------------------------------------------------------------------------------------------------------- 49
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(1) Mr. Kilcollin served as President through March 1999. In addition to his salary for the first three months of 1999 and the contributions made on his behalf to the qualified benefit plans outlined in note (3) below, Mr. Kilcollin received a cash payment at the date of his departure in the amount of $1,047,130. This table excludes amounts paid to Mr. Kilcollin under our qualified and non-qualified benefit plans relating to services performed in prior years. (2) Mr. Gordon served as Chairman of the Board of Directors during 1999 and received a stipend in the amount of $350,000 for these services. He has served as our chief executive officer during the remainder of 1999 following the departure of Mr. Kilcollin. (3) The following table shows the amount of each category of "all other compensation" earned by each of the named individuals, in addition to the payment described in note (1) above: [Enlarge/Download Table] 401(k) Matching Pension Supplemental SERP* Contribution Contribution Plan Contribution Total ---------------- --------------- ---------------- --------------- ---------- Mr. Kilcollin (1) $3,960 $12,800 $ 0 $ 0 $ 16,760 Mr. Gordon 0 0 0 0 0 Mr. Arditti 4,800 14,400 62,599 58,800 140,599 Mr. Beyer 4,800 12,800 56,623 58,573 132,796 Mr. Gill 4,800 8,000 25,705 42,409 80,914 Mr. Jenks 4,800 11,200 18,693 30,418 65,111 ---------------------------- * Supplemental Executive Retirement Plan. See description below. Employee Benefit Plans Omnibus Stock Plan. New CME has adopted an Omnibus Stock Plan under which stock based awards may be made to employees of New CME. An aggregate of 2,600,000 Class A shares has been reserved for awards under the plan. Other than the award made during 2000 to Mr. McNulty, described below under "Employment- Related Agreements," no awards have been made to date under the plan. The plan authorizes the making or grant of the following types of awards singly, in combination, or in tandem: (i) stock options, which may be either "incentive stock options" (within the meaning of Section 422 of the Internal Revenue Code) or non-qualified stock options; (ii) stock appreciation rights, which allow the recipient to receive a payment equal to the appreciation in market value of a stated number of Class A shares; (iii) stock awards, which may be restricted or unrestricted; and (iv) other stock based awards. The plan will be administered by the Compensation Committee of New CME's board. The Compensation Committee has the authority to interpret the plan, to select employees of New CME to receive awards under the plan, and to determine the form, amount and other terms and conditions of the awards. The committee also has the power to modify or waive restrictions on awards, to amend awards and to grant extensions and accelerate awards. No member of the Compensation Committee is eligible to participate in the plan because committee members may not include employees. 401(k) Plan. The Exchange sponsors a 401(k)-type plan known as the "Tax Efficient Savings Plan," which is a defined contribution retirement plan intended to qualify under Section 401 of the Internal Revenue Code. Employees are eligible to participate in this plan from the first day of employment. The Plan permits additional contributions at the discretion of the 50
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Exchange. The following table describes the employee and employer contributions permitted under the plan, and the vesting of those contributions: [Enlarge/Download Table] Employee Contributions Employer Contributions --------------------------- --------------------------------------------- Amount 1-15% of base pay* Matching amount up to 3% of base pay Additional amount up to 2% of base pay based upon specified increases in trading volume Vesting 100% 100% at end of second plan year following year in which contributions made; 100% after five years of eligible service ---------------- *Subject to plan limits and statutory annual limit. The following chart demonstrates how vesting in the non-trading volume matching contributions occurs with respect to a hypothetical employee who was hired on August 1, 1995: Vesting in Matching Contributions --------------------------------- [Download Table] Year Contribution Date the Contribution Is Made Becomes Vested ------------------- --------------------- 1995 December 31, 1997 1996 December 31, 1998 1997 December 31, 1999 1998 August 1, 2000 1999 August 1, 2000 2000 August 1, 2000 Also, an employee becomes 100% vested in the CME matching contributions if they reach age 65 or become disabled or die before they complete five years of CME service. Pension Plan. We also maintain a non-contributory defined benefit cash balance pension plan for eligible employees. To be eligible, an employee must have completed a continuous 12-month period of employment with us and have reached the age of 21. Effective January 15, 1995, the pension plan was amended to provide for an age-based contribution to a cash balance account, and to include cash bonuses in the definition of considered earnings. Participant cash balance accounts receive an interest credit at the one-year U.S. Treasury Bill rate. Our policy is to fund currently required pension costs. Participants become vested in their accounts after five years of service. The following is the schedule of the employer contributions based on age: Age % ------------ ---- under age 30 3% age 30 - 34 4% age 35 - 39 5% age 40 - 44 6% age 45 - 49 7% 51
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age 50 - 54 8% over age 54 9% The individuals named below have projected annual retirement benefits, based on current accumulated balances, an annual interest credit rate of 6% and future service to age 65 at current salary levels as follows: Mr. Kilcollin, none; Mr. Gordon, none; Mr. Arditti, $10,600; Mr. Beyer, $51,500; Mr. Gill, $92,600; and Mr. Jenks, $43,600. Non-Qualified Plans. The Exchange maintains the following non-qualified plans which are not subject to the Employee Retirement Income Security Act of 1974 under which participants may make assumed investment choices with respect to amounts contributed on their behalf. Although not required to do so, the Exchange invests the contributions in assets which mirror the assumed investment choices. The balances in these plans are subject to the claims of general creditors of the Exchange. . Deferred Compensation Plan - The Exchange maintains a deferred compensation plan under which eligible officers and board members may contribute a percentage of their compensation and defer income taxes thereon until the time of distribution. . Supplemental Plan - The Exchange maintains a non-qualified supplemental plan to provide benefits for officers who have been impacted by statutory limits under the provisions of the qualified 401(k) and pension plans. . Supplemental Executive Retirement Plan ("SERP") - The Exchange maintains a non-qualified, defined contribution plan for senior officers. Under the plan, the Exchange contributes an amount equal to 8% of salary and bonus of eligible employees annually. Post 1996 contributions are subject to a vesting schedule under which each annual contribution begins to vest after three years and is fully vested after five years. Employment-Related Agreements Mr. McNulty The Exchange has entered into an employment agreement with James J. McNulty to serve as its President and Chief Executive Officer through December 31, 2003, subject to renewal by mutual agreement of the parties. Under the agreement, Mr. McNulty will receive an annual base salary of $1 million. He is also entitled to an annual incentive bonus based upon the achievement of goals set by the board of directors, which bonus may not exceed the lesser of $1.5 million or, after demutualization, 10 percent of New CME's net income. The agreement provides for reimbursement of business expenses, perquisites, and legal fees associated with the negotiation of the employment agreement. Mr. McNulty will be eligible to participate in other benefit plans available generally to senior officers of the CME. As partial compensation for actual compensation, benefits and programs that Mr. McNulty was, or was reasonably expected to become, entitled to receive from his previous employer, he received a lump-sum payment of $2 million. Mr. McNulty has also been granted a non-transferable non-qualified stock option, which is designed to reward him for increasing the value of New CME. If the total value of the 52
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Exchange increases, exercise of the option would entitle him to receive essentially 2.5% of the increase above the starting valuation and 2.5% of the increase, if any, in excess of 150% of the starting valuation. If the demutualization is completed, the option would entitle him to purchase from New CME two "baskets" of New CME stock. Each basket is composed of up to 2.5% of the outstanding shares of New CME, although New CME may elect to issue solely shares of Class A common stock upon any exercise. The baskets have aggregate exercise prices of 2.5% and 3.75%, respectively, of the value of the Exchange on the date of commencement of Mr. McNulty's employment. The option will expire in ten years. It may be exercised only if the demutualization transaction is completed, and then only as to the portion of the option that has vested. The option vests 40 percent after the first year and 20 percent in each of the succeeding three years, subject to acceleration in the event of Mr. McNulty's termination without cause or forfeiture in the event of his termination for cause. The option remains exercisable in full for its remaining term following (i) a termination by the Exchange of the employment agreement without cause or due to Mr. McNulty's disability, (ii) a termination of the employment agreement by Mr. McNulty where the Exchange has in effect terminated his employment by moving the Exchange outside metropolitan Chicago, demoting him, significantly reducing his responsibilities or failing to pay him the agreed compensation and benefits under the agreement or (iii) upon the expiration of the original term of the employment agreement. Any vested portion of the option is exercisable for a period of 180 days following a termination by Mr. McNulty of the employment agreement. Upon exercise of the option, New CME may distribute, in lieu of each class of shares of New CME, cash and/or shares of Class A stock. The agreement provides that it may be terminated by the Exchange due to Mr. McNulty's death or disability, or for cause on thirty days written notice or without cause on ninety days written notice. In addition, the agreement allows Mr. McNulty to terminate it at anytime after one year upon ninety days written notice. He may also terminate the agreement for "good reason" if the Exchange's principal place of business is relocated outside of the Chicago metropolitan area, the Exchange fails, after notice, to pay the agreed-upon compensation or benefits or the Exchange fails, after notice, to rectify a situation in which he is, in effect, terminated due to a demotion or a significant reduction of his responsibilities. The agreement provides that, in the event of a termination without cause by the Exchange, Mr. McNulty shall be entitled to receive his base salary for the remainder of the original term plus one-third of the maximum annual incentive bonus. The agreement also provides that, in the event that Mr. McNulty terminates his employment after its first year on less than ninety days written notice, other than following one of the matters previously described as "good reason", the Exchange may recover from him a sum equal to his annual base salary, computed daily, for each day his notice of termination is less than ninety days. If Mr. McNulty's employment is terminated because of his death or disability, he or his beneficiary will continue to receive the base salary for six months following that termination. In the event of his death, his option will vest and be paid in cash. The Exchange intends to purchase key man life insurance to assist in funding payments that would be required in the event of Mr. McNulty's death. In the event the demutualization is not completed by December 31, 2000, either the Exchange or Mr. McNulty may terminate the agreement, subject to conditions, prior to January 31, 2001. In that case, Mr. McNulty shall continue to receive his annual base salary plus one-third of the maximum annual incentive bonus for the remainder of the original term of the agreement unless he becomes employed by a competitor to the Exchange. In addition, his option shall be forfeited. 53
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The agreement also provides that, if within two years of a "change in control" of the Exchange, Mr. McNulty is terminated by the Exchange or he terminates the agreement as a result of the occurrence of one of the matters described previously as "good reason," he shall be entitled to two times his base salary plus one and one-third times the maximum incentive bonus for which he would have been eligible, provided that the severance payments do not exceed $8 million. The payment would be subject to reduction to the extent that it would otherwise result in the payment of tax under Section 4999 of the Internal Revenue Code. Any unvested portion of his option would immediately vest and become exercisable for a one or three year period, depending upon whether the option securities are registered under the Securities Exchange Act of 1934. Messrs. Arditti, Beyer, Gill and Jenks The Exchange has employment agreements with each of Messrs. Arditti, Beyer, Gill and Jenks regarding their employment as executives of the Exchange. Each agreement is for an initial period of approximately two years, with the agreement of Mr. Serpico ending June 30, 2000, the agreement with Mr. Gill ending August 31, 2001, the agreement with Mr. Beyer ending April 12, 2001 and the agreement with Mr. Arditti ending June 30, 2001. Unless the agreement is renewed by the parties, it ceases to apply following its expiration even if the covered individual remains employed by the Exchange. The agreements provide that annual increases to an Executive's base salary are to be determined by the Exchange in accordance with its compensation policies and practices. The executives are also entitled to participate in a discretionary bonus program and in other benefit plans available generally to Exchange employees and officers. The agreements may be terminated by the Exchange in the event of the executive's death or disability and may also be terminated for cause. They may be terminated by the executive at any time and for any reason on at least sixty days written notice. In the event of a merger, sale, reorganization or other change in control of the Exchange, the agreements would be binding upon and inure to the benefit of any successor of the Exchange. In the event of a termination of an executive's employment for cause, the executive is entitled to any accrued, but unused, vacation pay. An executive's obligations under his employment agreement are suspended in the event that he becomes disabled and receives benefits under the Exchange's long-term disability insurance program, subject to reinstatement if he returns to his original position. If the executive returns to work in a different position or does not return to work at all upon the conclusion of his disability, the employment agreement will be terminated. If employment is terminated due to death or disability, an executive's legal representatives or the executive will receive his base salary for a period of six months following the termination. Mr. Kilcollin The Exchange had an employment agreement with T. Eric Kilcollin to serve as its President and Chief Executive Officer from February 1, 1997 through March 31, 2000; however, Mr. Kilcollin resigned effective March 19, 1999. The agreement provided for an initial base salary of $550,000, with increases at the Exchange's sole discretion. Under the agreement, he was eligible for a performance bonus and to participate in the Exchange's staff bonus program. 54
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He was also entitled to an annual enhanced pension benefit in an amount equal to ten percent of his base salary for the calendar year plus a gross-up payment to negate the effect of the additional taxes incurred because of the benefit. Under the agreement, he was entitled to reimbursement for various perquisites, an annual lump sum payment of $12,500 for professional services and participation in other benefit plans available generally to Exchange employees and officers. Under Mr. Kilcollin's separation agreement, the Exchange paid to Mr. Kilcollin $591,982.96, representing his annual base salary and vacation benefits through the original term of his employment agreement. He also received $155,555, representing reimbursement of costs of perquisites and of professional services he was expected to incur through March 31, 2000 and of amounts owed to him as the enhanced pension benefit, plus an additional bonus of $200,000. The Exchange also agreed to reimburse him, through March 31, 2000, for costs incurred to obtain health, dental, vision, life and accidental death and dismemberment insurance. Mr. Kilcollin's interests under the retirement and deferred compensation plans in which he participated became fully vested as of his resignation date. In all other respects, his rights and the Exchange's obligations pursuant to the plans are determined by the terms of those plans. Mr. Kilcollin was paid a single lump sum for amounts payable to him under the Exchange's Senior Management Supplemental Deferred Savings Plan and the Supplemental Executive Retirement Plan. In addition, he was paid $96,189.10, which represents the present value, after a gross-up for income taxes, of the benefits he would have received pursuant to the Pension Plan for Employees of the Chicago Mercantile Exchange, the Exchange's Tax Efficient Savings Plan and the Exchange's Supplemental Deferred Savings Plan had he remained employed with the Exchange through the term of his agreement. Beneficial Ownership of Management The following table lists the shares of capital stock of New CME that will be beneficially owned following the demutualization by each of the directors, each of the executive officers named in the Summary Compensation Table on page __ and the Exchange's directors and executive officers as a group. The information is based on the beneficial ownership by those persons of Exchange membership interests as of December 31, 1999. There was no person known to the Exchange to be the beneficial owner of more than five percent of the membership interests of the Exchange as of December 31, 1999. [Enlarge/Download Table] Total Equity Expressed in Name of Beneficial Class A Percent of Class B Shares Percent of Equivalent Class Percent of Owner1 Shares Class Number Series Class A shares2 Total Equity ---------------------------------------------------------------------------------------------------------------------------------- M. Scott Gordon 10,800 * 1 B-23 * 12,000 * ---------------------------------------------------------------------------------------------------------------------------------- --------------------------- * Less than one percent. 1 The address for all persons listed in the table is Chicago Mercantile Exchange, 30 South Wacker Drive, Chicago, Illinois 60606. 2 Class A equivalent shares are based on the number of Class A shares and the number of Class A shares that each series of Class B shares owned is considered to represent. See "Description of Common Stock" under "Description of Capital Stock of New CME." 3 Share will be held in a trust over which Mr. Gordon will have investment and voting power. 55
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[Enlarge/Download Table] ---------------------------------------------------------------------------------------------------------------------------------- Total Equity Expressed in Name of Beneficial Class A Percent of Class B Shares Percent of Equivalent Class Percent of Owner1 Shares Class Number Series Class A shares2 Total Equity ---------------------------------------------------------------------------------------------------------------------------------- Terrence A. Duffy 16,200 * 1 B-1 * 18,100 * 1 B-4 ---------------------------------------------------------------------------------------------------------------------------------- James E. Oliff 10,800 * 1 B-2 * 12,000 * ---------------------------------------------------------------------------------------------------------------------------------- Thomas A. Kloet 21,600 * 2 B-24 * 24,000 * ---------------------------------------------------------------------------------------------------------------------------------- Martin J. Gepsman 5,400 * 1 B-3 * 6,060 * 6 B-5 ---------------------------------------------------------------------------------------------------------------------------------- Leo Melamed 37,800 * 1 B-15 * 42,060 * 1 B-2 2 B-3 6 B-5 ---------------------------------------------------------------------------------------------------------------------------------- John F. Sandner 102,600 * 3 B-1 * 113,010 * 2 B-2 6 B-36 14 B-5 ---------------------------------------------------------------------------------------------------------------------------------- H. Jack Bouroudjian 5,400 * 1 B-3 * 6,000 * ---------------------------------------------------------------------------------------------------------------------------------- Timothy R. Brennan 21,600 * 1 B-1 * 24,020 * 1 B-3 2 B-5 ---------------------------------------------------------------------------------------------------------------------------------- Jeffrey R. Carter 21,600 * 1 B-1 * 24,000 * 1 B-3 ---------------------------------------------------------------------------------------------------------------------------------- E. Gerald Corrigan 0 0 ---------------------------------------------------------------------------------------------------------------------------------- Rahm Emanuel 0 0 ---------------------------------------------------------------------------------------------------------------------------------- Yra G. Harris 27,000 * 3 B-27 * 30,000 * 1 B-3 ---------------------------------------------------------------------------------------------------------------------------------- Robert L. Haworth 16,200 * 1 B-1 * 18,100 * 1 B-4 ---------------------------------------------------------------------------------------------------------------------------------- Leslie Henner Burns 21,600 * 2 B-1 * 24,020 * 2 B-5 ---------------------------------------------------------------------------------------------------------------------------------- Bruce F. Johnson 16,200 * 1 B-1 * 18,100 * 1 B-4 ---------------------------------------------------------------------------------------------------------------------------------- Gary M. Katler 5,400 * 1 B-38 * 6,100 1 B-4 ---------------------------------------------------------------------------------------------------------------------------------- Paul Kimball 0 0 ---------------------------------------------------------------------------------------------------------------------------------- John Lacey 0 0 ---------------------------------------------------------------------------------------------------------------------------------- Merton Miller 0 0 ---------------------------------------------------------------------------------------------------------------------------------- William Miller 0 0 ---------------------------------------------------------------------------------------------------------------------------------- Laurence E. Mollner 0 0 ---------------------------------------------------------------------------------------------------------------------------------- Patrick J. Mulchrone 32,400 * 1 B-1 * 36,100 * 1 B-2 1 B-3 1 B-4 ---------------------------------------------------------------------------------------------------------------------------------- John D. Newhouse 37,800 * 3 B-2 * 42,040 * 1 B-3 4 B-5 ---------------------------------------------------------------------------------------------------------------------------------- ---------------- 4 Includes one series B-2 share held by ABN AMRO BANK, N.V., over which Mr. Kloet will have voting power. 5 Mr. Melamed will have voting and investment power over the indicated shares, which are owned by Sakura Dellsher, Inc. 6 Mr. Sandner will have voting and investment power over two series B-3 shares held by RB&H Financial Services L.P. 7 Mr. Harris will have sole voting power over one series B-2 share. 8 Mr. Katler will have voting power over one series B-3 share. 56
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[Enlarge/Download Table] ---------------------------------------------------------------------------------------------------------------------------------- Total Equity Expressed in Name of Beneficial Class A Percent of Class B Shares Percent of Equivalent Class Percent of Owner1 Shares Class Number Series Class A shares2 Total Equity ---------------------------------------------------------------------------------------------------------------------------------- Ward Parkinson 0 0 ---------------------------------------------------------------------------------------------------------------------------------- Mark G. Papadopoulos 0 2 B-4 * 200 * ---------------------------------------------------------------------------------------------------------------------------------- Robert J. Prosi 27,000 * 1 B-1 * 30,000 * 2 B-39 ---------------------------------------------------------------------------------------------------------------------------------- David M. Pryde 97,200 * 1 B-110 * 108,000 3 B-2 9 B-3 17 B-5 ---------------------------------------------------------------------------------------------------------------------------------- Irwin Rosen 21,600 * 1 B-1 * 24,010 * 1 B-3 1 B-5 ---------------------------------------------------------------------------------------------------------------------------------- William G. Salatich, Jr. 16,200 * 1 B-1 * 18,020 * 2 B-5 ---------------------------------------------------------------------------------------------------------------------------------- Verne Sedlacek 0 0 ---------------------------------------------------------------------------------------------------------------------------------- Leon C. Shender 5,400 * 1 B-3 * 6,000 * ---------------------------------------------------------------------------------------------------------------------------------- William R. Shepard 32,400 * 1 B-1 * 36,050 * 1 B-2 1 B-3 5 B-5 ---------------------------------------------------------------------------------------------------------------------------------- Howard J. Siegel 21,600 * 1 B-1 * 24,030 * 1 B-3 3 B-5 ---------------------------------------------------------------------------------------------------------------------------------- David I. Silverman 10,800 * 1 B-2 * 12,000 * ---------------------------------------------------------------------------------------------------------------------------------- Jeffrey L. Silverman 16,200 * 1 B-1 * 18,020 * 2 B-5 ---------------------------------------------------------------------------------------------------------------------------------- Paul Simon 0 0 ---------------------------------------------------------------------------------------------------------------------------------- Fred D. Arditti 0 0 ---------------------------------------------------------------------------------------------------------------------------------- Gerald D. Beyer 0 0 ---------------------------------------------------------------------------------------------------------------------------------- Craig S. Donohue 0 0 ---------------------------------------------------------------------------------------------------------------------------------- Phupinder Gill 0 0 ---------------------------------------------------------------------------------------------------------------------------------- David G. Gomach 0 0 ---------------------------------------------------------------------------------------------------------------------------------- William W. Jenks 0 0 ---------------------------------------------------------------------------------------------------------------------------------- Donald D. Serpico 0 0 ---------------------------------------------------------------------------------------------------------------------------------- Carol B. Sexton 0 0 ---------------------------------------------------------------------------------------------------------------------------------- Directors and Executive Officers as a group 507,600 564,980 1.96 ---------------------------------------------------------------------------------------------------------------------------------- ---------------- 9 Mr. Prosi will have voting power over one series B-3 share. 10 Mr. Pryde will have voting power over each of the series B-1, B-2, B-3 and B-5 shares, which will be owned by several employees of his employer, J. P. Morgan Futures, Inc. * Less than one percent. 57
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BUSINESS Founded in 1898, the Exchange is one of the world's leading exchanges for the trading of futures and options on futures contracts, with total volume in 1999 of approximately 201 million contracts. The underlying value of the commodities involved in transactions (often referred to as the "notional value"), a comprehensive measure of economic activity, was approximately $138 trillion in 1999--exceeding that of any other derivatives exchange in the world. According to industry data, we ranked third worldwide among major futures exchanges in volume of contracts traded in 1999. That data also showed that we ranked second in terms of open interest -- representing the number of futures contracts and options positions outstanding at the close of trading. From our origins as a small agricultural market, we have evolved into a major financial center offering a diverse range of contracts based on interest rates, equity indices, foreign currencies, agricultural commodities and other underlying instruments and risk-based activities. We operate markets for the trading of commodity and financial futures contracts, as well as options on futures contracts. These contracts have been developed through our extensive research and development efforts and through relationships that we have developed with market participants and other financial institutions. We operate traditional open outcry auction markets where members trade among themselves for their own account and the account of their customers in a room known as a pit. We also operate an electronic trading system --now known as our GLOBEX2 system -- and were one of the first major futures exchanges in the world to develop an electronic system. We also match, clear, settle and guarantee all transactions executed on the Exchange through the CME Clearing House, and we engage in extensive regulatory, compliance, market surveillance and financial supervision activities designed to ensure market integrity and provide financial safeguards for users of our markets. Our traditional open outcry and electronic trade execution services provide "price discovery" and trade matching services that offer market participants complete price transparency, anonymity and immediacy. Our Clearing House provides market participants with clearing, settlement, risk management and guarantee services that provide near immediate transaction finality, resulting in the mitigation of counterparty credit risk. We also market and distribute valuable real-time and historical market data generated from trading activity in our markets to users of our products and related cash and derivative markets. Market participants include many of the world's largest banks and investment firms. These participants use our products for hedging, risk management, asset allocation, and speculation. Other market users include financial institutions, such as public and private pension funds, mutual funds, hedge funds and other managed funds, insurance companies, corporations, commercial banks, professional independent traders, and retail customers. Our users can be broadly categorized as hedgers or speculators--depending on whether they transfer risk or accept risk. Hedgers are market participants who want to transfer price risk in an underlying commodity (e.g., cattle) or financial instrument (e.g., cash foreign currency or an interest rate swap agreement). Speculators, on the other hand, accept price risk and attempt to make profits through buying and selling futures contracts by anticipating price changes. A speculator has no interest in making or taking delivery of the underlying commodity. Our members serve as liquidity providers for our markets and as financial intermediaries for customers who use our products. We have developed innovative and cost-effective products, execution and order routing systems, and clearing systems that have led to substantial volume and to the benefit of our 58
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members and customers. As indicated in the chart below, volume in our products remains strong and substantially greater today than volume prior to 1994, despite recent fluctuations in volume. Fluctuations in interest rate volatility, declines in currency volatility, growth in equity trading, and the business cycle of the U.S. economy have led to the fluctuations in our volume. [Graphic: Bar graph entitled and showing "CME ANNUAL VOLUME OF CONTRACTS TRADED 1990 - 1999". Below the horizontal axis each year for which trading volume is measured is written in chronological order from left to right. The vertical axis indicates the number of contracts traded, in millions, beginning with zero and increasing, in intervals of 50, up to 250. The lower portion of each bar is darkly shaded to the extent of the futures contracts traded and the upper portion is lightly shaded to the extent of the options contracts traded. Inset in a small square to the right of the graph is a legend containing a lightly shaded box to the immediate left of the word "Options" and immediately below which is a darkly shaded box to the immediate left of the word "Futures". Futures contracts were traded at a rate of approximately 84 million in 1990, 87 million in 1991, 107 million in 1992, 116 million in 1993, 176 million in 1994, 160 million in 1995, 141 million in 1996, 160 million in 1997, 184 million in 1998 and 168 million in 1999. Options contracts were traded at the rate of approximately 18 million in 1990, 21 million in 1991, 27 million in 1992, 30 million in 1993, 50 million in 1994, 43 million in 1995, 35 million in 1996, 41 million in 1997, 43 million in 1998 and 33 million in 1999.] Presently, derivatives markets are experiencing significant and rapid changes due to advances in technology, relaxation of regulatory barriers for some competitors, and resultant cost efficiencies. Computer and telecommunications systems today can efficiently and economically bring buyers and sellers together, presenting new challenges to centralized open outcry auction markets. These changes are lowering barriers to entry and creating a lower cost business model, forcing traditional exchanges to streamline their operations and reduce costs. Large market users, and the threat of competition, will force exchanges to seek more efficient trading, processing and clearing facilities. We have responded to these challenges, and positioned the Exchange to preserve and enhance our current business, by implementing technology to streamline our trade execution and clearing facilities, by refining our existing products and developing innovative new products to satisfy customer demands, and by continually enhancing the ability of our independent traders to provide liquidity in our markets. In order to continue to enhance our ability to compete in this dynamic marketplace, our organizational strategy is to convert the Exchange to a demutualized for-profit corporation. We intend to improve our governance and managerial structure by reducing our board size and focusing the role of the Board on traditional oversight activities. We will reduce significantly the number and responsibility of existing committees and will enhance and expand the responsibility and authority of our management and professional staff. The demutualization will also reduce members' petition and referenda rights, except for the approval rights reserved to Class B stockholders with respect to Core Rights. We believe that demutualization will better enable us to strengthen, expand and defend our core business. Our core business consists of four main areas: development of risk management products; operating execution facilities for those products; providing clearing and settlement services; and collecting and selling market data. Revenues from the first three business areas referred to in the preceding sentence are derived from bundled clearing and transaction fees, which represented 66% of total 1999 revenues. Revenue from the dissemination of market quote data represented 59
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21% of total 1999 revenue. Products The range and diversity of the products that may be traded on the Exchange's facilities is a significant contributor to our success. These products include futures contracts and options on futures contracts based upon interest rates, stock indices, foreign currencies, agricultural commodities and other underlying instruments and risk-based activities. We also offer exchange- for-physical transaction ("EFP") markets. These transactions involve simultaneous transactions in the futures and cash commodity markets in which one party can establish or liquidate a futures position in one of our products and the other party sells or purchases the underlying cash commodity. We have a research division and a marketing division to support market participants and foster the trading and development of current and future products. Our research and marketing staff meet regularly with market users, members and clearing members to determine whether our current products, facilities and services meet these participants' needs and whether modifications or enhancements are necessary. Our research and marketing staff also develop new product ideas in consultation with market users and other financial institutions. The charts below depict the distribution of trading volumes and clearing fee revenues across our four major product sectors. [Graphic: Pie chart entitled "1999 CME TRADE VOLUME SUMMARY" and representing the trading volume in each of the CME's four major product sectors as a percentage of the total trading volume. The entire chart represents and is subtitled "(100% = 201 million contracts". Trading volume percentages are: Interest Rate Products - 60%, Equity Index Products - 24%, Currency Products - 12% and Agricultural Products - 4%.] [Graphic: Pie chart entitled "1999 CLEARING FEE REVENUE" and representing the sources of clearing fee revenue as a percentage of total clearing fee revenue. The chart represents and is subtitled "(100% = $138.5 MILLION)", with revenue distributed as follows: Interest Rate Products - 36%, Currency Products - 32%, Equity Index Products - 27% and Agricultural Products - 5%.] Interest Rate Products. Our interest rate product line includes our Eurodollar futures and options contracts. Eurodollar futures and option contracts are a short term interest rate product and constitute one of the most successful products in our industry. The notional value of outstanding Eurodollar futures contracts typically exceeds $2.5 trillion on any given day. We also trade contracts based upon other short-term U.S. and foreign interest rates, such as one-month LIBOR, which stands for London Interbank Offered Rate, contracts and Euroyen. Eurodollars are U.S. dollars on deposit in commercial banks outside of the United States. The Eurodollar market has burgeoned over the past thirty years into a major international capital market as the dollar has become a world reserve currency. Eurodollar deposits play a major role in the international capital markets. The interbank market for immediate (spot) and forward delivery of offshore dollars is deep and liquid, giving banks the ability to fund dollar loans to foreign importers without incurring currency exchange risks. Our market users are generally banks and other financial institutions that face interest rate risks from their lending and borrowing activities or their activities as dealers in OTC interest rate swaps and structured derivative products. Many swap dealers use our Eurodollar and other interest rate contracts to hedge and/or arbitrage their money market swaps and to convert a floating interest rate exposure to a fixed rate exposure. A significant number of our clearing member firms are affiliates of 60
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major domestic and international banks who utilize our interest rate markets for their proprietary trading activities. Asset managers also use our interest rate products to lengthen the effective maturity of short-term investment assets by buying futures contracts, or shorten the effective maturity by selling futures. Our contracts are an attractive alternative when physical restructuring of a portfolio is not possible or when futures transaction costs are less than the cash market transaction costs. Market users take advantage of the flexibility and liquidity of the Eurodollar products we trade, which span forty-four contract months covering ten years of short-term interest rate risk. Further, by trading multiple contract months, market users can hedge and speculate on long-term interest rate movements. We have introduced innovative product extensions--Eurodollar Bundles and Packs--in order to facilitate these trading strategies. Eurodollar Bundles allow traders to simultaneously buy or sell a pre-packaged 1-, 2-, 3-, 4-, 5-, 7- or 10-year "strip" of individual contracts in a single transaction, rather than constructing the same positions with individual contracts. Similarly, Eurodollar Packs allow traders to simultaneously purchase or sell a consecutive series of four Eurodollar futures. To further benefit market users, we have implemented a series of product enhancements in recent years. We introduced quarter-tick (smaller price increment) trading for "front-month expiring" (contracts closest to expiration) Eurodollar and LIBOR futures and options contracts and we expanded half-tick trading through the twentieth quarterly Eurodollar expiration. We also implemented all-or-none trading in the quarterly expirations of Eurodollar futures, and in Eurodollar options contracts, permitting transactions to be executed in full, at the size and price specified. All of these changes have reduced costs and enhanced efficiency for market participants. As depicted in the chart below, our interest rate product trading volumes have fluctuated over the last five years. These fluctuations reflect primarily changes in central bank monetary policies and changing levels of interest rate volatility during these periods, rather than successful competition from other exchanges or increased use of alternative products or markets by market users. Presently, many banks that use Eurodollar futures have adopted internal systems that allow separate divisions within the bank to offset their positions as alternative to using our markets. Despite these activities, volume in these products continues to remain strong, and they constitute a significant part of our business. [Graphic: Bar graph representing and entitled "VOLUME OF INTEREST RATE CONTRACTS TRADED 1994 - 1999". Below the horizontal axis each year for which interest rate trading volume is measured is listed in chronological order from left to right. The vertical axis indicates the number of interest rate contracts traded, in millions, beginning with zero and increasing, in intervals of 50, to 150. The lower portion of each bar is darkly shaded to the extent of the futures contracts traded and the top portion of each bar is lightly shaded to the extent of options contracts traded. Inset in a small square to the right of the graph is a legend containing a lightly shaded box to the immediate left of the word "Options" and immediately below which is a darkly shaded box to the immediate left of the word "Futures". Futures contracts were traded at the rate of approximately 119 million in 1994, 110 million in 1995, 91 million in 1996, 103 million in 1997, 112 million in 1998 and 95 million in 1999. Options contracts were traded at the rate of approximately 20 million in 1994, 21 million in 1995, 22 million in 1996, 25 million in 1997, 33 million in 1998 and 25 million in 1999.] 61
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Stock Index Products. We offer trading in futures and options contracts based upon the S&P 500(R) and Nasdaq 100(R) stock indices, as well as other domestic and foreign small, medium and large cap indices. Over 90% of our volume in stock index products is in products based on the S&P 500 Index, to which we have an exclusive contract. Standard & Poor's Corporation designed and maintains the S&P 500 Index to be an accurate proxy for a diversified equity portfolio representing a broad cross-section of the U.S. equity market. The index is based upon the stock prices of five hundred large-capitalization companies. In 1999, the total notional value of S&P 500 futures contracts traded was $9.7 trillion compared to the $8.9 trillion value of stocks traded on the New York Stock Exchange. The Nasdaq 100 Index, also known as the "technology index," is based on the one-hundred largest non-financial stocks listed on the Nasdaq stock market. These products give market users the ability to hedge their equity portfolios, to gain exposure efficiently to U.S. and foreign equity markets without the execution and capital costs of implementing their trading strategy in the underlying cash markets, to take advantage of spread opportunities between different sectors of the market, to enhance the return or yield on an underlying portfolio of stocks or commodities, and to diversify a portfolio. Market users include public and private pension funds, investment companies, mutual funds, insurance companies and other financial services companies that benchmark their investment performance to different segments of the equity markets. As depicted in the chart below, our equity index product trading volumes have increased substantially in the last two years. In addition, we currently have about a 90% market share in all U.S. listed stock index futures and options on futures. Our dominance in this market reflects the liquidity that our members provide, as well as the fact that the S&P 500 Index is the U.S. financial standard for benchmarking stock market returns. In addition to the overall strength of the U.S. equity markets, our equity index volume growth in 1998 and 1999 is attributable to a one-half reduction in the size of our S&P 500 futures contract in November 1997, making the contract more attractive to smaller institutions. To benefit market users of our equity index products, we have introduced flexible term options on our equity index futures. These options allow users to more precisely tailor expiration dates, strike prices, the exercise style, and various other features of our standardized options contracts, in order to meet their needs and complement their trading strategies. [Graphic: Bar graph entitled "VOLUME OF EQUITY INDEX CONTRACTS TRADED 1994 - 1999" and representing the number of futures and options contracts on various stock indices traded on the CME. Below the horizontal axis each year measured is listed in chronological order from left to right. The vertical axis indicates the number of contracts traded, in millions, beginning with zero and increasing, in intervals of 10, to 50. The lower portion of each bar is darkly shaded to the extent of the futures contracts traded and the top portion is lightly shaded to the extent of the options contracts traded. Inset in a small square to the right of the graph is a legend containing a lightly shaded box to the immediate left of the word "Options" and immediately below which is a darkly shaded box to the immediate left of the word "Futures". Futures equity index contracts were traded at the rate of approximately 20 million in 1994, 21 million in 1995, 22 million in 1996, 25 million in 1997, 39 million in 1998 and 43 million in 1999. Options equity index contracts were traded at the rate of approximately 5 million in 1994, 6 million in 1995, 5 million in 1996, 5 million in 1997, 5 million in 1998 and 5 million in 1999.] 62
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We have had a licensing arrangement with Standard & Poor's Corporation since 1980 that gives us the exclusive right to trade futures and options on futures contracts on specified S&P stock indices, including the S&P 500. In 1997, we extended this arrangement until 2008, ensuring the continued success and expansion of this market. Our Nasdaq 100 license agreement will also continue until 2005. In 1997, we launched our highly successful E-Mini S&P 500 futures and options contracts and, in 1999, we launched our E-Mini Nasdaq 100 futures contracts. These contracts, which are traded both by electronic trading on GLOBEX2 and open outcry pit trading, are one-fifth the size of our principal S&P 500 and Nasdaq 100 futures contracts, and are designed to appeal to our growing retail and small institutional customer segment. The method of execution for these E-Mini products is determined by the size of the order. Smaller orders utilize complete electronic order entry, routing and trade matching via GLOBEX2. Larger orders are executed by open outcry on the trading floor via our innovative all-or-none facility. This facility allows pit transactions to be executed in full, at the size and price specified. Since their introduction, trading volumes in these products have grown rapidly. As the chart below indicates, quarterly volume in our E-Mini S&P 500 futures and options contracts recently exceeded three million contracts. The strong growth pattern is indicative of the strength of the U.S. equity markets, as well as the increasing prevalence of sophisticated retail customers interested in Internet access and day trading. We expect continued growth in our existing E-Mini markets and to develop E-Mini versions of some of our other products that will attract retail customers and small institutions. [Graphic: Bar graph entitled "E-MINI S&P QUARTERLY VOLUME Q4 1997 - Q4 1999" and representing the quarterly trading volume of E-Mini S&P 500 futures and options contracts from the fourth quarter of 1997 through the fourth quarter of 1999. Below the horizontal axis each quarter measured is listed in chronological order from left to right. The vertical axis indicates the number of contracts traded, in millions, beginning with zero and increasing, in intervals of 0.5, to 3.5. E-Mini contracts were traded at the rate of approximately 0.6 million in the fourth quarter of 1997, 0.7 million in the first quarter of 1998, 0.8 million in the second quarter of 1998, 1.3 million in the third quarter of 1998, 1.4 million in the fourth quarter of 1998, 2.0 million in the first quarter of 1999, 2.5 million in the second quarter of 1999, 3.0 million in the third quarter of 1999 and 3.2 million in the fourth quarter of 1999.] Currency Products. Since developing financial futures for currencies in 1972, we have built a strong presence in foreign currency trading, providing traders, investors and risk managers with tools to hedge their risk from foreign exchange market movements. Average daily turnover in the interbank foreign exchange market exceeds $1 trillion, making this market the world's largest. The interbank foreign currency market is dominated by large banks and multinational corporations. The Exchange provides an attractive alternative to this market by offering foreign currency futures and futures options contracts so that large and small investors alike can have equal access to the world of foreign exchange. We offer futures and options on futures contracts on the world's major currencies, including, among others, the Euro, Deutsche mark, Japanese yen, British pound, Canadian dollar, French franc, Swiss franc, Mexican peso, and Australian dollar. Users of these markets are institutions such as banks, hedge funds, commodity trading advisors and corporations with foreign currency exposures, and retail customers who speculate for profit on foreign currency price movements. To benefit market users and compete effectively with the interbank foreign currency market, we have introduced all-or-none trading whereby larger currency futures orders are filled in their entirety at a single 63
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price, without the possibility of partial fills. Additionally, foreign currency all-or-none transactions can occur outside the bid/ask or daily high/low for regular futures contracts, and market participants can receive competitive quotes from multiple market makers. As indicated in the charts below, our foreign currency futures and options product trading volumes have declined significantly in the last five years, while our foreign currency EFP transaction volumes have increased. The decline in our futures and options trading volumes reflect several different trends: bank consolidations and increased use of internal netting mechanisms by our bank customers, reduced volatility in cash foreign currency markets, and the introduction of the Euro and subsequent phasing out of major European currencies. We also face significant competition in this product sector from the interbank foreign currency market, which offers comparable and highly liquid cash and forward rate agreement trading facilities in these foreign currencies. Despite declines in our foreign currency futures and options trading volumes, however, the growth in foreign currency EFP transactions and EFP fees have stabilized revenues from our currency products. [Graphic: Bar graph entitled "VOLUME OF CURRENCY CONTRACTS TRADED 1994 - 1999" and representing the trading volume of foreign currency options and futures contracts. Below the horizontal axis each year measured is listed in chronological order from left to right. The vertical axis indicates the number of contracts traded, in millions, beginning with zero and increasing, in intervals of 10, to 50. The lower portion of each bar is darkly shaded to the extent of the futures contracts traded and the top portion is lightly shaded to the extent of the options contracts traded. Inset in a small square to the right of the graph is a legend containing a lightly shaded box to the immediate left of the word "Options" and immediately below which is a darkly shaded box to the immediate left of the word "Futures". Futures contracts were traded at the rate of approximately 30 million in 1994, 23 million in 1995, 21 million in 1996, 25 million in 1997, 25 million in 1998 and 22 million in 1999. Options contracts were traded at the rate of approximately 12 million in 1994, 10 million in 1995, 7 million in 1996, 5 million in 1997, 4 million in 1998 and 2 million in 1999.] [Graphic: Bar graph entitled "CURRENCY EFP AND FUTURES/OPTIONS PIT TRADING VOLUME 1994 - 1999" and representing trading volume in foreign currency transactions via pit trading and over the Exchange-for-Physicals (EFP) market. Below the horizontal axis each year measured is listed in chronological order from left to right. The vertical axis indicates the number of contracts traded, in millions, beginning with zero and increasing, in intervals of 10, to 50. The lower portion of each bar is darkly shaded to the extent of the pit trading volume and the top portion is lightly shaded to the extent of the EFP trading volume. Inset in a small square to the right of the graph is a legend containing a lightly shaded box to the immediate left of the initials "EFP" and immediately below which is a small darkly shaded box to the immediate left of the word "Pit". Pit trading volume was approximately 37 million in 1994, 29 million in 1995, 25 million in 1996, 24 million in 1997, 27 million in 1998 and 23 million in 1999. EFP trading volume was approximately 4 million in 1994, 3 million in 1995, 4 million in 1996, 6 million in 1997, 7 million in 1998 and 7 million in 1999.] Additionally, we have launched new E-Mini currency products based on the Euro and the Japanese Yen that we are targeting toward the developing electronic retail customer base opened up by the prevalence of on-line Internet trading of equities, and by our developing franchise in E-Mini equity products. 64
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Agricultural Products. Agricultural products were the core from which we started at the turn of the last century. The Exchange has maintained a strong franchise in our agricultural products, including contracts based on cattle, hogs, pork bellies, dairy products, and other agricultural commodities. Our market users include agricultural producers of commodities, food processors, and retail customers. Extensive revisions to existing contracts and the development of new products have led to stable volume and modest growth in this product sector in recent years. Our agricultural product trading volumes are depicted in the chart below. We believe that continuing consolidation and restructuring in the agricultural sector, and the reduction or elimination of government subsidies, could provide growth in our agricultural markets as large producers and processors adopt formal hedging and risk management programs. [Graphic: Bar graph representing and entitled "VOLUME OF AGRICULTURAL CONTRACTS TRADED 1994 - 1999". Below the horizontal axis each year measured is listed in chronological order from left to right. The vertical axis indicates the number of contracts traded, in millions, beginning with zero and increasing, in intervals of 2, to 10. The lower portion of each bar is darkly shaded to the extent of the futures contracts traded and the top portion is lightly shaded to the extent of the options contracts traded. Inset in a small square to the right of the graph is a legend containing a lightly shaded box to the immediate left of the word "Options" and immediately below which is a darkly shaded box to the immediate left of the word "Futures". Futures contracts were traded at the rate of approximately 6.4 million in 1994, 6.3 million in 1995, 7.7 million in 1996, 7.7 million in 1997, 7.9 million in 1998 and 7.5 million in 1999. Options contracts were traded at the rate of approximately 1.0 million in 1994, 0.9 million in 1995, 1.0 million in 1996, 1.0 million in 1997, 1.1 million in 1998 and 1.0 million in 1999.] Other Products. We offer several interest rate, currency and index contracts based upon the emerging markets of the world, providing tools for managing the risk associated with emerging market financial flows, investments and foreign exchange transactions. We also developed the first exchange-traded credit and temperature-related weather derivatives contracts. We believe these contracts will create new risk management opportunities for credit institutions and insurance companies that face risks in their lending and insurance activities. The CME Quarterly Bankruptcy Index, the world's first exchange- listed consumer credit derivatives contract, is designed to allow credit card companies and other lenders in the $1.4 trillion consumer credit market to hedge risk associated with the escalating number of U.S. bankruptcy filings in recent years. Our Heating Degree Day and Cooling Degree Day futures and options on futures are designed to help businesses protect their revenues during times of depressed demand or excessive costs because of unexpected or unfavorable weather conditions. Weather affects an estimated 20 percent of the $9 trillion U.S. economy, and the over-the-counter market in managing weather-related risk has grown significantly over the past few years. Execution Facilities We operate two trade execution facilities--open outcry trading pits and GLOBEX2. Both offer our users secure and reliable facilities, immediacy of trade execution, anonymity, and price transparency. Both the trading pits and GLOBEX2 are state-of-the-art trading environments supported by substantial infrastructure and technology for order routing, trade reporting, market data dissemination, and market surveillance and regulation. 65
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Open Outcry Trading. Open outcry trading occurs in individual pits on our two trading floors and represent ninety-two percent of our total volume in 1999. The pits are the centralized meeting place for floor brokers and independent traders to trade contracts. Orders for market participants not on the floor are relayed to brokers for execution in the pits. The trading floors, covering 70,000 square feet, have tiered booths surrounding the pits from which clearing member firm personnel can communicate with customers regarding current market activity and prices and receive orders either electronically or by telephone. In addition, our trading floors display current market information and news on wallboards hung above the pits. GLOBEX2 Electronic Trading. Our original GLOBEX System, which we jointly developed in partnership with Reuters, was introduced in 1992. GLOBEX2, the second generation system we introduced in 1998, is based on the Nouveau Systeme de Cotation developed and licensed to us by our GLOBEX2 partner, ParisBourse. GLOBEX2 maintains an electronic, centralized order book and trade execution algorithm for futures and futures options contracts and allows users to directly enter orders into the order book. Initially, these systems were used to offer our products to market users after the close of our regular daytime trading sessions. Today, however, we trade some of our most successful products virtually around the clock on our GLOBEX2 system, including our E-Mini S&P 500 futures and options contracts, E-Mini Nasdaq 100 futures, E-Mini Euro FX futures and E-Mini Japanese Yen futures. In 1999, in response to customer interest, we initiated simultaneous "side-by-side" electronic and open outcry trading in our most successful contracts--Eurodollar futures and options--expanding market users' alternatives for trade execution facilities. Most recently, we have initiated trading exclusively on our GLOBEX2 system, in some foreign currency cross-rate contracts, and in innovative new credit and weather derivatives products. Eight percent of our 1999 volume was traded on GLOBEX2 and, as indicated in the table below, our yearly GLOBEX2 volume has grown rapidly. GLOBEX2 trading volume has increased from 210,000 contracts in 1992, when the original system was launched, to more than sixteen million contracts in 1999. Through 1998, GLOBEX2 volume doubled every year since 1996. [Graphic: Bar graph entitled "GLOBEX VOLUME 1992 - 1999" and representing the number of contracts traded over the GLOBEX System and its 1998 replacement the GLOBEX2 System. Below the horizontal axis each year measured is listed in chronological order from left to right. The vertical axis indicates the number of contracts traded over these Systems, in millions, beginning with 0 and increasing, in intervals of 5, to 20. System volume was approximately 0.2 million in 1992, 1.0 million in 1993, 1.0 million in 1994, 1.3 million in 1995, 2.0 million in 1996, 4.4 million in 1997, 9.7 million in 1998 and 16.1 million in 1999.] GLOBEX2 users include clearing member firms, locals, market makers, commodity trading advisors and individuals that have been issued electronic trading hours permits. In response to the rapid growth in electronic trading of financial instruments, we are significantly expanding the functionality, capacity and distribution of GLOBEX2. The flexibility of the open architecture design of GLOBEX2 allows us to add new products to the system and to easily and quickly increase processing throughput. Technology Supporting our Execution Facilities. We have enhanced our open outcry and electronic markets with automation and cost efficiencies that will help us retain our competitive advantage of instant liquidity for market users. In order to streamline the trading operations of our members and link our existing order routing technology, we have developed an application programming interface, CME FIX API(TM), designed to route orders efficiently from 66
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independent software vendors' and clearing member firms' order management systems to our trading floors and to GLOBEX2. As indicated in the diagram below, orders are sent from the end user or member's trading application, through our secure network, and then delivered to CUBS(TM), TOPS Route(TM) or GLOBEX2. These systems then execute in the case of GLOBEX2 or, in the case of CUBS and TOPS Route, route the order to the trading floor for execution and return the fill information back to the member or end user. CUBS enables our floor brokers standing in the pits to electronically receive orders and report fills to the order originator by providing an electronic direct link between a clearing member firm's order desk and a filling broker. TOPS Route, our electronic order entry, routing, and fill reporting system, expedites the flow of orders permitting clearing member firms and their customers to electronically route orders directly to our trading floors. TOPS Route also generates fill reports and transmits trade records to member firms' back office systems. TOPS Route can be accessed from a dedicated TOPS Route terminal or through a firm's proprietary system connected via the CME FIX API. GalaxC(TM), introduced in 1999, is our proprietary wireless handheld unit that offers our local floor traders the ability to enter limit orders and execute against orders resting on GLOBEX2, and to execute trades in the cash foreign currency markets. Our development of links between open outcry, electronic trading and electronic order routing will provide market users with greater access to the liquidity and execution facilities we provide. [Graphic: Flow-chart representing and entitled "CME's Trading and Order Routing Systems". Each symbol in the chart is shaded and a symbol's label is inscribed in that symbol. Atop the chart, a two-headed arrow runs between a rectangle labeled "Internet Access" and a rectangle below it labeled "Retail- Ordering Clearing Firms". From the bottom left of the latter rectangle, a two- headed arrow runs to the top left of an oval labeled "FIX API Access". From the top right of that oval a two-headed arrow in the shape of two stair steps leads to a rectangle labeled "Clearing Firm". From the top of that rectangle, a two- headed arrow connects it to a rectangle labeled "Public Customer" and from its right face a two-headed arrow connects it to a rectangle labeled "Proprietary Trading Desk". From the bottom right of the "FIX API Access" oval, a two-headed arrow in the shape of a backward "L" leads to the right face of a square labeled "GLOBEX2". A two-headed arrow connects the top center of the "GLOBEX2" square to the bottom center of a rectangle labeled "GLOBEX Terminal". From the upper right face of the "GLOBEX2" square, a two-headed arrow runs diagonally upward to a rectangle labeled "TOPS ROUTE Order Routing System". An arrow runs from the right face of that rectangle to the words "Other Exchanges", a two-headed arrow runs from its top face to a rectangle labeled "TOPS Terminal" and a two-headed arrow runs from its left face to the "FIX API Access" oval. From the bottom of the "FIX API Access" oval a two-headed arrow in the shape of an "L" runs to the left angle point of a hexagon labeled "CUBS II Amker Station". This hexagon is connected by two chevrons, pointing left and running from its bottom face, to the top face of a hexagon labeled "GalaxC Wireless Handheld". A two-headed arrow in the shape of an "L" runs from the bottom face of the "GLOBEX2" square to left angle point of the "GalaxC" hexagon. That hexagon is connected by two parallel lines running from its right angle point and lower right face to a hexagon labeled "Telephone Lines". Two chevrons, pointing to the right run from the latter hexagon's top face to the bottom face of a fourth hexagon labeled "Ticket Printing & Trade". Two parallel lines connect this fourth hexagon at its left angle point and lower left face to the "CUBS II" hexagon. Each hexagon is the same size. Written beneath the bottom two hexagons is "Open Outcry Trading". A two-headed arrow in the shape of a single stair step runs upward and to the right from the top of the "Ticket Printing & Trade" hexagon to the "TOPS 67
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ROUTE" rectangle.] We are also expanding global access, virtually twenty-four hours a day, to our trading, clearing and risk management facilities. Recognizing the growth in electronic trading and our ability to expand our product reach around the globe, we have nearly doubled the number of dedicated GLOBEX2 terminals in use. In addition to the thousands of order routing terminals that interface with our GLOBEX2 trading environment, we have over 1,200 GLOBEX2 execution terminals in the United States and throughout the world: 855 in the U.S. (not including over 300 on our two trading floors) and 54 terminals internationally (Europe, Asia, Bermuda). In addition, many firms and customers route orders to GLOBEX2 via the Internet, further extending electronic access to our markets. Our ten largest retail-oriented clearing members have full Internet order routing capabilities, including the ability to execute trades, check account balances, and gain on- line access to quotes and charts. In addition to technology, we offer market users other trade execution efficiencies. For example, in 1992, we introduced the Average Price System(TM) (APS), which enables clearing member firms to compute and confirm average prices when multiple prices are received on the execution of an order or series of orders during a single trading day. APS was developed to address the difficulty account managers have when an order representing multiple accounts is executed at different prices. These account managers sometimes prefer to use alternative dealer markets where a single price execution is available--although sometimes at less favorable prices. APS provides our market users with the operational flexibility they need, while also providing the transparent, competitive and efficient pricing that we provide in our markets. Clearing The CME Clearing House clears, settles, nets and guarantees performance of all matched transactions in our contracts. Unlike most other exchanges, the Exchange owns and operates the Clearing House, enabling the Exchange to achieve the closest possible coordination between its clearing functions and its other main business areas of risk management, new product initiatives, customer service and competitive issues. At each settlement cycle, the Clearing House "marks-to-market" all open positions by calling for payments from clearing members whose positions have lost value, and by paying clearing members whose positions have gained value. The Clearing House marks all open positions to market at least twice a day - more often if market volatility warrants. The diagram below illustrates the daily mark-to-market and settlement activities of Clearing House. [Graphic: Flow-chart titled and representing "CME Clearing House Activities". Each symbol in the chart is shaded and a symbol's label is inscribed in that symbol. Atop the chart, two octagons are aligned horizontally, with a horizontal arrow pointing from the right face of the octagon labeled "LONG POSITION" to the left face of the octagon labeled "SHORT POSITION". A single arrow points from the bottom face of each octagon to one of two ovals, each oval being aligned horizontally and centered beneath each octagon. Each oval is labeled "CLEARING FIRM MEMBER". An arrow bent as if signifying the time five o'clock, points from the bottom right portion of the left oval to the top of a large circle labeled "CLEARING HOUSE Match Trade Guarantee Trade Collect margins and settlement variations". Inserted into the vertical portion of the arrow line is an unshaded circle containing the number "2". Immediately above the arrowhead and sloping downward to the right is written "TRADE 68
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DATA". Halfway embedded in the top center of the large circle is a much smaller unshaded circle containing the number "3". A two-headed arrow bent as if signifying the time five o'clock, leads from the bottom center of the left oval to the top of the large circle. Inserted after the bend into the arrow line and just above the arrowhead is an unshaded circle containing the number "4". An arrow leads from the lower left face of the left oval and turns vertically downward to abut the top of a rectangle labeled "SETTLEMENT BANK Makes payment from clearing firm to clearing house and safekeeps margin assets". An arrow leads upward from the top left of the rectangle and turning horizontally to the right where its arrowhead abuts the upper left face of the left oval. An arrow in the shape of an "L" leads from the left face of the large circle to the rectangle. An unshaded circle containing the number "4" is inserted into the horizontal segment of the arrow line. An arrow in the shape of an "L" runs from the bottom of the rectangle to the large circle. An unshaded circle containing the number "5" is inserted into the perpendicular portion of the arrow line. Written below the horizontal portion of the arrow line is "CONFIRMS PAYMENT". An arrow bent as if signifying the time seven o'clock, points from the bottom left face of the right oval to the top of the large circle. Inserted into the vertical segment of the arrow line is an unshaded circle containing the number"2". Above the arrowhead and sloping downward and to the left is written "TRADE DATA". A two-headed arrow bent as if signifying the time seven o'clock, leads from the bottom center of the left oval to the top of the large circle. Inserted after the bend in the arrow line and just above the arrowhead is an unshaded circle containing the number "4". A horizontal line leaves from the lower right face of the right oval, turns vertically downward where its arrowhead touches the top of a second rectangle labeled "SETTLEMENT BANK Makes payment from clearing firm to clearing house and safekeeps margin assets". An arrow in the shape of a backward "L" leads from the right face of the large circle to the rectangle. An unshaded circle containing the number "4" is inserted into the horizontal segment of the arrow line. An arrow in the shape of a backward "L" runs from the bottom of the box to the large circle. An unshaded circle containing the number "5" is inserted into the vertical segment of the arrowline. Written below the horizontal segment of the arrow line is "CONFIRMS PAYMENT". An arrow leads upward from the top right face of the box, turns horizontally to the left and abuts the upper right face of the right oval. An arrow leads from the lower right face of the oval, turns vertically downward and abuts the rectangle.] Our ability to conduct a minimum of two daily settlement cycles helps protect the financial integrity of the Clearing House, our clearing member firms, and market participants. This ability enables the Clearing House to identify more quickly any clearing firms that may not be able to satisfy the financial obligations resulting from changes in the prices of their open contracts before those financial obligations become exceptionally large and jeopardize the ability of the Clearing House to insure performance on their open positions. The CME Clearing House has a perfect record for performance on its obligations, and no clearing member firm has ever failed to perform on its obligations to the CME Clearing House. On an average day, we act as custodian for approximately $20 billion in performance bond assets, and we move an average of $990 million of settlement variation funds through our clearing system. As indicated below, our Clearing House guarantees the performance of our contracts with approximately $64 billion in available assets. CME Clearing House Available Assets as of December 31, 1999 (in billions) [Download Table] Aggregate Performance Bond Deposits by Clearing Member $18.9 69
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Firms Market Value of Pledged Memberships 0.1 CME Surplus Funds 0.1 Security Deposits of Clearing Members 0.4 Common Bond of Clearing Members 44.8 ----- Total $64.3 The CME Clearing House guarantee of performance is a significant attraction of our markets: our market users do not need to evaluate the credit of each potential counterparty or limit themselves only to a selected set of counterparties. This increases the potential liquidity available for each trade and reduces the costs of using our markets. Additionally, the substitution of the CME Clearing House as the counterparty to every transaction allows our market users to establish a position with one party, and then to offset the position with another party. This contract netting process provides our market users with significant flexibility in establishing and adjusting positions. In order to ensure performance, we establish and monitor financial requirements for our clearing members and set minimum performance bond levels for our traded products. The CME Clearing House holds performance bond collateral to cover the largest reasonable losses between marks-to-market. It typically seeks to cover at least ninety-five percent of all daily price changes in each product. The Clearing House uses its proprietary SPAN(R) system, which targets performance bonds to risks, to simulate the gains and losses of complex portfolios. We utilize risk management and financial surveillance programs. These programs are designed to prevent the accumulation of losses, ensure the availability of sufficient resources to cover future obligations, promptly detect financial and operational weaknesses, and allow swift and appropriate action to be taken to rectify any financial problems. In the unlikely event of a clearing member payment default, we would apply the following assets of the clearing member to cover the member's payment obligation: . security deposit, . performance bonds, and . any other available assets, which could include proceeds from the sale of any memberships owned by or assigned to the clearing member. If the payment default remains unsatisfied, then the following assets would be applied to address the deficit: . surplus funds of the Exchange . security deposits of other clearing members, and . funds collected through the assessment of a common bond against all other clearing member firms. The Exchange also maintains an unsecured, confirmed $350 million line of credit agreement with a consortium of banks in order to ensure adequate liquidity to deal with a clearing member payment default. This line of credit may also be utilized if there is a temporary problem with the domestic payments system that would delay payments of settlement variation between the 70
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Clearing House and clearing members. The Clearing House also manages final settlement on all CME contracts, including cash settlement, physical delivery of selected commodities, and option exercise and assignment. Although more than ninety-five percent of all futures contracts are liquidated before the expiration of a contract, the remainder must be delivered according to detailed specifications. The Clearing House acts as the delivery agent for all contracts. This ensures that timely delivery of the exact quality and quantity specified in a contract is made by the seller, and that full and timely payment is made by the buyer. Our objective is to offer the highest possible risk management services and financial safeguards to our clearing member firms while providing maximum capital efficiencies to users of our markets. In 1999, we enhanced our financial safeguards by increasing our security deposit pool from $125 million to $305 million. We also introduced net margining in proprietary accounts, thereby reducing capital costs for our clearing member firms by an estimated $900 million a day. We implemented risk-based capital requirements to match more closely the capital requirements of our clearing member firms to the actual risks borne by those firms. In order to achieve further capital efficiencies for our clearing member firms, we have also established our Interest Earning Facility(TM), two money market funds managed by a third party investment manager, to allow clearing member firms to enhance the yields that they receive on their performance bond collateral deposits with the Clearing House. We currently have approximately $1 billion in balances in these funds, which are benchmarked against the ninety-day U.S. Treasury Bill average yield. Because initial and maintenance performance bonds, as well as profits in some of our contracts, are denominated in various foreign currencies, the Clearing House offers the Moneychanger(TM) Service to its clearing member firms. This service provides traders with access to overnight funds in various foreign currencies at competitive bid/ask spreads free of charge for the transfer of funds to satisfy the terms of a futures contract. To support our objective to provide firms with high quality clearing services, we have developed in conjunction with the New York Mercantile Exchange a state-of-the-art clearing system, Clearing 21(R), which processes reported trades and positions on a real-time basis, providing users with instantaneous information on trades, positions, money and risk exposure. Clearing 21 supports futures and options products, securities, and cash instruments, as well as complex new product types including combinations, options on combinations, options on options, swaps, repurchase and reverse repurchase agreements, and other instruments. Through Clearing 21 workstations, our clearing member firms can electronically manage their positions, exercise options, enter transactions related to foreign currency deliveries, manage collateral posted to meet performance bond requirements, and access all of our other on-line applications. Together with the GLOBEX2, we offer straight through electronic processing of transactions in which an order is electronically routed, matched, cleared, and made available to the clearing firm's back office systems for further processing. The Clearing House's highly sophisticated SPAN system has now been adopted by over thirty other exchanges and clearing organizations worldwide. SPAN simulates the effects of changing market conditions on a complex portfolio and uses standard options pricing models to 71
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determine a portfolio's overall risk. SPAN then generates a performance bond requirement that covers the largest reasonable overnight loss. We have led the derivatives industry in establishing cross-margining agreements with other leading clearing houses that reduce capital costs for clearing member firms and users of our markets. The cross-margining agreements permits an individual clearing house to recognize a clearing firm's open positions at other clearing houses that produce risk offsets and to lower capital requirements.. We have implemented, or are in the process of implementing, cross-margining arrangements with The Options Clearing Corporation, Commodity Clearing Corporation, the Board of Trade Clearing Corporation, the London Clearing House, the Singapore Exchange Derivatives Clearing and Clearnet. The CME Clearing House has the operational capacity and organizational expertise to extend its services flexibly and efficiently to a range of potential new products and also to other exchanges and trading platforms. Market Data Our markets generate valuable information regarding prices and trading activity in our products. We sell our "market data," which includes bids, offers, trades, and trade size to banks, broker-dealers, public and private pension funds, investment companies, mutual funds, insurance companies, individual investors, and other financial services companies or organizations that use our markets or monitor general economic conditions. Revenue from market data represents approximately 21% of our revenue during 1999, and has grown at an annual rate of 5.6% over the last five years. In general, the price information is sent via dedicated networks to 115 worldwide quote vendors who consolidate our market data and information with that from other exchanges and third party data and news services and resell the consolidated data and information to their subscribers. These quote vendors distribute our market data through dedicated networks, the Internet, and through wireless handheld devices. We currently have over 36,000 subscribers of our real time market data who display the data on over 175,000 screens. The market data supplied by the Exchange is central to trading activity in our products and to trading activity in related cash and derivatives markets The dissemination of real time data generates revenue and supports our customer bases with timely market information. We believe that the evolution of technology and the financial services industry will change the existing distribution channels, sales methods and pricing structure for market data. These changes might adversely impact our sale of market data. Increases in the volume of electronic trading, the use of the Internet as a distribution mechanism, and increases in the use of our products by individual retail investors will all impact the sale of our market data. We have created marketing programs to stimulate usage of our market data, and we have begun to enter into new business relationships with companies that develop value-added computer-based applications that use our market data to provide specific insights into the dynamics of trading activity in our listed contracts. International Alliances We are expanding our network of international alliances and partnerships with other exchanges in order to offer our products to customers on a global basis and to access the existing distribution capabilities of some of our partners' electronic trading systems. We have established 72
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the GLOBEX Alliance with the derivatives markets operated by ParisBourse in France, The Singapore Exchange Derivatives Trading Limited, the Bolsa de Mercadorias y Futuros in Brazil, and the Montreal Exchange. We have also entered into a partnership with the London International Financial Futures & Options Exchange and its clearing partner, the London Clearing House. Through these alliances, partnerships and relationships, we intend to offer our customers capital efficiencies by cross-margining mutually agreed upon highly correlated products; trading efficiencies by interconnecting our trading platforms and networks of each exchange and by harmonizing trading rules and interfaces. Additionally, when mutually beneficial, we will share in the cost of the development of technology. We seek to expand these alliances to include other foreign and domestic markets. Marketing Programs and Advertising Our marketing programs target both institutional and retail customers. Our marketing programs for institutional customers aim to inform highly sophisticated traders, portfolio managers, corporate treasurers and other market professionals about novel uses of our products, such as new hedging and risk management strategies. We also strive to educate these users about changes in product design, margin requirements and new clearing services. Our marketing typically involves the development of personal relationships with professional traders who actively use our markets. We participate in all major domestic and international trade shows and seminars regarding futures and options and other derivatives products. In addition, we sponsor educational workshops and marketing events designed to educate market users about our new products. Through these relationships and programs, we ascertain the needs of our customer base and we use information from them to drive our product development and product maintenance efforts. We advertise our products and our brand name to increase our trading volumes. Our advertising strategy is twofold: to maintain awareness and familiarity among our institutional target customers and to generate awareness among our growing retail audience. Our primary method of communication is with print media, using both monthly trade magazines and daily business publications. We are also committing media dollars to Internet advertising given the growth of the medium and the synergies with our electronically traded products. Competition We face a variety of competitors and competing marketplaces and products. We compete by offering market participants efficient, cost-effective and liquid marketplaces for trade execution through both open outcry and electronic trading platforms, broadly disseminated and transparent market and quotation data, a financially secure clearing system, access to market making, superior product design, and state-of-the-art technology. Additionally, we are continually enhancing our products and providing additional efficiencies to our customers. For example, to address competitive threats to our Eurodollar market, we have implemented trading in half-tick and quarter-tick increments; we have introduced mid-curve options and Eurodollar packs and bundles, and we have changed the final settlement procedures for these contracts to meet the needs of our customers. Additionally, we offer Eurodollar participants both open outcry and electronic trading platforms to choose from for trade execution. We believe we are well prepared to meet potential competition, and we are committed to maintaining the technology, services, market integrity and liquidity that make us an industry leader. 73
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Over-the-counter markets for interest rate and currency swaps, for cash currencies, and for other bilaterally negotiated derivative products compete with our products. However many of the participants in the over-the-counter markets use our products to hedge the risk they acquire in the over-the-counter markets. These over-the-counter markets depend heavily upon bilateral credit support; therefore, they tend to be dominated by large financial institutions with very high credit ratings. As a result, participation in these markets by some market participants and financial institutions with lesser credit ratings is sometimes limited or more expensive. The mutualization of risk offered by our Clearing House guarantee, and the mitigation of counterparty credit risk, allows us to service a broader segment of customers in these financial markets. In addition to competition from other exchanges that offer comparable derivative products, we also face competition from other financial exchanges, from electronic trading systems, from consortia of end users and futures commission merchants, and from technology firms. Other financial exchanges have trading platforms and financial market expertise that may lead them to consider listing copies of our non-equity products. These potential competitors would still need to obtain the regulatory approval, establish market liquidity, and develop derivative product clearing services. Electronic trading firms that currently specialize in the trading of equity securities have electronic trade execution and routing systems that can be used to trade products that compete with our products. Typically, while these firms have advanced electronic and Internet technology, significant capitalization, and competitive pricing, they lack the overall market liquidity, distribution, neutrality and market integrity offered by our electronic and open outcry trading platforms. They also lack the financial security and guarantees offered by our Clearing House. In many cases these electronic trading systems do not have the regulatory systems and approvals to trade products that compete directly with ours. Consortia owned by member firms and large market participants also may become our competitors, particularly with respect to our Eurodollar futures and options contracts. For instance, BrokerTec Global LLC, a proposed electronic inter-dealer fixed income broker, has announced its intention to develop or acquire a facility for electronic trading of U.S Treasury securities, Euro- denominated sovereign debt and other fixed income securities and futures related products. All of the members of BrokerTec Global LLC are either clearing member firms of the Exchange or affiliates of our clearing member firms, and are significant participants in the Eurodollar market. Similarly, Electronic Brokerage System, a partnership of major market-making banks, has an electronic trading system for currencies and short-term forward rate agreements that are very similar to our Eurodollar futures contract. Technology companies, market data and information vendors, and front end software vendors also represent potential competitors because, as purveyors of market data, these firms typically have substantial distribution. As technology firms, they also have access to trading engines that can be connected to their data and information networks. Additionally, technology and software firms that develop trading systems, hardware and networks but who are otherwise outside of the financial services industry may be attracted to enter our markets. Our Members 74
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We are presently owned by our members who have purchased seats on the Exchange. Members and individuals who have leased seats from members can execute trades for their own accounts or for the accounts of customers of clearing member firms. The trades of members and lessees of memberships for their own accounts qualify for lower fees in recognition of the market liquidity that their trading activity provides. Members and lessees also benefit from market information advantages that may accrue from their proximity to trading activity on the trading floors and from access to the GLOBEX2 order book. Memberships are purchased from existing members at prevailing market prices. There are four types of memberships: CME, IMM, IOM and GEM, each with different trading privileges and voting rights. All membership applicants are subjected to a thorough review process and must be approved. Members can buy or sell memberships through mechanisms maintained by the Exchange. High/Low Sale Prices of Memberships (in thousands) [Enlarge/Download Table] ----------------------------------------------------------------------------------------------------------------- GEM CME IMM IOM GEM Fraction ----------------------------------------------------------------------------------------------------------------- Year Qtr. High Low High Low High Low High Low High Low ----------------------------------------------------------------------------------------------------------------- 1998 1 $480.0 $459.0 $400.0 $390.0 $275.0 $255.0 $45.0 $38.0 $4.3 $3.5 ----------------------------------------------------------------------------------------------------------------- 2 410.0 390.0 335.0 210.0 245.0 135.0 30.0 21.5 3.6 1.5 ----------------------------------------------------------------------------------------------------------------- 3 333.0 251.0 242.5 180.0 151.0 110.0 28.0 15.0 2.3 1.5 ----------------------------------------------------------------------------------------------------------------- 4 325.0 276.5 208.0 181.5 140.0 115.0 18.0 15.0 2.0 1.5 ----------------------------------------------------------------------------------------------------------------- 1999 1 340.0 310.0 275.0 217.5 205.0 127.0 18.0 18.0 1.9 1.6 ----------------------------------------------------------------------------------------------------------------- 2 345.0 320.0 250.0 222.0 190.0 173.0 18.5 15.0 1.9 1.6 ----------------------------------------------------------------------------------------------------------------- 3 480.0 345.0 330.0 240.0 225.0 191.0 16.0 12.5 1.7 1.4 ----------------------------------------------------------------------------------------------------------------- 4 550.0 450.0 400.0 320.0 248.0 220.0 22.0 17.0 2.7 1.6 ----------------------------------------------------------------------------------------------------------------- Source: Exchange records. Individual Members Our Membership Committee reviews applicants and conducts proceedings to determine whether candidates meet our membership criteria. Additionally, registration or a temporary license to act as either a floor broker or a floor trader must be granted by the National Futures Association before an individual can begin trading on the Exchange's trading floors. All members must be guaranteed or qualified to trade by a clearing member before they may personally execute a transaction on the Exchange. With respect to GLOBEX2, qualified members may obtain a terminal to trade for their own accounts and participate in the P-M-T Limited Partnership, the owner of the GLOBEX2 system, as Class A Limited Partners. CME Division. The Chicago Mercantile Exchange division membership entitles the holder to execute trades in all futures and options contracts listed on the Exchange. There are 625 CME division memberships. IMM Division. The International Monetary Market ("IMM") division membership entitles the holder to execute trades in all currency and interest rate futures and options contracts, as well as the contracts assigned to the IOM and GEM divisions (defined below). There are 813 75
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IMM division memberships. IOM Division. Membership in the Index and Option Market ("IOM") division entitles the holder to execute trades in all stock index futures contracts, random length lumber futures contracts, all options contracts, and all contracts assigned to the GEM division. There are 1,287 IOM division memberships. GEM Division. The Growth and Emerging Markets ("GEM") division membership entitles holders to execute trades in all growth and emerging market currency, stock index and interest rate products that are assigned to that division by the board. When the GEM division was created in 1995, each member of the Exchange's other three divisions received a fractional GEM membership, and 50 memberships were sold to eligible third parties. GEM fractions may be sold and combined to create, together with the 50 full memberships that were sold to third parties, a total of 467 full memberships. Clearing Members An Exchange clearing member firm must satisfy our legal and financial requirements, as well as the requirements imposed by the CFTC. Nearly all of our clearing members are registered futures commission merchants. Clearing membership entitles the firm to execute orders on the Exchange and to clear resulting positions through the Exchange Clearing House. We have seventy clearing members. The right to be a clearing member in New CME will require an ownership interest equivalent to current requirements. Exchange rules require that each Exchange clearing member must own or have assigned to it at least two CME memberships, at least two IMM memberships and at least two IOM memberships. Additionally, due to a rule change that occurred in May 1987, a clearing member which was an IMM Class A clearing member on or prior to May 6, 1987, was allowed to own or have assigned to it at least one CME membership, three IMM memberships, and two IOM memberships. Twenty-two clearing firms were grandfathered under this rule, which was amended so that clearing members would no longer be divided into two different classes. The goal of the change was to consolidate clearing members into one group for uniformity and simplicity. Finally, after November 3, 2000, each clearing member must have at least one GEM membership assigned to it. The rules also require that at least one CME, one IMM, one IOM and one GEM membership assigned to the clearing member must be owned by the clearing member or an officer, principal or partner with an acceptable proprietary interest. Upon completion of the demutualization transaction, each clearing member will be required to satisfy the above-described criteria by owning Class A shares and Class B shares in an amount reflecting the total shares allocated to such clearing member in respect to the memberships held by it for purposes of meeting those requirements. New CME management may choose to alter these ownership interest requirements. Other Business Relationships And Subsidiaries P-M-T Limited Partnership. P-M-T Limited Partnership is an Illinois limited partnership and a partially-owned subsidiary of the Exchange. It was formed in 1988 to initiate the development of the GLOBEX system. P-M-T owns all rights to electronic trading of the 76
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Exchange's products. It has entered into contractual arrangements with the Exchange for the provision of services in connection with the operation of the system and the provision of related support services. The Exchange charges P-M-T for these services. The Exchange is the sole general partner of P-M-T. In addition, P-M-T has 1,695 owners of its Class A limited partnership interest and 57 owners of its Class B limited partnership interests. The following table indicates the number of units held by the Exchange and by members: Number of Units Held By -------------------------------------------- Limited Exchange Members Partner Number -------------------------------------------- Class of Units Number Percentage Number Percentage ------------------------------------------------------------------- A 4,786 321 6.7% 4,465 93.3% B 90 34 37.7 56 62.3 Class A limited partnership interests are held by CME, IOM and IMM members. Class B limited partnership interests are held by clearing member firms. GFX Corporation. GFX Corporation is a wholly-owned subsidiary of the Exchange. It was established by the Exchange for the purpose of maintaining and creating liquidity in our foreign currency futures contracts. Experienced foreign currency traders employed by GFX buy and sell our foreign currency futures contracts using our GLOBEX2 system. Offsetting arbitrage transactions using futures contracts or spot foreign currency transactions with approved counterparties in the interbank market are used to limit risk. GFX does not seek to profit from its trading and seeks to minimize risk. GFX's net trading gains amounted to $2.4 million in 1999, $4.8 million in 1998 and $2.2 million in 1997. CME Trust. The Chicago Mercantile Exchange Trust was established to provide financial assistance, on a discretionary basis, to customers of any clearing member that becomes insolvent. The Trust, the first of its kind for any exchange, contains $42.7 million in assets. The trustees of the fund, who are also members of the Exchange's Board of Directors, have discretion to use the fund to satisfy customer losses in the event a clearing member fails or is in such severe financial condition that it cannot meet a customer's obligations provided that those customers' losses are related to transactions in Exchange contracts. Neither the Exchange nor its members have any residual interest in the assets of the Trust. Intellectual Property We regard substantial elements of our brand name, marketing elements and logos, products, market data, software, and technology as proprietary, and we attempt to protect these elements by relying on trademark, service mark, copyright and trade secret laws, restrictions on disclosure and other methods. For example, with respect to trademarks, we have registered marks in more than twenty countries. Additionally, by way of example, we actively utilize trade secret laws to protect our market data. We will continue to use these and other methods of intellectual property protection in the future as appropriate. Employees As of December 1, 1999, we had 1,054 full-time equivalent employees. We consider our relations with our employees to be good. We have never had a work stoppage, and none of our employees are represented by a collective bargaining agreement. However, since 1982, we have had an understanding with the International Union of Operating Engineers, Local 399, AFL-CIO, 77
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relating to building engineers at the headquarters building. At present, there are seven employees to whom this understanding applies. Facilities The Exchange's principal executive offices are located at 30 South Wacker Drive, Chicago Illinois 60606. Our telephone number is (312) 930-1000. Our trading floor operations are also located there. We occupy approximately 430,000 square feet of office space under a lease that expires in 2003 and 70,000 square feet of trading floor space under a lease with the CME Trust. The trading arena has state-of-the-art wallboard price display systems, order-routing and communications systems. On November 1, 1998, we entered into a first extension of our lease with the CME Trust, and we have an option on three additional extensions which will secure the availability of our trading facility until October 2026. We maintain backup facilities for electronic systems in separate office towers at 10 and 30 South Wacker Drive, Chicago, Illinois. We also maintain remote offices in leased office space in Washington D.C., London, England and Tokyo, Japan. We believe that our facilities are adequate for our current operations and that additional space can be obtained if needed. Legal Proceedings From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. As of the date of this prospectus, except as described below, we are not a party to any litigation or other legal proceeding that, in our opinion, could have a material adverse effect on our business, operating results or financial condition. While the ultimate results of these proceedings against the Exchange cannot be predicted with certainty, management of the Exchange believes that the resolution of these matters will not have a material adverse effect on its consolidated financial position or results of operations. In May 1999, Victor Niederhoffer, Niederhoffer Investments, Inc., and several commodities pools controlled by Victor Niederhoffer filed a complaint against the Exchange and a number of unidentified employees, officials and members in federal district court in Chicago, under the Commodity Exchange Act. (Niederhoffer Intermarket Fund, L.P., et al. v. Chicago Mercantile Exchange, No. 99 C 3223 (N.D. Ill.)) The complaint charges that the Exchange failed to enforce its rules relating to the establishment of settlement prices on specified dates and that as a consequence Niederhoffer, the pools, and their futures commission merchant suffered damages of at least $105 million. Based on extensive pre-complaint investigation, discovery conducted to date, and advice from legal counsel, we believe that the lawsuit is without merit and that the plaintiffs are unlikely to prevail. On May 5, 1999, the Exchange, the Chicago Board of Trade, the New York Mercantile Exchange, and Cantor Fitzgerald, L.P., were sued by Electronic Trading Systems, Inc. in the United States District Court for the Northern District of Texas (Dallas Division) for alleged infringement of Wagner United States patent 4,903,201, entitled "Automated Futures Trade Exchange." The patent relates to a system and method for implementing an electronic, computer- automated futures exchange. Defense of the Exchange has been undertaken by attorneys for EuroNext, the licensor of our trading system and a subsidiary of ParisBourse, pursuant to an indemnification agreement. EuroNext has reserved its rights under that agreement in the event that any modifications to the licensed system made by us result in liability. Counsel 78
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for EuroNext have advised us that they do not believe that our licensed system infringes the patent. Regardless of the outcome of the proceeding, we believe that the indemnification agreement and the probability that a license will be available preclude any material effect on the Exchange. Regulation Regulation of the U.S. Futures Industry Futures and options contracts, which are traded on futures exchanges, are subject to regulation by the CFTC under the CEA. Futures exchanges in the United States and elsewhere are subject to extensive regulation. Clearinghouses affiliated with futures exchanges are similarly regulated. Our business activities fall within the scope of this law and these regulations. We are a designated contract market licensed by the CFTC. As a matter of public policy, regulatory bodies in the United States and the rest of the world are charged with safeguarding the integrity of futures markets and with protecting the interests of investors participating in those markets and in the cash markets underlying futures contracts. The Exchange maintains broad powers to ensure that free and open markets exist for the trading of futures and options contracts. In addition to its trading regulations, the Exchange has the power to take immediate action in dealing with an abrupt change in factors influencing futures markets in order to ensure orderly trading. In the United States, the CFTC is the federal agency responsible for the administration of the CEA. The CEA and CFTC rules govern most aspects of our operations and impose many affirmative obligations that can be costly and burdensome. Our ability to continue operating depends on continued compliance with the CEA and CFTC rules and regulations. Our ability to list new contracts is dependent on that compliance. If we fail to comply, the CFTC may conduct administrative proceedings which can result in censure, fine, the issuance of cease-and-desist orders or the suspension of our designation as a contract market. Changes in Existing Laws and Rules Additional legislation or regulation, or changes in existing laws and rules or their interpretation, may directly affect our mode of operation and our profitability. The CFTC has recently adopted regulations that will reduce the cost and burdens of listing new contracts for trading. Proposals for changes to the CEA that have been suggested by other regulators might be less favorable to our business. The regulations under which we have operated since 1974 may be changed in a manner that will permit unregulated competitors and competitors in other regulated industries to duplicate our markets and trade our products. The CEA requires all futures contracts to be executed on an exchange that has been approved by the CFTC. The exchange trading requirement has been modified by CFTC regulations to permit privately negotiated swap contracts to be transacted in the over-the-counter market. At the end of 1998, according to data from the Bank for International Settlements, the total estimated notional amount of outstanding over-the-counter derivative contracts was $80 trillion compared to $13.5 trillion for exchange-traded futures and options contracts. The CFTC 79
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exemption under which the over-the-counter derivative market operates precludes the over-the-counter market from using exchange-like electronic transaction systems and clearing. These limitations on the exemptions granted to the over- the-counter market have been called into question by a recent report of the President's Working Group on Financial Markets ("PWG"). The PWG is made up of the Treasury Secretary, and the Chairmen of the SEC, the CFTC and the Board of Governors of the Federal Reserve System. The PWG advocates a complete exemption from the CEA for some principal-to- principal derivative exchanges that provide trade execution services comparable to those performed by the Exchange. The customers who may access those exchanges are also significant customers of regulated exchanges such as ours. The PWG has not recommended equivalent treatment for the existing electronic markets operated by regulated exchanges. The PWG also recommends legislation that will permit CFTC regulated clearing organizations to clear futures, options on futures contracts, and OTC derivatives that are not securities or securities options. In contrast, the PWG recommends permitting banks and SEC regulated clearing organizations to clear financial derivative contracts, as well as equities, government securities, repurchase and reverse repurchase agreements, and other instruments. Finally, the PWG recommends permitting banks and broker- dealers, and their affiliates, to operate currency futures markets for retail customers without being subject to regulation under the CEA. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-4 with respect to the common stock offered in this document. This document, which constitutes a part of the registration statement, does not contain all the information in the registration statement or the exhibits and schedules that are part of the registration statement. For further information with respect to New CME and its common stock, please see the registration statement and the exhibits and schedules that are part of the registration statement. You may read and copy this document and any subsequent documents we file at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the Public Reference Room. Our SEC filings are also available to the public from the SEC's Web site at http://www.sec.gov. Because of the offering, we will become subject to the information requirements of the Securities Exchange Act. We will fulfill our obligations with respect to those requirements by filing periodic reports, proxy statements and other information with the SEC. Those reports, proxy statements and information may be inspected and copied at the Public Reference Room referred to above. We intend to furnish holders of our common stock with annual reports that include annual consolidated financial statements audited by an independent certified public accounting firm and quarterly reports for the first three quarters of each fiscal year containing unaudited interim financial information. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our consolidated financial statements appearing elsewhere in this document. 80
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Historical Overview We are currently a not-for-profit company and have operated in a manner consistent with that structure. During the 1980's, we held the position as the world's second largest derivatives exchange with volume growing from 25 million contracts in 1981 to in excess of 100 million in 1989. Revenues increased steadily over that period and, with a relatively fixed cost structure, profits added to a growing working capital position. In addition, members' equity grew from $17.0 million in 1980 to $89.0 million at the end of 1990. We continued to expand our open outcry markets, and in 1994 volume exceeded 200 million contracts traded. In 1993, we internally financed the construction of a second 37,000 square foot trading floor and began developing Clearing 21. During the 1990's, we continued to reinvest profits in product development and promotion that gave customers new hedging and trading instruments and expanded our product offering. In addition, we positioned ourselves for the future by adding to our working capital position, making ongoing investments in electronic trading and expanding strategic alliances. The competitive landscape changed in the 1990's with increased competition from the over-the-counter market and the emergence of new electronic exchanges. Working capital at the end of 1998 was $92.6 million. During 1999, we made significant investments in technology infrastructure, trading floor technology and performance upgrades to GLOBEX2. We financed these strategic initiatives, in part, through working capital, which declined to $66.8 million at December 31, 1999. The chart below and related overview is based on financial results for the year ended December 31, 1999. Management believes they present a fair representation of our sources of revenue and expense categories. [Graphic: Pie chart entitled "1999 REVENUE SOURCES" and displaying each revenue source as a percentage of gross revenue for the year ended December 31, 1999. The entire chart represents and is subtitled "(100% = $208.5 MILLION)". Revenues are broken down as follows: Clearing Fees and Transaction Fees - 66% or $138.5, Quotation Data - 21% or $43.0, Investment Income - 4% or $9.1, Communications - 4% or $8.2 and Other - 5% or $9.7.] Clearing fees, transaction fees and quotation data fees account for 87% percent of total revenues. Investment income, communications charges to our members and clearing member firms and other operating revenue comprise the remaining 13% of revenues. Clearing and transaction fees include GLOBEX2 fees and other volume related fees, and account for 66% of our revenues. Revenue from clearing fees is very sensitive to volume and changes in product mix which drives the average rate per trade. During 1999, the average rate per trade was 69c and is a function of the following factors: . Product mix (1999 volume: futures 80%, options 16%, EFPs 4%) . Account ownership status (member, lessee, customer, etc.) . Product (licensed, non-licensed, E-Mini, etc.) . Trading venue (open outcry, GLOBEX2) 81
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[Graphic: Line graph entitled "Average rate per trade (round-turn)" and representing the average clearing fee per trade cleared by the CME. Below the horizontal axis each year measured is listed in chronological order from left to right, beginning with 1994 and ending with 1999. The vertical axis indicates the average fee per trade in cents, beginning with $0.50 and increasing, in intervals of $0.05, to $0.70. A continuous line graph connects the average clearing fee per trade for each particular year. The average rate per trade was $0.55 in 1994, $0.61 in 1995, $0.62 in 1996, $0.58 in 1997, $0.55 in 1998 and $0.69 in 1999.] The fluctuation in the rate per trade over the six year period is due to several factors. Fee reduction programs and product promotion fee waivers put downward pressure on the average rate per trade. Conversely, increases in the EFP surcharge and the relative growth in GLOBEX2 volume have increased the average rate per trade. Specifically, 8c of the increase in the rate per trade from 1998 to 1999 is related to the end of the fee reduction program that was in place during 1998, while approximately 3c is attributable to the rapid growth in GLOBEX2 volume in 1999. Pricing decisions for clearing fees are based on two primary factors. First, based on the competitive environment, we may raise or lower fees to address the business threat. Second, and somewhat related to the first, during times of excess profit, the Board may take action to reduce fees to build customer loyalty and increase pricing pressure on the competition. In 1998, we implemented a fee reduction initiative which resulted in a $16.9 million reduction in clearing fees and an additional $1.0 million waiver of lessee brokerage fees. In addition to the 1998 fee reduction program, in 1997 we reduced fees from August 1 through December 31. Fees were raised again in 1998, but not back to the original rates that were in effect prior to August 1, 1997. The graph below illustrates the effect of fee reduction programs on clearing revenue. [Graphic: Bar graph entitled and representing "CLEARING FEES 1994 -1999". Below the horizontal axis each year measured is listed in chronological order from left to right. The vertical axis indicates the fees that were received and that would have been received had not some discount or fee waiver been in effect, in millions, beginning with zero and increasing, at intervals of 50, to 200. The lower portion of each bar is darkly shaded to the extent of the actual fees received. To the extent any fee reductions or waivers apply, the bars are shaded medium and lightly, respectively. Inset in a small square to the right of the graph is a legend containing a lightly shaded box to the immediate left of the word "Waiver", immediately below which is a slightly darker box to the immediate left of the words "Reduction in Rate", and immediately below which is a darkly shaded box to the immediate left of the word "Actual". Actual clearing fees were approximately $114 million in 1994, $111 million in 1995, $109 million in 1996, $117 million in 1997, $125 million in 1998 and $139 million in 1999. Fee waivers during the period amounted to approximately $12 million in 1994 and $18 million in 1998. Fee reductions during the period amounted to approximately $11 million in 1997, $13 million in 1998 and $10 million in 1999.] The second largest source of revenue, amounting to 21% of total revenue in 1999, is quotation data fees from the sale of market data. We have contractual relations with over 100 vendors who act as value-added resellers. The vendors disseminate the data to over 36,000 subscribers and remit the exchange data fee to us. Revenue growth in this key area has increased at a compounded annual rate of 6.5% over the past ten years. The number 82
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of subscribers, the revenue driver, has increased at a similar pace. Other revenues, which make up 13% of total revenues, are derived from telecommunications services provided to members, investment income and from various services provided to members. [Graphic: Pie chart entitled "1999 EXPENSES BY CATEGORY" and displaying each expense category as a percentage of total expenses for the year ended December 31, 1999. The entire chart represents and is subtitled "(100% = $201.8 MILLION)". Expenses are broken down as follows: Salaries & Benefits - 40%, Professional Fees & Outside Services - 14%, Communications & Computer Maintenance - 14%, Depreciation & Amortization - 13%, Occupancy - 8%, Public Relations & Promotion- 4% and Other - 7%.] Our operating expenses have increased significantly since 1997 primarily due to increased staffing and expenditures for technology projects. For 1999, salaries and benefits accounted for 40% of our expenses as both the trading floor and the systems development and maintenance areas required large investments in human capital. The next largest category, professional fees and outside services, represents 14% of total expenses in 1999 and is primarily related to information technology consultants that are working on strategic initiatives. Also included in this category are legal fees and license fees. The communications and computer maintenance category accounts for 14% of our expenses and includes expenses to support the GLOBEX2 network, computer equipment and software and the cost to maintain the trading floors and tenant phone systems which are administered by our Telecommunications Department. The telecommunications revenue approximately offsets the related expense. Occupancy related to staff offices, trading floors and remote offices represent 8% of the expenses in 1999. Depreciation and amortization account for 13% of total expenses. Together, occupancy and depreciation and amortization make up our fixed costs and account for 21% of the budget. The last two categories, other operating expenses and marketing and promotion, account for only 11% of our expenses. In general, the results of operations reflect our not-for-profit membership structure. Only a very small percentage of our expenses are variable, thus, revenues from volume increases flow directly to operating income. Since we do not distribute earnings, we increase spending on discretionary items and reduce fees as a way of providing value to our members and improving the competitive position of the Exchange. Results of Operations 1999 Compared to 1998 Revenues of $208.5 million for the year ended December 31, 1999, increased $13.3 million compared to the prior year. Clearing fees and GLOBEX2 transaction fees were $138.5 million in 1999, representing an increase of $14.0 million over 1998. This increase is attributable primarily to the effect of a program which reduced clearing fees approximately $17.9 million in the fourth quarter of 1998, offset by an 11% decrease in volume from 226.6 million contracts traded in 1998 to 200.7 million contracts traded in 1999. There was no similar fee reduction program during 1999. The decrease in volume was primarily due to reduced volatility, continued consolidation of institutional customers and a slowdown in business as customers prepared for 83
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Y2K. Low inflation, stable economic conditions, and the absence of world financial crises, such as the Asian financial crisis which added to our interest rate product volume in 1998, contributed to reduced volatility and decreased volume in interest rate products. Revenue from quotation data fees in 1999 was $43.0 million, an increase of $3.0 million compared to 1998, resulting from an increase in the number of subscribers. Investment income decreased $1.0 million due to a decrease in average invested balances. Other revenues decreased $2.6 million as a result of a reduction in trading revenues from our GFX subsidiary and a lower level of member fines. These reductions were partially offset by $1.7 million in revenues from GLOBEX2 terminal charges for which there were no similar charges in 1998. Operating expenses in 1999 were $201.8 million, an increase of $20.8 million over 1998. Expenses increased as a result of technology advancements in the areas of GLOBEX2, trade order processing systems, hand-held trading devices, infrastructure improvements, and the support of both open outcry and electronic trading systems. Salaries and benefits increased $8.6 million in 1999 to $81.0 million, reflecting additional technology staff and merit increases. Occupancy expense decreased $1.9 million in 1999 due primarily to a reduction in rent expense for the trading floor resulting from our exercise of an option to extend the term of the lease. Professional fees, outside services and license fees amounted to $28.3 million in 1999 and include significant expenditures for GLOBEX2, Year 2000 compliance, trading floor systems, recruiting, legal services and S&P license fees. These expenses increased $0.3 million compared to 1998, and are net of capitalized software development costs as described in the following paragraph. Communications and computer and software maintenance expenses increased $5.7 million in 1999 primarily due to the expansion of the GLOBEX2 electronic trading network. Depreciation and amortization expense increased $7.3 million in 1999 as a result of computer equipment additions and the amortization of capitalized software development costs. Public relations and promotion expenses decreased $1.9 million compared to 1998, reflecting a reduction in advertising and new product promotions. Other operating expenses increased $2.7 million in 1999 to $13.4 million due to increases in equipment lease interest, travel, board stipends, department supplies, staff training, and state and local sales and use taxes. We adopted Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1") effective January 1, 1999, and accordingly, commenced capitalizing certain costs of developing internal use software which would otherwise have been expensed under our previous accounting policy. Costs capitalized during 1999 amounted to $15.3 million, and consist primarily of staff salaries and outside consulting costs. Amortization of capitalized software development costs in 1999 amounted to $0.9 million. Income from continuing operations, before a deduction for limited partners' interest in the earnings of P-M-T Limited Partnership and a provision for income taxes, was $6.6 million in 1999, representing a decrease of $7.5 million compared to 1998. The limited partners' interest in the earnings of P-M-T was $2.1 million in 1999, $0.7 million less than 1998 as a result of a $1.0 million decrease in operating income of the partnership. The provision for income taxes decreased in 1999 to $1.9 million compared to $4.3 million in 1998 as a result of lower pre-tax income in 1999. The increase in our effective income tax rate from 38% in 1998 to 41% in 1999 was primarily due to greater nondeductible expenses, including costs associated with our pending demutualization transaction. 84
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Net income for the year ended December 31, 1999, was $2.7 million compared to $7.0 million for the year ended December 31, 1998. 1998 Compared to 1997 Revenues for the year ended December 31, 1998, were $195.2 million compared to $177.6 million for 1997. Clearing fees and GLOBEX2 transaction fees increased to $124.6 million from $116.9 million in 1997 primarily due to a 13% increase in volume from 200.7 million contracts traded in 1997 to 226.6 million contracts traded in 1998. Trading volume on GLOBEX2, included above, increased 122% to 9.7 million contracts traded in 1998. The revenue impact of this increased volume was partially offset by a $16.9 million fee reduction program and an additional $1.0 million waiver of lessee brokerage during the fourth quarter of 1998. Quotation data fees increased to $40.1 million in 1998 from $37.7 million in 1997 as a result of an increase in subscribers and devices in service. Communication fees of $8.1 million increased $0.2 million, or 3%, over 1997. Investment income increased $1.9 million to $10.1 million in 1998 due to an increase in the average invested balance which more than offset the impact of declining interest rates. Other operating revenue increased to $12.3 million from $6.9 million primarily due to an increase in GFX trading revenues and systems consulting fees we received for enhancements to the CLEARING 21(R) system. Total expenses in 1998 were $181.0 million compared to $158.6 million in 1997. The increase was due primarily to new strategic initiatives, electronic trading and other technology projects and enhancements. Salaries and benefits increased $5.5 million to $72.4 million in 1998 due primarily to increases in salaries and bonuses compared to the prior year. Professional fees, outside services and license fees of $28.0 million were $11.1 million greater than in 1997 primarily due to expenses associated with the strategic planning process and increased spending on GLOBEX2, Year 2000 compliance and trading floor technology. Expenses for communications and computer equipment increased $5.5 million due, in large part, to communications cost related to the GLOBEX2 network. Income from continuing operations, before a deduction for limited partners' interest in the earnings of PMT and a provision for income taxes, was $14.2 million in 1998, a decrease of $4.9 million compared to the $19.1 million recorded in 1997. The primary reason for the decrease was the clearing fee reduction program and waiver of lessee brokerage for the period October 12, 1998, through December 18, 1998. The limited partners' interest in the earnings of P-M-T was $2.8 million for 1998 compared to zero in 1997. Under the terms of the partnership agreement, the CME, as general partner, absorbed P-M-T's entire 1997 loss of $0.9 million. The provision for income taxes on income from continuing operations, at an effective tax rate of 38%, was $4.3 million in 1998 compared to $7.0 million for the same period in 1997. The loss from discontinued operations during the year ended December 31, 1997, consists of operating losses and the write-off of certain assets of the CME Depository Trust Company, which ceased operation in September 1997. No further adjustments were required in 1998. CME Depository Trust Company had been developing collateral management services for the over- the-counter derivatives market. It had not reported any revenue, and the Exchange determined that additional developmental efforts were not warranted. Net income was $7.0 million for the year ended December 31, 1998, compared to $8.7 million for the year ended December 31, 1997. Financial Position 85
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Total assets increased to $301.7 million at December 31, 1999, from $293.2 million at December 31, 1998. Current assets decreased to $176.7 million at December 31, 1999, from $203.3 million at December 31, 1998, due primarily to a decrease of $27.6 million in investment securities. Property, net of accumulated depreciation, increased to $93.5 million at the end of 1999 compared to $71.3 million at the end of 1998 primarily due to purchases of computer equipment to support technology and electronic trading both on and off the trading floor. Other assets increased to $31.4 million from $18.6 million at the end of 1998 due primarily to an increase of $14.4 million in capitalized software development costs net of accumulated amortization, an increase in computer software of $1.3 million, and an increase of $1.6 million in securities held in connection with deferred compensation plans partially offset by a $4.5 million decrease in net deferred tax assets. At December 31, 1999, we held cash, cash equivalents and investment securities of $74.4 million, had working capital of $66.8 million and had a current ratio of 1.6-to-1. This compares to cash, cash equivalents and investment securities of $102.6 million, working capital of $92.6 and a 1.8-to-1 current ratio at December 31, 1998. Total liabilities increased to $133.0 million at December 31, 1999, from $126.3 million at December 31, 1998. Current liabilities decreased to $110.0 million at December 31, 1999, from $110.7 million at December 31, 1998. A decrease in accounts payable in 1999 was largely offset by an increase in the current portion of long-term debt and an increase in cash performance bonds and security deposits. The limited partners' interest in PMT Limited Partnership increased to $3.0 million at December 31, 1999, compared to $0.9 million a year earlier due to 1999 net income of this consolidated partnership in the amount of $2.6 million. Long-term debt consists of the long-term portion of capitalized lease obligations and increased to $8.1 million at December 31, 1999, from $5.0 million at December 31, 1998. Other liabilities increased to $11.9 million at December 31, 1999, from $9.8 million at December 31, 1998, due primarily to a $1.6 million increase in deferred compensation liabilities. Members' equity was $168.7 million at December 31, 1999, and $166.9 million at December 31, 1998. Liquidity and Capital Resources For the year ended December 31, 1999, net cash provided from operating activities was $13.3 million, a decrease of $12.1 million from $25.5 million in 1998. This decrease was primarily due to an increase in capitalized software development costs in 1999. For the year ended December 31, 1998, net cash provided from operating activities was $25.5 million, a decrease of $0.6 million from $26.1 million in 1997. For the year ended December 31, 1999, net cash used in investing activities decreased to $11.3 million from $19.9 million in 1998. Purchases of computer equipment and other property increased $18.7 million in 1999 compared to 1998. This increase was more than offset by an increase of $27.3 million in net sales of investment securities in 1999 compared to 1998. For the year ended December 31, 1998, net cash used in investing activities decreased to $19.9 million from $24.6 million in 1997 due primarily to reduced net investment purchases in 1998. Net cash used in financing activities consisted of $2.7 in payments on capital lease obligations in the year ended December 31, 1999, and a cash distribution to P-M-T limited partners in the amount of $2.0 million during the year ended December 31, 1998. For the year ended December 31, 1999, interest payments amounted to $0.7 million and 86
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consisted primarily of interest paid on capital lease obligations. New capital lease additions increased $1.8 million to $7.9 million in 1999 from $6.1 million during 1998. The Exchange is a designated contract market for futures and options on futures, and clears and guarantees the settlement of all futures and options contracts traded in our markets. The Clearing House maintains an unsecured committed line of credit with a consortium of banks in the amount of $350 million to provide liquidity and capacity to pay settlement variation to all clearing members even if a clearing member fails to meet its financial obligations to the Clearing House. This line of credit is renewed annually and has never been utilized. We expect that the principal use of funds in the foreseeable future will be to fund operations, capital expenditures and working capital, and anticipate that existing cash and investment balances will be sufficient to meet our needs for at least the next year. Market Risk Interest Rate Risk Interest income from investment securities, temporary cash investments and cash performance bonds and security deposits amounted to approximately $7.9 million in 1999. Realized and unrealized gains (losses) on our investment portfolio amounted to approximately $(1.4) million, $0.6 million and $0.6 million in 1999, 1998 and 1997, respectively. An increase (decrease) in market interest rates would have a corresponding increase (decrease) on interest income from temporary cash investments, cash performance bonds and security deposits, variable rate investment securities and new purchases of investment securities. An increase (decrease) in market interest rates would also result in an opposite increase (decrease) in the fair value of investment securities held. At December 31, 1999, our investment portfolio consisted primarily of U.S. government agency and state and municipal securities, including approximately $8.4 million in variable rate securities. Contractual maturities and interest coupon rates for fixed rate investment securities at December 31, 1999 were as follows (dollars in thousands): [Download Table] Weighted Principal Average Year Amount Interest Rate ---- --------- ------------- 2000 $ 5,689 5.3% 2001 22,220 6.1% 2002 7,911 6.4% 2003 6,000 5.2% 2004 9,300 6.0% ------- --- Total $51,120 5.9% ------- --- Derivative Trading Risk Through our GFX trading subsidiary, we engage in the purchase and sale of CME foreign currency futures contracts to promote liquidity in our markets, and enter into offsetting arbitrage transactions using futures contracts or spot foreign currency transactions to limit market risk. Net position limits are established for each trader and currently amount to $6 million in aggregate notional value. At December 31, 1999, we held futures positions with a notional value 87
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of approximately $4 million, offset by a similar amount of spot foreign currency positions resulting in a zero net position. All positions are marked to market through a charge or credit to income on a daily basis. Net trading gains amounted to $2.4 million, $4.8 million and $2.2 million in 1999, 1998 and 1997, respectively. Accounting Standards In June, 1998, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. This statement requires that all derivative instruments be recorded in the statement of financial position at fair value. This statement is effective for all fiscal years commencing after June 15, 2000. We currently report all derivative transactions at fair market value, with changes in fair value recognized in our statement of income, and this practice will not be affected by SFAS No. 133. EXPERTS Our consolidated financial statements as of December 31, 1999 and 1998, and for each of the three years in the period ended December 31, 1999, are included in this document together with Arthur Andersen LLP's audit report on these financial statements. Arthur Andersen LLP issued their report as independent public accountants and as experts in auditing and accounting. VALIDITY OF SECURITIES The validity of the shares of Class A and Class B common stock to be issued in connection with the demutualization transactions will be passed upon for New CME by Sidley & Austin, Chicago, Illinois. 88
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CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS [Download Table] Page ---- Report of Independent Public Accountants.................................. F-2 Consolidated Balance Sheets as of December 31, 1999 and December 31, 1998. F-3 Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997 ........................................................... F-4 Consolidated Statements of Members' Equity and Comprehensive Income for the Years Ended December 31, 1999, 1998 and 1997......................... F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997...................................................... F-6 Notes to Consolidated Financial Statements................................ F-7 F-1
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Members of the Chicago Mercantile Exchange: We have audited the accompanying consolidated balance sheets of the Chicago Mercantile Exchange (an Illinois not-for-profit corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, members' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1999. These financial statements are the responsibility of the Exchange's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Chicago Mercantile Exchange and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. Arthur Andersen, LLP Chicago, Illinois February 2, 2000 F-2
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CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS [Download Table] At December 31, ----------------- ASSETS 1999 1998 ------ -------- -------- (dollars in thousands) Current Assets: Cash and cash equivalents.................................. $ 14,249 $ 14,841 Investments (Note 2)....................................... 60,156 87,730 Accounts receivable........................................ 26,534 27,338 Prepaid expenses........................................... 2,655 1,589 Cash performance bonds and security deposits (Note 3)...... 73,134 71,803 -------- -------- Total current assets..................................... 176,728 203,301 Property, net of accumulated depreciation and amortization (Note 4).................................................... 93,531 71,266 Other assets (Notes 2, 5 and 7).............................. 31,444 18,638 -------- -------- Total assets............................................. $301,703 $293,205 ======== ======== LIABILITIES AND MEMBERS' EQUITY ------------------------------- Current Liabilities: Accounts payable........................................... $ 15,569 $ 19,070 Other current liabilities (Note 8)......................... 21,250 19,797 Cash performance bonds and security deposits (Note 3)...... 73,134 71,803 -------- -------- Total current liabilities................................ 109,953 110,670 Limited Partners' interest in net assets of PMT Limited Partnership (Note 6)........................................ 3,018 891 Long-term debt (Notes 10 and 11)............................. 8,132 4,969 Other liabilities (Note 9)................................... 11,937 9,778 -------- -------- Total liabilities........................................ 133,040 126,308 Members' equity.............................................. 168,663 166,897 -------- -------- Total liabilities and members' equity.................... $301,703 $293,205 ======== ======== See accompanying notes to consolidated financial statements. F-3
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CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME [Download Table] Year Ended December 31, ---------------------------- 1999 1998 1997 -------- -------- -------- (dollars in thousands) Revenues Clearing and transaction fees.................. $138,526 $124,575 $116,917 Quotation data fees............................ 43,005 40,079 37,719 Communication fees............................. 8,165 8,128 7,885 Investment income.............................. 9,091 10,117 8,178 Other operating revenue........................ 9,701 12,317 6,945 -------- -------- -------- Total revenues............................... 208,488 195,216 177,644 -------- -------- -------- Expenses Salaries and benefits (Note 9)................. 80,957 72,385 66,873 Occupancy...................................... 17,773 19,702 19,779 Professional fees, outside services and licenses...................................... 28,319 28,038 16,913 Communications and computer and software maintenance................................... 28,443 22,731 17,197 Depreciation and amortization.................. 25,274 17,943 16,689 Public relations and promotion................. 7,702 9,586 11,175 Other operating expense........................ 13,376 10,638 9,960 -------- -------- -------- Total expenses............................... 201,844 181,023 158,586 -------- -------- -------- Income from continuing operations before limited partners' interest in PMT and income taxes...... 6,644 14,193 19,058 Limited partners' interest in earnings of PMT Limited Partnership (Note 6).................... (2,126) (2,849) -- Provision for income taxes (Note 7).............. (1,855) (4,315) (6,963) -------- -------- -------- Income from continuing operations................ 2,663 7,029 12,095 Loss from discontinued operations, net of income tax benefit of $2,285 (Note 16)................. -- -- (3,428) -------- -------- -------- Net income................................... $ 2,663 $ 7,029 $ 8,667 ======== ======== ======== See accompanying notes to consolidated financial statements. F-4
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CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY AND COMPREHENSIVE INCOME [Download Table] Total Proceeds from Unrealized Members' Retained Issuance of Securities Equity Earnings Memberships Gains (losses) -------- -------- ------------- -------------- (dollars in thousands) Balance, December 31, 1996..... $150,631 $107,062 $43,605 $ (36) Comprehensive income: Net income................... 8,667 8,667 Unrealized net gain on securities, net of tax of $171.......... 256 256 -------- Total comprehensive income. 8,923 -------- -------- ------- ----- Balance, December 31, 1997..... 159,554 115,729 43,605 220 Comprehensive income: Net income................... 7,029 7,029 Unrealized net gain on securities, net of tax of $209.......... 314 314 -------- Total comprehensive income. 7,343 -------- -------- ------- ----- Balance, December 31, 1998..... 166,897 122,758 43,605 534 Comprehensive income: Net income................... 2,663 2,663 Unrealized net loss on securities, net of tax benefit of $597.. (897) (897) -------- Total comprehensive income. 1,766 -------- -------- ------- ----- Balance, December 31, 1999..... $168,663 $125,421 $43,605 $(363) ======== ======== ======= ===== See accompanying notes to consolidated financial statements. F-5
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CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS [Download Table] Year Ended December 31, -------------------------- 1999 1998 1997 ------- ------- -------- (dollars in thousands) Cash Flows from Operating Activities Net income....................................... $ 2,663 $ 7,029 $ 8,667 Adjustments to reconcile net income to net cash provided by operating activities: Limited partners' interest in earnings of PMT Partnership................................. 2,126 2,849 -- Deferred income tax provision................ 5,087 (1,311) (3,127) Depreciation and amortization................ 25,274 17,943 16,689 Gain on sale of investments.................. (135) (57) (196) Loss on disposal of fixed assets............. 7 125 98 Decrease (increase) in accounts receivable... 804 (8,367) (533) Decrease (increase) in prepaid expenses...... (1,066) (907) 127 Decrease (increase) in other assets.......... (19,412) (859) 1,910 Decrease (increase) in net assets of discontinued operations..................... -- -- 3,363 Increase (decrease) in accounts payable...... (3,501) 2,524 4,090 Increase (decrease) in other current liabilities................................. (661) 5,628 (3,650) Increase (decrease) in other liabilities..... 2,160 896 (1,367) ------- ------- -------- Net cash provided by operating activities.. 13,346 25,493 26,071 ------- ------- -------- Cash Flows from Investing Activities Purchases of property, net....................... (37,480) (18,817) (14,346) Purchases of investments......................... (41,938) (99,332) (139,865) Proceeds from sales and maturities of investments..................................... 68,144 98,284 129,623 ------- ------- -------- Net cash used in investing activities...... (11,274) (19,865) (24,588) ------- ------- -------- Cash Flows from Financing Activities............... Payments on long-term debt....................... (2,664) -- -- Distribution to limited partners of PMT Limited Partnership..................................... -- (1,957) -- ------- ------- -------- Net cash used in financing activities...... (2,664) (1,957) -- ------- ------- -------- Net increase (decrease) in cash and cash equivalents....................................... (592) 3,671 1,483 Cash and cash equivalents, beginning of year....... 14,841 11,170 9,687 ------- ------- -------- Cash and cash equivalents, end of year............. $14,249 $14,841 $ 11,170 ======= ======= ======== Supplemental Disclosure of Cash Flow Information Interest paid.................................... $ 705 $ 2 $ 26 ======= ======= ======== Income taxes paid (refunded)..................... $ (265) $ 9,042 $ 8,317 ======= ======= ======== Leased asset additions and related obligations... $ 7,940 $ 6,118 $ -- ======= ======= ======== See accompanying notes to consolidated financial statements. F-6
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CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies: Description of Business The Chicago Mercantile Exchange (the "CME") is a member-owned corporation organized under Illinois not-for-profit law. It is subject to federal and state corporate income tax and files a consolidated income tax return. The CME is a designated contract market for the trading of futures and options on futures contracts. Trades are executed through both open outcry and electronic trading systems. Through its in-house clearing division, the CME clears, settles, nets and guarantees performance of all matched transactions in its products. As an Illinois not-for-profit corporation, the CME may not pay dividends to its members. Basis of Presentation The consolidated financial statements include the accounts of the Chicago Mercantile Exchange and its controlled subsidiaries, which include the PMT Limited Partnership and GFX Corporation (collectively, the "Exchange"). Included as discontinued operations are the accounts of the CME Depository Trust Co. ("CME-DTC") whose operations ceased in 1997 (See Note 16). All intercompany transactions and accounts have been eliminated in consolidation. Cash and Cash Equivalents Cash equivalents consist of highly liquid investments with maturities of three months or less when purchased. Investments Investment securities have generally been classified as available for sale and are carried at fair value with unrealized gains and losses reported net of tax as a component of members' equity and comprehensive income. Interest on investment securities is recognized as income when earned and includes accreted discount less amortized premium. Additional securities held in connection with non-qualified deferred compensation plans have been classified as trading securities. These securities are included in other assets in the accompanying consolidated balance sheets at fair value, and unrealized gains and losses are reflected in investment income. Performance Bonds and Security Deposits Performance bonds and security deposits held by the Exchange for the account of clearing members may be in the form of cash or securities. Cash performance bonds and security deposits are reflected in the accompanying consolidated balance sheets. Cash received may be invested and any interest received accrues to the Exchange. Securities consist primarily of short-term U.S. Treasury securities and are not reflected in the accompanying consolidated balance sheets. These securities are held in safekeeping, and interest and gain or loss on such securities accrues to the clearing member. Property Property is stated at cost less accumulated depreciation and amortization. Depreciation on furniture, fixtures and equipment is provided on the straight- line method over the estimated useful lives of the assets, generally three to seven years. Leasehold improvements are amortized over the lesser of their estimated useful lives or the remaining term of the applicable leases. Maintenance and repair items are charged to expense as incurred; renewals and betterments are capitalized. F-7
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CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Software Development Costs During 1998 and prior years, the Exchange expensed all internal and external costs associated with the development of software for internal use. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). This pronouncement identifies the characteristics of internal use software and provides guidance on new cost recognition principles. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. The Exchange adopted SOP 98-1 effective January 1, 1999, and accordingly, commenced capitalizing certain costs of developing internal use software, which would otherwise have been expensed under its previous accounting policy. Capitalized costs are generally amortized over three years, commencing with the completion of the project. Fair Value of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of the fair value of financial instruments. The carrying values of financial instruments included in assets and liabilities in the accompanying consolidated balance sheets are reasonable estimates of their fair values. Impairment of Assets The Exchange reviews its long-lived assets and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Clearing and Transaction Fees Clearing and transaction fees include per contract charges for trade execution and clearing and GLOBEX2 electronic system fees. Fees are charged at various rates based on the product traded and the account owner's Exchange membership. Rates have been adjusted or waived periodically. Quotation Data Fees Quotation revenue represents fees charged for the dissemination of market information. Income Taxes Deferred income taxes are determined in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," and arise from temporary differences between amounts reported for income tax and financial statement purposes. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain reclassifications have been made to the 1998 and 1997 consolidated financial statements to conform to the presentation in 1999. In addition, the Exchange adopted a new balance sheet presentation for performance bonds and security deposits as described above, and the accompanying balance sheets reflect this new presentation. The Exchange previously included performance bonds and security deposits received from its clearing members in the form of securities as both an asset and a liability in its consolidated balance sheets. F-8
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CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2. Investment Securities Investment securities included in current assets have been classified as available for sale. The amortized cost and fair value of these investment securities at December 31, 1999 and 1998, were as follows (dollars in thousands): [Download Table] 1999 1998 ----------------- ----------------- Amortized Fair Amortized Fair Cost Value Cost Value --------- ------- --------- ------- U.S. Treasury......................... $ 64 $ 64 $ 3,127 $ 3,127 U.S. Government agency................ 16,563 16,191 23,073 23,308 State and municipal................... 44,135 43,901 60,641 61,295 ------- ------- ------- ------- Total investment securities....... $60,762 $60,156 $86,841 $87,730 ======= ======= ======= ======= Unrealized gains (losses) on investment securities classified as available for sale, included in the accompanying consolidated statement of changes in members' equity, are reported as a component of comprehensive income. The amortized cost and fair value of these investment securities at December 31, 1999, by contractual maturity, were as follows (dollars in thousands): [Download Table] Amortized Fair Cost Value --------- ------- Maturity of one year or less........................... $ 5,678 $ 5,662 Maturity between one and five years.................... 46,684 46,094 Maturity greater than five years....................... 8,400 8,400 ------- ------- Total.............................................. $60,762 $60,156 ======= ======= Trading securities held in connection with non-qualified deferred compensation plans are included in other assets and amounted to approximately $6.9 million at December 31, 1999, and $5.3 million at December 31, 1998. Investment income includes unrealized gains relating to trading securities of $469,000, $407,000 and $285,000 for the years ended December 31, 1999, 1998 and 1997, respectively. 3. Performance Bonds and Security Deposits The Exchange is a designated contract market for futures and options on futures, and clears and guarantees the settlement of all futures and options contracts traded in its markets. In its guarantor role, the Exchange has precisely equal and offsetting claims to and from clearing members on opposite sides of each contract. The CME bears counterparty credit risk in the event that future market movements create conditions which could lead to clearing members failing to meet their obligations to the Exchange. The CME reduces its exposure through a risk management program which includes rigorous initial and ongoing financial standards for clearing membership, initial and maintenance performance bond requirements and mandatory security deposits. In addition, the Exchange maintains an unsecured committed line of credit with a consortium of banks (Note 12) in the amount of $350 million to provide liquidity and capacity to pay settlement variation to all clearing members even if a clearing member may have failed to meet its financial obligations to the CME, or in the event of a temporary problem with the domestic payments system that would delay payments of settlement variation between the Exchange and its clearing members. The Exchange is required under the Commodity Exchange Act to segregate cash and securities deposited by clearing members on behalf of their customers. In addition, Exchange rules require a segregation of all funds deposited by clearing members from operating funds. F-9
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CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Clearing members, at their option, may instruct the Exchange to invest cash on deposit for performance bond purposes, in a portfolio of securities in the Exchange's Interest Earning Facility ("IEF"). The IEF was organized in 1997 as two limited liability companies, and interest earned, net of expenses, is passed on to participating member firms. IEF principal is guaranteed by the Exchange. The IEF investment portfolio is managed by one of the Exchange's approved settlement banks, and eligible investments include U.S. Treasury bills and notes, U.S. Treasury strips, and reverse repurchase agreements. Repurchase agreements are also permitted. The maximum average portfolio maturity is 90 days, and the maximum maturity for an individual security is 13 months. IEF principal amounted to approximately $762 million and $634 million at December 31, 1999 and 1998, respectively. Management believes that the market risk exposure relating to its guarantee is not material to the financial statements taken as a whole. The Exchange earned fees under the IEF program in the amount of $932,000, $428,000 and $96,000 during 1999, 1998 and 1997, respectively. Each clearing member is required to deposit and maintain specified margin in the form of cash, U.S. Government securities or bank letters of credit. These performance bonds are available to meet only the financial obligations of that clearing member to the Exchange. All obligations and non-cash margin deposits are marked to market on a daily basis, and haircuts are applied for margin and risk management purposes. Under an agreement with the CME and the Board of Trade Clearing Corporation ("BOTCC"), firms that are clearing members of both the CME and BOTCC may place required performance bonds in one common bank account and designate the portion allocable to each clearing organization. The Exchange and the Options Clearing Corporation ("OCC") have a cross- margin arrangement whereby a common clearing member may maintain a cross-margin account in which the clearing member's positions in certain futures and options on futures are combined with certain OCC cleared option positions for purposes of calculating performance bond requirements. The performance bond deposits are held jointly by the Exchange and the OCC. Each clearing member is also required to deposit and maintain specified security deposits in the form of cash or securities. In the event that performance bonds and security deposits of a defaulting clearing member are inadequate to fulfill that clearing member's outstanding financial obligation, the entire security deposit fund is available to cover potential losses after first utilizing surplus operating funds of the Exchange. Cash and securities held as performance bonds and security deposits at December 31 were as follows (dollars in thousands): [Download Table] 1999 1998 ------------------- ------------------- Securities Securities and and Cash IEF Funds Cash IEF Funds ------- ----------- ------- ----------- Performance bonds................ $68,738 $17,841,859 $67,192 $15,469,446 Security deposits................ 4,396 351,897 4,611 184,737 Cross-margin securities, held jointly with OCC................ -- 1,056,709 -- 576,873 ------- ----------- ------- ----------- Total........................ $73,134 $19,250,465 $71,803 $16,231,056 ======= =========== ======= =========== In addition, irrevocable letters of credit, which are not included in the accompanying consolidated balance sheets, held at December 31 were as follows (dollars in thousands): [Download Table] 1999 1998 ---------- ---------- Performance bonds.................................. $1,000,350 $1,078,650 Cross-margin accounts.............................. 77,010 4,110 ---------- ---------- Total letters of credit........................ $1,077,360 $1,082,760 ========== ========== F-10
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CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. Property A summary of the property accounts as of December 31 is presented below (dollars in thousands): [Download Table] 1999 1998 -------- -------- Furniture, fixtures and equipment..................... $140,836 $101,022 Leasehold improvements................................ 83,461 77,855 -------- -------- Total property........................................ 224,297 178,877 Less accumulated depreciation and amortization........ (130,766) (107,611) -------- -------- Net property.......................................... $ 93,531 $ 71,266 ======== ======== 5. Other assets Other assets consisted of the following at December 31 (dollars in thousands): [Download Table] 1999 1998 ------- ------- Software development costs.............................. $15,326 $ -- Less accumulated amortization......................... (935) -- Software................................................ 9,300 6,812 Less accumulated amortization......................... (5,469) (4,286) Deferred compensation assets............................ 6,934 5,345 Net deferred tax asset.................................. 5,868 10,357 Other................................................... 420 410 ------- ------- Total................................................... $31,444 $18,638 ======= ======= 6. P-M-T Limited Partnership The Exchange is the general partner and members and clearing members of the Exchange are limited partners of the PMT Limited Partnership ("PMT"), an Illinois limited partnership. PMT was formed in 1987 to initiate the development of the GLOBEX(R) global electronic trading system ("GLOBEX"). From May 1, 1996, through November 1998, GLOBEX was operated by Reuter Futures Services Inc. ("Reuters") under an agreement with participating exchanges (the Exchange and MATIF, a French futures exchange). The system previously operated by Reuters was replaced by a new system, called GLOBEX\\2\\, which is operated by the Exchange and uses electronic trading software licensed from ParisBourseSBFSA. The Exchange charges PMT for services provided. PMT reported net income (loss) of $2,578,000, $3,536,000 and $(872,000) in 1999, 1998 and 1997, respectively, and made an income distribution of $2,393,000 in 1998. Losses in excess of limited partner capital account balances are allocated to the Exchange as general partner. As a result, PMT's entire 1997 loss was absorbed by the CME. F-11
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CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. Income Taxes The provision for income taxes from continuing operations is comprised of the following (dollars in thousands): [Download Table] 1999 1998 1997 ------- ------- ------- Current: Federal...................................... $(2,721) $ 4,613 $ 8,274 State........................................ (511) 1,013 1,816 ------- ------- ------- Total...................................... (3,232) 5,626 10,090 ------- ------- ------- Deferred: Federal...................................... 4,166 (1,075) (2,564) State........................................ 921 (236) (563) ------- ------- ------- Total...................................... 5,087 (1,311) (3,127) ------- ------- ------- Total continuing operations.................... 1,855 4,315 6,963 Total discontinued operations.................. -- -- (2,285) ------- ------- ------- Total provision for income taxes........... $ 1,855 $ 4,315 $ 4,678 ======= ======= ======= Reconciliation of the statutory U.S. federal income tax rate to the effective tax rate on income from continuing operations is as follows: [Download Table] 1999 1998 1997 ----- ---- ---- Statutory U.S. federal tax rate........................ 35.0% 35.0% 35.0% State taxes, net of federal benefit.................... 5.9 3.8 4.3 Tax exempt interest income............................. (15.0) (6.6) (2.8) Non deductible expenses................................ 21.1 3.7 2.1 Other, net............................................. (5.9) 2.1 (2.1) ----- ---- ---- Effective tax rate..................................... 41.1% 38.0% 36.5% ===== ==== ==== At December 31, the components of deferred tax assets (liabilities) were as follows (dollars in thousands): [Download Table] 1999 1998 ------ ------- Deferred tax assets: Depreciation and amortization.......................... $6,085 $ 5,813 Deferred compensation.................................. 2,452 2,167 Accrued expenses....................................... 2,929 2,828 Unrealized losses on securities........................ 242 -- ------ ------- Subtotal............................................. 11,708 10,808 Valuation allowance.................................. -- -- ------ ------- Deferred tax assets.................................. 11,708 10,808 ------ ------- Deferred tax liabilities: Software development costs............................. (5,709) -- Unrealized gains on securities......................... -- (356) Other.................................................. (131) (95) ------ ------- Deferred tax liabilities............................... (5,840) (451) ------ ------- Net deferred tax asset................................... $5,868 $10,357 ====== ======= F-12
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CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. Other Current Liabilities Other current liabilities include accrued salaries and benefits of $13.0 million and $12.7 million at December 31, 1999 and 1998, respectively. Also included in other current liabilities is the current portion of long-term debt which totaled $3.3 million at December 31, 1999, and $1.1 million at December 31, 1998. 9. Employee Benefit Plans Pension Plan The Exchange maintains a noncontributory defined benefit cash balance pension plan ("Plan") for eligible employees. Employees who have completed a continuous 12-month period of employment and have reached the age of 21 are eligible to participate. The Plan provides for an age-based contribution to the cash balance account and includes cash bonuses in the definition of considered earnings. Participant cash balance accounts receive an interest credit at the one-year U.S. Treasury Bill rate. Participants become vested in their accounts after five years. The Exchange's policy is to currently fund required pension costs. A reconciliation of beginning and ending balances of the benefit obligation and fair value of Plan assets, the funded status of the Plan, certain actuarial assumptions and the components of pension cost are indicated below (dollars in thousands): [Download Table] 1999 1998 ------- ------- Change in benefit obligation Benefit obligation at beginning of year.............. $11,826 $10,646 Service cost......................................... 2,052 1,774 Interest cost........................................ 988 850 Actuarial loss (gain)................................ (303) 401 Benefits paid........................................ (1,095) (1,845) ------- ------- Benefit obligation at end of year.................. $13,468 $11,826 ======= ======= Change in plan assets Fair value of plan assets at beginning of year....... $13,522 $11,742 Actual return on plan assets......................... 1,741 1,530 Employer contribution................................ 1,000 2,095 Benefits paid........................................ (1,095) (1,845) ------- ------- Fair value of plan assets at end of year........... $15,168 $13,522 ======= ======= Funded status at December 31 Plan assets in excess of benefit obligation.......... $ 1,700 $ 1,696 Unrecognized transition asset........................ (335) (410) Unrecognized prior service cost (credit)............. (227) (278) Unrecognized net actuarial gain...................... (3,082) (1,962) ------- ------- Accrued benefit cost............................... $(1,944) $ (954) ======= ======= F-13
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CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) [Download Table] 1999 1998 1997 ------ ------ ------ Actuarial assumptions as of December 31 Discount rate................................... 7.75% 6.75% 7.25% Rate of compensation increase................... 5.00% 5.00% 5.00% Expected return on plan assets.................. 8.00% 8.00% 8.00% Components of pension cost Service cost.................................... $2,052 $1,774 $1,943 Interest cost................................... 988 850 810 Expected return on plan assets.................. (925) (803) (800) Amortization of prior service cost.............. (51) (51) (51) Amortization of transition asset................ (74) (74) (74) Recognized net actuarial gain................... -- -- (25) ------ ------ ------ Net pension cost.............................. $1,990 $1,696 $1,803 ====== ====== ====== Savings Plan The Exchange maintains a savings plan pursuant to Section 401(k) of the Internal Revenue Code whereby all employees are participants and have the option to contribute to the Plan. The Exchange matches employee contributions up to 3% of the employee's base salary and makes an additional contribution of up to 2% of salary based on annual trading volume. Total expense for the savings plan amounted to $1,264,000, $1,762,000 and $1,682,000 in 1999, 1998 and 1997, respectively. Non-Qualified Plans The Exchange maintains the following non-qualified plans under which participants may make assumed investment choices with respect to amounts contributed on their behalf. Although not required to do so, the Exchange invests such contributions in assets which mirror the assumed investment choices. The balances in these plans are subject to the claims of general creditors of the Exchange, and amounted to approximately $6.9 million and $5.3 million at December 31, 1999 and 1998, respectively. Supplemental Plan--The Exchange maintains a non-qualified supplemental plan to provide benefits for certain officers who have been impacted by statutory limits under the provisions of the qualified pension and savings plans. Total expense for the supplemental plan amounted to $319,000, $260,000 and $230,000 in 1999, 1998 and 1997, respectively. Deferred Compensation Plan--The Exchange maintains a deferred compensation plan under which eligible officers and board members may contribute a percentage of their compensation and defer income taxes thereon until the time of distribution. Supplemental Executive Retirement Plan--The Exchange maintains a non- qualified, defined contribution plan for senior officers. Under the plan, the Exchange contributes an amount equal to 8% of salary and bonus of eligible employees annually. Post 1996 contributions are subject to a vesting schedule under which each annual contribution begins to vest after three years and is fully vested after five years. Total expense for the plan amounted to $461,000, $213,000 and $186,000 in 1999, 1998 and 1997, respectively. 10. Lease Commitments The Exchange has commitments under operating and capital leases for certain facilities and equipment. Lease commitments for office space expire in the year 2003, with annual minimum rentals of approximately $7.9 million. The Exchange leases trading facilities from the Chicago Mercantile Exchange Trust through October 2005, with annual minimum rentals of approximately $1.3 million, and has an option to extend the term of the lease thereafter. Total rental expense was approximately $15.1 million in 1999, $18.0 million in 1998 and $18.9 million in 1997. F-14
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CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Future minimum obligations under lease commitments in effect at December 31, 1999, were as follows (dollars in thousands): [Download Table] Capitalized Operating Leases Leases ----------- --------- 2000................................................ $ 4,037 $10,097 2001................................................ 3,856 10,008 2002................................................ 3,021 9,737 2003................................................ 2,051 9,110 2004................................................ -- 1,557 Thereafter.......................................... -- 1,124 ------- ------- Total minimum lease payments.................... 12,965 41,633 Less sublease commitments........................... -- (1,256) Less amount representing interest................... (1,571) -- ------- ------- Total........................................... $11,394 $40,377 ======= ======= 11. Long-Term Debt Long-term debt consists of the long-term portion of capitalized lease obligations. 12. Credit Facility At December 31, 1999 and 1998, the Exchange had an unsecured committed line of credit with a consortium of banks in the amount of $350 million. Interest on amounts borrowed is calculated at the then-prevailing prime rate. The facility, which originated in 1988 and has never been used, may be utilized if there is a temporary problem with the domestic payments system that would delay payments of settlement variation between the Exchange and its clearing members, or in the event of a clearing member default. Commitment fees for this facility were $516,000, $570,000 and $494,000 for the years ended December 31, 1999, 1998 and 1997, respectively. 13. Contingencies At December 31, 1999, the Exchange was contingently liable on irrevocable letters of credit totaling $33 million in connection with its mutual offset agreement with the Singapore Exchange Derivatives Trading Ltd. (formerly SIMEX) and $2.5 million in connection with activities of GFX Corporation. The Exchange is a defendant in, and is threatened with, various legal proceedings arising from its regular business activities. While the ultimate results of such proceedings against the Exchange cannot be predicted with certainty, management of the Exchange believes that the resolution of these matters will not have a material adverse effect on its consolidated financial position or results of operations. 14. GFX Derivative Transactions GFX Corporation engages in the purchase and sale of CME foreign currency futures contracts. GFX posts bids and offers in these products on the GLOBEX\\2\\ electronic trading system in order to maintain a market and promote liquidity in the CME's currency futures products. It limits risk from these transactions through offsetting arbitrage transactions using futures contracts or spot foreign currency transactions with approved counterparties in the interbank market. Formal trading limits have been established. Futures transactions are cleared by an independent clearing member. Any residual open positions are marked to market on a daily basis, and all realized and unrealized gains (losses) are included in other revenue in the accompanying consolidated statements of income. Net trading gains amounted to $2,392,000 in 1999, $4,786,000 in 1998 and $2,173,000 in 1997. F-15
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CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 15. Segment Reporting The Exchange has three reportable operating segments: the Chicago Mercantile Exchange ("CME", a designated contract market and clearing house), GFX Corporation ("GFX", a wholly owned trading subsidiary), and PMT Limited Partnership ("PMT", a limited partnership which operates the GLOBEX\\2\\ electronic trading system). A summary by business segment follows (dollars in thousands): [Download Table] CME GFX PMT Eliminations Total -------- ------ ------- ------------ -------- Year Ended December 31, 1999 Total revenues from external customers................... $178,792 $2,392 $18,213 $ -- $199,397 Intersegment revenues........ 15,173 1,190 -- (16,363) -- Investment income............ 8,750 310 31 -- 9,091 Depreciation and amortization................ 25,141 133 -- -- 25,274 Operating profit (loss)...... 4,236 (675) 2,578 505 6,644 Total assets................. 298,385 7,990 3,761 (8,433) 301,703 Capital expenditures......... 37,438 42 -- -- 37,480 Year Ended December 31, 1998 Total revenues from external customers................... $170,136 $4,786 $10,177 $ -- $185,099 Intersegment revenues........ 5,441 -- -- (5,441) -- Investment income............ 9,803 314 -- -- 10,117 Depreciation and amortization................ 17,849 94 15 (15) 17,943 Operating profit (loss)...... 10,218 1,620 3,570 (1,215) 14,193 Total assets................. 292,298 8,663 1,803 (9,559) 293,205 Capital expenditures......... 18,809 8 -- -- 18,817 Year Ended December 31, 1997 Total revenues from external customers................... $161,746 $2,173 $ 5,547 $ -- $169,466 Intersegment revenues........ 3,542 -- -- (3,542) -- Investment income............ 7,860 318 -- -- 8,178 Depreciation and amortization................ 16,031 595 66 (3) 16,689 Operating profit (loss)...... 19,930 1 (872) (1) 19,058 Total assets................. 328,436 6,856 1,409 (7,970) 328,731 Capital expenditures......... 14,320 26 -- -- 14,346 16. Discontinued Operations In September 1997, the operations of CME-DTC were discontinued. Accordingly, the results of its operations and its net assets are included in the consolidated financial statements as discontinued operations. Certain costs associated with the start-up of CME-DTC were capitalized and were being amortized over a thirty-six month period. Remaining deferred charges and capitalized software license fees of approximately $1.8 million were written- off in 1997. [Download Table] 1997 ---------- (dollars in thousands) Revenues of discontinued operations............................ $ -- Expenses of discontinued operations............................ (3,856) Income tax benefit............................................. 1,542 ------- Loss from operations........................................... (2,314) Loss from discontinuance, net of income tax benefit of $743.... (1,114) ------- Total loss from discontinued operations........................ $(3,428) ======= F-16
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CHICAGO MERCANTILE EXCHANGE AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 17. Demutualization Plan On October 27, 1999, the Board of Directors approved a plan for demutualization of the Chicago Mercantile Exchange whereby the Exchange would be converted from an Illinois not-for-profit corporation into a Delaware for- profit corporation. Under this plan, membership interests in the Exchange would be converted into shares of Class B common stock, and in the cases of the CME, IMM and IOM membership interests, shares of Class A common stock. Class B shares would be issued in several series, each of which would contain the traditional features of common stock and would confer the trading privileges associated with the membership interest that was converted into such shares. Class A shares would represent traditional common stock. Completion of the demutualization transaction is subject to the affirmative vote of at least two- thirds of membership votes present and voting, receipt of a favorable ruling from the Internal Revenue Service regarding the federal income tax consequences of the contemplated transactions, completion of the cash purchase by the Exchange of the assets and business of PMT Limited Partnership (which requires the approval of the holders of two-thirds of the Class A partnership units of the Partnership), and approval by the Commodity Futures Trading Commission of certain changes to Exchange rules to reflect the demutualization. 18. Subsequent Event During January 2000, the Exchange entered into an employment agreement with James J. McNulty to serve as its President and Chief Executive Officer from February 7, 2000, through December 31, 2003. Mr. McNulty was granted an option to purchase up to 2.5% of the stock of the Exchange at a price equal to 2.5% of the aggregate value of the Exchange memberships, as defined, and an option to purchase up to an additional 2.5% of the stock of the Exchange at a price equal to 3.75% of the aggregate value of the Exchange memberships. These options vest 40% after one year and an additional 20% after each of the succeeding three years, and are exercisable for a period of ten years. In the event that the Exchange does not demutualize, Mr. McNulty will be entitled to a cash payment based on the increase in the value of Exchange memberships on the exercise date over the value of Exchange memberships on the grant date in an amount similar to that described above. F-17
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EXHIBIT A CERTIFICATE OF INCORPORATION OF Chicago Mercantile Exchange Inc. ARTICLE ONE: The name of the corporation is CHICAGO MERCANTILE EXCHANGE INC. ARTICLE TWO: The address of the corporation's registered office in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801. The name of the Corporation's registered agent at such address is The Corporation Trust Company. ARTICLE THREE: The purpose of the corporation shall be to engage in any lawful act or activity for which corporations may be organized and incorporated under the General Corporation Law of the State of Delaware. ARTICLE FOUR: The total number of shares of all classes of capital stock which the corporation is authorized to issue is 110,005,332 shares which shall be divided into three classes as follows: 10,000,000 shares of Preferred Stock having a par value of $0.01 per share (the "Preferred Stock"), 100,000,000 shares of Class A Common Stock having a par value of $0.01 per share (the "Class A Common Stock"), and 5,332 shares of Class B Common Stock having a par value of $0.01 per share (the "Class B Common Stock"). The term "Common Stock" shall mean both the Class A Common Stock and the Class B Common Stock. The designations, voting powers, optional or other special rights and the qualifications, limitations or restrictions thereof, of the above classes shall be as follows: Division A Preferred Stock The rights, preferences and privileges and qualifications, limitations and restrictions granted to and imposed on the shares of Preferred Stock of the corporation shall be as set forth below in this Division A. A-1
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Shares of Preferred Stock may be issued in one or more series at such time or times, and for such consideration or considerations, as the Board of Directors shall determine. The Board of Directors is hereby authorized to fix, state and establish, in the resolution or resolutions providing for the issuance of any wholly unissued series of Preferred Stock, the relative powers, rights, designations, preferences, qualifications, limitations and restrictions of such series in relation to any other series of Preferred Stock at the time outstanding. The Board of Directors is also expressly authorized to fix the number of shares of each such series, but not below the number of shares thereof then outstanding. The authority of the Board of Directors with respect to each series of Preferred Stock shall include (without limitation) the determination of the following: (a) the dividend rate on the shares of such series, whether dividends shall be cumulative, and, if so, from which date or dates, and the rights of priority, if any, with respect to the payment of dividends on the shares of such series relative to other series of Preferred Stock or classes of stock; (b) whether the shares of such series shall have voting rights (other than the voting rights provided by law) and, if so, the terms and extent of such voting rights; (c) whether the shares of such series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate upon the occurrence of such events as the Board of Directors may prescribe; (d) whether the shares of such series shall be subject to redemption by the corporation or at the request of the holder(s) thereof, and, if so, the terms and conditions of any such redemption; (e) the rights of the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the corporation, and the rights of priority, if any, with respect to the distribution of assets on the shares of such series relative to other series of Preferred Stock or classes of stock; and (f) any other preferences, privileges and powers, and relative, participating, optional or other special rights, and qualifications, limitations or restrictions of such series, as the Board of Directors may deem advisable and as shall not be inconsistent with the provisions of this Certificate of Incorporation, as the same may be amended from time to time. Division B Common Stock Subdivision 1: General Provisions A-2
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(1) Definitions. In addition to the terms defined elsewhere, the following terms shall have the respective meanings set forth below: "Additional Common Shares" shall mean all shares of Class A Common Stock issued (or, pursuant to Section 6(b), deemed to be issued) by the corporation after the Effectiveness Date, other than shares of Class A Common Stock issued or issuable at any time: (A) to officers, directors and employees of, and consultants to, the corporation; (B) as a dividend or distribution on shares of the Class B Common Stock; (C) pursuant to the conversion of shares of the Series B-5 Stock; or (D) by way of dividend or other distribution on Common Stock excluded from the definition of Additional Common Shares by the foregoing clauses (A), (B), (C) or this clause (D). "Applicable Equivalent Amount" means (i) with respect to shares of Class A Common Stock, one, (ii) with respect to shares of Series B- 1 Stock, 1,800 (as adjusted from time to time in accordance with the provisions of Section 6 of this Division), (iii) with respect to shares of Series B-2 Stock, 1,200 (as adjusted from time to time in accordance with the provisions of Section 6 of this Division), (iv) with respect to shares of Series B-3 Stock, 600 (as adjusted from time to time in accordance with the provisions of Section 6 of this Division), (v) with respect to shares of Series B-4 Stock, 100 (as adjusted from time to time in accordance with the provisions of Section 6 of this Division), and (vi) with respect to shares of Series B-5 Stock, 10 (as adjusted from time to time in accordance with the provisions of Section 6 of this Division). For purposes of Section 6, the term "Applicable Equivalent Amount" shall not include clause (i) of the preceding sentence, since no adjustment is to be made under that Section in respect of the Applicable Equivalent Amount for shares of Class A Common Stock. "Commitment to Maintain Floor Trading" shall mean the corporation's obligation, (i) as long as an open outcry market is "liquid," to maintain for such open outcry market a facility for conducting business, for the dissemination of price information, for clearing and delivery and (ii) to provide reasonable financial support (consistent with the calendar year 1999 budget levels established by Chicago Mercantile Exchange, an Illinois not-for-profit corporation) for technology, marketing and research for open outcry markets. If an open outcry market is not liquid, as determined by the Board of Directors, the Board may determine, in its sole discretion, whether such obligations will continue, and for how long, in respect of such market. For purposes of the foregoing, an open A-3
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outcry market will be deemed "liquid" if it meets any of the following tests on a quarterly basis: (1) if a comparable exchange-traded product exists, the open outcry market has maintained at least 30 percent of the average daily volume of such comparable product (including for calculation purposes, volume from Exchange-For-Physicals transactions in such open outcry market); or (2) if a comparable exchange-traded product exists and the product trades exclusively by open outcry, the open outcry market has maintained at least 30 percent of the open interest of such comparable product; or (3) if no comparable exchange-traded product exists, the open outcry market has maintained at least 40 percent of the average quarterly volume in that market as maintained by Chicago Mercantile Exchange, an Illinois not-for-profit corporation, in 1999 (including, for calculation purposes, volume from Exchange- For-Physicals transactions in such open outcry market); or (4) if no comparable exchange-traded product exists and the product trades exclusively by open outcry, the open outcry market has maintained at least 40 percent of the average open interest in that market as maintained by Chicago Mercantile Exchange, an Illinois not-for-profit corporation, in 1999. "Convertible Securities" shall mean any evidences of indebtedness, shares or other securities convertible into or exchangeable for shares of Class A Common Stock. "Core Rights" shall mean: (1) the divisional product allocation rules applicable to each series of Class B Common Stock as set forth in the rules of the corporation; (2) the trading floor access rights and privileges granted to each series of Class B Common Stock, including the Commitment to Maintain Floor Trading; (3) the number of authorized and issued shares of any series of Class B Common Stock; or (4) eligibility requirements for an individual or entity to hold shares of any series of Class B Common Stock or to exercise any of the A-4
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trading rights or privileges inherent in any series of Class B Common Stock. "Effectiveness Date" means the date of the effectiveness of the merger of CME Transitory Co. into and with the corporation as contemplated by that certain agreement and plan of merger dated as of March 1, 2000 between CME Transitory Co. and the corporation. Such date of effectiveness shall be evidenced by or in a certificate of merger filed with the Secretary of State of Delaware regarding such merger. "Fair Market Value" means (i) if shares of Class A Common Stock are traded on a national securities exchange, the last sales or the average of the bid and asked prices (if no sale has taken place), as reported in the principal consolidated transaction reporting system with respect to such exchange, (ii) if shares of Class A Common Stock are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers Automated Quotation System or such other system then in use, or (iii) if neither clause (i) or (ii) apply, as determined in good faith by the Board of Directors. "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either shares of Class A Common Stock or Convertible Securities. "Share Equivalent Basis" means that (i) with respect to participation in dividends, other distributions or liquidating distributions, a stockholder's participation therein is determined based upon the number of Class A Common Stock share equivalents that such stockholder's shares represent in relation to the total number of Class A Common Stock share equivalents that all stockholders' shares represent, and (ii) with respect to voting, a stockholder's aggregate votes available to be cast is determined based on the number of Class A Common Stock share equivalents that such stockholder's shares represent (with each whole share equivalent representing one vote and each fractional share equivalent representing an equivalent fractional vote). The number of Class A Common Stock share equivalents of a share of Class A Common Stock, Series B-1 Stock, Series B-2 Stock, Series B- 3 Stock, Series B-4 Stock and Series B-5 Stock shall equal the Applicable Equivalent Amount for such stock. (2) Liquidation Rights. Upon the liquidation, dissolution or winding up of the corporation, holders of Common Stock shall be entitled to receive any amounts available for distribution to holders of Common Stock after the payment of, or provision for, obligations of the corporation and any preferential amounts payable to holders of any outstanding shares of Preferred Stock. Such amounts as are available to the holders of Common Stock for distribution shall be distributed to such holders on a Share Equivalent Basis. A-5
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Subdivision 2: Class A Common Stock The rights, preferences and privileges, and qualifications, limitations and restrictions granted to and imposed on the shares of Class A Common Stock of the corporation shall be as set forth in Subdivision 1 and this Subdivision 2 of this Division B. (1) Dividend Rights. Subject to any preferential or participatory rights of holders of any shares of Preferred Stock, the holders of shares of Class A Common Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of any assets of the corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors on shares of the outstanding Common Stock of the corporation, participating with the holders of the outstanding shares of the Class B Common Stock on a Share Equivalent Basis. (2) Voting Rights. Each holder of shares of Class A Common Stock shall have the right to one vote for each share held on each matter for which the vote of the holders of the Class A Common Stock shall be required or considered to be necessary. Each holder of Class A Common Stock shall have the right, voting with the holders of the Class B Common Stock on a Share Equivalent Basis, to vote in the election of the Equity Directors (as defined below). (3) Transfer Restrictions. Shares of Class A Common Stock shall be subject to the following transfer restrictions during the indicated period: (a) During the period commencing on the Effectiveness Date and ending on the date occurring 180 days thereafter (inclusive), shares of Class A Common Stock may only be transferred, sold or otherwise disposed together with the associated shares of Class B Common Stock (i.e., 16,200 shares of Class A Common Stock may be transferred with one share of Series B-1 Stock, 10,800 shares of Class A Common Stock may be transferred with one share of Series B-2 Stock, and 5,400 shares of Class A Common Stock may be transferred with one share of Series B-3 Stock). (b) During the period commencing on the 181st day after the Effectiveness Date and ending on the date occurring 270 days after the Effectiveness Date, up to twenty-five percent (25%) of the shares of Class A Common Stock received by a holder on the Effectiveness Date or thereafter acquired may be transferred, sold or otherwise disposed. In addition, such holder may transfer, sell or otherwise dispose of such holder's Class A Common Stock as described in clause (a) of this Section 3. (c) During the period commencing on the 271st day after the Effectiveness Date and ending on the date occurring 360 days after the Effectiveness Date, up to fifty percent (50%) of the shares of Class A Common Stock received by a holder on the Effectiveness Date or thereafter acquired may be transferred, sold or otherwise disposed. In addition, such holder may transfer, A-6
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sell or otherwise dispose of such holder's Class A Common Stock as described in clause (a) of this Section 3. (d) During the period commencing on the 361st day after the Effectiveness Date and ending on the date occurring 450 days after the Effectiveness Date, up to seventy-five percent (75%) of the shares of Class A Common Stock received by a holder on the Effectiveness Date or thereafter acquired may be transferred, sold or otherwise disposed. In addition, such holder may transfer, sell or otherwise dispose of such holder's Class A Common Stock as described in clause (a) of this Section 3. (e) On and after the 451st day after the Effectiveness Date, there shall be no restrictions applicable to the Class A Common Stock under this Section 3. Subdivision 3: Class B Common Stock The rights, preferences and privileges, and qualifications, limitations and restrictions granted to and imposed on the shares of Class B Common Stock of the corporation shall be as set forth in Subdivision 1 and this Subdivision 3 of this Division B. (1) Designation and Number of Shares Constituting Series. Shares of the Class B Common Stock shall be issued in four series having the designations and consisting of the number of shares set forth below: 625 shares designated as "Class B Common Stock, Series B-1" (the "Series B-1 Stock"), 813 shares designated as "Class B Common Stock, Series B-2" (the "Series B-2 Stock"), 1,287 shares designated as "Class B Common Stock, Series B-3" (the "Series B-3 Stock"), 467 shares designated as "Class B Common Stock, Series B-4" (the "Series B-4 Stock") and 2,140 shares designated as "Class B Common Stock, Series B-5" (the "Series B-5 Stock"). (2) Trading Rights. (a) Series B-1 Stock. The holders of shares of the Series B-1 Stock shall have the trading rights, including trading floor access rights and privileges, set forth in the corporation's by-laws and rules for its Chicago Mercantile Exchange Division Members. A-7
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(b) Series B-2 Stock. The holders of shares of the Series B-2 Stock shall have the trading rights, including trading floor access rights and privileges, set forth in the corporation's by-laws and rules for its International Monetary Market Division Members. (c) Series B-3 Stock. The holders of shares of the Series B-3 Stock shall have the trading rights, including trading floor access rights and privileges, set forth in the corporation's by-laws and rules for its Index and Option Market Division Members. (d) Series B-4 Stock. The holders of shares of the Series B-4 Stock shall have the trading rights, including trading floor access rights and privileges, set forth in the corporation's by-laws and rules for its Growth and Emerging Markets Division Members. (e) Series B-5 Stock. The holders of shares of the Series B-5 Stock shall have the trading rights, including trading floor access rights and privileges, set forth in the corporation's by-laws and rules for holders of fractional interests in its Growth and Emerging Markets Division. (3) Dividend Rights. Subject to any preferential or participatory rights of holders of any shares of Preferred Stock, the holders of shares of Class B Common Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of any assets of the corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors on shares of the outstanding Common Stock of the corporation, participating with the holders of the outstanding shares of the Class A Common Stock on a Share Equivalent Basis. (4) Voting Rights. Holders of shares of Class B Common Stock shall have the following voting rights: (a) Election of Directors. (i) Class B Directors. Holders of shares of Series B-1 Stock shall have the sole right to elect the Series B-1 Directors (as defined below), and each holder of Series B-1 Stock shall have one vote per share held in any such election. Holders of shares of Series B-2 Stock shall have the sole right to elect the Series B-2 Directors (as defined below), and each holder of Series B-2 Stock shall have one vote per share held in any such election. Holders of shares of Series B-3 Stock shall have the sole right to elect the Series B-3 Director (as defined below), and each holder of Series B-3 Stock shall have one vote per share held in any such election. (ii) Equity Directors. Each holder of Class B Common Stock shall have the right, voting with the holders of the Class A Common Stock A-8
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on a Share Equivalent Basis, to vote in the election of the Equity Directors. (b) Core Rights. Any change, amendment or modification of the Core Rights shall be submitted to a vote of the holders of the Class B Common Stock for their consideration and approval. In any such vote, holders of Series B-1 Stock shall be entitled to six votes for each share of Series B-1 Stock held, holders of Series B-2 Stock shall be entitled to two votes for each share of Series B-2 Stock held, holders of Series B-3 Stock shall be entitled to one vote for each share of Series B-3 Stock held, holders of Series B-4 Stock shall be entitled to one-sixth vote for each share of Series B-4 Stock held and holders of Series B-5 Stock shall be entitled to one-sixtieth vote for each share of Series B-5 Stock held. Any such change, amendment or modification must receive a majority of the aggregate votes cast by the holders of the Class B Common Stock present (in person or by proxy) and voting in order to be approved. (c) Other Matters. Holders of shares of Class B Common Stock shall be entitled to vote on a Share Equivalent Basis on any matters not described in Sections 4(a) or (b) that require the approval of the holders of the Class B Common Stock, whether voting together with the holders of the Class A Common Stock or voting separately as a class. (5) Transfer Restrictions. Shares of Class B Common Stock may be transferred at any time, subject to the following restrictions: (a) No individual or entity may acquire shares of a series of Class B Common Stock, or receive or exercise rights in respect thereof, unless such individual or entity (i) satisfies the trading eligibility requirements specified for such series in the by-laws of the corporation and in any rules or regulations as the Board of Directors may provide and (ii) agrees to be bound by any rules or regulations as the Board of Directors may provide with respect to such series of Class B Common Stock. (b) No sale, transfer or hypothecation of any share of any series of Class B Common Stock or lease of the trading privilege component thereof shall be valid and binding on the corporation unless and until (x) the purchaser, lessee or transferee satisfies the trading eligibility requirements specified for such shares in the by-laws of the corporation and in any other rules or regulations as the Board of Directors may provide, and (y) such sale, transfer, hypothecation or lease has been reported to the corporation. (c) No person who has sold a share of any series of Class B Common Stock shall be eligible to purchase another share of the same series of Class B common stock within six months of the closing of such sale, except as may be otherwise allowed under rules adopted by the Board of Directors. (6) Adjustments to Applicable Equivalent Amounts For Dilutive Issues. A-9
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(a) No Adjustment Unless Economic Dilution. No adjustment in the Applicable Equivalent Amount of any series of Class B Common Stock shall be made in respect of the issuance or deemed issuance of Additional Common Shares unless the consideration per share for an Additional Common Share issued or deemed to be issued by the corporation is less than the Fair Market Value of a share of Class A Common Stock on the date of such issue or deemed issue. (b) Deemed Issue of Additional Common Shares. (1) Options and Convertible Securities. In the event the corporation, at any time or from time to time after the Effectiveness Date, shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Class A Common Stock (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Common Shares (except as otherwise provided in the definition thereof) issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that in any such case in which Additional Common Shares are deemed to be issued: (A) no further adjustment in the Applicable Equivalent Amounts shall be made upon the subsequent issue of Convertible Securities or shares of Class A Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the corporation, or in the number of shares of Class A Common Stock issuable upon the exercise, conversion or exchange thereof, the Applicable Equivalent Amounts computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; A-10
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(C) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Applicable Equivalent Amounts computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if: (I) in the case of Convertible Securities or Options for Class A Common Stock, the only Additional Common Shares issued were shares of Class A Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the corporation upon such conversion or exchange, and (II) in the case of Options for Convertible Securities, the only Convertible Securities issued were Convertible Securities, if any, actually issued upon the exercise of such Options, and the consideration received by the corporation for the Additional Common Shares deemed to have been issued was the consideration actually received by the corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the corporation upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (D) no readjustment pursuant to clause (B) or (C) above shall have the effect of reducing any Applicable Equivalent Amount to an amount which is less than the higher of (i) the such Applicable Equivalent Amount on the original adjustment date, or (ii) the Applicable Equivalent Amount that would have resulted from any issuance of Additional Common Shares between the original adjustment date and such readjustment for which no adjustment was originally made; and (E) in the case of any Options, which expire by their terms not more than 60 days after the date of issue thereof, no A-11
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adjustment of the Applicable Equivalent Amount shall be made until the expiration or exercise of all such Options. (2) Stock Dividends. In the event the corporation, at any time or from time to time after the Effectiveness Date, shall declare or pay any dividend on shares of its capital stock payable in shares of Class A Common Stock, then and in any such event, Additional Common Shares (except as otherwise provided in the definition thereof) shall be deemed to have been issued immediately after the close of business on the record date for the determination of holders of any class of securities entitled to receive such dividend for purposes of adjusting the Applicable Equivalent Amounts; provided, however, that if such record date is fixed and such dividend is not fully paid, the only Additional Common Shares deemed to have been issued will be the number of shares of Class A Common Stock actually issued in such dividend, and such shares will be deemed to have been issued as of the close of business on such record date, and such Applicable Equivalent Amounts shall be recomputed accordingly. (c) Adjustment of Applicable Equivalent Amounts Upon Issuance of Additional Common Shares. In the event the corporation shall issue Additional Common Shares (including Additional Common Shares deemed to be issued pursuant to Section 6(b)) without consideration or for a consideration per share less than the Fair Market Value of a share of Class A Common Stock in effect immediately prior to such issue, then and in such event, the Applicable Equivalent Amounts shall be increased, concurrently with such issue, to amounts (calculated to the nearest one-tenth of a share) determined by multiplying each Applicable Equivalent Amount by a fraction, the numerator of which shall be the number of shares of Class A Common Stock outstanding immediately prior to such issue plus the number of such Additional Common Shares so issued and the denominator of which shall be the number of shares of Class A Common Stock outstanding immediately prior to such issue plus the number of shares of Class A Common Stock which the aggregate consideration received by the corporation for the total number of Additional Common Shares so issued would purchase at such Fair Market Value; provided that, for the purposes of this subsection (c), all shares of Class A Common Stock issuable upon exercise of outstanding Options, and conversion of outstanding Convertible Securities shall be deemed to be outstanding. (d) Determination of Consideration. For purposes of this Section, the consideration received by the corporation for the issue of any Additional Common Shares shall be computed as follows: (1) Cash and Property. Such consideration shall: A-12
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(A) insofar as it consists of cash, be computed at the aggregate amount of cash received by the corporation excluding amounts paid or payable for accrued interest or accrued dividends; (B) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (C) in the event Additional Common Shares are issued together with other shares or securities or other assets of the corporation for the consideration so received, be computed as provided in clauses (A) and (B) above, as determined in good faith by the Board of Directors. (2) Options and Convertible Securities. The consideration per share received by the corporation for Additional Common Shares deemed to have been issued pursuant to Section 6(b)(1), relating to Options and Convertible Securities, shall be determined by dividing: (A) the total amount, if any, received or receivable by the corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (B) the maximum number of shares of Class A Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (3) Stock Dividends. Any Additional Common Shares deemed to have been issued relating to stock dividends shall be deemed to have been issued for no consideration. In the event that Additional Common Shares are proposed to be issued in connection with an acquisition or other transaction subject to certain conditions precedent, such that there will be a delay between the execution of the associated agreement and the consummation of the acquisition or transaction and the A-13
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issuance of the Additional Common Shares, the value of the consideration to be received per share shall be compared to the Fair Market Value of a share of Class A Common Stock as of the date of execution of the associated agreement for the purposed of calculating any adjustments under this Section 6. (e) Adjustments for Subdivisions, Combinations or Consolidation of Common Stock. In the event the outstanding Class A Common Stock shall be subdivided (by stock split or otherwise) into a greater number of shares of Class A Common Stock, the Applicable Equivalent Amounts then in effect shall, concurrently with the effectiveness of such subdivision, be proportionately increased. In the event the outstanding Class A Common Stock shall be combined or consolidated (by reclassification or otherwise) into a lesser number of shares of Class A Common Stock, the Applicable Equivalent Amounts then in effect shall, concurrently with the effectiveness of such combination or consolidation, be proportionately decreased. (f) No Impairment. The corporation will not, by amendment of this Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed under this Section by the corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section. (7) Conversion Rights of Series B-5. (a) Conversion. Subject to and upon compliance with the provisions of this Section 7, each holder of any shares of Series B-5 Stock shall have the right at such holder's option, at any time or from time to time prior to the close of business in Chicago, Illinois on November 3, 2000, to convert such shares of Series B-5 Stock into fully paid and nonassessable shares of Series B-4 Stock at the ratio of ten shares of Series B-5 Stock for each share of Series B-4 Stock to be received in conversion. Shares of Series B-5 Stock may be converted into Series B-4 Stock only in integral multiples of ten. No fractional shares of Series B-4 Stock will be issued upon conversion. (b) Mechanics of Conversion. A holder of shares of Series B-5 Stock may exercise the conversion right specified in Section 7(a) as to such holder's shares by surrendering to the corporation or any transfer agent of the corporation the certificate or certificates for the shares to be converted, accompanied by written notice stating that the holder elects to convert all of the shares represented thereby. Conversion shall be deemed to have been effected on the date when delivery of such written notice and share certificates is made, and such date is referred to herein as the Conversion Date. As promptly as practicable after the Conversion Date, the corporation shall issue and deliver to or upon the written order of such holder a certificate or certificates for the number of full shares of A-14
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Series B-4 Stock to which such holder is entitled as a result of the exercise of such conversion right. The person in whose name the certificate or certificates for Series B-4 Stock are to be issued shall be deemed to have become a holder of record of such Series B-4 Stock on the applicable Conversion Date. After the initial issuance of shares of Series B-4 Stock on the Effectiveness Date pursuant to the agreement and plan of merger dated as of March 1, 2000 between CME Transitory Co. and the corporation, shares of Series B-4 Stock may only be issued upon the conversion pursuant to this Section 7 of shares of Series B-5 Stock. (c) Automatic Conversion. Each share of Series B-5 Stock shall automatically be converted into ten shares of Class A Common Stock on November 4, 2000. (d) Status of Converted Shares. Shares of Series B-5 Stock that are converted into shares of Series B-4 Stock or shares of Class A Common Stock shall not be reissued. ARTICLE FIVE: (A) The initial Board of Directors shall consist of thirty- nine members. The terms of eighteen of the directors shall expire at the annual meeting of the stockholders held in December 2000, and the terms of the remaining twenty-one directors shall expire at the annual meeting of the stockholders held in December 2001. (B) At the annual meeting of stockholders held in December 2000, the size of the Board of Directors shall be reduced to thirty members and nine directors shall be elected to serve two-year terms as follows: (1) Six directors shall be elected by the holders of Common Stock voting together as a single class on a Share Equivalent Basis from a Board- nominated slate of candidates nominated in accordance with the nominating provisions as provided in the corporation's bylaws; (2) One director shall be elected by the holders of Series B-1 Stock; (3) One director shall be elected by the holders of Series B-2 Stock; and (4) One director shall be elected by the holders of Series B-3 Stock. (C) At the annual meeting of stockholders held in December 2001, the size of the Board of Directors shall be reduced to nineteen members and ten directors shall be elected to serve two-year terms as follows: (1) Seven directors shall be elected by the holders of Common Stock voting together as a single class on a Share Equivalent Basis from a Board- nominated slate of candidates nominated in accordance with the nominating provisions provided in the corporation's bylaws. (2) Two directors shall be elected by the holders of Series B-1 Stock; and A-15
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(3) One director shall be elected by the holders of Series B-2 Stock. The directors elected as provided in Sections (B)(1) and (C)(1) are referred to as the "Equity Directors;" the directors elected as provided in Sections (B)(2) and (C)(2) are referred to as the "Series B-1 Directors;" the directors elected as provided in Sections (B)(3) and (C)(3) are referred to as the "Series B-2 Directors;" and the director elected as provided in Section (B)(4) is referred to as the "Series B-3 Director." The Equity Directors shall include persons fulfilling the requirements of any regulatory authority having jurisdiction over the corporation. (D) At each succeeding annual meeting of stockholders, the successors of the Series B-1 Directors, the Series B-2 Directors, any Series B-3 Director and the Equity Directors whose terms expire at that meeting shall be elected by the holders of the Series B-1 Stock, the Series B-2 Stock, the Series B-3 Stock, and the Common Stock voting as a single class on a Share Equivalent Basis, respectively. The directors so elected shall be elected for a term expiring at the annual meeting of stockholders held in the second year following the year of their election, and until their successors are duly elected and qualified and have accepted office, subject to death, resignation or removal from office. Any vacancy occurring in a directorship may be filled by the Board of Directors; provided, however, that any vacancy occurring with respect to a Series B-1 Director, a Series B-2 Director or a Series B-3 Director shall be filled from the candidates who lost for such position from the most recent election, with the candidates being selected to fill such vacancy in the order of the aggregate number of votes received in such previous election. Any persons so elected shall serve for the remaining term of his or her predecessor in office. (E) No person shall be eligible for election as a Series B-1 Director, a Series B-2 Director or a Series B-3 Director unless he or she shall own, or be recognized under rules adopted by the Board of Directors as a permitted transferee (other than temporary lease-type transfers) of, at least one share of the series of Class B Common Stock entitled to elect such director. (F) Any director may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least two-thirds of the voting power of the shares entitled to elect such person as a director under this Article. ARTICLE SIX: The Board of Directors is hereby authorized to create and issue, whether or not in connection with the issuance and sale of any of its stock or other securities or property, rights entitling the holders thereof to purchase from the corporation shares of Preferred Stock, Class A Common Stock or securities of any other corporation. The times at which and the terms upon which such rights are to be issued will be determined by the Board of Directors and set forth in the contracts or instruments that evidence such rights. The authority of the Board of Directors with respect to such rights shall include, without limitation, determination of the following: (A) The initial purchase price per share or other unit of the stock or other securities or property to be purchased upon exercise of such rights; A-16
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(B) Provisions relating to the times at which and the circumstances under which such rights may be exercised or sold or otherwise transferred, either together with or separately from, any other stock or other securities of the corporation; (C) Provisions which adjust the number or exercise price of such rights or amount or nature of the stock or other securities or property receivable upon exercise of such rights in the event of a combination, split or recapitalization of any stock of the corporation, a change in ownership of the corporation's stock or other securities or a reorganization, merger, consolidation, sale of assets or other occurrence relating to the corporation or any stock of the corporation, and provisions restricting the ability of the corporation to enter into any such transaction absent an assumption by the other party or parties thereto of the obligations of the corporation under such rights; (D) Provisions which deny the holder of a specified percentage of the outstanding stock or other securities of the corporation the right to exercise such rights and/or cause the rights held by such holder to become void; (E) Provisions which permit the corporation to redeem or to exchange such rights; and (F) The appointment of a rights agent with respect to such rights. ARTICLE SEVEN: (A) In furtherance of and not in limitation of the powers conferred by law, the Board of Directors is expressly authorized and empowered to adopt, amend, or repeal the bylaws of the corporation, provided, however, that the bylaws may also be altered, amended, or repealed by the affirmative vote of the holders of two-thirds of the voting power of the then outstanding Common Stock, voting together as a single class on a Share Equivalent Basis. (B) Unless and except to the extent that the by-laws of the corporation shall so require, the election of directors of the corporation need not be by written ballot. ARTICLE EIGHT: No stockholder shall have any preemptive right to subscribe to an additional issue of any class or series of the corporation's capital stock or to any securities of the corporation convertible into such stock. ARTICLE NINE: Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of at least two-thirds of the voting power of the then outstanding Common Stock, voting together as a single class on a Share Equivalent Basis, shall be required to amend, repeal, or adopt any provisions inconsistent with paragraph (F) of Article Five or Articles Six, Nine, Ten, Eleven, Twelve, Thirteen or Fourteen of this Certificate of Incorporation. ARTICLE TEN: No director of the corporation shall be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper A-17
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personal benefit. Any amendment or repeal of this Article by the stockholders shall not adversely affect any right or protection of a director of the corporation existing hereunder in respect of any act or omission occurring prior to such amendment or repeal. ARTICLE ELEVEN: The corporation shall, to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented, have the power to indemnify any and all persons whom it shall have the power to indemnify under said Section from and against any and all expenses, liabilities or other matters referred to in or covered by said Section, and the power provided for herein shall not be deemed exclusive of any other right to which those indemnified may be entitled under any bylaw, agreement, or vote of stockholders, disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office. ARTICLE TWELVE: In furtherance and not in limitation of the powers conferred by law or in this Certificate of Incorporation, the Board of Directors (and any committee of the Board of Directors) is expressly authorized, to the extent permitted by law, to take such action or actions as the Board of Directors or such committee may determine to be reasonably necessary or desirable to (A) encourage any individual, limited partnership, general partnership, corporation or other firm or entity (a "person") to enter into negotiations with the Board of Directors and management of the corporation with respect to any transaction which may result in a change in control of the corporation which is proposed or initiated by such person or (B) contest or oppose any such transaction which the Board of Directors or such committee determines to be unfair, abusive or otherwise undesirable with respect to the corporation and its business, assets or properties or the stockholders of the corporation, including, without limitation, the adoption of such plans or the issuance of such rights, options, capital stock, notes, debentures or other evidences of indebtedness or other securities of the corporation, which rights, options, capital stock, notes, debentures or other evidences of indebtedness and other securities (i) may be exchangeable for or convertible into cash or other securities on such terms and conditions as may be determined by the Board of Directors or such committee and (ii) may provide for the treatment of any holder or class of holders thereof designated by the Board of Directors or any such committee in respect of the terms, conditions, provisions and rights of such securities which is different from, and unequal to, the terms, conditions, provisions and rights applicable to all other holders thereof. ARTICLE THIRTEEN: No action required to, or which may, be taken at an annual or special meeting of stockholders of the corporation may be taken without a meeting, and the power of the stockholders of the corporation to act by written consent, whether pursuant to Section 228 of the General Corporation Law or otherwise, is specifically denied. ARTICLE FOURTEEN: Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by this Certificate of Incorporation, may be called by the Chairman of the Board, in his discretion, and shall be called by the Chairman of the Board or the Secretary at the request in writing of a majority of the directors then holding office. Any such written request shall state the purpose or purposes of the proposed meeting. A-18
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EXHIBIT B AGREEMENT AND PLAN OF MERGER of Chicago Mercantile Exchange and CME Transitory Co. THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made and entered into as of March 1, 2000, between Chicago Mercantile Exchange, an Illinois not- for-profit corporation ("CME"), and CME Transitory Co., a Delaware nonstock corporation ("Transitory" or "Surviving Corporation"), said corporations hereinafter sometimes referred to jointly as the "Constituent Corporations"; WITNESSETH: WHEREAS, CME is a not-for-profit corporation duly organized and existing under the Illinois Act, having as its registered agent Craig S. Donohue; WHEREAS, Transitory is a nonstock corporation duly organized and existing under the Delaware General Corporation Law, having as its registered agent The Corporation Trust Company; WHEREAS, the Constituent Corporations propose, pursuant to the applicable provisions of the Illinois General Not For Profit Corporation Act and the Delaware General Corporation Law, for CME to merge with and into Transitory, which shall be the Surviving Corporation in consideration for which Members of CME will receive Membership Interests in Transitory (the "Merger"); WHEREAS, all rights and privileges that Members of CME derive from their Membership Interests shall be and remain as they exist immediately prior to the Effective Date of this Agreement, preserved in the rights and privileges of the Membership Interests in Transitory received by Members of CME in the Merger; and WHEREAS, the respective Boards of Directors of the Constituent Corporations have determined that it is advisable that CME be merged with and into Transitory and have approved such Merger on the terms and conditions hereinafter set forth in accordance with the applicable provisions of law permitting such Merger; NOW, THEREFORE, in consideration of the foregoing and of the agreements, covenants and provisions hereinafter set forth, the parties hereto, intending to be legally bound, do hereby agree as follows: ARTICLE I DEFINITIONS In addition to the words defined elsewhere in this Agreement, the following words have the following respective meanings, and such definitions shall be equally applicable to both the singular and plural forms of any of the words herein defined: B-1
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"Consent" means any consent, license, permit, waiver, approval, authorization or other action of, by or with respect to, or registration, declaration or filing with, any court, Governmental Authority or Person. "DGCL" means the General Corporation Law of the State of Delaware, as amended. "Effective Date" means the date on which the Merger becomes effective as provided by the applicable provisions of the Illinois Act and the DGCL. "Governmental Approval" means any Consent of, with or to any Governmental Authority, including the expiration of any waiting or other time period required to pass before governmental consent or acquiescence may be assumed or relied on. "Governmental Authority" means any court or governmental authority, department, commission, board, bureau, agency or instrumentality, domestic or foreign, any tribunal or arbitrators of competent jurisdiction and any self-regulatory organization. "Illinois Act" means the Illinois' General Not For Profit Corporation Act of 1986, as amended. "Member" means the owner of a Membership Interest, or any portion thereof, in a Constituent Corporation. An owner of two or more Membership Interests, or portions thereof, in a single Constituent Corporation shall be deemed to be a separate Member with respect to each individual Membership Interest owned. "Membership Interest" means, with respect to a Constituent Corporation, all the rights or interests of a Member in such Constituent Corporation, including, but not limited to, any floor access and electronic trading rights, any right to vote, any rights with regard to earnings, surplus or assets of such Constituent Corporation, and any other rights in liquidation, merger, reorganization or conversion of such Constituent Corporation. "Person" means an individual, corporation, joint venture, partnership, association, trust, trustee, unincorporated entity, organization or government or any department or agency thereof. A Person who owns a Membership Interest in more than one capacity shall be deemed to be a separate Person in each such capacity. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. B-2
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ARTICLE II MERGER Section 2.1 Effect of the Merger. Subject to the terms of this Agreement, and as more fully set forth and supplemented by the other provisions herein, upon the Effective Date and pursuant to the Merger: (a) CME will merge with and into Transitory, the separate existence of CME shall cease, except to the extent provided by the laws of the State of Illinois in the case of a corporation after its merger into another corporation, and Transitory shall be the Surviving Corporation. (b) Each Membership Interest in CME shall be converted into a Membership Interest in Transitory pursuant to and in accordance with this Agreement. (c) The Surviving Corporation shall possess all the rights, privileges, immunities, powers and franchises, of a public or private nature, of each of the Constituent Corporations, and all property, real, personal and mixed, all debts due on whatever account, including subscriptions to membership interests and all other choses in action, and all and every other interest, of or belonging to or due to each of the Constituent Corporations, shall be taken and deemed to be transferred to and vested in the Surviving Corporation without further act or deed; and the title to all real estate, or any interest therein, vested in either of the Constituent Corporations shall not revert or be in any way impaired by reason of the Merger. (d) The Surviving Corporation shall be responsible and liable for all of the liabilities and obligations of each of the Constituent Corporations, and any claim existing or action or proceeding pending by or against either of the Constituent Corporations may be prosecuted to judgment as if the Merger had not taken place, or the Surviving Corporation may be substituted in its place, and neither the rights of creditors nor any liens upon the property of either of the Constituent Corporations shall be impaired by the Merger. (e) (i) The respective assets of CME and Transitory shall be taken up or continued on the books of the Surviving Corporation in the amounts at which such assets shall have been carried on their respective books immediately prior the Effective Date; and (ii) the respective liabilities and reserves of CME and Transitory shall be taken up or continued on the books of the Surviving Corporation in the amounts at which such liabilities and reserves shall have been carried on their respective books immediately prior to the Effective Date. (f) All corporate acts, plans, policies, agreements, arrangements, approvals and authorizations of CME, its Members, Board of Directors and committees thereof, officers and agents, which were valid and effective immediately prior to the Effective Date shall be taken for all purposes as the acts, plans, policies, agreements, arrangements, approvals and authorizations of the Surviving Corporation and shall be as effective and binding thereon as the same were with respect to CME. B-3
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Section 2.2 Charter and By-Laws. The Certificate of Incorporation and By-laws of Transitory as in effect on the Effective Date shall be and constitute the Certificate of Incorporation and By-Laws of the Surviving Corporation until the same shall be altered, amended or changed in accordance with their respective terms and applicable law. Section 2.3 Directors and Officers. The directors and officers of CME prior to the Effective Date shall serve as the directors and officers of the Surviving Corporation on and after the Effective Date, until new directors and officers have been duly elected and qualified pursuant to the Certificate of Incorporation and By-laws of the Surviving Corporation, or until their earlier resignation, removal or replacement. Section 2.4 Employees and Agents. The employees and agents of CME shall become the employees and agents of the Surviving Corporation and shall continue to be entitled to the same rights and benefits which they enjoyed as employees and agents of CME. ARTICLE III CONVERSION OF MEMBERSHIP INTERESTS Section 3.1 Conversion of Membership Interests. On the Effective Date, and without any further action by CME or Transitory, all the Membership Interests in CME shall be converted into Membership Interests in Transitory. The Membership Interests in CME shall be converted in accordance with the following: (a) Each individual Chicago Mercantile Exchange division Membership Interest in CME shall be converted into one Chicago Mercantile Exchange division Membership Interest in Transitory. (b) Each individual International Monetary Market division Membership Interest in CME shall be converted into one International Monetary Market division Membership Interest in Transitory. (c) Each individual Index and Option Market division Membership Interest in CME shall be converted into one Index and Option Market division Membership Interest in Transitory. (d) Each individual Growth and Emerging Markets division Membership Interest in CME shall be converted into one Growth and Emerging Markets division Membership Interest in Transitory. (e) Each fractional Growth and Emerging Markets division Membership Interest in CME shall be converted into an equivalent fractional Growth and Emerging Markets division Membership Interest in Transitory. Each of the Membership Interests in Transitory described in the foregoing clauses (a) through (e) (inclusive) shall have the rights, preferences and privileges provided for in the Consolidated Rules of CME for the corresponding Membership Interests in CME as of the Effective Date. B-4
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Section 3.2 Further Rules. CME and Transitory are empowered to adopt further rules and regulations, not inconsistent with the provisions of this Agreement, regarding the conversion of the Membership Interests in CME into Membership Interests in Transitory. ARTICLE IV COVENANTS Section 4.1 Further Actions. Each of the Constituent Corporations agrees to use its reasonable efforts to take, or to cause to be taken, all actions and to do, or to cause to be done, all things necessary, proper or advisable to consummate and to make effective the transactions contemplated by this Agreement, including, but not limited to: (a) making, or causing to be made, all such filings and submissions under any applicable law and giving such reasonable undertakings, as may be necessary to consummate this Agreement and the transactions contemplated hereby; (b) using its reasonable efforts to obtain, or causing to be obtained, all Governmental Approvals and other Consents necessary to be obtained in order to consummate this Agreement and the transactions contemplated hereby; and (c) using its reasonable efforts to take, or cause to be taken, all other actions, necessary, proper or advisable in order to fulfill its obligations in respect of this Agreement and the transactions contemplated hereby. Each of the parties hereto shall coordinate and cooperate with the other party in exchanging such information and supplying such reasonable assistance as may be requested by such other party in connection with the filings and other actions contemplated by this Section 4.1. Section 4.2 Service in Illinois. Transitory, as the Surviving Corporation, agrees that it may be served with process in Illinois in any proceeding for enforcement of (i) any obligation of CME as well as (ii) any of its obligations arising from this Merger. Transitory hereby irrevocably appoints the Secretary of State of Illinois as its agent to accept service of process in any such suit or other proceedings, and any such process so accepted shall be mailed by the Secretary of State of Illinois to Chicago Mercantile Exchange Inc., 30 South Wacker Drive, Chicago, Illinois 60606, attention: General Counsel. ARTICLE V CONDITIONS TO MERGER Section 5.1 Conditions to Effectiveness. The obligation of each of the parties hereto to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment on or prior to the Effective Date of the following conditions: (a) No Injunctions or Restraints. Consummation of the transactions contemplated by this Agreement shall not have been restrained, enjoined or otherwise B-5
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prohibited by any applicable law, including any order, injunction, decree or judgment of any court or other Governmental Authority, and no action or proceeding shall be pending or threatened by any Governmental Authority on the Effective Date before any court or other Governmental Authority to restrain, enjoin or otherwise prevent the consummation of the transactions contemplated hereby or to recover any material damages or obtain other material relief as a result of such transactions. There shall not have been promulgated, entered, issued, or determined by any court or other Governmental Authority to be applicable to this Agreement any applicable law making illegal the consummation of the transactions contemplated hereby, and no proceeding with respect to the application of any such applicable law shall be pending. (b) Effectiveness of the Registration Statement. The Registration Statement on Form S-4 filed with the SEC by Chicago Mercantile Exchange Inc., a Delaware corporation ("New CME"), relating to its issuance of its common stock (including the proxy statement and prospectus constituting part thereof, the "Registration Statement") shall have become and remain effective under the Securities Act. No stop order suspending the effectiveness of the Registration Statement shall have been issued by the SEC and no proceedings for that purpose and no similar proceeding in respect of the Registration Statement shall have been initiated or threatened by the SEC. (c) Requisite Approvals. The Members of CME shall have approved this Agreement as required by law. (d) Internal Revenue Service Revenue Ruling. Issuance by the Internal Revenue Service of a ruling that this Merger and the ultimate issuance of common stock by New CME qualify for tax-free treatment under the Internal Revenue Code of 1986, as amended. (e) P-M-T. The offer by New CME to purchase the assets and business of P-M-T Limited Partnership, an Illinois limited partnership, for cash shall have been approved by the holders of two-thirds of the outstanding P-M-T Class A partnership units (excluding units held by CME). ARTICLE VI AMENDMENT; TERMINATION AND CORRECTIONS Section 6.1 Amendment of Agreement. At any time prior to the Effective Date, the parties hereto may agree to amend this Agreement. No such amendment may, in the sole judgment of the Board of Directors of CME, materially and adversely affect the rights of the Members of CME. Section 6.2 Abandonment of Agreement. At any time prior to the Effective Date, CME may abandon this Agreement by appropriate resolution of its Board of Directors, notwithstanding prior approval at the Special Meeting. No Person shall have any rights or claims against either Constituent Corporation or its respective Board of Directors based on abandonment of this Agreement. B-6
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Section 6.3 Corrections. The Constituent Corporations may, until the Effective Date, by an instrument executed by a Chairman, Vice Chairman, President or any Vice President of each Constituent Corporation, make such modifications as are appropriate to correct errors, clarify existing items or make additions to correct manifest omissions in this Agreement. ARTICLE VII ADDITIONAL PROVISIONS Section 7.1 Notices. If CME complies substantially and in good faith with the requirements of the Illinois Act or the terms of this Agreement with respect to the giving of any required notice to its Members, its failure in any case to give such notice to any Person or Persons entitled thereto shall not impair the validity of the actions and proceedings taken under the Illinois Act or this Agreement or entitle such Person or Persons to any injunctive or other equitable relief with respect thereto. Section 7.2 Severability. To the extent possible, each provision of this Agreement shall be interpreted in a manner as to be valid, legal and enforceable. Any determination that any provision of this Agreement or any application thereof is invalid, illegal or unenforceable in any respect or in any instance shall be effective only to the extent of such invalidity, illegality or unenforceablity and shall not effect the validity, legality or enforceability of any other provision of this Agreement. Section 7.3 Headings. Article and Section headings contained in this Agreement are inserted for convenience and reference only, and shall not be considered in construing or interpreting any of the provisions hereof. Section 7.4 Entire Agreement. This Agreement supersedes any and all oral or written agreements heretofore made relating to the subject matter hereof and constitutes the entire Agreement of the parties relating to the subject matter hereof. Section 7.5 Expenses. Transitory, as the Surviving Corporation, shall pay all expenses of carrying this Merger into effect and accomplishing the Merger herein provided for. Section 7.6 Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. Section 7.7 Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware, without giving effect to any conflicts or choice of law provisions that would make applicable the substantive laws of any other jurisdiction. B-7
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IN WITNESS WHEREOF, each of the Constituent Corporations, pursuant to authority duly given by resolutions adopted by its Board of Directors, has caused this Agreement to be executed in its name by its duly authorized officer as of the day and year aforesaid. CHICAGO MERCANTILE EXCHANGE By: ________________________________ Name: M. Scott Gordon Title: Chairman of the Board CME TRANSITORY CO. By: ________________________________ Name: M. Scott Gordon Title: Chairman of the Board B-8
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PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law provides that the Registrant may, and in some circumstances must, indemnify the directors and officers of the Registrant against liabilities and expenses incurred by such person by reason of the fact that such person was serving in such capacity, subject to certain limitations and conditions set forth in the statute. The Registrant's Certificate of Incorporation and By-Laws provide that the Registrant will indemnify its directors and officers, and may indemnify any person serving as director or officer of another business entity at the Registrant's request, to the extent permitted by the statute. In addition, the Registrant's Certificate of Incorporation provides, as permitted by the the Delaware General Corporation Law, that directors shall not be personally liable for monetary damages for breach of fiduciary duty as a director, except (i) for breaches of their duty of loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, and (iv) for transactions from which a director derived an improper personal benefit. Item 21. Exhibits and Financial Statement Schedules (a) Exhibits The following is a list of Exhibits included as part of this Registration Statement. The Registrant agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request. [Enlarge/Download Table] Exhibit Number Description of Exhibit ------ ---------------------- 2.1 Form of Agreement and Plan of Merger dated as of March 1, 2000 between Chicago Mercantile Exchange and CME Transitory Co. (included as Exhibit B to the Proxy Statement/Prospectus). 2.2 Form of Agreement and Plan of Merger dated as of March 1, 2000 between CME Transitory Co. and the Registrant 3.1* Certificate of incorporation of the Registrant 3.2 Amended and Restated Certificate of Incorporation (included as Exhibit A to the Proxy Statement/Prospectus) 3.3 By-laws of the Registrant 5.1 Opinion of Sidley & Austin regarding legality of securities being registered 8.1** Opinion of Sidley & Austin regarding tax matters 10.1 Chicago Mercantile Exchange Omnibus Stock Plan, effective February 7, 2000. 10.2* Chicago Mercantile Exchange Senior Management Supplemental Deferred Savings Plan, including First Amendment thereto dated December 14, 1994, Second Amendment thereto dated December 8, 1998 and Administrative Guidelines thereto. 10.3* Chicago Mercantile Exchange Directors' Deferred Compensation Plan, including First Amendment thereto dated December 8, 1998. 10.4* Chicago Mercantile Exchange Supplemental Executive Retirement Plan, including First Amendment thereto dated December 31, 1996, Second Amendment thereto dated January 14, 1998 and Third Amendment thereto dated December __, 1998. 10.5* Chicago Mercantile Exchange Supplemental Executive Retirement Trust, including First Amendment thereto dated September 7, 1993. 10.6* Agreement dated March 21, 1997 between Chicago Mercantile Exchange and T. Eric Kilcollin. 10.7* Separation Agreement and General Release, executed December 31, 1998 between T. Eric Kilcollin and Chicago Mercantile Exchange. 10.8** Agreement dated February 7, 2000 between Chicago Mercantile Exchange and James J. McNulty. 10.9* Employment Agreement dated October 27, 1998 between Chicago Mercantile Exchange and Frederick Arditti, and First Amendment thereto dated October 27, 1998 and Second Amendment thereto dated October 27, 1998. 10.10* Employment Agreement dated December 10, 1999 between Chicago Mercantile Exchange and Gerald D. Beyer. 10.11* Employment Agreement, executed September 8, 1999 between Chicago Mercantile Exchange and Phupinder Gill. 10.12* Employment Agreement dated July 17, 1998 between Chicago Mercantile Exchange and William Jenks 10.13 License Agreement, effective as of September 24, 1997 between Standard & Poor's, a Division of The McGraw-Hill Companies, Inc., and Chicago Mercantile Exchange. (confidential material appearing in this document has been omitted and filed separately with the Securities and Exchange Commission in accordance with the Securities Act of 1933, as amended, and 17 C.F.R. 230.406 and 200.80 promulgated thereunder. Omitted information has been replaced with asterisks.) 10.14* Lease dated as of November 11, 1983 between Chicago Mercantile Exchange Trust (successor to CME Real Estate Co. of Chicago, Illinois) and Chicago Mercantile Exchange, including amendment thereto dated as of December 6, 1989. 10.15* Lease dated March 31, 1988 between EOP -- 10 & 30 South Wacker, L.L.C., as beneficiary of a land trust dated October 1, 1997 and known as American National Bank and Trust Company of Chicago Trust No. 123434 (as successor in interest to American National Bank and Trust Company of Chicago, not individually but solely as trustee under Trust Agreement dated June 2, 1981 and known as Trust No. 51234) and Chicago Mercantile Exchange relating to 10 South Wacker Drive, including First Amendment thereto dated as of November 1, 1999. 10.16* Lease dated May 11, 1981 between EOP -- 10 & 30 South Wacker, L.L.C., as beneficiary of a land trust dated October 1, 1997 and known as American National Bank and Trust Company of Chicago Trust No. 123434-06 (as successor in interest to American National Bank and Trust Company of Chicago, not individually but solely as trustee under Trust Agreement dated March 20, 1980 and known as Trust No. 48268) and Chicago Mercantile Exchange relating to 30 South Wacker Drive, including First Amendment thereto dated as of February 1, 1982, Second Amendment thereto dated as of April 26, 1982, Third Amendment thereto dated as of June 29, 1982, Fourth Amendment thereto dated as of July 28, 1982, Fifth Amendment thereto dated as of October 7, 1982, Sixth Amendment thereto dated as of July 5, 1983, Seventh Amendment thereto dated as of September 19, 1983, Eighth Amendment thereto dated as of October 17, 1983, Ninth Amendment thereto dated as of December 3, 1984, Tenth Amendment thereto dated as of March 16, 1987, Eleventh Amendment thereto dated as of January 1, 1999, Twelfth Amendment thereto dated as of June 30, 1999. 21.1 Subsidiaries of the Registrant 23.1 Consent of Sidley & Austin (included in Exhibit 5.1) 23.2* Consent of Arthur Andersen LLP 24.1* Form of Power of Attorney executed by Directors of Registrant 27.1 Financial Data Schedule 99.1* Form of proxy ______________________ * Previously filed. ** To be filed by amendment.
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(b) Financial Statement Schedules None. Item 22. Undertakings. The Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933. (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) That prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (5) That every prospectus: (i) that is filed pursuant to paragraph (4) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such 2
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post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (6) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (7) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 3
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SIGNATURES Pursuant to the requirements of the Securities Act, the registrant has duly caused this Amendment No. 1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chicago, State of Illinois, on March 9, 2000. CHICAGO MERCANTILE EXCHANGE INC. By: /s/ M. Scott Gordon ------------------------------------- M. Scott Gordon Chairman of the Board Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated on this 9th day of March, 2000. Name Title ---- ----- M. Scott Gordon Chairman of the Board and Director --------------------------- M. Scott Gordon (Chief Executive Officer) David G. Gomach Senior Vice President and Chief Financial Officer --------------------------- David G. Gomach (Principal Financial Officer) Raymond C. Repede Vice President and Controller --------------------------- Raymond C. Repede (Principal Accounting Officer) * Director --------------------------- H. Jack Bouroudjian * Director --------------------------- Timothy R. Brennan * Director --------------------------- Leslie Henner Burns * Director --------------------------- Jeffrey R. Carter Director --------------------------- E. Gerald Corrigan * Director --------------------------- Terrence A. Duffy * Director --------------------------- Rahm Emanuel 4
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* Director --------------------------- Martin J. Gepsman * Director --------------------------- Yra G. Harris * Director --------------------------- Robert L. Haworth * Director --------------------------- Bruce F. Johnson Director --------------------------- Gary M. Katler * Director --------------------------- Paul Kimball * Director --------------------------- Thomas A. Kloet * Director --------------------------- John W. Lacey * Director --------------------------- Leo Melamed * Director --------------------------- Merton H. Miller * Director --------------------------- William P. Miller II * Director --------------------------- Laurence E. Mollner * Director --------------------------- Patrick J. Mulchrone * Director --------------------------- John D. Newhouse * Director --------------------------- James E. Oliff * Director --------------------------- Mark G. Papadopoulos * Director --------------------------- Ward Parkinson 5
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* Director --------------------------- Robert J. Prosi Director --------------------------- David M. Pryde * Director --------------------------- Irwin Rosen * Director --------------------------- William G. Salatich, Jr. * Director --------------------------- John F. Sandner * Director --------------------------- Verne O. Sedlacek * Director --------------------------- Leon C. Shender * Director --------------------------- William R. Shepard * Director --------------------------- Howard J. Siegel * Director --------------------------- David I. Silverman * Director --------------------------- Jeffrey L. Silverman * Director --------------------------- Paul Simon * By: /s/ Craig S. Donohue ---------------------- Craig S. Donohue Attorney-in-Fact 6

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