The change will increase net income for the first half of 2002 by approximately $2.9 million, to about $41.7 million, or $1.40 per diluted share, from $38.8 million, or $1.31 per diluted share. For 2001 and 2000, there is no impact on the full-year results. For 2001, quarterly net income and earnings per share will change. The quarterly numbers will be announced in amendments to the company's filings with the Securities and Exchange Commission later this week. Since stock-based compensation expense is a non-cash expense, the changes will have no impact on the company's cash flow.
In May 2002, Ernst & Young was appointed as the company's independent auditors for the 2002 fiscal year to replace the company's former independent auditors, Arthur Andersen. In that role, Ernst & Young was asked by the company to re-audit the company's fiscal 1999, 2000 and 2001 financial results. After completing the audit, Ernst & Young informed the company that it had reached a different conclusion than the previous auditors on the appropriate accounting for a portion of the CEO's stock option under Accounting Principles Board (APB) Opinion No. 25, ''Accounting for Stock Issued to Employees.'' Ernst & Young recommended that variable accounting treatment be employed for the full value of the CEO's stock option, treating the option's Class A and Class B shares in the same manner. Ernst & Young recommended no other changes to the company's financial results for previous years.
"The original accounting treatment we adopted was based on considerable discussion with, and the advice of, our previous auditors," said Chairman Terry Duffy. "Our new auditors have come to a different conclusion, and we have adopted the changes and will make the necessary adjustments and disclosures."
The majority of the company's stock-based compensation expense is for the CEO's stock option for 5 percent of all classes of outstanding common stock, which was granted in February 2000. For accounting purposes, the option was treated as a stock appreciation right until Nov. 13, 2000, when the company demutualized and created two classes of stock. Since that date, the Class A share portion of the option, which represents the equity value in the firm, has been valued using fixed accounting. In the second quarter of 2001, the company adopted variable accounting treatment for the Class B share portion of the option, which represents the value of the trading rights, while maintaining fixed accounting treatment for the Class A shares in the option. With the adoption of variable accounting for Class A shares in the option, the company's stock option expense will vary quarter-to-quarter based on price changes from the previous quarter in the value of both the Class A and Class B shares.
Chicago Mercantile Exchange Holdings Inc. is the parent company of Chicago Mercantile Exchange Inc. (www.cme.com), the largest futures exchange in the United States based on notional value, trading volume and open interest. As an international marketplace, CME brings together buyers and sellers on its trading floors and GLOBEX around-the-clock electronic trading platform. CME offers futures contracts and options on futures primarily in four product areas: interest rates, stock indexes, foreign exchange and commodities. The exchange moves about $1.5 billion per day in settlement payments and manages $27.1 billion in collateral deposits.
