Business Context and Reporting Period
Company: Chicago Mercantile Exchange Holdings Inc. (CME Group Inc.)
Filing Type: Form 8-K (Current Report)
Date of Report: September 23, 2002
Context: The registrant is the parent company of the Chicago Mercantile Exchange Inc., the largest futures exchange in the United States. This filing discloses a material change in accounting policy regarding stock-based compensation, recommended by new independent auditors Ernst & Young LLP, retroactive to December 31, 2000.
Key Financial Metrics
Revenue: Not provided in this filing.
Profit (Net Income):
- First Half 2002 (Revised): Approximately $41.7 million ($1.40 per diluted share).
- First Half 2002 (Original): $38.8 million ($1.31 per diluted share).
- Impact: Increase of approximately $2.9 million due to accounting change.
Margins, Debt, Liquidity: Not provided in this filing.
Material Changes Versus Prior Period
The primary material change is a revision to reported net income and earnings per share for the first half of 2002.
- Accounting Change: Adoption of variable accounting treatment for the full value of the CEO's stock option (Class A and Class B shares), replacing the previous mixed fixed/variable treatment.
- 2002 Impact: Net income increases by $2.9 million for the first half of the year.
- 2001 and 2000 Impact: No impact on full-year results; however, quarterly net income and earnings per share for 2001 will change.
- Auditor Change: Ernst & Young replaced Arthur Andersen in May 2002 and recommended this adjustment after re-auditing fiscal years 1999, 2000, and 2001.
Guidance, Outlook, and Risks
Management Commentary: Chairman Terry Duffy stated the original accounting was based on advice from previous auditors, and the company is adopting the new conclusion from Ernst & Young. The change will result in stock option expense varying quarter-to-quarter based on price changes in Class A and Class B shares.
Outlook: The company expects to announce amended quarterly results in filings with the SEC later in the week of September 23, 2002.
Risks and Contingencies:
- Future stock option expense will fluctuate based on share price movements.
- Forward-looking statements regarding future performance involve risks and uncertainties.
Investor Verification Checklist
- Verify the amended quarterly filings for 2001 and the first half of 2002 to confirm the revised net income and EPS figures.
- Review the full text of the press release and shareholder letter (Exhibits 99.1 and 99.2) for detailed breakdowns of the accounting methodology.
- Monitor future quarterly reports for volatility in stock-based compensation expense due to the new variable accounting treatment.
- Confirm the status of the re-audit for fiscal years 1999, 2000, and 2001 conducted by Ernst & Young.