Fourth quarter results included the results of operations of PCX Holdings, Inc. (PCX), acquired by Archipelago at the end of September 2005. Also included are certain merger related costs for the companies proposed merger with the New York Stock Exchange (NYSE) consisting of:
-- $28.8 million of compensation expense incurred as a result of the acceleration of certain payments and vesting to our executive officers that would have occurred in 2006 following the termination of employment agreements or change in control severance agreements after the completion of our proposed merger with the NYSE, -- $2.9 million of legal and other fees incurred directly in connection with the NYSE merger, and -- $3.0 million of legal fees incurred in monitoring litigation matters involving NYSE and certain of its members.
Excluding the $34.7 million of NYSE merger costs and related executive compensation, the net income for the fourth quarter of 2005 would have been $13.1 million, or $0.28 per diluted share. A full reconciliation of these items is included in the attached table entitled "Reconciliation of non-GAAP financial measures to GAAP measures."
In connection with Archipelago's September 2005 acquisition of PCX, the Securities and Exchange Commission entered an order under which Archipelago undertook to divest its introducing broker, Wave Securities. Accordingly, the results of operations and financial condition of Wave Securities are presented as discontinued. To allow for accurate financial performance comparisons, all historical periods have been conformed to this presentation.
On January 23, 2006, Archipelago announced that it sold Wave Securities to Merrill Lynch & Co., Inc.
Full-Year Results
Total revenues for the year ended December 31, 2005 were $493.4 million, up from $491.3 million in 2004. Net income was $16.3 million compared to net income attributable to common stockholders of $59.3 million in 2004. Diluted earnings per share for 2005 totaled $0.34 versus $1.38 in 2004. Excluding the $46.1 million of NYSE merger costs and related executive compensation, the net income for the year ended December 31, 2005 would have been $42.9 million, or $0.90 per diluted share.
Jerry Putnam, Chairman and CEO of Archipelago, commented, "We began 2005 with our announced acquisition of the Pacific Exchange and quickly followed up with our planned merger with the New York Stock Exchange. We focused on diversifying our business and making continued improvements to our existing services. As a result, we are well positioned today to meet the changing needs of the evolving marketplace and our transformation to the NYSE Group."
Fourth Quarter Financial Highlights
* Total revenues for the fourth quarter of 2005 were $136.9 million as
compared to $114.1 million for the third quarter of 2005 and $128.2
million for the fourth quarter of 2004.
* Cost of revenues declined $4.0 million to $71.3 million for the fourth
quarter of 2005 from $75.3 million for the same period in 2004.
* Gross margin increased to $65.6 million for the fourth quarter of 2005
from $53.0 million for the fourth quarter of 2004, representing an
increase of $12.6 million, or 23.8%. As a percentage of total revenues,
gross margin increased to 47.9% for the fourth quarter of 2005 from
41.3% for the fourth quarter of 2004.
* Indirect expenses increased to $80.1 million for the fourth quarter of
2005 from $35.5 million in the fourth quarter of 2004. This increase was
primarily due to NYSE merger costs and related executive compensation as
well as increased employee compensation and benefits.
* For the fourth quarter of 2005, the operations of PCX contributed $16.8
million to total revenues and $4.5 million to operating income.
* As of December 31, 2005, the continuing operations of Archipelago had
$134.4 million of cash and cash equivalents and no long-term debt.
Fourth Quarter Business and Volume Highlights
* Clients executed 38.3 billion shares or 14.0% of total U.S. equity
securities on ArcaEx during the fourth quarter of 2005 compared to 36.2
billion shares or 13.9% in the fourth quarter a year ago.
* ArcaEx market share decreased to 22.3% in Nasdaq-listed stocks from
23.0% in the third quarter of 2005 and 23.7% from the fourth quarter of
2004.
* ArcaEx market share increased to 4.8% in NYSE-listed stocks from 3.7% in
the third quarter of 2005 and 2.3% from the fourth quarter of 2004.
* ArcaEx market share increased to 32.8% in AMEX-listed stocks from 30.8%
in the third quarter of 2005 and up from 25.6% from the fourth quarter
of 2004.
* The internal match rate rose slightly to 89.2% on ArcaEx compared to an
internal match rate of 88.8% in the third quarter of 2005 and 87.4% in
the fourth quarter a year ago.
Fourth Quarter Business Highlights
* ArcaEx announced plans to launch a corporate bond trading platform that
would allow users of ArcaEx to trade certain bonds listed on, or issued
by companies listed by (US) markets and exchanges, through unlisted
trading privileges pending SEC approval.
* Archipelago announced plans for the development of a next generation
options trading platform replacing the PCX Plus trading system, designed
to offer significant improvements in trading system performance,
functionality and reliability.
* Archipelago shareholders approved its merger with the NYSE.
To supplement Archipelago's consolidated financial statements prepared in accordance with United States generally accepted accounting principles (GAAP) and to better reflect period-over-period comparisons, Archipelago uses non- GAAP financial measures of operating performance. A non-GAAP financial measure is a numerical measure of performance, financial position, or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure, calculated and presented in accordance with GAAP. Non-GAAP financial measures do not replace and are not superior to the presentation of GAAP financial results but are provided to present the effects of expenses recorded by Archipelago in connection with its announced merger with the NYSE and to improve overall understanding of the company's current financial performance and its prospects for the future. Specifically, Archipelago believes the non-GAAP financial results provide useful information to both management and investors regarding certain additional financial and business trends relating to financial condition and operating results. In addition, management uses these measures for reviewing financial results and evaluating financial performance.
Forward-Looking Statements
Certain statements in this press release may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on Archipelago's current expectations and involve risks and uncertainties that could cause Archipelago's actual results to differ materially from those set forth in the statements. There can be no assurance that such expectations will prove to be correct. Factors that could cause Archipelago's results to differ materially from current expectations include: general economic and business conditions, industry trends, competitive conditions, regulatory developments as well as other risks or factors identified in the Company's filings with the Securities Exchange Commission, including its Report on Form 10-K for the fiscal year ending December 31, 2004 which is available on the Company's website at http://www.archipelago.com. You should not place undue reliance on forward- looking statements, which speak only as of the date of this press release. Except for any obligation to disclose material information under the Federal securities laws, Archipelago undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this press release.
About Archipelago
Archipelago Holdings (PCX: AX) operates the Archipelago Exchange(R) (ArcaEx(R)) the first totally open all-electronic stock exchange in the United States. ArcaEx trades all Nasdaq-listed equity securities and exchange listed equity securities, including those listed on the New York Stock Exchange(R), American Stock Exchange(R), and ArcaEx(R). In addition to offering core execution services, ArcaEx provides corporate clients with listing services and innovative data products. In September 2005, Archipelago acquired PCX Holdings, Inc., parent company of the Pacific Exchange and PCX Equities, Inc. allowing Archipelago to bring together the all-electronic trading of equity securities and options products thereby expanding and diversifying Archipelago's business lines. For more information please visit http://www.archipelago.com.
Contacts:
Margaret Nagle, 312-442-7083 (Press)
Patrick Murphy, 312-442-7005 (Investor Relations)
Archipelago Holdings, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Three months ended Year ended
December 31, September 30, December 31, December 31,
2005 2005(a) 2004 2005(a) 2004
(unaudited) (unaudited)
Revenues
Transaction fees $114,658 $98,853 $110,018 $424,981 $434,482
Activity assessment
fees 47,988 - - 47,988 -
Market data fees 16,249 15,080 18,098 61,996 56,366
Listing and other
fees 6,003 135 121 6,379 445
Total revenues 184,898 114,068 128,237 541,344 491,293
Section 31 fees 47,988 - - 47,988 -
Revenues, less Section
31 fees 136,910 114,068 128,237 493,356 491,293
Cost of revenues
Liquidity payments 53,985 49,457 52,312 206,907 203,506
Routing charges 15,738 15,684 21,039 66,705 88,703
Clearance, brokerage
and other transaction
expenses 1,561 1,357 1,925 5,880 13,686
Total cost of revenues 71,284 66,498 75,276 279,492 305,895
Gross margin 65,626 47,570 52,961 213,864 185,398
Gross margin as a %
of total revenues 47.9% 41.7% 41.3% 43.3% 37.7%
Indirect expenses
NYSE merger costs and
related executive
compensation 34,702 2,993 - 46,127 -
Other employee
compensation and
benefits 15,871 12,135 9,743 51,552 38,382
Depreciation and
amortization 6,776 5,262 4,569 21,631 22,877
Communications 5,190 4,803 4,549 19,512 16,278
Marketing and
promotion 4,234 4,689 7,937 22,141 20,123
Legal and professional 4,158 3,121 2,847 12,623 11,129
Occupancy 2,600 1,504 1,322 6,708 4,243
General and
administrative 6,569 3,379 4,522 16,173 11,267
Total indirect expenses 80,100 37,886 35,489 196,467 124,299
Operating income (loss)(14,474) 9,684 17,472 17,397 61,099
Interest and other, net 1,197 1,372 667 4,458 1,580
Income (loss) from
continuing operations
before income tax
provision (benefit) (13,277) 11,056 18,139 21,855 62,679
Income tax provision
(benefit) (4,851) 4,533 7,169 9,349 5,286
Income (loss) from
continuing operations (8,426) 6,523 10,970 12,506 57,393
Income from discontinued
operations 783 1,238 1,555 3,813 11,547
Net income (loss) (7,643) 7,761 12,525 16,319 68,940
Deemed dividend on
convertible preferred
shares - - - - (9,619)
Net income (loss)
attributable to common
stockholders $(7,643) $7,761 $12,525 $16,319 $59,321
Basic earnings (loss)
per share from:
Continuing operations $(0.18) $0.14 $0.23 $0.27 $1.42
Discontinued
operations 0.02 0.03 0.03 0.08 0.29
Deemed dividend on
convertible preferred
shares - - - - (0.24)
Basic earnings (loss)
per share $(0.17) $0.16 $0.27 $0.35 $1.47
Diluted earnings (loss)
per share from:
Continuing operations $(0.18) $0.14 $0.23 $0.26 $1.34
Discontinued
operations 0.02 0.03 0.03 0.08 0.27
Deemed dividend on
convertible preferred
shares - - - - (0.22)
Diluted earnings (loss)
per share $(0.17) $0.16 $0.26 $0.34 $1.38
Basic weighted average
shares outstanding 45,660 47,206 47,137 46,806 40,301
Diluted weighted
average shares
outstanding 46,785 48,292 47,635 47,821 42,915
(a) Excludes the results of operations of PCX Holdings, Inc. and
subsidiaries for the four-day period ended September 30, 2005. These
results of operations were not material.
Archipelago Holdings, Inc.
Consolidated Statements of Financial Condition
(In thousands)
December 31,
2005 2004
(unaudited)
Assets
Current assets:
Cash and cash equivalents $134,358 $145,170
Accounts receivable, net 79,889 74,356
Income tax receivable 18,014 2,220
Deferred tax asset 5,863 5,094
Total current assets 238,124 226,840
Fixed assets, net 67,091 44,738
Goodwill 131,865 131,865
Other intangible assets, net 108,753 92,169
Non-current deferred tax asset,
net 11,863 340
Other assets 7,976 7,774
Total non-current assets 327,548 276,886
Assets of discontinued operations 14,122 40,172
Total assets $579,794 $543,898
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and accrued
expenses $136,185 $62,600
Capital lease obligations 1,691 1,545
Total current liabilities 137,876 64,145
Deferred tax liability 10,347 3,595
Liabilities of discontinued
operations 9,422 15,285
Total liabilities 157,645 83,025
Stockholders' equity
Common stock 475 471
Additional paid-in capital 472,705 451,625
Treasury stock (73,395) -
Unearned stock-based
compensation (2,751) (19)
Retained earnings 25,115 8,796
Total stockholders'
equity 422,149 460,873
Total liabilities and stockholders'
equity $579,794 $543,898
Archipelago Holdings, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year ended
December 31,
2005 2004
(unaudited)
Cash flows from operating activities:
Income from continuing operations $12,506 $57,393
Adjustments to reconcile income from
continuing operations to net cash provided
by operating activities:
Depreciation and amortization of
fixed assets 19,911 21,250
Amortization of intangible assets 1,720 1,627
Provision for doubtful accounts (540) (900)
Deferred taxes 7,648 (1,839)
Stock-based compensation 11,113 151
Tax benefit from stock-based
payment arrangements 5,516 18
Changes in operating assets and
liabilities:
Accounts receivable 13,805 (6,365)
Income tax receivable (15,794) (2,220)
Other assets 32 (4,310)
Accounts payable and accrued
expenses 35,550 (35,500)
Net cash provided by operating
activities of continuing operations 91,467 29,305
Net cash provided by (used in)
operating activities of discontinued
operations (655) 31,964
Net cash provided by operating
activities 90,812 61,269
Cash flows from investing activities:
Acquisition of business, net of cash
acquired (89,376) -
Additions to fixed and other
intangible assets (29,032) (25,135)
Net cash used in investing activities
of continuing operations (118,408) (25,135)
Net cash provided by investing
activities of discontinued operations 2,922 339
Net cash used in investing
activities (115,486) (24,796)
Cash flows from financing activities:
Capital contribution from discontinued
operations 24,000 17,000
Proceeds from initial public offering,
net of underwriting discounts - 67,646
Direct costs of initial public
offering - (6,777)
Cash distribution to former Members - (24,613)
Principal payments under capital lease
obligations (1,770) (2,253)
Repurchase of common stock (7,825) -
Proceeds from exercises of stock
options 1,724 16
Repayment of note payable - (4,429)
Net cash provided by financing
activities of continuing operations 16,129 46,590
Net cash used in financing activities
of discontinued operations (24,000) (17,000)
Net cash provided by (used in)
investing activities (7,871) 29,590
Net increase (decrease) in cash and
cash equivalents (32,545) 66,063
Cash and cash equivalents at beginning
of period 177,878 111,815
Cash and cash equivalents at end of
period 145,333 177,878
Cash and cash equivalents of
discontinued operations 10,975 32,708
Cash and cash equivalents of
continuing operations $134,358 $145,170
Archipelago Holdings, Inc.
Operating Data
(unaudited)
Three months ended Year ended
December September December
31, 30, 31 December 31,
2005 2005 2004 2005 2004
Trading Days 63 64 64 252 252
Total U.S. market volume
(millions of shares)(1) 274,112 252,130 260,031 1,047,720 990,497
Our total U.S. market
volume (millions of
shares)(1) 38,278 34,589 36,168 144,318 140,306
Our share of total U.S.
market volume(1)(2) 14.0% 13.7% 13.9% 13.8% 14.2%
% of handled shares
matched internally(3) 11.3% 11.0% 10.8% 11.1% 10.9%
% of handled shares
routed out(3) 2.7% 2.7% 3.1% 2.7% 3.3%
Total volume of Nasdaq-
listed securities
(millions of shares) 111,368 105,797 120,994 453,363 455,536
Our total volume of
Nasdaq-listed securities
(millions of shares) 24,855 24,288 28,682 104,271 115,008
Our share of total volume
of Nasdaq-listed
securities(2) 22.3% 23.0% 23.7% 23.0% 25.2%
% of handled shares
matched internally(3) 17.9% 18.4% 18.3% 18.4% 19.2%
% of handled shares
routed out(3) 4.4% 4.6% 5.4% 4.6% 6.0%
Total volume of NYSE-
listed securities
(millions of shares) 142,435 128,241 120,810 523,615 460,455
Our volume in NYSE-listed
securities (millions of
shares) 6,768 4,721 2,828 18,855 8,375
Our share of total volume
of NYSE-listed
securities(2) 4.8% 3.7% 2.3% 3.6% 1.8%
% of handled shares
matched internally(3) 3.8% 2.8% 1.7% 2.8% 1.2%
% of handled shares
routed out(3) 1.0% 0.9% 0.6% 0.8% 0.6%
Total volume of AMEX-
listed securities
(millions of shares) 20,309 18,092 18,227 70,742 74,506
Our volume in AMEX-listed
securities (millions of
shares) 6,655 5,580 4,658 21,192 16,924
Our share of total volume
on AMEX-listed
securities(2) 32.8% 30.8% 25.6% 30.0% 22.7%
% of handled shares
matched internally(3) 28.1% 26.3% 22.3% 25.8% 19.4%
% of handled shares
routed out(3) 4.7% 4.5% 3.3% 4.2% 3.3%
Our ETF volume (millions
of shares) 7,618 6,376 4,618 25,152 15,637
Our U.S. equity
transaction volume
(thousands of
transactions) 131,522 119,782 112,255 486,638 416,629
Our average U.S. equity
transaction size (shares
per transaction) 291 289 322 297 337
Our average U.S. equity
transactions per day
(thousands of
transactions) 2,088 1,872 1,754 1,931 1,653
Our average transaction-
related revenue (per
share)(4) $0.0027 $0.0029 $0.0030 $0.0029 $0.0031
Our average transaction-
related cost of revenue
(per share)(5) $0.0018 $0.0019 $0.0020 $0.0019 $0.0021
Our average transaction-
related gross margin
(per share)(6) $0.0009 $0.0010 $0.0010 $0.0010 $0.0010
% of customer order
volume matched
internally(7) 89.2% 88.8% 87.4% 88.8% 86.6%
% of customer order
volume routed out(7) 10.8% 11.2% 12.6% 11.2% 13.4%
(1) U.S. market volume is calculated based on the number of shares of
equity securities traded on the NYSE, AMEX and Nasdaq, including
exchange-traded funds, as reported in the consolidated tape. The
"consolidated tape" is the system that continuously provides the last
sale price and volume of securities transactions in listed securities
to the public.
(2) Our market share is calculated based on the number of shares handled
on the Archipelago system as a percentage of total volume. For
example, if a customer's 10,000 share buy order is matched with
another customer's 10,000 share sell order in our internal liquidity
pool, our handled volume will be 10,000 shares. If the buy or sell
order were routed out, our handled volume would still be 10,000
shares.
(3) Represents our share of the total volume of such securities handled on
ArcaEx that was either matched internally on ArcaEx or routed out to
an external market center.
(4) The per share amount is calculated based on our total revenues derived
from equity transaction fees of $105.1 million, $98.9 million, and
$110.0 million for the three months ended December 31, 2005, September
30, 2005, and December 31, 2004, respectively, and $415.4 million and
$434.5 million for the years ended December 31, 2005 and 2004,
respectively.
(5) The per share amount is calculated based on our cost of revenues
derived from transaction fees, which consist of routing charges and
liquidity payments, of $69.7 million, $65.1 million, and $73.4 million
for the three months ended December 31, 2005, September 30, 2005, and
December 31, 2004, respectively, and $273.6 million and $292.2 million
for the years ended December 31, 2005 and 2004, respectively. The cost
of revenue from transaction fees used in the per share computation
does not include clearance, brokerage and other transaction expenses.
(6) The per share amount is calculated based on our net revenues received
from transaction fees, and our total U.S. market volume for the
relevant period.
(7) The percentage of customer order volume matched internally is
calculated by dividing the volume of customer orders executed within
our internal liquidity pool (including the volume of both buy orders
and sell orders) by the total volume of customer orders (again
including the volume of both buy orders and sell orders when such
orders are matched internally). The percentage of customer orders
routed out is calculated by dividing the volume of customer orders
routed to other market centers by the total volume of customer orders.
Archipelago Holdings, Inc.
Reconciliation of non-GAAP financial measures to GAAP measures
for the three months and the year ended December 31, 2005
(In thousands, except per share data)
(unaudited)
We use non-GAAP financial measures of operating performance. Non-GAAP measures do not replace and are not superior to the presentation of our GAAP financial results but are provided to improve overall understanding of our current financial performance and our prospects for the future.
Three months ended Year ended
December 31, December 31,
2005 2005
Income (loss) from continuing
operations before income tax
provision (benefit), GAAP $(13,277) $21,855
Add back:
NYSE merger costs and related
executive compensation 34,702 46,127
Income from continuing operations
before income tax provision, non-GAAP 21,425 67,982
Income tax provision(1) 9,106 28,892
Income from continuing operations,
non-GAAP 12,319 39,090
Income from discontinued operations 783 3,813
Net income, non-GAAP $13,102 $42,903
Diluted earnings (loss) per share,
GAAP $(0.17) $0.34
Net effect of adjustments 0.45 0.56
Diluted earnings per share, non-GAAP $0.28 $0.90
Diluted weighted average shares
outstanding 46,785 47,821
(1) Using a 42.5% effective tax rate.
