During this quarter, Archipelago continued to incur costs in connection with its announced merger with the New York Stock Exchange (NYSE). For the third quarter of 2005, the NYSE merger costs totaled $3.0 million. Excluding these merger costs, diluted earnings per share would have been $0.20. A full reconciliation of this item is included in the attached table entitled "Reconciliation of non-GAAP financial measures to GAAP measures."
On September 26, 2005, Archipelago completed the acquisition of PCX Holdings, Inc. and its subsidiaries. In connection with this acquisition, the Securities and Exchange Commission entered an order under which Archipelago undertook to divest its introducing broker, Wave Securities, by December 31, 2005. Accordingly, the results of operations and financial condition of Wave Securities are presented as discontinued. To allow for accurate financial performance comparisons going forward, all historical periods have been conformed to this presentation.
"The significant event of this quarter was the closing of our acquisition of PCX Holdings and the forthcoming opportunity to bring Archipelago's equities success to the options marketplace. As you know, we believe there is great opportunity in this area," commented Jerry Putnam, Chairman and CEO of Archipelago. "We also continued to enhance functionality, speed, connectivity, and reliability in our core equity trading products and expect to continue to leverage these advances for options trading."
Third Quarter Financial Highlights
* Total revenues for the third quarter of 2005 were $114.1 million as
compared to $119.7 million for the second quarter of 2005 and $116.0
million for the third quarter of 2004.
* Gross margins were $47.6 million for the third quarter of 2005 as
compared to $50.4 million for the second quarter of 2005 and $44.7
million for the third quarter of 2004.
* As a percentage of total revenues, gross margins were down slightly at
41.7% for the third quarter of 2005 as compared to 42.1% for the second
quarter of 2005 and up from 38.5% for the third quarter of 2004.
* Indirect expenses decreased to $37.9 million for the third quarter of
2005 from $47.9 million for the second quarter of 2005 and were up from
third quarter 2004 indirect expenses of $32.2 million. Indirect expenses
were down sequentially by $10.0 million primarily due to a $5.4 million
decrease of NYSE merger expenses and a $5.5 million decrease of
discretionary marketing and promotion expenses.
* As of September 30, 2005, Archipelago had $133.5 million of cash and
cash equivalents and no long-term debt obligations.
Third Quarter Volume Highlights
* Total U.S. market volumes decreased to 252.1 billion shares for the
third quarter of 2005 from 258.6 billion shares for the second quarter
of 2005. Clients executed 34.6 billion shares, or 13.7% of total U.S.
equity securities, on ArcaEx during the third quarter of 2005 compared
to 35.6 billion shares, or 13.8 %, for the second quarter of 2005 and
32.8 billion, or 14.8%, for the third quarter 2004.
* ArcaEx market share in Nasdaq-listed stocks was 23.0% for the third
quarter 2005 -- largely inline with the 23.1% recorded in the second
quarter of 2005, but down from the 26.5% recorded in the third quarter
of 2004.
* ArcaEx market share increased to 3.7% in NYSE-listed stocks from 3.3%
for the second quarter of 2005 and 1.8% for the third quarter in 2004.
* ArcaEx market share increased to 30.8% in AMEX-listed stocks from 29.7%
for the second quarter of 2005 and 26.2% for the third quarter of 2004.
* ArcaEx ETF volume grew to 6.4 billion shares, up from 6.2 billion shares
for the second quarter of 2005 and 4.2 billion for the third quarter of
2004.
* The third quarter's 88.8% internal match rate was in line with a second
quarter 2005 rate of 88.9%. This compares favorably to a third quarter
2004 internal match rate of 87.1%.
Third Quarter Business Highlights
* Archipelago announced the closing of its acquisition of PCX Holdings,
Inc. and its subsidiaries, the Pacific Exchange, Inc. and PCX Equities,
Inc -- officially providing a platform for the options business.
* The Archipelago Exchange announced that Barclays Global Investors (BGI),
a worldwide leader in exchange traded funds (ETFs), plans to transfer
the listing of 20 of its iShares(R) exchange-traded products to ArcaEx.
* The Archipelago Exchange added six listings -- three of which are
exclusive listings.
* Archipelago continued to take share in listed stocks and demonstrate
leadership in the ETF space.
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 direct costs 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.
Important Acquisition Information with Respect to Archipelago's Merger with the NYSE
In connection with the proposed merger of Archipelago and the NYSE, the parties filed a registration statement on Form S-4 with the Securities and Exchange Commission ("SEC") on July 21, 2005, as amended on September 14, 2005 and October 24, 2005, containing a preliminary joint proxy statement/prospectus regarding the proposed transaction. The registration statement has not yet become effective. The parties will file other relevant documents concerning the proposed transaction with the SEC.
Such final documents, however, are not currently available. ARCHIPELAGO'S SHAREHOLDERS AND MEMBERS OF THE NYSE ARE URGED TO READ THE DEFINITIVE JOINT PROXY STATEMENT/PROSPECTUS REGARDING THE PROPOSED TRANSACTION WHEN IT BECOMES AVAILABLE AND ANY OTHER RELEVANT DOCUMENTS FILED BY THE PARTIES WITH THE SEC, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. Archipelago's shareholders and members of the NYSE are able to obtain a free copy of the joint proxy statement/prospectus, as well as other filings containing information about Archipelago and the NYSE, at the SEC's website (http://www.sec.gov) as they are filed with the SEC. Copies of the joint proxy statement/prospectus can also be obtained, without charge, by directing a request to Archipelago, Attention: Investor Relations, at 100 S. Wacker Drive, Suite 1800, Chicago, Illinois 60606 or calling (888) 514-7284.
Archipelago, NYSE and their respective directors and executive officers and other members of management and employees may be deemed to be participants in the solicitation of proxies from Archipelago stockholders in respect of the proposed transaction. Information regarding Archipelago's directors and executive officers is available in Archipelago's proxy statement for its 2005 annual meeting of stockholders, dated March 31, 2005. Additional information regarding the interests of such potential participants are included in the joint proxy statement/prospectus and the other relevant documents filed with the SEC when they become available.
This document shall not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.
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 Pacific Exchange(R). In addition to offering core execution services, ArcaEx provides corporate clients with listing services and innovative data products. In 2004, Archipelago launched ArcaVision to provide corporate and trading clients with more transparent market data, analytical tools and access to market-wide and ArcaEx specific trading information. Archipelago Holdings completed its initial public offering in August 2004. For more information please visit www.archipelago.com.
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 Annual Report on Form 10-K for the fiscal year ended 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.
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)
(unaudited)
Three months ended
September 30, June 30, September 30,
2005(a) 2005 2004
Revenues
Transaction fees $98,853 $103,703 $101,615
Market data fees 15,080 15,841 14,250
Listing fees 135 123 118
Total revenues 114,068 119,667 115,983
Cost of revenues
Liquidity payments 49,457 50,983 48,087
Routing charges 15,684 16,860 19,980
Clearance, brokerage and
other transaction expenses 1,357 1,416 3,213
Total cost of revenues 66,498 69,259 71,280
Gross margin 47,570 50,408 44,703
Gross margin as a % of total
revenues 41.7% 42.1% 38.5%
Indirect expenses
Employee compensation and
benefits 12,135 12,446 9,526
Depreciation and amortization 5,262 4,996 4,071
Communications 4,803 4,885 4,228
Marketing and promotion 4,689 10,172 7,751
Legal and professional 3,121 2,354 2,644
NYSE merger costs 2,993 8,432 -
Occupancy 1,504 1,251 1,114
General and administrative 3,379 3,363 2,893
Total indirect expenses 37,886 47,899 32,227
Operating income 9,684 2,509 12,476
Interest and other, net 1,372 1,139 739
Income from continuing
operations before income tax
provision 11,056 3,648 13,215
Income tax provision 4,533 1,496 (1,883)
Income from continuing
operations 6,523 2,152 15,098
Income from discontinued
operations 1,238 884 2,017
Net income 7,761 3,036 17,115
Deemed dividend on convertible
preferred shares - - (9,619)
Net income attributable to
common stockholders $7,761 $3,036 $7,496
Basic earnings (loss) per share
from:
Continuing operations $0.14 $0.05 $0.36
Discontinued operations 0.03 0.02 0.05
Deemed dividend on convertible
preferred shares - - (0.23)
Basic earnings per share $0.16 $0.06 $0.18(b)
Diluted earnings (loss) per
share from:
Continuing operations $0.14 $0.04 $0.34
Discontinued operations 0.03 0.02 0.05
Deemed dividend on convertible
preferred shares - - (0.22)
Diluted earnings per share $0.16 $0.06 $0.17(b)
Basic weighted average shares
outstanding 47,206 47,227 41,640(b)
Diluted weighted average
shares outstanding 48,292 48,171 43,994(b)
Nine months ended
September 30,
2005(a) 2004
Revenues
Transaction fees $310,323 $324,464
Market data fees 45,747 38,268
Listing fees 376 324
Total revenues 356,446 363,056
Cost of revenues
Liquidity payments 152,922 151,194
Routing charges 50,967 67,664
Clearance, brokerage and other
transaction expenses 4,319 11,761
Total cost of revenues 208,208 230,619
Gross margin 148,238 132,437
Gross margin as a % of total revenues 41.6% 36.5%
Indirect expenses
Employee compensation and benefits 35,681 28,639
Depreciation and amortization 14,855 18,308
Communications 14,322 11,729
Marketing and promotion 17,907 12,186
Legal and professional 8,465 8,282
NYSE merger costs 11,425 -
Occupancy 4,108 2,921
General and administrative 9,604 6,745
Total indirect expenses 116,367 88,810
Operating income 31,871 43,627
Interest and other, net 3,261 913
Income from continuing operations
before income tax provision 35,132 44,540
Income tax provision 14,200 (1,883)
Income from continuing operations 20,932 46,423
Income from discontinued operations 3,030 9,992
Net income 23,962 56,415
Deemed dividend on convertible
preferred shares - (9,619)
Net income attributable to common
stockholders $23,962 $46,796
Basic earnings (loss) per share from:
Continuing operations $0.44 $1.22
Discontinued operations 0.06 0.26
Deemed dividend on convertible
preferred shares - (0.25)
Basic earnings per share $0.51 $1.23(b)
Diluted earnings (loss) per share from:
Continuing operations $0.44 $1.12
Discontinued operations 0.06 0.24
Deemed dividend on convertible
preferred shares - (0.23)
Diluted earnings per share $0.50 $1.13(b)
Basic weighted average shares
outstanding 47,192 38,006(b)
Diluted weighted average shares
outstanding 48,106 41,360(b)
(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.
(b) Adjusted to reflect our reorganization from a Delaware limited
liability company to a Delaware corporation on August 11, 2004.
Archipelago Holdings, Inc.
Consolidated Statements of Financial Condition
(In thousands)
September 30, December 31,
2005 2004
(unaudited)
Assets
Current assets:
Cash and cash equivalents $116,267 $145,170
Accounts receivable, net 77,623 72,686
Total current assets 193,890 217,856
Fixed assets, net 65,429 44,738
Goodwill 131,865 131,865
Other intangible assets, net 107,235 92,169
Deferred tax asset, net 22,956 5,434
Other assets 10,164 7,774
Total non-current assets 337,649 281,980
Assets of discontinued operations 20,227 40,172
Total assets $551,766 $540,008
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and accrued expenses $96,055 $58,710
Deferred tax liability 13,397 3,595
Capital lease obligations 1,916 1,545
Total current liabilities 111,368 63,850
Liabilities of discontinued operations 16,310 15,285
Total liabilities 127,678 79,135
Stockholders' equity
Common stock 473 471
Additional paid-in capital 462,633 451,625
Treasury stock (65,570) -
Unearned stock-based compensation (6,205) (19)
Retained earnings 32,757 8,796
Total stockholders' equity 424,088 460,873
Total liabilities and stockholders' equity $551,766 $540,008
Archipelago Holdings, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
Nine months ended
September 30,
2005 2004
Cash flows from operating activities:
Income from continuing operations $20,932 $46,423
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of
fixed assets 13,582 17,087
Amortization of intangible assets 1,273 1,221
Provision for doubtful accounts (787) (500)
Deferred taxes 5,832 (3,280)
Stock-based compensation 2,239 113
Tax benefit from stock option
exercises 1,056 -
Changes in operating assets and
liabilities:
Accounts receivable 14,675 403
Other assets (1,822) (7,226)
Accounts payable and accrued expenses 431 (30,955)
Net cash provided by operating activities
of continuing operations 57,411 23,286
Net cash provided by operating activities
of discontinued operations 5,560 27,115
Net cash provided by operating
activities 62,971 50,401
Cash flows from investing activities:
Acquisition of business, net of cash
acquired (89,376) -
Additions to fixed and other intangible
assets (20,922) (19,837)
Net cash used in investing activities
of continuing operations (110,298) (19,837)
Net cash provided by investing activities
of discontinued operations 2,952 406
Net cash used in investing
activities (107,346) (19,431)
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 (1,545) (1,756)
Proceeds from exercises of stock options 1,529 -
Repayment of note payable - (4,429)
Net cash provided by financing activities
of continuing operations 23,984 47,071
Net cash used in financing activities
of discontinued operations (24,000) (17,000)
Net cash provided by (used in)
investing activities (16) 30,071
Net increase (decrease) in cash and
cash equivalents (44,391) 61,041
Cash and cash equivalents at beginning
of period 177,878 111,815
Cash and cash equivalents at end of
period 133,487 172,856
Cash and cash equivalents of discontinued
operations 17,220 27,926
Cash and cash equivalents of continuing
operations $116,267 $144,930
Archipelago Holdings, Inc.
Operating Data
(unaudited)
Three months ended
September 30, June 30, September 30,
2005 2005 2004
Trading Days 64 64 64
Total U.S. market volume
(millions of shares)(1) 252,130 258,625 221,085
Our total U.S. market volume
(millions of shares)(1) 34,589 35,620 32,793
Our share of total U.S. market
volume(1)(2) 13.7% 13.8% 14.8%
% of handled shares matched
internally(3) 11.0% 11.1% 11.5%
% of handled shares routed out(3) 2.7% 2.7% 3.3%
Total volume of Nasdaq-listed
securities (millions of shares) 105,797 113,955 99,937
Our total volume of Nasdaq-listed
securities (millions of shares) 24,288 26,360 26,460
Our share of total volume of
Nasdaq-listed securities(2) 23.0% 23.1% 26.5%
% of handled shares matched
internally(3) 18.4% 18.5% 20.2%
% of handled shares routed out(3) 4.6% 4.6% 6.3%
Total volume of NYSE-listed securities
(millions of shares) 128,241 127,745 104,025
Our volume in NYSE-listed securities
(millions of shares) 4,721 4,239 1,843
Our share of total volume of
NYSE-listed securities(2) 3.7% 3.3% 1.8%
% of handled shares matched
internally(3) 2.8% 2.5% 1.2%
% of handled shares routed out(3) 0.9% 0.8% 0.6%
Total volume of AMEX-listed securities
(millions of shares) 18,092 16,925 17,124
Our volume in AMEX-listed securities
(millions of shares) 5,580 5,021 4,490
Our share of total volume on
AMEX-listed securities(2) 30.8% 29.7% 26.2%
% of handled shares matched
internally(3) 26.3% 25.6% 22.7%
% of handled shares routed out(3) 4.5% 4.1% 3.5%
Our ETF volume (millions of shares) 6,376 6,215 4,190
Our U.S. equity transaction volume
(thousands of transactions) 119,782 119,588 103,543
Our average U.S. equity
transaction size (shares per
transaction) 289 298 317
Our average U.S. equity transactions
per day (thousands of transactions) 1,872 1,869 1,618
Our average transaction-related
revenue (per share)(4) $0.0029 $0.0029 $0.0031
Our average transaction-related
cost of revenue (per share)(5) $0.0019 $0.0019 $0.0021
Our average transaction-related
gross margin (per share)(6) $0.0010 $0.0010 $0.0010
% of customer order volume matched
internally(7) 88.8% 88.9% 87.1%
% of customer order volume routed
out(7) 11.2% 11.1% 12.9%
Nine months ended
September 30,
2005 2004
Trading Days 189 188
Total U.S. market volume (millions of
shares)(1) 773,602 730,466
Our total U.S. market volume (millions
of shares)(1) 106,040 104,138
Our share of total U.S. market volume(1)(2) 13.7% 14.3%
% of handled shares matched
internally(3) 11.0% 10.9%
% of handled shares routed out(3) 2.7% 3.4%
Total volume of Nasdaq-listed securities
(millions of shares) 341,990 334,541
Our total volume of Nasdaq-listed
securities (millions of shares) 79,416 86,326
Our share of total volume of Nasdaq-listed
securities(2) 23.2% 25.8%
% of handled shares matched
internally(3) 18.5% 19.5%
% of handled shares routed out(3) 4.7% 6.3%
Total volume of NYSE-listed securities
(millions of shares) 381,179 339,646
Our volume in NYSE-listed securities
(millions of shares) 12,087 5,547
Our share of total volume of NYSE-listed
securities(2) 3.2% 1.6%
% of handled shares matched internally(3) 2.4% 1.0%
% of handled shares routed out(3) 0.8% 0.6%
Total volume of AMEX-listed securities
(millions of shares) 50,432 56,279
Our volume in AMEX-listed securities
(millions of shares) 14,536 12,265
Our share of total volume on AMEX-listed
securities(2) 28.8% 21.8%
% of handled shares matched internally(3) 24.8% 18.5%
% of handled shares routed out(3) 4.0% 3.3%
Our ETF volume (millions of shares) 17,533 11,019
Our U.S. equity transaction volume
(thousands of transactions) 355,116 304,374
Our average U.S. equity transaction
size (shares per transaction) 299 342
Our average U.S. equity transactions
per day (thousands of transactions) 1,879 1,619
Our average transaction-related revenue 00
(per share)(4) $0.0029 $0.0031
Our average transaction-related cost of
revenue (per share)(5) $0.0019 $0.0021
Our average transaction-related gross
margin (per share)(6) $0.0010 $0.0010
% of customer order volume matched
internally(7) 88.7% 86.3%
% of customer order volume routed
out(7) 11.3% 13.7%
(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 transaction fees of $98.9 million, $103.7 million and $101.6
million for the three months ended September 30, 2005, June 30, 2005
and September 30, 2004, respectively, and $310.3 million and $324.5
million for the nine months ended September 30, 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 $65.1 million, $67.8 million and $68.1 million
for the three months ended September 30, 2005, June 30, 2005 and
September 30, 2004, respectively, and $203.9 million and $218.9
million for the nine months ended September 30, 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 and nine months ended September 30, 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 Nine months
ended ended
September 30, September 30,
2005 2005
Income from continuing operations
before income tax provision, GAAP $11,056 $35,132
Add back:
NYSE merger costs 2,993 11,425
Income from continuing operations before
income tax provision, non-GAAP 14,049 46,557
Income tax provision(1) 5,760 19,088
Income from continuing operations,
non-GAAP 8,289 27,469
Income from discontinued operations 1,238 3,030
Net income, non-GAAP $9,527 $30,499
Diluted earnings per share, GAAP $0.16 $0.50
Net effect of adjustments 0.04 0.14
Diluted earnings per share, non-GAAP $0.20 $0.63
Diluted weighted average shares
outstanding 48,292 48,106
(1) Using a 41.0% estimated effective tax rate.
