**UNITED STATES SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM10-Q**

 

**(MARKONE)**

**ý****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FORTHE QUARTERLY PERIOD ENDED MARCH 31, 2005**

 

**OR**

 

**o****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FORTHE TRANSITION PERIOD FROM       TO       **

 

**COMMISSIONFILE NUMBER: 001-32274**

 

**ARCHIPELAGOHOLDINGS, INC.**

(Exact name ofRegistrant as specified in its charter)

 
| **DELAWARE**                                                      | ** ** | **86-1075595**                           |
|-------------------------------------------------------------------|------------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or  organization) |       | (I.R.S. Employer  Identification Number) |

 

**100South Wacker Drive, Suite 1800**

**Chicago,IL 60606**

**(312)960-1696**

(Address,including zip code, and

telephone numberincluding area code, of

Registrant’sprincipal executive offices)

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required tofile such reports) and (2) has been subject to such filing requirementsfor the past 90 days.  Yes ý No o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12B-2of the Exchange Act).  Yes o No ý

 

As of May 4, 2005, theRegistrant had approximately 47,216,000 shares of common stock, $0.01 par valueper share, outstanding.

 

 

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ARCHIPELAGOHOLDINGS, INC.

QUARTERLY REPORTON FORM 10-Q

TABLE OF CONTENTS

 
| PART I – Financial  Information                                                                              |   |
|-------------------------------------------------------------------------------------------------------------------|--------|
| Item 1. Financial  Statements                                                                                     |   |
| Condensed  Consolidated Statements of Financial Condition as of December 30, 2004 and  March 31, 2005 (unaudited) |   |
| Condensed  Consolidated Statements of Operations for the Three Months Ended March 31,  2004 and 2005 (unaudited)  |   |
| Condensed  Consolidated Statements of Cash Flows for the Three Months Ended March 31,  2004 and 2005 (unaudited)  |   |
| Notes  to Condensed Consolidated Financial Statements (unaudited)                                                 |   |
| Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations              |   |
| Item  3. Quantitative and Qualitative Disclosure about Market Risk                                                |   |
| Item 4. Controls and  Procedures                                                                                  |   |
| PART II – Other Information                                                                                  |   |
| Item 1. Legal Proceedings                                                                                         |   |
| Item  2. Unregistered Sale of Equity Securities and Use of Proceeds                                               |   |
| Item 3.  Defaults Upon Senior Securities                                                                          |   |
| Item  4. Submission of Matters to a Vote of Security Holders                                                      |   |
| Item 5. Other Information                                                                                         |   |
| Item 6. Exhibits                                                                                                  |   |
| Signatures                                                                                                        |   |

 

**FORWARD-LOOKING STATEMENTS**

 

In addition to historical information, this Quarterly Report on Form10-Q contains forward-looking statements regarding Archipelago Holdings, Inc.and its subsidiaries (collectively “Archipelago”). These statements relate tofuture events our financial performance and may include information relating topending transactions involving Archipelago (including the benefits of thetransaction and future plans and expectations following the consummation oftransaction) and are intended to be covered by the safe harbor for “forward-lookingstatements” provided by the Private Securities Litigation Reform Act of 1995. Forward-lookingstatements are based on the current belief of management and involve unknownrisks, uncertainties and other factors that may cause our actual results,levels of activity, performance or achievements, to be materially differentfrom those expressed or implied in this Report. In some cases, you can identifyforward-looking statements with terminology such as “may”, “will”, “should”, “expects”,“intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”,“continue”, “pending” or the negative of these terms or other comparableterminology.  These statements are onlypredictions. You should not place undue reliance on forward-looking statementswhich speak only as of the date of this Report. Actual events or results may differ materially and we undertake no ongoing obligation, other than that imposed by law, to update these statements. Youshould, however, consult any further disclosures of a forward-looking natureArchipelago may make in our Annual Reports on Form 10-K, Quarterly Reports onForm 10-Q and Current Reports on Form 8-K.

 

Although we believe that the expectations reflected in theforward-looking statements are reasonable, we cannot guarantee future results,levels of activity, performance or achievements. These forward-lookingstatements are subject to numerous risks and uncertainties, including, but notlimited to; general economic conditions; our future operating results; marketpenetration and financial condition; industry trading activity and fluctuations;regulatory changes and competition; the ability to obtain governmental approvalof any pending transaction on the proposed terms and schedule; the failure toobtain stockholder approval for any pending transaction; the inability tointegrate businesses successfully following the consummation of any pendingtransaction; the risk that any expected cost savings and any revenue synergiesresulting from any pending transaction may not be fully realized or may takelonger to realize than expected; the risk that disruption from any pendingtransaction may make it more difficult to maintain relationships with clients,employees or suppliers; as well as the risks and uncertainties described in PartI, Item 1. under the section heading “Certain Factors That May Affect OurBusiness” of our Form 10-K filed with the Securities and Exchange Commission onMarch 23, 2005 and the factors discussed below under “Management’sDiscussion and Analysis.” You are urged to carefully consider these factors.All forward-looking statements attributable to us are expressly qualified intheir entirety by the foregoing cautionary statements.

 

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***ImportantAcquisition Information with Respect to the PCX Holdings Acquisition***

 

In connection with theproposed acquisition of PCX Holdings and its subsidiaries by Archipelago, theparties intend to file relevant materials with the SEC, including aregistration statement on Form S-4. Such documents, however, are notcurrently available. INVESTORS ARE URGED TO READ THE REGISTRATION STATEMENT REGARDINGTHE PROPOSED TRANSACTION WHEN IT BECOMES AVAILABLE, BECAUSE IT WILL CONTAINIMPORTANT INFORMATION. Investors will be able to obtain a free copy of theregistration statement, as well as other filings containing information aboutArchipelago, PCX Holdings, the Pacific Exchange and PCX Equities withoutcharge, at the SEC’s website (http://www.sec.gov) once such documents are filedwith the SEC. Copies of the registration statement will also be available,without charge, once they are filed with the SEC by directing a request toArchipelago, Attention: Investor Relations, at 100 South Wacker Drive,Suite 1800, Chicago, Illinois 60606 or calling (888) 514-7284, or bydirecting a request to the Shareholder Services Department of PCX Holdings at115 Sansome Street, San Francisco, California 94104 or calling(415) 393-4114.

 

This filing (includingthe exhibits hereto) shall not constitute an offer to sell or the solicitationof an offer to buy any securities, nor shall there be any sale of securities inany jurisdiction in which such offer, solicitation or sale would be unlawfulprior to registration or qualification under the securities laws of any suchjurisdiction. No offering of securities shall be made except by means of aprospectus meeting the requirements of Section 10 of the Securities Act of1933, as amended.

 

***ImportantAcquisition Information with Respect to the Archipelago – New York StockExchange (“NYSE”) Merger***

 

In connection with theproposed merger of Archipelago and NYSE, the parties intend to file relevantmaterials with the SEC, including a joint proxy statement/prospectus regardingthe proposed transaction. Such documents, however, are not currently available.INVESTORS ARE URGED TO READ THE JOINT PROXY STATEMENT/PROSPECTUS REGARDING THEPROPOSED TRANSACTION WHEN IT BECOMES AVAILABLE, BECAUSE IT WILL CONTAINIMPORTANT INFORMATION.

 

Investors will be able toobtain a free copy of the joint proxy statement/prospectus, as well as otherfilings containing information about Archipelago and NYSE without charge, atthe SEC’s website (http://www.sec.gov) once such documents are filed with theSEC. Copies of the joint proxy statement/prospectus can also be obtained,without charge, once they are filed with the SEC, by directing a request toArchipelago, Attention: Investor Relations, at 100 S. Wacker Drive,Suite 800, Chicago, Illinois 60606 or calling (888) 514-7284.

 

Archipelago, NYSE andtheir respective directors and executive officers and other members ofmanagement and employees may be deemed to be participants in the solicitationof proxies from Archipelago stockholders in respect of the proposedtransaction. Information regarding Archipelago’s directors and executiveofficers is available in Archipelago’s proxy statement for its 2005 annualmeeting of stockholders, dated March 31, 2005. Additional informationregarding the interests of such potential participants will be included in thejoint proxy statement/prospectus and the other relevant

 

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documents filed with the SEC when they becomeavailable. This filing (including the exhibits hereto) shall not constitute anoffer to sell or the solicitation of an offer to buy any securities, nor shallthere be any sale of securities in any jurisdiction in which such offer,solicitation or sale would be unlawful prior to registration or qualificationunder the securities laws of any such jurisdiction. No offering of securitiesshall be made except by means of a prospectus meeting the requirements of Section 10of the Securities Act of 1933, as amended.

 

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**PART I –Financial Information**

 

**Item 1.Financial Statements**

 

Archipelago Holdings, Inc.

Condensed Consolidated Statements of Financial Condition

(In thousands, except per share data)

 
| ** **                                                                                                 | ** ** | **December 31,  2004** | ** ** | **March 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                                                                                                 | ** ** | ** **                  | ** ** | **(unaudited)**          | ** ** |
| **Assets**                                                                                                 | ** ** | ** **                  | ** ** | ** **               | ** ** |
| Current  assets:                                                                                           |       |                        |       |                     |       |
| Cash  and cash equivalents                                                                                 |       | $                           | 177,878    |                     | $          | 193,184 |   |
| Receivables  from brokers, dealers and customers, net                                                      |       | 31,400                      |       | 28,192                   |       |
| Receivables  from related parties                                                                          |       | 41,726                      |       | 37,708                   |       |
| Total  current assets                                                                                      |       | 251,004                     |       | 259,084                  |       |
|                                                                                                       |       |                        |       |                     |       |
| Fixed  assets, net                                                                                         |       | 49,495                      |       | 47,808                   |       |
| Goodwill                                                                                                   |       | 131,865                     |       | 131,865                  |       |
| Intangible  asset - Pacific Exchange facility agreement                                                    |       | 90,000                      |       | 90,000                   |       |
| Other  intangible assets, net                                                                              |       | 2,169                       |       | 1,763                    |       |
| Deferred  tax asset, net                                                                                   |       | 1,839                       |       | 1,107                    |       |
| Other  assets                                                                                              |       | 8,076                       |       | 10,932                   |       |
| Total  assets                                                                                              |       | $                           | 534,448    |                     | $          | 542,559 |   |
|                                                                                                       |       |                        |       |                     |       |
| **Liabilities and Stockholders’ Equity**                                                              |       |                        |       |                     |       |
| Current  liabilities:                                                                                      |       |                        |       |                     |       |
| Accounts  payable and accrued expenses                                                                     |       | $                           | 36,269     |                     | $          | 21,010 |   |
| Payables  to brokers, dealers and exchanges                                                                |       | 19,408                      |       | 16,509                   |       |
| Payables  to related parties                                                                               |       | 16,353                      |       | 29,459                   |       |
| Current  portion of capital lease obligations                                                              |       | 1,545                       |       | 1,039                    |       |
| Total  liabilities                                                                                         |       | 73,575                      |       | 68,017                   |       |
|                                                                                                       |       |                        |       |                     |       |
| Commitments  and contingencies                                                                             |       |                        |       |                     |       |
|                                                                                                       |       |                        |       |                     |       |
| Stockholders’  equity                                                                                 |       |                        |       |                     |       |
| Common  stock, $.01 par value, 165,000 shares authorized; 47,138 and 47,147 shares  issued and outstanding |       | 471                         |       | 471                      |       |
| Additional  paid-in capital                                                                                |       | 451,625                     |       | 456,989                  |       |
| Unearned  stock-based compensation                                                                         |       | (19                         | )          | (4,879                   | )          |
| Retained  earnings                                                                                         |       | 8,796                       |       | 21,961                   |       |
| Total  stockholders’ equity                                                                           |       | 460,873                     |       | 474,542                  |       |
| Total  liabilities and stockholders’ equity                                                           |       | $                           | 534,448    |                     | $          | 542,559 |   |

 

The accompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

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Archipelago Holdings, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(unaudited)

 
| ** **                                                                                     | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                     | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| **Revenues**                                                                                   |       |                                   |       |   |   |
| Transaction  fees ($54,232 and $45,555 with related parties)                                   |       | $                                      | 135,001    |   | $ | 118,726 |   |
| Market  data fees ($4,245 and $6,667 with related parties)                                     |       | 11,724                                 |       | 14,850 |   |
| Listing  fees                                                                                  |       | 89                                     |       | 118 |   |
| Total  revenues                                                                                |       | 146,814                                |       | 133,694 |   |
|                                                                                           |       |                                   |       |   |   |
| **Cost of revenues**                                                                           |       |                                   |       |   |   |
| Liquidity  payments ($15,333 and $13,416 with related parties)                                 |       | 53,204                                 |       | 51,938 |   |
| Routing  charges ($13,872 and $9,857 with with related parties)                                |       | 26,480                                 |       | 18,841 |   |
| Clearance,  brokerage and other transaction expenses ($5,607 and $1,428 with related  parties) |       | 12,666                                 |       | 7,666 |   |
| Total  cost of revenues                                                                        |       | 92,350                                 |       | 78,445 |   |
|                                                                                           |       |                                   |       |   |   |
| **Gross margin**                                                                               |       | 54,464                                 |       | 55,249 |   |
|                                                                                           |       |                                   |       |   |   |
| **Indirect expenses**                                                                          |       |                                   |       |   |   |
| Employee  compensation and benefits                                                            |       | 10,333                                 |       | 12,504 |   |
| Depreciation  and amortization                                                                 |       | 10,732                                 |       | 5,421 |   |
| Communications  ($873 and $1,268 with related parties)                                         |       | 4,529                                  |       | 5,509 |   |
| Marketing  and promotion ($8 and $- with related parties)                                      |       | 1,746                                  |       | 3,075 |   |
| Legal  and professional ($250 and $600 with related parties)                                   |       | 2,303                                  |       | 3,133 |   |
| Occupancy                                                                                      |       | 976                                    |       | 1,444 |   |
| General  and administrative                                                                    |       | 1,934                                  |       | 3,088 |   |
| Total  indirect expenses                                                                       |       | 32,553                                 |       | 34,174 |   |
|                                                                                           |       |                                   |       |   |   |
| Operating  income                                                                              |       | 21,911                                 |       | 21,075 |   |
| Interest  and other, net                                                                       |       | 68                                     |       | 866 |   |
| Income  before income tax provision                                                            |       | 21,979                                 |       | 21,941 |   |
| Income  tax provision                                                                          |       | —                                 |       | 8,776 |   |
| **Net income**                                                                                 |       | $                                      | 21,979     |   | $ | 13,165 |   |
|                                                                                           |       |                                   |       |   |   |
| Basic  earnings per share (a)                                                                  |       | $                                      | 0.61       |   | $ | 0.28 |   |
| Diluted  earnings per share (a)                                                                |       | $                                      | 0.55       |   | $ | 0.28 |   |
|                                                                                           |       |                                   |       |   |   |
| Basic  weighted average shares outstanding (a)                                                 |       | 36,169                                 |       | 47,142 |   |
| Diluted  weighted average shares outstanding (a)                                               |       | 40,163                                 |       | 47,799 |   |

 

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(a)   Adjustedto reflect our reorganization from a Delaware limited liability company to aDelaware corporation on August 11, 2004. See Note 1 to condensedconsolidated financial statements.

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

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Archipelago Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

 
| ** **                                                                         | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| **Cash flows from operating activities**                                           |       |                                   |       |   |   |
| Net  income                                                                        |       | $                                      | 21,978     |   | $ | 13,165 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                                   |       |   |   |
| Depreciation  and amortization                                                     |       | 10,325                                 |       | 5,015 |   |
| Amortization  of other intangible assets                                           |       | 407                                    |       | 406 |   |
| Deferred  taxes                                                                    |       | —                                 |       | 732 |   |
| Stock-based  compensation                                                          |       | 38                                     |       | 414 |   |
| Tax  benefit from stock option exercises                                           |       | —                                 |       | 37 |   |
| Changes  in operating assets and liabilities:                                      |       |                                   |       |   |   |
| Accounts  receivable                                                               |       | (11,796                                | )          | 7,226 |   |
| Other  assets                                                                      |       | (2,517                                 | )          | (2,857 | ) |
| Accounts  payable and accrued expenses                                             |       | 2,155                                  |       | (5,052 | ) |
| Net  cash provided by operating activities                                         |       | 20,590                                 |       | 19,086 |   |
|                                                                               |       |                                   |       |   |   |
| **Cash flows from investing activities**                                           |       |                                   |       |   |   |
| Additions  to fixed assets                                                         |       | (6,286                                 | )          | (3,328 | ) |
| Net  cash used in investing activities                                             |       | (6,286                                 | )          | (3,328 | ) |
|                                                                               |       |                                   |       |   |   |
| **Cash flows from financing activities**                                           |       |                                   |       |   |   |
| Direct  costs of initial public offering                                           |       | (3,144                                 | )          | — |   |
| Principal  payments under capital lease obligations                                |       | (626                                   | )          | (506 | ) |
| Proceeds  from exercises of stock options                                          |       | —                                 |       | 54 |   |
| Net  cash used in financing activities                                             |       | (3,770                                 | )          | (452 | ) |
|                                                                               |       |                                   |       |   |   |
| Net  increase in cash and cash equivalents                                         |       | 10,534                                 |       | 15,306 |   |
| Cash  and cash equivalents at beginning of period                                  |       | 111,815                                |       | 177,878 |   |
| Cash  and cash equivalents at end of period                                        |       | $                                      | 122,349    |   | $ | 193,184 |   |
|                                                                               |       |                                   |       |   |   |
| **Supplemental disclosures of cash flow  information**                             |       |                                   |       |   |   |
| Cash  paid for:                                                                    |       |                                   |       |   |   |
| Interest                                                                           |       | $                                      | 76         |   | $ | 23 |   |
| Income  taxes                                                                      |       | —                                 |       | 460 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

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**Archipelago Holdings, Inc.**

**Notes to Condensed Consolidated Financial Statements**

**March 31, 2005**

 

**1.  ORGANIZATION AND BASIS OF PRESENTATION**

 

**Organization**

 

ArchipelagoHoldings, Inc. operates the Archipelago Exchange, or ArcaEx® (“ArcaEx”), thefirst open all-electronic stock market in the United States for trading in allNYSE, Nasdaq, AMEX and Pacific Exchange-listed stocks. Archipelago Holdings,L.L.C. (“Holdings LLC”), a Delaware limited liability company and thepredecessor to the Company, was organized in January 1999.  In July 2000,Holdings LLC entered into a facility services agreement with the PacificExchange, Inc. (“PCX”) which allowed it to establish and operate ArcaEx.The Securities and Exchange Commission’s (“SEC”) approval of ArcaEx wasannounced in October 2001 and ArcaEx began trading operations for listedsecurities in March 2002 and for over-the-counter securities in April 2003.

 

OnAugust 11, 2004, Holdings LLC converted to a Delaware corporation,Archipelago Holdings, Inc.  We refer toArchipelago Holdings, Inc. and, prior to its conversion to a Delawarecorporation, Holdings LLC, as the “Company”.  On August 19, 2004, theCompany completed an initial public offering (“IPO”) of its common stock. Seebelow discussion of the “*Conversion Transaction*”and the “*Initial Public Offering.*”

 

Throughcertain subsidiaries, the Company also provides broker execution services toinstitutions for orders involving Nasdaq and listed securities, as well asintroducing broker services for ArcaEx to broker-dealers that do not hold anexchange trading permit (“ETP”).

 

**ConversionTransaction**

 

OnAugust 11, 2004, prior to the consummation of the IPO, Holdings LLCconverted from a Delaware limited liability company to a Delaware corporation,Archipelago Holdings, Inc. As a limited liability company, all income taxeswere paid by the members of Holdings LLC. As a corporation, the Company isresponsible for the payment of all federal and state corporate income taxes.

 

Asa result of the reorganization of Holdings LLC from a Delaware limitedliability company into a Delaware corporation, the members of Holdings LLCreceived 0.222222 shares of common stock of the Company for each of theirmembership interests held by such member in Holdings LLC, which corresponds toa 4.5-for-1 reverse stock split. The weighted average number of shares used inthe basic and diluted earnings per share computations gives retroactive effectto the 4.5-for-1 reverse stock split.

 

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Asapproved by the Company’s board of managers on July 16, 2004, the Companymade a $24.6 million cash distribution to the members of Holdings LLCimmediately prior to the conversion transaction. The cash distribution permittedthe members to pay the taxes that the members owe for their share of theCompany’s profits in 2004 as a limited liability company through the date ofthe conversion transaction, calculated primarily based on the highest federaland state income tax rate applicable for the tax withholding purposes to anindividual.

 

**InitialPublic Offering**

 

OnAugust 19, 2004, the Company completed the IPO of its common stock as aresult of which the Company sold 6,325,000 shares of common stock at $11.50 pershare.  The Company received net proceeds of $67.6 million and incurredapproximately $6.8 million in expenses in connection with the IPO. In addition,6,325,000 shares of common stock were sold in the IPO by certain sellingstockholders of the Company, for which the Company received no proceeds. The Company’s stock is listed on the Pacific Exchange and is traded on ArcaExunder the symbol “AX”.  A summary of the terms of the IPO can be found inthe Company’s Registration Statement on Form S-1 (File No. 333-113226), whichwas declared effective by the SEC on August 12, 2004.

 

**Basisof Presentation**

 

The accompanying condensed consolidatedfinancial statements include the accounts of the Company and its wholly-ownedsubsidiaries.

 

The accompanying condensedconsolidated financial statements are prepared in accordance with accountingprinciples generally accepted in the United States of America.  Management has made estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities as of the date of the financial statementsand the reported amounts of revenues and expenses during the reporting period.Management believes that the estimates utilized in preparing its financialstatements are reasonable and prudent. Actual results could differ from theseestimates.

 

Inthe opinion of management, all adjustments considered necessary for a fairpresentation have been included. All material intercompany accounts andtransactions have been eliminated in consolidation. Certain reclassificationshave been made to the prior periods in order to conform to the current period’spresentation.

 

Certain information andfootnote disclosures normally included in financial statements have beencondensed or omitted; however, management believes that the disclosures areadequate to make the information presented not misleading.

 

The condensed consolidatedfinancial statements are unaudited and should be read in conjunction with theCompany’s audited financial statements as of and for the year ended December 31,2004, included in the Company’s Annual Report onForm 10-K

 

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filed with the SEC on March 23, 2005. Operatingresults for the three months ended March 31, 2005 are not necessarilyindicative of the results that may be expected for the year ending December 31,2005.

 

**2.  ACQUISITION OF PCXHOLDINGS, INC. (“PCXH”)**

 

OnJanuary 3, 2005, the Company entered into a definitive agreement with PCXHunder which the Company has agreed to acquire PCXH and all of its wholly-ownedsubsidiaries including the PCX and PCX Equities, Inc. (the “PCXH Transaction”).The purchase price of the PCXH Transaction is represented by two elements: (i)the aggregate value of 1,645,415 shares of the Company’s common stock(determined at the time of execution of the agreement), currently indirectlyowned by PCXH through PCX which will be returned to, and either cancelled orheld in treasury by the Company after the consummation of the PCXH Transaction,and (ii) $17.0 million.

 

Atthe time of the execution of the definitive agreement, the purchase price ofthe PCXH Transaction was approximately $50.7 million, to be paid (i) 80% in cash(or approximately $40.6 million); and (ii) 20% in shares of the Company’scommon stock, calculated using the average closing price of the Company’s commonstock over the ten consecutive days prior to the execution date of thedefinitive agreement (or approximately $10.1 million).

 

However,as a result of the Company’s execution of a merger agreement described in Note3 below, at closing, the purchase price of the PCXH Transaction will becalculated using the average closing price per share of the Company’s commonstock over the ten consecutive trading days prior to the closing date of thePCXH Transaction, rather than the ten consecutive days prior to the executiondate of the definitive agreement.  Inaddition, the final calculation of the purchase price will depend upon severalfactors and adjustments, including but not limited to: (i) an adjustmentrelating to any working capital excess or shortfall of PCXH at closing that iseither over or under an agreed upon threshold; and (ii) a downward adjustmentin the event that any change of control and related payments to certainexecutives of the seller exceeds approximately $4.9 million.

 

Managementexpects that after consummation of the PCXH Transaction, the Company will beable to offer all-electronic trading of equity securities and options productsand to expand and diversify the Company’s business lines and products. Theconsummation of the PCXH Transaction also will result in the Company acquiringthe self-regulatory organization of the PCX. Immediately following theannouncement of the PCXH Transaction integration planning was initiated by theparties. To date, detailed integration plans have been developed.  The PCXH Transaction is subject to approvalsfrom PCXH shareholders and the SEC. The applicable waiting period under theHart-Scott-Rodino Act for the PCXH Transaction expired on March 7, 2005. TheCompany anticipates that the PCXH Transaction will close in the third quarterof 2005.

 

InOctober 2004, the Company entered into a financial advisory servicesengagement with a stockholder, under which the stockholder agreed to performfinancial advisory services in relation to the PCXH Transaction.  The Company has not made any payments underthis agreement as of March 31, 2005.

 

 

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**3.  SUBSEQUENT EVENT – MERGER WITHNEW YORK STOCK EXCHANGE, INC. (“NYSE”)**

 

OnApril 20, 2005, the Company entered into a definitive merger agreementwith NYSE under which they agreed to combine their businesses and becomewholly-owned subsidiaries of a newly-created, for-profit and publicly-tradedholding company (the “NYSE Transaction”) which the parties expect to be namedthe NYSE Group, Inc. (“Holdco”).

 

Inthe NYSE Transaction:

 

•              Through a series of transactions, the currentNYSE memberships will be converted into $300,000 in cash per NYSE membership,and a number of shares of Holdco common stock representing 70% of the entireissued and outstanding shares of Holdco common stock at the closing of the NYSETransaction, calculated on a fully diluted basis (less any shares of Holdco commonstock underlying Holdco restricted stock units reserved for issuance toemployees of the NYSE).

 

•              Through a single merger with a wholly-ownedsubsidiary of Holdco, under which the Company will be the surviving entity: (i)each share of the issued and outstanding shares of the Company’s common stockwill convert automatically into the right to receive one share of Holdco commonstock; (ii) all outstanding stock options of the Company, whether vestedor unvested, will convert into options to purchase an equivalent number ofshares of Holdco common stock; and (ii) all outstanding restricted stockunits of the Company will convert into an equal number of restricted stockunits of Holdco common stock. The aggregate number of shares (including sharesunderlying stock options and restricted stock units) to be received by theCompany’s stockholders will equal 30% of the issued and outstanding shares ofHoldco common stock at the closing of the NYSE Transaction, calculated on afully diluted basis.

 

Under the terms of the mergeragreement, the parties will prepare and file with the SEC proxy materialsconsisting of a joint proxy statement/prospectus relating to the matters to besubmitted to the NYSE members and the Company’s stockholders. In addition,Holdco will prepare and file with the SEC a registration statement onForm S-4 with respect to the issuance of its common stock in the NYSETransaction. The consummation of the NYSE Transaction is subject to a number ofcustomary closing conditions, including the receipt of approval by the NYSEmembers and the Company’s stockholders as well as certain government approvals,including the SEC, and the expiration or termination of the applicable waitingperiod under the Hart-Scott-Rodino Act. The Company anticipates that the NYSETransaction will close in the first quarter of 2006.

 

Themerger agreement contains customary representations and warranties,

 

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includingthe representation that each party has received: (i) the requisite approval ofits board of directors to enter into the merger agreement; and (ii) an opinionof its financial advisor stating, to the effect that the consideration to bereceived in the transaction is fair from a financial point of view.

 

Themerger agreement also contains customary termination provisions which, undercertain circumstances in the event of a termination under the merger agreement,may subject the parties to liability for the payment of termination fees andreimbursement of expenses in an amount up to $40.0 million, and includes aprovision which permits either party to terminate the merger agreement if thetransaction fails to close by February 1, 2006 (unless extended under theterms of the merger agreement). Either party may extend the term of the mergeragreement without the consent of the other party for two separate three-monthperiods (with the first period ending on May 1, 2006 and the second ending on August 1,2006), provided that the only conditions that remain to be satisfied are thereceipt of the approvals of either the NYSE members, the Company’s stockholdersor any regulatory entity, and outstanding litigation.

 

Theparties expect that the combined businesses will bring together the strength ofNYSE’s auction market and the speed and innovation of the Company and itstechnology and management.  The partiesbelieve this combination will create a strong and dynamic enterprise  with diverse products that will be wellpositioned to compete in the industry and possess enhanced growth potential.

 

Followingthe closing of the NYSE Transaction, the parties expect that the board ofdirectors of Holdco will consist of fourteen members who satisfy the NYSEindependence requirements, three of whom will be designated by the Company andagreed to by NYSE, and the remaining eleven members will be the directors ofthe NYSE immediately prior to the effective time of the NYSE Transaction. TheChief Executive Officer of NYSE immediately prior to the effective time of the NYSETransaction will be the Chief Executive Officer of Holdco.

 

InApril 2005, the Company entered into a letter agreement with a stockholderunder which the stockholder agreed to perform certain services in relation tothe proposed merger of the Company and NYSE which included facilitatingdiscussions between the parties and providing certain valuation analysis.  The Company agreed to pay the stockholder atransaction fee of $3.5 million in cash upon consummation of the NYSETransaction. The Company also agreed to reimburse the stockholder for one-halfof the stockholder’s reasonable out-of-pocket expenses (including the fees anddisbursements of attorneys plus any sales, use or similar taxes) in an amountnot to exceed $50,000 without the prior written consent of the Company. In theevent the NYSE Transaction is terminated or not consummated, the Company willpay a transaction fee to be mutually agreed upon between the parties. TheCompany has not made any payments under this agreement as of March 31,2005.

 

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**4.  FIXED ASSETS**

 

Fixedassets consisted of the following:

 
| ** **                                      | ** ** | **December 31,  2004** | ** ** | **March 31,  2005** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                                      | ** ** | **(In thousands)**          | ** ** |
| Software,  including software development costs |       | $                           | 44,511     |                     | $          | 45,643 |   |
| Computers  and equipment                        |       | 43,131                      |       | 45,212                   |       |
| Leasehold  improvements                         |       | 18,770                      |       | 18,819                   |       |
| Equipment  under capital leases                 |       | 18,070                      |       | 18,070                   |       |
| Routers                                         |       | 5,524                       |       | 5,572                    |       |
| Furniture  and fixtures                         |       | 3,074                       |       | 3,092                    |       |
|                                            |       | 133,080                     |       | 136,408                  |       |
| Accumulated  depreciation and amortization      |       | (83,585                     | )          | (88,600                  | )          |
|                                            |       | $                           | 49,495     |                     | $          | 47,808 |   |

 

TheCompany capitalized software development costs of approximately $0.8 millionfor the three months ended March 31, 2005.

 

**5.  GOODWILL AND OTHER INTANGIBLE ASSETS**

 

**Goodwill**

 

InMarch 2002, the Company acquired REDIBook in a transaction accounted foras a purchase business combination. Approximately $20.8 million of the $150.5million purchase price was assigned to the net tangible and intangible assetsacquired, with the remaining value of $129.7 million ascribed to goodwill. In August 2004, the Company issuedcontingent consideration to former REDIBook members in the form of 192,194shares of the Company’s common stock valued at $11.50 per share and recorded$2.2 million of additional goodwill.

 

**PCXExchange Facility Agreement**

 

InMay 2001, the Company acquired the right to operate as the exclusive equitytrading facility of PCX Equities, Inc. including the rights to certain revenuestreams comprised primarily of transaction fees, market data fees, and listingfees, for an aggregate consideration of $90.0 million consisting of a$40.0 million cash payment and 10.8% equity interest in the Company. TheCompany determined that this intangible asset had an indefinite life and, assuch, it is not subject to amortization.

 

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**OtherIntangible Assets**

 

InOctober 2002, the Company acquired Globenet Securities, Inc. and the netassets of its parent, Globenet Capital Corporation in a transaction accountedfor as an asset acquisition.  The Companyassigned $4.9 million to an intangible asset related to the technologyacquired.  This intangible asset isamortized over three years from the implementation of the technology inMay 2003.  The Company recordedapproximately $0.4 million in amortization on this intangible asset for boththe three months ended March 31, 2004 and the three months ended March 31,2005. As of March 31, 2005, the net book value of this intangible assetwas approximately $1.8 million.

 

**6.  RELATED PARTY TRANSACTIONS**

 

Thefollowing is a summary of the related party transactions involving the Companyand certain former members (i.e., owners of Holdings LLC prior to the IPO) andcurrent stockholders (i.e., stockholders of the Company after the IPO), PCX andother affiliates as part of its operations:

 
| ** **                                                                                                      | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                      | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| ** **                                                                                                      | ** ** | **(In thousands)**                     | ** ** |
| **Revenues**                                                                                                    |       |                                   |       |   |   |
| Transaction  fees earned from stockholders/former members and affiliates(1)                                     |       | $                                      | 54,232     |   | $ | 45,555 |   |
| Market  data fees received from PCX (net of amounts shared with customers of $3,644  and $5,759) (2)            |       | 4,245                                  |       | 6,667 |   |
| **Cost of revenues**                                                                                            |       |                                   |       |   |   |
| Liquidity  payments to stockholders/former members and affiliates(1)                                            |       | 15,333                                 |       | 13,416 |   |
| Routing  charges:                                                                                               |       |                                   |       |   |   |
| Routing  fees paid to stockholder/former member(3)                                                              |       | 13,008                                 |       | 9,289 |   |
| Routing  fees for listed securities paid to stockholders/former members(4)                                      |       | 864                                    |       | 568 |   |
| Clearance,  brokerage and other transaction expenses:                                                           |       |                                   |       |   |   |
| Clearing  services provided by a stockholder/former member(5)                                                   |       | 3,672                                  |       | 644 |   |
| Clearing  services provided by an affiliated clearing broker(5)                                                 |       | 1,255                                  |       | — |   |
| Regulatory  services fees paid to PCX(6)                                                                        |       | 1,613                                  |       | 1,954 |   |
| Registered  representative fees received from PCX(6)                                                            |       | (933                                   | )          | (1,170 | ) |
| **Indirect expenses**                                                                                           |       |                                   |       |   |   |
| Communications:                                                                                                 |       |                                   |       |   |   |
| Back  office services provided by an affiliate(7)                                                               |       | 300                                    |       | 300 |   |
| Software  related services provided by an affiliate (net of amounts charged to  customers of $686 and $499) (8) |       | 573                                    |       | 968 |   |
| Marketing  and promotion:                                                                                       |       |                                   |       |   |   |
| Business  development costs(9)                                                                                  |       | 8                                      |       | — |   |
| Legal  and professional:                                                                                        |       |                                   |       |   |   |
| Professional  fees for services provided by an affiliate(10)                                                    |       | 250                                    |       | 450 |   |
| Consulting  fees for services from a firm whose principal serves a director of the  Company (11)                |       | —                                 |       | 150 |   |
|                                                                                                                 |            |                                        |            |  |  |  |  |

 

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(1)           Certain stockholders/former members ofHoldings LLC and affiliates execute transactions through ArcaEx, and previouslythrough the Company’s ECN, and are charged a transaction service fee by theCompany for such activities. Liquidity payments are made to stockholders/formermembers of Holdings LLC and affiliates in relation to such transaction fees.

 

(2)           The Company participates in theconsolidation, dissemination and sale of market data in U.S. exchange-listedsecurities and Nasdaq-listed securities through ArcaEx. In connection withthat, the Company receives market data fees, based on the level of tradingactivity on ArcaEx, for providing data to centralized aggregators that in turnsell the data to third-party consumers. PCX is a direct participant in theplans governing the consolidation and dissemination of market data and as adirect participant in these plans collects tape revenues for trading activitieson ArcaEx. Under the terms of the facility services agreement, the Company isentitled to all tape revenues earned in connection with trading activities onArcaEx.

 

(3)           A stockholder/former member of Holdings, LLCreceives routing fees for trades executed through ArcaEx, that ultimately routethrough to the stockholder/former member’s ECN.

 

(4)           Certain stockholders/former members ofHoldings LLC provide routing services for listed securities through the NewYork Stock Exchange, Inc. on behalf of the Company.

 

(5)           The Company clears its transactions forinstitutional customers through an affiliated clearing broker and transactionsfor non-institutional customers through a stockholder/former member of HoldingsLLC/clearing broker.

 

(6)           Under the terms of the facility servicesagreement, PCX provides certain regulatory services to the Company in returnfor regular payments as negotiated between the parties. Also, PCX forwardsregistered representative fees received from the NASD to the Company.

 

(7)           An affiliate provides back-office services toWave Securities, L.L.C. (“Wave”). The services include offering and managingconnectivity to alternative execution venues, clearing technology, as well asreporting to the NASD’s Order Audit Trail Systems through which NASD membersare required to report information regarding Nasdaq transactions.

 

(8)           An affiliate provides software relatedservices to the Company, a portion of which is charged to the Company’scustomers.

 

(9)           The Company paid rental fees for the yachtthat it leases for certain business development functions, which is operated bythe domestic partner of a sister of a member of management.

 

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(10)         An affiliate provides software relatedservices to the Company.

 

(11)         The Company signed an agreement on June 1,2004 with a consulting firm whose principal serves as a director.  The consulting agreement provides for aminimum fee of $150,000 per quarter and has a one-year term.

 

Anaffiliate provided software development services to the Company in the amountof $1.0 million for the three months ended March 31, 2004.

 

Inthe opinion of management, transactions were made at prevailing rates, termsand conditions and do not involve more than the normal risk of collectibilityor present other unfavorable features.

 

**7.  STOCK-BASED COMPENSATION**

 

TheCompany accounts for stock option grants to employees in accordance withAccounting Principles Board Opinion (“APB”) No. 25, “Accounting for StockIssued to Employees”, and, accordingly, recognizes compensation expense usingthe intrinsic value method. Under the intrinsic value method, stock-basedcompensation, if any, is measured as the excess of the estimated fair value ofthe Company’s stock over the option exercise price.

 

TheCompany adopted the disclosure provisions of SFAS No. 123, “Accounting forStock-Based Compensation” and SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure”.  Had compensation expense for the Company’s stock option plans beendetermined based upon fair value consistent with SFAS No. 123, the Company’snet income and earnings per share would have been changed to the following proforma amounts:

 

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| ** **                                                                                                                                                | ** ** | **Three months ended  March 31,**    | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                                                | ** ** | **2004**                                  | ** ** | **2005** | ** ** |
| ** **                                                                                                                                                | ** ** | **(in thousands, except per share data)** | ** ** |
| Net  income, as reported                                                                                                                                  |       | $                                         | 21,979     |   | $ | 13,165 |   |
| Add:  Stock-based employee compensation cost included in net income                                                                                       |       | 38                                        |       | 248 |   |
| Deduct:  Stock-based employee compensation cost determined under the fair value based  method for all awards, net of related tax effects of $135 and $383 |       | 190                                       |       | 574 |   |
| Net  income, pro forma                                                                                                                                    |       | $                                         | 21,827     |   | $ | 12,839 |   |
|                                                                                                                                                      |       |                                      |       |   |   |
| Earnings  per share:                                                                                                                                      |       |                                      |       |   |   |
| Basic,  as reported                                                                                                                                       |       | $                                         | 0.61       |   | $ | 0.28 |   |
| Basic,  pro forma                                                                                                                                         |       | $                                         | 0.60       |   | $ | 0.27 |   |
| Diluted,  as reported                                                                                                                                     |       | $                                         | 0.55       |   | $ | 0.28 |   |
| Diluted,  pro forma                                                                                                                                       |       | $                                         | 0.54       |   | $ | 0.27 |   |

 

Thefair value of each option grant was estimated on the date of grant using theBlack-Scholes option pricing model with the following assumptions:

 
| ** **                | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------|------------|----------------------------------------|------------|
| ** **                | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| Dividend  yield           |       | —                                 |       | — |   |
| Expected  volatility      |       | 30.0                                   | %          | 30.0 | % |
| Risk-free  interest rate  |       | 3.8                                    | %          | 4.2 | % |
| Expected  life (in years) |       | 7                                      |       | 7 |   |

 

TheBlack-Scholes option pricing model was developed for use in estimating thevalue of traded options that have no vesting restrictions and are fullytransferable.  In addition, optionpricing models require the input of highly subjective assumptions.  Because the Company’s employee stock optionshave characteristics significantly different from those of traded options, andbecause changes in the subjective input assumptions can materially affect theestimate, in management’s opinion, the existing valuation models may notprovide a reliable measure of the fair value of the Company’s employee stockoptions.

 

Theabove pro forma information gives effect to the Company’s conversion into a Delawarecorporation as if it occurred at the beginning of the periods presented.  In addition, the pro forma information wastax effected at combined federal, state and local rates of 41.5% and 40.0% forthe three months ended March 31, 2004 and 2005, respectively.

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 123(R) (revised 2004), “Share-Based Payment”, requiring thatcompensation cost associated with share-based payment transactions berecognized in financial statements. This cost is to be measured at the fairvalue of the instrument issued. SFAS No. 123(R) covers a wide range ofshare-based compensation arrangements including

 

17

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stockoptions, restricted stock plans, performance based awards, share appreciationrights and employee stock purchase plans. Statement No. 123(R) replaces theformer SFAS No. 123 and supersedes APB No. 25. The Company plans to adopt SFAS No. 123(R) on January 1, 2006 usingthe modified-prospective method.  TheCompany is currently evaluating the option pricing model to be utilized and theoverall impact of the adoption of SFAS No. 123(R).  The adoption of the fair value method willhave an impact on the Company’s results of operations, although it will have noimpact on the Company’s overall financial condition.

 

**8.  COMPUTATION OF EARNINGS PER SHARE**

 

Thefollowing is a reconciliation of the basic and diluted earnings per sharecomputations:

 
| ** **                                                | ** ** | **Three months ended  March 31,**    | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                | ** ** | **2004**                                  | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **(In thousands, except per share data)** | ** ** |
|                                                      |       |                                      |       |   |   |
| Net  income                                               |       | $                                         | 21,979     |   | $ | 13,165 |   |
| Shares  of common stock and common stock equivalents:     |       |                                      |       |   |   |
| Weighted  average shares used in basic computation        |       | 36,169                                    |       | 47,142 |   |
| Dilutive  effect of:                                      |       |                                      |       |   |   |
| Preferred  shared converted to common in August 2004 |       | 3,732                                     |       | — |   |
| Stock  options and restricted stock units                 |       | 262                                       |       | 657 |   |
|                                                      |       |                                      |       |   |   |
| Weighted  average shares used in diluted computation      |       | 40,163                                    |       | 47,799 |   |
|                                                      |       |                                      |       |   |   |
| Basic  earnings per share                                 |       | $                                         | 0.61       |   | $ | 0.28 |   |
|                                                      |       |                                      |       |   |   |
| Diluted  earnings per share                               |       | $                                         | 0.55       |   | $ | 0.28 |   |

 

AtMarch 31, 2004 and 2005, approximately 1.4 million and 0.5 millionsecurities, respectively, were excluded from the computation of dilutedearnings per share because their effect would have been antidilutive.

 

**9.  SEGMENT REPORTING**

 

TheCompany operates in two reportable segments: Transaction Execution Services andAgency Brokerage Services.

 

TransactionExecution Services consist primarily of transaction execution services, marketdata services on a real-time or summary basis and, through the Company’salliance with PCX, a trading venue for issuers of equity securities, exchangetraded funds and structured products. Under PCX rules, issuers are listed onPCX for trading on ArcaEx. The customers in this segment are required to holdan ETP or be a broker-dealer introduced to ArcaEx by an ETP. An ETP holder mustbe a broker-dealer.

 

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AgencyBrokerage Services are provided through Wave and consist of order executionservices, on an agency basis, for orders received from institutions involvingprimarily Nasdaq and listed securities. This segment provides institutions thatare not ETP holders or are not sponsored by ETP holders access to all U.S.Nasdaq and exchange-listed securities markets through ArcaEx.

 

Revenuesare generated primarily in the United States of America. Revenues derived fromone stockholder/former member of Holdings LLC and its affiliates representedapproximately 10.0% and 9.0%, of the consolidated revenues for the three monthsended March 31, 2004 and 2005, respectively.  All of the Company’s long lived assets arelocated in the United States.

 

Summarizedfinancial information concerning the Company’s reportable segments is asfollows (in thousands):

 
| **Three  months ended March 31,**     | ** ** | **Transaction  Execution  Services** | ** ** | **Agency  Brokerage  Services** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| **2004**                                   |       |                                 |       |                            |       |             |       |             |       |
| Revenues                                   |       | $                                    | 132,945    |                            | $          | 15,698           |       | $                | (1,829     | ) | $ | 146,814 |   |
| Cost  of revenues                          |       | 84,892                               |       | 9,287                           |       | (1,829           | )          | 92,350           |       |
| Gross  margin                              |       | 48,053                               |       | 6,411                           |       | —           |       | 54,464           |       |
| Indirect  expenses                         |       | 28,506                               |       | 4,047                           |       | —           |       | 32,553           |       |
| Operating  income                          |       | 19,547                               |       | 2,364                           |       | —           |       | 21,911           |       |
|                                       |       |                                 |       |                            |       |             |       |             |       |
| **2005**                                   |       |                                 |       |                            |       |             |       |             |       |
| Revenues                                   |       | $                                    | 123,165    |                            | $          | 11,891           |       | $                | (1,362     | ) | $ | 133,694 |   |
| Cost  of revenues                          |       | 72,625                               |       | 7,182                           |       | (1,362           | )          | 78,445           |       |
| Gross  margin                              |       | 50,540                               |       | 4,709                           |       | —           |       | 55,249           |       |
| Indirect  expenses                         |       | 29,842                               |       | 4,332                           |       | —           |       | 34,174           |       |
| Operating  income                          |       | 20,698                               |       | 377                             |       | —           |       | 21,075           |       |
| Identifiable  assets (as of March 31) |       | 521,964                              |       | 30,062                          |       | (9,467           | )          | 542,559          |       |

 

In2004, the Company revised its methodology for allocating certain expensesbetween the segments to reflect the fact that Agency Brokerage Services hadbuilt out its own infrastructure and therefore relies less on Company sharedservices. Indirect costs allocated to Agency Brokerage Services were $1.5million for both the three months ended March 31, 2004 and 2005.

 

**10.  NET CAPITAL REQUIREMENTS**

 

Wave,Archipelago Securities, L.L.C. (“ARCAS”) and Archipelago Trading Services, Inc.(“ATSI”) are registered broker-dealers and are subject to net capitalrequirements under SEC Rule 15c3-1. Wave and ATSI compute their netcapital using the basic method. Under this method, these subsidiaries mustmaintain minimum net capital (as defined) and the ratio of aggregate indebtedness(as defined) to net capital may not exceed 15 to 1. ARCAS computes its netcapital under the alternative method. This method requires that minimum netcapital not be less than the greater of $250,000 or 2% of aggregate debit itemsarising from customer transactions.

 

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Asof March 31, 2005, these subsidiaries were in compliance with theirrespective net capital requirements and their net capital, net capital inexcess of required net capital, and ratio of aggregate indebtedness to netcapital were as follows (in thousands, except ratios):

 
| **Net capital**                                    |   |      |   |
|----------------------------------------------------|--------|-----------|--------|
| Wave                                               |   | $         | 12,198 |   |
| ARCAS                                              |   | 8,481     |   |
| ATSI                                               |   | 3,372     |   |
| **Net capital in excess of required net capital**  |   |      |   |
| Wave                                               |   | $         | 11,370 |   |
| ARCAS                                              |   | 8,231     |   |
| ATSI                                               |   | 3,220     |   |
| **Ratio of aggregate indebtedness to net capital** |   |      |   |
| Wave                                               |   | 1.02 to 1 |   |
| ARCAS                                              |   | N/A       |   |
| ATSI                                               |   | .68 to 1  |   |

 

Advancesto affiliates, dividend payments and other equity withdrawals are subject tocertain notification and other provisions of the net capital rule of the SECand other regulatory bodies.

 

TheCompany’s international broker-dealer subsidiaries are subject to capitaladequacy requirements promulgated by authorities of the countries in which theyoperate. As of March 31, 2005, these subsidiaries had met their localcapital adequacy requirements.

 

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

You should read the following discussions togetherwith the condensed consolidated financial statements and related notes as wellas the forward looking statements included elsewhere in this report.

 

**Executive Overview**

 

We operate ArcaEx, the first open, all-electronicstock market in the United States for trading in NYSE-, Nasdaq-, AMEX- andPCX-listed equity securities, exchange-traded funds and other exchange-listedsecurities. During the three months ended March 31, 2004 and 2005, ourcustomers executed 101.3 million and 115.7 million transactions in U.S. equitysecurities through ArcaEx, respectively, representing 37.8 billion and 35.8billion shares. Our trading platforms and services have been designed toenhance the speed and quality of trade execution for our customers. Our tradingplatforms provide our customers with fast electronic execution and open, directand anonymous market access. The technological capabilities of our tradingsystems, together with our trading rules, have allowed us to create a pool ofliquidity that is available to our customers internally on ArcaEx andexternally through other market centers. We also operate The ArcaEdge®, a broker-dealersponsored trading platform designed to bring the benefits of ArcaEx—fastelectronic execution, transparency and open market access—to the trading ofsmall-cap equity securities.

 

We earn revenues and generate cash from transactionfees collected in connection with trade execution (whether matched internallyor routed out) on ArcaEx. We also generate revenues from fees collected forintroducing broker-dealers that do not hold an ArcaEx electronic trading permit(“ETP”). In addition, we receive market data fees, based on the level oftrading activity on ArcaEx, for providing data to centralized aggregators thatin turn sell the data to third-party consumers. Through our alliance with PCX,we also collect listing fees from companies and index providers that list onPCX as a trading venue for their equity securities, exchange-traded funds andother structured products. Through our wholly-owned subsidiary, WaveSecurities, L.L.C., we offer and derive revenues from fees collected inconnection with agency brokerage services for institutional customers seekingto access ArcaEx and other U.S. market centers electronically.

 

Our business is dependent on the liquidity (i.e.,the number and range of buy orders and sell orders posted on our system andavailable to our customers) of ArcaEx. As a result, our most significant costof generating revenues is the cost of liquidity, which we pay for in one of twoways. First, to enhance the liquidity of our system, we pay a small fee pershare (denominated in tenths of a cent per share) to participants, referred toas “liquidity providers,” that post buy orders and sell orders on theArchipelago system, when the quote is executed against, or “hit,” by liquiditytakers purchasing or selling securities internally on our system. Second, aspart of our best execution business model, we incur routing charges when theArchipelago system does not have the best buy or sell

 

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order in the market for a security that a customer istrying to buy or sell on our system. In that case, we will route the customer’sorder to the external market center that displays the best buy order or sellorder. The external market center will charge us a fee per share (denominatedin tenths of a cent per share) for routing to its system.

 

Making liquidity payments and incurring routingcharges are part of the costs we incur to generate revenues through increasedliquidity on the Archipelago system. We seek to offset these costs by increasedtrade execution on the Archipelago system. Our cost of liquidity generallyfluctuates based on (i) trading volumes and (ii) the per share fee we payliquidity providers for trades executed internally on ArcaEx or the per sharerouting charge we pay to external market centers for outbound trades.

 

We also incur clearance, brokerage and relatedtransaction expenses, which primarily include transaction expenses paid toclearing entities for clearing and settlement, service fees paid per trade toexchanges for trade execution. As the operator of a facility of PCX Equities,Inc., we do not incur clearing charges for internally matched trades executedon ArcaEx by our customers. As a result, our clearing costs are lower fortrades executed internally on ArcaEx. If we route a trade to an external marketcenter, we bear clearing and settlement costs.

 

In addition to our direct cost of revenues, we incurthe following indirect expenses:

 

•                  employeecompensation and benefits expenses, which include salaries, incentive compensationand related employee benefits and taxes as well as amortization of stock-basedcompensation;

 

•                  depreciation andamortization expenses, which result primarily from the depreciation of thefixed assets we purchase, including computer software and hardware used in thedevelopment of our trading systems;

 

•                  communicationsexpenses, which consist primarily of costs for our network connection with ourcustomers and our data centers, as well as connectivity to various other marketcenters;

 

•                  marketing and promotionexpenses, which consist primarily of media, print and other advertisingexpenses as well as customer marketing expenses;

 

•                  legal andprofessional expenses, which consist primarily of legal and accountingexpenses;

 

•                  occupancy expenses,which consist primarily of rental expenses; and

 

•                  general andadministrative expenses, which include travel and entertainment expenses andother administrative expenses and general

 

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office costs.

 

On August 11, 2004 we converted from a limitedliability company to a “C” corporation in connection with the consummation ofour Initial Public Offering (“IPO”). Please refer to Note 1 — Organization and Basis of Presentation underthe sub-headings “Conversion Transaction” and “Initial Public Offering” forfurther discussion in our unaudited financial statements.

 

For financial reporting purposes, our business isdivided into two reportable segments: transaction execution services and agencybrokerage services. Our transaction execution business includes trade executionon the Archipelago system as well as fees we receive for market data and fromissuers with equity securities listed on the Pacific Exchange for trading onArcaEx. Our trade execution customers are required to hold an ETP or be abroker-dealer introduced to ArcaEx by an ETP holder in order to trade onArcaEx. An ETP holder must be a broker-dealer. Our agency brokerage servicesare provided through Wave Securities, L.L.C., our broker-dealer subsidiary, andconsist of order execution services, on an agency basis, for orders receivedexclusively from institutions involving primarily Nasdaq and listed securities.This segment provides institutions that are not ETP holders or are notsponsored by ETP holders access to all U.S. Nasdaq and exchange-listedsecurities markets through ArcaEx.

 

**Business Development**

 

# ***Acquisition of PCX Holdings, Inc. (“PCXH”)***

# ** **

OnJanuary 3, 2005, we entered into a definitive agreement to acquire PCXH andall of its wholly-owned subsidiaries for approximately $50.7 million,consisting of approximately $40.6 million in cash and approximately $10.1million in stock, subject to working capital and certain other possibleadjustments.  As a result of our mergeragreement with the New York Stock Exchange, Inc. (see *Merger with New York Stock Exchange, Inc.*below), the purchase price of PCXH will be calculated upon consummation of theacquisition using the average closing price per share of our common stock overthe ten consecutive trading days prior to the closing date of the PCXHacquisition, rather than the ten consecutive days prior to the execution dateof the our definitive agreement with PCXH.

 

Weexpect that after consummation of the PCXH acquisition, we will be able tooffer all-electronic trading of equity securities and options products and willbe able to expand and diversify our business lines and products. Theconsummation of the PCXH acquisition also will result in our acquisition of theself-regulatory organization (“SRO”) of the PCX. This transaction is subject toapprovals from PCXH shareholders as well as the Securities and ExchangeCommission (“SEC”) and other regulatory entities. We anticipate that the PCXHacquisition will close in the third quarter of 2005.

 

***Merger with New York Stock Exchange, Inc. (“NYSE”)***

 

OnApril 20, 2005, we entered into a definitive merger agreement with NYSE

 

23

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underwhich, each of Archipelago and NYSE will operate as a wholly-owned subsidiaryunder a newly-created, for-profit and publicly-traded holding company, whichthe parties expect to be named the NYSE Group, Inc. (“Holdco”).  Under the terms of the merger agreement, we willbe the surviving entity of a merger with a newly created for-profit Delaware corporationand wholly-owned subsidiary of Holdco. In this transaction, each share of the issued and outstanding shares of ourcommon stock will convert automatically into the right to receive one share of Holdcocommon stock, with the aggregate amount of such shares of Holdco common stockequaling 30% of the issued and outstanding shares of common stock of Holdco atthe closing.

 

Theparties expect that the combined businesses will bring together the strength ofthe NYSE’s auction market and our speed and innovation.  The parties believe this combination willcreate a strong and dynamic enterprise with diverse products that will be wellpositioned to compete in the industry and possess enhanced growth potential.

 

Theconsummation of the transaction is subject to the receipt of approval by themembers of the NYSE and our stockholders as well as certain governmentapprovals, including the SEC. We anticipate that our merger with NYSE willclose in the first quarter of 2006.

 

Themerger agreement contains customary representations and warranties andconditions to closing, including the representation that each party hasreceived: (i) the requisite approval of its board of directors to enter intothe merger agreement; and (ii) an opinion of its financial advisor stating, tothe effect that the consideration to be received in the transaction is fairfrom a financial point of view.  The mergeragreement also contains customary termination provisions which, under certaincircumstances in the event of a termination under the merger agreement, maysubject the parties to liability for the payment of termination fees orreimbursement of expenses in an amount up to $40.0 million, and includes aprovision which permits either party to terminate the agreement if thetransaction fails to close by February 1, 2006. Either party may extendthe term of the merger agreement without the consent of the other party for twoseparate three-month periods (with the first period ending on May 1, 2006 andthe second ending on August 1, 2006), provided that the only conditionsthat remain to be satisfied are the receipt of the approvals of either the NYSEmembers, our stockholders or any regulatory entity, and outstanding litigation.

 

***Adoption of Regulation NMS***

 

OnApril 6, 2005, the SEC voted to adopt Regulation NMS, which containsproposals designed to change the regulatory structure of the U.S. equitymarkets, each of which were disclosed in our Annual Report on Form 10-K for thefiscal year ended December 31, 2004.

 

RegulationNMS will change the current formula for allocating revenues generated by marketdata fees to market centers that produce the data for investors (the “MarketData Rule”), as well as create Rules 610 (the “Intermarket Access Rule”), 611

 

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(the“Order Protection Rule”) and 612 (the “Sub-Penny Pricing Rule”) under theExchange Act of 1934.  The final releasefor Regulation NMS is currently pending, however the final release is expectedto include the following provisions:

 

*MarketData Rule*

 

•                  Allocate market data revenues to marketcenters based on the value of the quotes and trades for all securities.

 

•                  Give market centers and their members theability to distribute their own data independently with or without fees.

 

•                  Require market centers to provide their bestbids and offers and last sale information for consolidated disseminationthrough the joint-industry plans.

 

•                  Require the SROs governing the market dataconsolidation systems to create advisory committees composed of non-SROrepresentatives to the joint industry plans.

 

*IntermarketAccess Rule*

 

•                  Allow for the use of private linkages, ratherthan mandating a collective linkage facility to facilitate order interactionbetween markets.

 

•                  Establish a limit on the access fees chargedby trading centers when incoming orders execute against their displayed quotesat the best bid or offer to $0.003 per share (30 cents per 100 share order) or,if the price of the best bid or offer is less than $1.00, to no more than 0.3%of the quotation price per share.

 

•                  Require SROs to establish and enforce rulesthat prohibit members from displaying quotes that internally lock or cross theautomated quotes of other trading centers. A locked market occurs when theprice to buy a stock is the same as the price to sell the stock. A crossedmarket occurs when the price to buy (sell) a stock is higher (lower) than theprice to sell (buy) a stock.

 

*OrderProtection Rule*

 

•                  Require broker-dealers to make available, forprotection under the trade through rule, the best bids and offers across allmarkets.

 

•                  Protect bids and offers displayed on anautomated market from being traded through by any market. An “automated market”is essentially one that executes an incoming order on an immediate basiswithout human intervention.

 

•                  Not protect bids and offers displayed on anon-automated market from being traded through by any market.

 

•                  Include exceptions such as intermarket sweeporders, quotations displayed by markets that fail to meet the responserequirements for automated quotations, and flickering quotations with multipleprices displayed in a single second.

 

25

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•                  Require SROs to establish and enforce rulesthat are designed to reasonably prevent trade throughs in accordance with theserules.

 

*Sub-PennyPricing Rule*

 

•                  Prohibit electronic communications networks,exchanges, market makers and alternative trading systems from displaying,ranking or accepting quotes in NMS securities that are priced in increments ofless than a penny, unless the stock price is less than $1.00, in which case,the minimum increment would be $0.0001.

 

The SEC has stated that the final release for Regulation NMS willprovide for extended compliance dates, specifically: (i)  compliance with the Intermarket Access Ruleand Order Protection Rule would begin with a small group of representative NMSstocks, with the first phase beginning on April 10, 2006 and ending on June 9,2006; (ii) on June 12, 2006, trading centers would be required to begintrading all NMS stocks pursuant to the requirements of the Intermarket AccessRule and Order Protection Rule; (iii) the compliance date for the Sub-PennyPricing Rule would be July 1, 2005; and (iv) the compliance date for theMarket Data Rule would be July 3, 2006.

 

We continue to analyze the potential impact of the adoption ofRegulation NMS to our business and results of operations, however, we believethat when implemented: (i) the amount of transaction fees we earn, whichrepresented over 89.5% of our total revenues for the year ended December 31,2004, could potentially decrease; and (ii) the impairment of market centers’ability to increase revenues through higher pricing of transaction fees couldhave a material adverse effect on the revenues and operating results of allmarket centers, including our business.

 

Our preliminary analysis assumes, however, that trading volumes and ourmarket share of the U.S. equities market remain constant and does not giveeffect to changes investors may make in their trading patterns as a result of,or in response to, Regulation NMS.

 

***Nasdaq proposed acquisition of Instinet Group, Inc.***

 

OnApril 25, 2005, The Nasdaq Stock Market, Inc. and a consortium ofinvestors entered into a definitive agreement to acquire Instinet Group, Inc.This transaction, if consummated, would combine two large competitors with whomwe compete for business, including our transaction-based services.  Currently, we cannot predict the potentialimpact of this transaction on our industry in general, including liquidity,market share and price competition, or specifically to our business or futureresults of operations.

 

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**Key Statistical Information**

 

Our revenues and gross margin are directly impactedby trading volumes of U.S. equity securities on the Archipelago system. Ourprofitability depends to a significant extent on our ability to attract andretain trading volumes, both in absolute terms and relative to other market centers.We derive revenues on both a per-share basis and a per-transaction basis,depending upon the source of revenue. The transaction fees we receive for tradeexecution and the payments we make to liquidity providers are determined on aper-share basis. Market data fees for exchange-listed securities are determinedon a per-transaction basis, and market data fees for Nasdaq-listed securitiesare determined on a combination of share volume and transaction volume.

 

The following table presents unaudited key transactionvolume information, as well as selected operating information, for the periodspresented. A description of how we calculate our market share, our tradingvolumes and other operating measures is set forth below.

 

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| ** **                                                                | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| Trading  Days                                                             |       | 62                                     |       | 61 |   |
|                                                                      |       |                                   |       |   |   |
| Total  U.S. market volume (millions of shares)(1)                         |       | 269,448                                |       | 262,846 |   |
| Our  total U.S. market volume (millions of shares)(1)                     |       | 37,750                                 |       | 35,830 |   |
|                                                                      |       |                                   |       |   |   |
| Our  share of total U.S. market volume(1)(2)                              |       | 14.01                                  | %          | 13.63 | % |
| % of  handled shares matched internally(3)                                |       | 10.50                                  | %          | 10.84 | % |
| % of  handled shares routed out(3)                                        |       | 3.51                                   | %          | 2.79 | % |
|                                                                      |       |                                   |       |   |   |
| Total  volume of Nasdaq-listed securities (millions of shares)            |       | 126,314                                |       | 122,238 |   |
| Our  total volume of Nasdaq-listed securities (millions of shares)        |       | 32,239                                 |       | 28,768 |   |
|                                                                      |       |                                   |       |   |   |
| Our  share of total volume of Nasdaq-listed securities(2)                 |       | 25.52                                  | %          | 23.53 | % |
| % of  handled shares matched internally(3)                                |       | 19.16                                  | %          | 18.68 | % |
| % of  handled shares routed out(3)                                        |       | 6.36                                   | %          | 4.85 | % |
|                                                                      |       |                                   |       |   |   |
| Total  volume of NYSE-listed securities (millions of shares)              |       | 123,068                                |       | 125,194 |   |
| Our  volume in NYSE-listed securities (millions of shares)                |       | 1,972                                  |       | 3,126 |   |
|                                                                      |       |                                   |       |   |   |
| Our  share of total volume of NYSE-listed securities(2)                   |       | 1.60                                   | %          | 2.50 | % |
| % of  handled shares matched internally(3)                                |       | 0.95                                   | %          | 1.82 | % |
| % of  handled shares routed out(3)                                        |       | 0.65                                   | %          | 0.68 | % |
|                                                                      |       |                                   |       |   |   |
| Total  volume of AMEX-listed securities (millions of shares)              |       | 20,066                                 |       | 15,415 |   |
| Our  volume in AMEX-listed securities (millions of shares)                |       | 3,539                                  |       | 3,936 |   |
|                                                                      |       |                                   |       |   |   |
| Our  share of total volume of AMEX-listed securities(2)                   |       | 17.64                                  | %          | 25.53 | % |
| % of  handled shares matched internally(3)                                |       | 14.50                                  | %          | 21.98 | % |
| % of  handled shares routed out(3)                                        |       | 3.14                                   | %          | 3.55 | % |
|                                                                      |       |                                   |       |   |   |
| Our  ETF volume (millions of shares)                                      |       | 3,046                                  |       | 4,943 |   |
|                                                                      |       |                                   |       |   |   |
| Our  U.S. equity transaction volume (thousands of transactions)           |       | 101,274                                |       | 115,746 |   |
|                                                                      |       |                                   |       |   |   |
| Our  average U.S. equity transaction size (shares per transaction)        |       | 373                                    |       | 310 |   |
| Our  average U.S. equity transactions per day (thousands of transactions) |       | 1,633                                  |       | 1,897 |   |
|                                                                      |       |                                   |       |   |   |
| Our  average transaction-related revenue (per share)(4)              |       | $                                      | 0.0036     |   | $ | 0.0033 |   |
| Our  average transaction-related cost of revenue (per share)(5)      |       | $                                      | 0.0021     |   | $ | 0.0020 |   |
| Our  average transaction-related gross margin (per share)(6)         |       | $                                      | 0.0015     |   | $ | 0.0013 |   |
|                                                                      |       |                                   |       |   |   |
| % of  customer order volume matched internally(7)                         |       | 85.5                                   | %          | 88.4 | % |
| % of  customer order volume routed out(7)                                 |       | 14.5                                   | %          | 11.6 | % |

 

----

(1) U.S. market volume is calculated based on thenumber of shares of equity securities traded on the NYSE, AMEX and Nasdaq,including exchange-traded funds, as reported in the consolidated tape. The “consolidatedtape” is the system that continuously provides the last sale price and volumeof securities transactions in listed securities to the public.

 

(2) Our market share is calculated based on thenumber of shares handled on the Archipelago system as a percentage of totalvolume.

 

(3) Represents our share of the total volume of suchsecurities handled on ArcaEx that was either matched internally on ArcaEx orrouted out to an external market center.

 

(4) The per share amount is calculated based on ourtotal revenues derived from

 

28

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transaction fees of $135.0 million and $118.7million for the three months ended March 31, 2004 and 2005, respectively.

 

(5) The per share amount is calculated based on ourcost of revenues derived from transaction fees, which consist of routingcharges and liquidity payments of $79.7 million and $70.8 million for the threemonths ended March 31, 2004 and 2005, respectively, and our total U.S.market volume for the relevant period. The cost of revenue from transactionfees used in the per share computation does not include clearance, brokerage andother transaction expenses.

 

(6) The per share amount is calculated based on ournet revenues received from transaction fees, and our total U.S. market volumefor the relevant period.

 

(7) The percentage of customer order volume matchedinternally is calculated by dividing the volume of customer orders executedwithin our internal liquidity pool (including the volume of both buy orders andsell orders) by the total volume of customer orders (again including the volumeof both buy orders and sell orders when such orders are matched internally).The percentage of customer orders routed out is calculated by dividing thevolume of customer orders routed to other market centers by the total volume ofcustomer orders.

 

For purposes of calculating our volume, we includeall shares that are “handled” on the Archipelago system. Handled shares includeboth shares that are bought or sold within our internal liquidity pool andshares that are routed to external markets for execution. We count everytransaction handled by the Archipelago system once; we do not count both sidesof any transaction. For example, if a customer’s 10,000 share buy order ismatched with another customer’s 10,000 share sell order in our internalliquidity pool, our handled volume will be 10,000 shares. As another example,if one of our customers sends us an order to buy 10,000 shares and the bestprice for that order is displayed at another market center, we will route thatorder to the other market center for execution. The other market center willreport a 10,000 share transaction in the consolidated tape, and our handledvolume will be 10,000 shares. As a result, the 10,000 shares we report ashandled by us in this example are also handled by the external market center.

 

In computing the percentage of customer order volumematched internally and the percentage of customer order volume routed out, wecalculate the percentage based on the volume of individual customer orders, notthe volume of matched trades (i.e., only counting one side of a matchedtransaction). For example, we calculate two customer orders matched internallyon our system as two customer orders matched internally, and we include thevolume of both the buy order and the sell order in computing our percentages ofcustomer order volume matched internally and routed out. We calculate onecustomer order routed to an external market center (which will be matched withan order at that other market center) as one outbound trade or one customerorder. We calculate one customer order routed to us from an external marketcenter and matched with an order on our system as one inbound trade or onecustomer order.

 

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Transactions in Nasdaq and exchange-listedsecurities are reported in the consolidated tape, a high-speed system thatcontinuously provides last sale price and volume in listed securities. Ourhandled volume is higher than our volume reported to the centralizedaggregators for inclusion in the consolidated tape for two reasons. First, wedo not report trades routed to another market center to the centralizedaggregators of this data. Instead, the destination market center reports thesetrades. For example, if a customer’s 10,000 share buy order is routed toanother market center for execution, our handled volume will be 10,000 shares,but we will not report the trade. Second, our handled volume includes odd lottransactions, generally defined as trades of fewer than 100 shares, which, byrule, we do not report to the centralized aggregators for inclusion in theconsolidated tape. For example, if one of our customers buys 50 shares, ourhandled volume will be 50 shares but we will not report this trade.

 

For purposes of calculating our market share, we usethe volume of shares that are handled on the Archipelago system (as describedabove) as the numerator, and the aggregate volume of shares reported by allsecurities exchanges and associations in the consolidated tape as thedenominator. Our market share may be expressed as:

 

Number of shares handled on the Archipelagosystem

Overall market volume as reported in theconsolidated tape

 

As an alternative method of calculating marketshare, we could include in the numerator of the above formula only transactionsthat we report in the consolidated tape. This would exclude shares routed toother market centers and odd-lot transactions from our market sharecalculation.

 

For purposes of calculating the percentage ofhandled shares matched internally or routed out, we count all shares that are “handled”on the Archipelago system as described above. We count every transactionhandled by the Archipelago system once; we do not count both sides of anytransaction. Therefore, if five trades are executed on ArcaEx for 10,000 shareseach, three of which are routed out, we will have handled 50,000 shares and ourpercentage of that share volume matched internally would be 40% and routed outwould be 60%.

 

Alternatively, for the purpose of calculating thepercentage of customer order volume matched internally or routed out, we counteach customer order exactly once. If two customers’ orders are matched withinour internal liquidity pool, we count the volume of both the buy order and thematched sell order. On the other hand, if a customer’s order is routed toanother market center and matched with an order posted at that other marketcenter, we count only the volume of the order routed out.

 

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**Resultsof Operations**

 

***Three Months Ended March 31, 2005 versus Three Months Ended March 31,2004***

 

Thefollowing table sets forth our consolidated statements of operations data forthe periods presented:

 
| ** **                                           | ** ** | **Three months  ended March 31,** | ** ** | **Amount  Change  Favorable  (Unfavorable)** | ** ** | **Percentage  Change  Favorable  (Unfavorable)** | ** ** | **Percentage of Revenues** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------|------------|----------------------------|------------|
| ** **                                           | ** ** |
| ** **                                           | ** ** |
| ** **                                           | **2004**   | ** **                             | **2005**   | **2004**                                     | ** ** | **2005**                                         | ** ** |
| ** **                                           | ** ** | **(In millions)**                      | ** ** | ** **                                   | ** ** | ** **                                       | ** ** | ** **                 | ** ** |
| **Revenues**                                         | ** ** | ** **                             | ** ** | ** **                                   | ** ** | ** **                                       | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Transaction  fees                                    |       | $                                      | 135.0      |                                         | $          | 118.7                                            |       | $                          | (16.3      | ) | (12.1 | )% | 91.9 | % | 88.8 | % |
| Market  data fees                                    |       | 11.7                                   |       | 14.9                                         |       | 3.2                                              |       | 27.4                       | %          | 8.0 | % | 11.1 | % |
| Listing  fees                                        |       | 0.1                                    |       | 0.1                                          |       | —                                           |       | —                     | %          | 0.1 | % | 0.1 | % |
| Total  revenues                                      |       | 146.8                                  |       | 133.7                                        |       | (13.1                                            | )          | (8.9                       | )%         | 100.0 | % | 100.0 | % |
|                                                 |       |                                   |       |                                         |       |                                             |       |                       |       |   |   |   |   |
| Cost  of revenues                                    |       |                                   |       |                                         |       |                                             |       |                       |       |   |   |   |   |
| Liquidity  payments                                  |       | 53.2                                   |       | 51.9                                         |       | 1.3                                              |       | 2.4                        | %          | 36.2 | % | 38.8 | % |
| Routing  charges                                     |       | 26.5                                   |       | 18.8                                         |       | 7.7                                              |       | 29.1                       | %          | 18.1 | % | 14.1 | % |
| Clearance,  brokerage and other transaction expenses |       | 12.7                                   |       | 7.7                                          |       | 5.0                                              |       | 39.4                       | %          | 8.7 | % | 5.8 | % |
| Total  cost of revenues                              |       | 92.4                                   |       | 78.4                                         |       | 14.0                                             |       | 15.2                       | %          | 63.0 | % | 58.7 | % |
|                                                 |       |                                   |       |                                         |       |                                             |       |                       |       |   |   |   |   |
| Gross  margin                                        |       | 54.4                                   |       | 55.3                                         |       | 0.9                                              |       | 1.7                        | %          | 37.0 | % | 41.3 | % |
|                                                 |       |                                   |       |                                         |       |                                             |       |                       |       |   |   |   |   |
| Indirect  expenses                                   |       |                                   |       |                                         |       |                                             |       |                       |       |   |   |   |   |
| Employee  compensation and benefits                  |       | 10.3                                   |       | 12.5                                         |       | (2.2                                             | )          | (21.4                      | )%         | 7.0 | % | 9.3 | % |
| Depreciation  and amortization                       |       | 10.7                                   |       | 5.4                                          |       | 5.3                                              |       | 49.5                       | %          | 7.3 | % | 4.0 | % |
| Communications                                       |       | 4.5                                    |       | 5.5                                          |       | (1.0                                             | )          | (22.2                      | )%         | 3.1 | % | 4.1 | % |
| Marketing  and promotion                             |       | 1.7                                    |       | 3.1                                          |       | (1.4                                             | )          | (82.4                      | )%         | 1.2 | % | 2.3 | % |
| Legal  and professional                              |       | 2.3                                    |       | 3.1                                          |       | (0.8                                             | )          | (34.8                      | )%         | 1.6 | % | 2.3 | % |
| Occupancy                                            |       | 1.0                                    |       | 1.4                                          |       | (0.4                                             | )          | (40.0                      | )%         | 0.7 | % | 1.0 | % |
| General  and administrative                          |       | 2.0                                    |       | 3.2                                          |       | (1.2                                             | )          | (60.0                      | )%         | 1.4 | % | 2.4 | % |
| Total  indirect expenses                             |       | 32.5                                   |       | 34.2                                         |       | (1.7                                             | )          | (5.2                       | )%         | 22.3 | % | 25.4 | % |
|                                                 |       |                                   |       |                                         |       |                                             |       |                       |       |   |   |   |   |
| Operating  income                                    |       | 21.9                                   |       | 21.1                                         |       | (0.8                                             | )          | (3.7                       | )%         | 14.7 | % | 15.9 | % |
| Interest  and other, net                             |       | 0.1                                    |       | 0.8                                          |       | 0.7                                              |       | 700.0                      | %          | 0.1 | % | 0.6 | % |
| Income  before income tax provision                  |       | 22.0                                   |       | 21.9                                         |       | (0.1                                             | )          | (0.5                       | )%         | 14.8 | % | 16.5 | % |
| Income  tax provision                                |       | —                                 |       | 8.8                                          |       | (8.8                                             | )          | (100.0                     | )%         | — | % | 6.6 | % |
| Net  income                                          |       | $                                      | 22.0       |                                         | $          | 13.1                                             |       | $                          | (8.9       | ) | (40.5 | )% | 14.8 | % | 9.9 | % |

 

*Highlights*

 

Forthe three months ended March 31, 2005, our income before income taxprovision was $21.9 million, consistent with $22.0 million for the three monthsended March 31, 2004.  We managed toachieve nearly the same level of income before income tax provision despite thefact that our total U.S. market volume declined to 35.8 billion shares for thethree months ended March 31, 2005 from 37.8 billion shares for the threemonths ended March 31, 2004, a 5.3% decrease.  Our results of operations for the periodprimarily reflect the following principal factors:

 

•                  *More liquidity posted on ArcaEx.*  Thepercentage of customer orders

 

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matchedinternally increased to 88.4% from 85.5% while the percentage of shares routedto other market centers for execution declined to 11.6% from 14.5%, resultingin a change in the amount and mix of our cost of revenues:

•                  Liquidity payments declined to $51.9 millionfor the three months ended March 31, 2005 from $53.2 million for the threemonths ended March 31, 2004.  As apercentage of total revenues, liquidity payments increased to 38.8% from 36.2%.

•                  Routing charges declined to $18.8 million, or14.1% of total revenues, from $26.5 million, or 18.1% of total revenues.

•                  Clearance, brokerage and other transactionexpenses declined to $7.7 million, or 5.8% of total revenues, from $12.7million, or 8.7% of total revenues.

•                  *Improved gross margin*. Despite the decline of our total revenues, gross margin increased to$55.3 million for the three months ended March 31, 2005 from $54.4 millionfor the three months ended March 31, 2004. Consequently, our gross margin percentage increased to 41.3% from 37.0%for the respective periods.  Theimprovement was primarily the result of our higher internal match rate ofcustomer orders and a greater contribution of market data fees to our totalrevenues.

 

*Revenues*

 

Ourtotal revenues declined $13.1 million or 8.9% to $133.7 million for the threemonths ended March 31, 2005 from $146.8 million for the three months endedMarch 31, 2004.

 

Transactionfees declined by $16.3 million or 12.1% to $118.7 million for the three monthsended March 31, 2005 from $135.0 million for the comparable period a yearago.  The decline in transaction fees wasprimarily due to (i) the 5.1% decrease in our total U.S. market volume and (ii)to the $3.8 million decrease of the revenues derived from our agency brokerageservices segment from $15.7 million for the three months ended March 31,2004 to $11.9 million for the three months ended March 31, 2005.

 

Marketdata fees increased $3.2 million or 27.4% to $14.9 million for the three monthsended March 31, 2005 from $11.7 million for the three months ended March 31,2004.  Market data fees derived fromtrading Nasdaq-listed securities increased from $7.4 million to $8.2million.  Market data fees derived fromtrading Amex-listed securities increased from $3.8 million to $6.0million.  Market data fees derived fromtrading NYSE-listed securities increased from $0.5 million to $0.7 million.

 

Forthe three months ended March 31, 2005, revenues from listing fees were$0.1 million, unchanged from $0.1 million for the three months ended March 31,2004.

 

32

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*Cost ofRevenues*

 

Ourtotal cost of revenues declined to $78.4 million for the three months ended March 31,2005 from $92.4 million for the three months ended March 31, 2004, a $14.0million or 15.2% decrease.  As apercentage of total revenues, our cost of revenues declined to 58.7% from 63.0%for the respective periods.

 

Liquiditypayments declined $1.3 million to $51.9 million for the three months ended March 31,2005 from $53.2 million for the comparable period a year ago.  This decrease was the result of lower tradingvolumes period-over-period partially offset by the increase in the internalmatch rate to 88.4% (with 11.6% routed out to other market centers forexecution) from 85.5% (with 14.5% routed out to other market centers forexecution).

 

Routingcharges declined to $18.8 million for the three months ended March 31,2005 from $26.5 million for the three months ended March 31, 2004, a $7.7million or 29.1% decrease.  This declineprimarily reflects lower routed volume (as the percentage of customer ordersmatched internally increased period-over-period) and lower routing costs pershare as a result of certain cost management initiatives.

 

Clearance,brokerage and other transaction expenses declined to $7.7 million for the threemonths ended March 31, 2005 from $12.7 million for the comparable period ayear ago, a $5.0 million or 39.4% decrease.  This decline was the result of the decrease ofour total U.S. market volume and the decrease in the relative number of tradessubject to clearing costs due to the lower percentage of orders routed out, aswell as the reduction of our clearing costs following the recent self-clearingof the trading activity of our introducing broker and routing brokerbusinesses.

 

Ouragency brokerage services segment accounted for $7.2 million of our costs ofrevenues for the three months ended March 31, 2005 compared to $9.3million of our cost of revenues for the three months ended March 31, 2004.The decreased contribution of this segment to our consolidated cost of revenueswas primarily driven by lower revenues.

 

*GrossMargin*

 

Grossmargin increased by $0.9 million, or 1.7%, to $55.3 million for the threemonths ended March 31, 2005 from $54.4 million for the three months ended March 31,2004.  Our gross margin percentageincreased to 41.3% from 37.0 % for the respective periods.  Despite declining revenues, our gross marginimproved as a result of the higher internal match rate of customer orders andthe greater contribution of market data fees to our total revenues.

 

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*IndirectExpenses*

 

Total indirect expenses increased by $1.7 million, or 5.2%, to $34.2million for the three months ended March 31, 2005 from $32.5 million forthe three months ended March 31, 2004. Total indirect expenses increased as a percentage of total revenues to25.4% from 22.3%.  This increase waschiefly associated with the following:

 

•                  a $2.2 million increase in employeecompensation and benefits as a result of increased staffing and theamortization of certain employee stock-based compensation expense;

•                  a $1.4 million increase in marketing andpromotion expense due primarily to increased advertising based on the timing ofour campaigns;

•                  a $1.0 million increase in communicationsexpense that is mainly the result of our operation of a new data center in NewJersey; and

•                  a $1.2 million increase in general andadministrative expenses primarily in relation to higher insurance premiums andadditional expenses incurred as a public company.

 

Theaggregate $5.8 million effect of these increases was offset by a $5.3 millionreduction of depreciation and amortization. In June 2003, we determined that certain software and computerequipment would be retired by March 31, 2004 and, therefore, weaccelerated depreciation on these assets. For the three months ended March 31,2004, we recorded an additional $3.9 million in relation to such acceleration.

 

*Interestand Other*

 

Interestand other income and expenses increased by $0.7 million to $0.8 million for thethree months ended March 31, 2005. The increase was primarily due toincreased average cash balances and interest earning assets, and a reduction ofinterest expenses incurred in connection with a note payable which we fullyrepaid in April 2004.

 

*IncomeTax Provision*

 

Forthe three months ended March 31, 2005, we provided for income taxes at a40.0% blended rate. For the three months ended March 31, 2004, we weretreated as a partnership for federal, state and local income tax purposes. As aresult, all items of income, expense, gain or loss were generally reportable onthe tax returns of our members.

 

*NetIncome*

 

Asa result of the foregoing, we reported net income for the three months ended March 31,2005 of $13.1 million, a decrease of $8.9 million from the $22.0 million netincome we reported for the comparable period a year ago.

 

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**Liquidity and Capital Resources**

 

Historically,our primary sources of liquidity have been cash provided by operations andproceeds generated from the sale of our common equity and preferred shares. On August 19,2004, we completed the sale of 6,325,000 shares of common stock at $11.50 pershare in our IPO, for which we received net proceeds of $67.6 million. Weincurred approximately $6.8 million in expenses related to our IPO. Certainformer members of Holdings LLC sold another 6,325,000 million shares to thepublic, for which we received no proceeds. We intend to use the net proceedsfrom our IPO for general corporate purposes, including providing additionalfunds for our operations and to expand and diversify our products and serviceofferings.

 

OnJanuary 3, 2005, we entered into a definitive agreement to acquire PCXHand all of its wholly-owned subsidiaries.  At the time of the execution of the definitive agreement, the purchaseprice was approximately $50.7 million, to be paid (i) 80% in cash (orapproximately $40.6 million); and (ii) 20% in shares of our common stock,calculated using the average closing price of our common stock over the tenconsecutive days prior to the execution date of the definitive agreement (or approximately$10.1 million).  However, as a result ofour execution of a merger agreement with the NYSE, at closing, the purchaseprice will be calculated using the average closing price per share of ourcommon stock over the ten consecutive trading days prior to the closing date ofthe PCXH acquisition, rather than the ten consecutive days prior to theexecution date of the definitive agreement. In addition, the final calculation of the purchase price will depend uponseveral factors and adjustments, including but not limited to: (i) anadjustment relating to any working capital excess or shortfall of PCXH atclosing that is either over or under an agreed upon threshold; and (ii) adownward adjustment in the event that any change of control and related paymentsto certain executives of the seller exceeds approximately $4.9 million.

 

Inconnection with our contemplated merger with NYSE, at closing, we will be requiredto have at least $150.0 million in cash. In addition, we anticipate that we will incur substantial mergerexpenses consisting primarily of legal, accounting and other advisory fees. Forthe month of April 2005, we incurred merger and acquisition expenses ofapproximately $7.5 million, including $3.5 million to be paid to a stockholderupon consummation of our merger with NYSE for services performed in relation tothe proposed transaction.

 

Ourprincipal liquidity requirements are for working capital, capital expendituresand general corporate purposes. Our capital expenditures have historically relatedprimarily to developing our trading platforms, which included investments insoftware development and hardware, as well as building our data centers. Inaddition to the anticipated acquisition of PCXH, we estimate that our capitalexpenditures for 2005 will be approximately $23.0 million for continueddevelopment of our trading platforms, and the development of new products andservices, including market data products.

 

AtMarch 31, 2005, we had cash and cash equivalents of $193.2 million, anincrease of $15.3 million as compared to December 31, 2004. For the threemonths ended

 

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March31, 2005, we provided cash of $19.1 million from our operating activities,consisting of net income of $13.2 million and the $5.9 million net effect ofnon-cash items and changes in working capital. We used $3.3 million ininvesting activities to purchase fixed assets and develop software and used$0.5 million to make principal payments under a capital lease obligation.

 

Webelieve that cash flows from operating activities, together with net proceedsfrom our IPO, should be sufficient for us to fund our current operations for atleast the next twelve months. If this proves insufficient, we intend to seekadditional financing in the credit or capital markets, although we may beunsuccessful in obtaining additional financing on acceptable terms or at all.

 

Ourbroker-dealer subsidiaries are subject to regulatory requirements intended toensure their respective general financial soundness and liquidity, whichrequire that they comply with certain minimum capital requirements. Theseregulations, which differ in the United States, the United Kingdom andCanada—the three countries in which our broker-dealer subsidiaries do business—generallyprohibit a broker-dealer subsidiary from repaying borrowings from us or ouraffiliates, paying cash dividends, making loans to us or our affiliates orotherwise entering into transactions that would result in a significantreduction in its regulatory net capital position without prior notification orapproval of its principal regulator. Our capital structure is designed toprovide each of our subsidiaries with capital and liquidity consistent with itsbusiness and regulatory requirements.

 

**Seasonality**

 

Ourbusiness experiences seasonal fluctuations, reflecting reduced trading activityduring summer months, particularly in August.

 

**Item 3.****Quantitative and Qualitative Disclosures About Market Risk**

 

We provided a discussion ofour market risk in Item 7A of our Annual Report on Form 10-K for the year endedDecember 31, 2004. For the three months ended March 31, 2005, therewas no substantive change in our market risk.

 

**Item 4.Controls and Procedures**

 

**Evaluation of Disclosure Controls and Procedures**

 

Asof the end of the period covered by this report, an evaluation was carried outunder the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Financial Officer, of the effectivenessof the design and operation of our disclosure controls and procedures. Basedupon that evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that the design and operation of these disclosure controls andprocedures were effective.  No significant changes were made in ourinternal controls or in other factors that could significantly

 

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affectthese controls subsequent to the date of their evaluation.

 

**PART II –Other Information**

 

**Item 1.Legal Proceedings**

 

Weprovided a discussion of material pending litigation matters relating to our companyand our Chairman and Chief Executive Officer in Item 3 of Part I of our AnnualReport on Form 10-K for the year ended December 31, 2004. For the threemonths ended March 31, 2005, there were no material developments withregard to the matters reported in our Annual Report for the year ended December 31,2004 and no other matters were reportable during the period.However, with respect to the *Nasdaq Litigation*, previously described in our Annual Reporton Form 10-K for the fiscal year ended December 31, 2004, on April 16, 2005,Judge Denise Cote of the Southern District Court of New York issued an ordersuspending the matter for nine months due to the fact that significant pendingcorporate transactions might affect the parties' interest in the case.

 

Inaddition to the matters described in our Annual Report for the year ended December 31,2004, from time to time we are involved in various legal proceedings arising inthe ordinary course of our business. We do not believe, based on currentlyavailable information, that the results of any of these proceedings will have amaterial adverse effect on our operating results or financial condition.

 

**Item 2. Unregistered Sales of Equity Securities and Use ofProceeds**

 

(a) Unregistered Sale ofEquity Securities

 

Between January 1, 2005and March 31, 2005, we granted: (i) options to purchase 192,943 shares of ourcommon stock at a purchase price of $19.30 per share to certain of our officers;(ii) 288,849 restricted stock units to certain of our officers and keyemployees; and (iii) 14,797 restricted stock units to our non-managementdirectors under our 2004 Stock Incentive Plan. These transactions were effected under Rule 701 of theSecurities Exchange Act of 1933, as amended, as transactions by an issuer undercompensatory benefit plans and contracts relating to compensation within theparameters required by Rule 701.

 

* (b) Use of Proceeds*

 

All of the net initial public offering proceedsremain invested in short-term marketable securities pending application of thefunds to general corporate purposes. There has been no material change in theplanned use of the initial public offering proceeds as described in our finalProspectus dated August 12, 2004 filed with the SEC pursuant toRule 424(b).

 

**Item 3. Defaults Upon Senior Securities.**

 

None.

 

**Item 4. Submission of Matters to a Vote of Security Holders.**

 

We did not submit any matters to stockholders tovote upon between January 1, 2005 and March 31, 2005.

 

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**Item 5.Other Information.**

 

Theaudit committee of our Board of Directors approved all of the non-auditservices performed by Ernst & Young LLP, our independent auditors, duringthe period covered by this report.

 

**Item 6.Exhibits**

 

**(a)  Exhibits**

 
| 2.1    |   | Exchange  Agreement, dated as of January 17, 2002, among Archipelago  Holdings, L.L.C., REDIBook ECN L.L.C. and the parties named therein.*                                                                                  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                   |
| 2.2    |   | Contribution  Agreement, dated as of November 12, 2003, between Archipelago  Holdings, L.L.C. and GAP Arca Holdings, Inc.*                                                                                              |
|   |   |                                                                                                                                                                                                                                   |
| 2.3    |   | Agreement  and Plan of Merger, dated as of February 27, 2004, between Archipelago  Holdings, L.L.C. and GAP Archa Holdings, Inc.*                                                                                       |
|   |   |                                                                                                                                                                                                                                   |
| 2.4    |   | Letter  Agreement, dated February 27, 2004, among GAP-W, L.L.C., Archipelago  Holdings, L.L.C. and GAP Archa Holdings, Inc.*                                                                                            |
|   |   |                                                                                                                                                                                                                                   |
| 2.5    |   | Contribution  Agreement, dated July 12, 2000, among Archipelago Holdings, L.L.C.,  Pacific Exchange, Inc. and PCX Equities, Inc.*                                                                                            |
|   |   |                                                                                                                                                                                                                                   |
| 2.6    |   | Agreement  and Plan of Merger, dated January 3, 2005, among Archipelago  Holdings, Inc., New Apple Acquisitions Corporation and PCX  Holdings, Inc.**                                                              |
|   |   |                                                                                                                                                                                                                                   |
| 2.7    |   | Agreement  and Plan of Merger dated as of April 20, 2005, by and among the New York  Stock Exchange, Inc., Archipelago Holdings, Inc., and such other parties that  become signatories thereto pursuant to the terms thereof. *** |
|   |   |                                                                                                                                                                                                                                   |
| 3.1    |   | Form  of Certificate of Incorporation of Archipelago Holdings, Inc.*                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                   |
| 3.2    |   | Form  of Bylaws of Archipelago Holdings, Inc.*                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                   |
| 3.3    |   | Ninth  Amended and Restated Limited Liability Company Agreement of Archipelago  Holdings, L.L.C.*                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                   |
| 3.4    |   | Amendment  No.1 to Ninth Amended and Restated Limited Liability Company Agreement of  Archipelago Holdings, L.L.C.*                                                                                                               |
|   |   |                                                                                                                                                                                                                                   |
| 4.1    |   | Specimen  Certificate of Common Stock.*                                                                                                                                                                                                |

 

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| 4.2    |   | Registration  Rights Agreement, dated November 12, 2003, among Archipelago  Holdings, L.L.C., General Atlantic Partners 77, L.P., GAP Coinvestment  Partners II, L.P., GapStar, L.L.C., GAPCO GmbH & Co. KG, GAP-W, L.L.C.,  GAP Archa Holdings,  Inc., and the Class A Members of the Archipelago  Holdings, L.L.C. and the affiliates of certain of such Class A Members.* |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.1   |   | Letter  Agreement between Goldman Sachs & Co. and Archipelago Holdings, Inc. **                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.2   |   | Annual  Director Compensation Agreement +                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.3   |   | Form  Employee Restricted Stock Unit Award Agreement + +                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.4   |   | Letter  Agreement between Goldman, Sachs & Co. and Archipelago Holdings, Inc. ***                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 31.1   |   | Rule  13a-14(a) Certification (CEO).                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 31.2   |   | Rule  13a-14(a) Certification (CFO).                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| 32.1   |   | Section 1350  Certifications.                                                                                                                                                                                                                                                                                                                                                                   |

 

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*                                         Incorporated by reference to thecorresponding Exhibit to the Registrant’s registration statement onForm S-1(No.333-113226).

 

**                                  Incorporated by reference to thecorresponding Exhibit to the Registrant’s Form 8-K filed with the SEC on January 4,2005.

 

***                           Incorporated by reference to thecorresponding Exhibit to the Registrant’s report on Form 8-K filed with the SECon April 26, 2005

 

+                                         Incorporatedby reference from Exhibit 10.1 to the Registrant’s Form 8-K filed withthe SEC on February 3, 2005.

 

++                                  Incorporatedby reference from Exhibit 10.1 to the Registrant’s Form 8-K filed withthe SEC on February 10, 2005.

 

 

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**Signature**

 

Pursuantto the requirements of the Securities Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized, on May 16, 2005.

 
|   | ARCHIPELAGO  HOLDINGS, INC. |
|--------|----------------------------------|
|   |                             |   |
|   |                             |   |
|   | By:                              | /s/  NELSON  CHAI |   |
|   | * *                         | Nelson  Chai*Chief Financial Officer* |

 

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