KCG HOLDINGS INC 
By JERSEY CITY, N.J., Nov. 12, 2013 /PRNewswire/ --KCG Holdings, Inc. (NYSE: KCG), the parent company formed as a result of the July 1, 2013 merger of Knight Capital Group, Inc. ("Knight") and GETCO Holding Company, LLC ("GETCO"), today announced a one-time, non-cash gain of $128.0 million in the third quarter of 2013 as a result of GETCO's investment in Knight. Prior to the merger, GETCO held the investment in Knight at fair value with gains recorded in other comprehensive income within equity. At acquisition date, GETCO reversed the cumulative gains in other comprehensive income and recognized all gains from the investment in the income statement. KCG's previously announced third quarter earnings did not reflect this accounting gain.
As a result of the inclusion of this one-time, non-cash gain, KCG reported net income of $226.8 million and diluted earnings per share of $1.98 for the three months ended September 30, 2013 in its Form 10-Q dated November 12, 2013, compared to net income of $98.9 million and diluted earnings per share of $0.86 as originally reported in the third quarter earnings press release dated October 30, 2013. The gain is included in investment income and other, net within total revenues. Please refer to the exhibits contained herein for revised financial schedules.
KCG also announced today that it has filed restated historical financial statements of GETCO. The restatements of GETCO's financial statements are for the years ended December 31, 2012, 2011 and 2010, the nine months ended September 30, 2012 and September 30, 2011, the three and six months ended June 30, 2013 and June 30, 2012, and the three months ended March 31, 2013 and March 31, 2012.
The restatements are due to errors in the presentation of GETCO members' equity, earnings per unit and cash flows as well as an accounting charge for certain non-cash, merger-related compensation. Accordingly, investors should no longer rely upon previously issued financial statements of GETCO for the relevant periods.
The restatement that related to the presentation of members' equity resulted from the misclassification of certain equity interests as GETCO members' equity. These interests were redeemable in certain circumstances outside the control of GETCO and have been reclassified as mezzanine equity. The correction impacted all relevant periods covered by GETCO historical results prior to the merger close and resulted in reclassifications to Redeemable preferred member's equity from members' equity of between $289.6 million and $338.0 million. This classification error did not result in any changes in reported net income or loss for any of the affected periods; however, the reclassification did result in the restatement of earnings allocated to common units for each such period and related earnings per unit disclosures.
The restatement that related to the presentation of cash flows resulted from the misclassification of cash flows between operating and financing activities related to unit award compensation and members' distributions. The correction resulted in increases in cash used in operating activities of $71.2 million for the nine months ended September 30, 2012, $9.8 million for the nine months ended September 30, 2011 and $12.8 million for the year ended 2011, with offsetting decreases in cash used in financing activities in each period.
The restatement that related to the reporting of certain non-cash compensation in the first half of 2013 resulted from the accounting treatment of an agreement by certain owners of GETCO units to accept a less favorable merger conversion ratio for their units than the ratio to which they were contractually entitled. The intended effect of the agreement increased the merger conversion ratio of other owners, which included GETCO employees and should have been classified as compensation expense. The correction resulted in the realization of a non-cash, merger-related compensation charge of $7.1 million for the three and six months ended June 30, 2013, which increased GETCO's net losses by an equivalent amount for the affected periods.
As a result of these restatements, KCG's management has concluded that there were material weaknesses in GETCO's financial statement preparation processes and the related disclosure controls for each of the affected periods.
With respect to the restatements, KCG is filing a Form 8-K today which contains restated consolidated financial statements for the affected periods. The KCG Form 10-Q being filed today includes KCG financial statements for the three and nine months ended September 30, 2013, which reflect the $128 million gain on investment.
To access the KCG Holdings, Inc. Form 10-Q and Form 8-K filings dated November 12, 2013, go to http://investors.kcg.com/phoenix.zhtml?c=105070&p=irol-sec.
About KCG
KCG is a leading independent securities firm offering clients a range of services designed to address trading needs across asset classes, product types and time zones. The firm combines advanced technology with exceptional client service across market making, agency execution and trading venues. KCG has multiple access points to trade global equities, fixed income, currencies and commodities via voice or automated execution. www.kcg.com
Certain statements contained herein may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are typically identified by words such as "believe," "expect," "anticipate," "intend," "target," "estimate," "continue," "positions," "prospects" or "potential," by future conditional verbs such as "will," "would," "should," "could" or "may," or by variations of such words or by similar expressions. These "forward-looking statements" are not historical facts and are based on current expectations, estimates and projections about KCG's industry, management beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Any forward-looking statement contained herein speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise. Accordingly, readers are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict including, without limitation, risks associated with: (i) the strategic combination of Knight Capital Group, Inc. ("Knight") and GETCO Holding Company, LLC ("GETCO"), including, among other things, (a) difficulties and delays in integrating the Knight and GETCO businesses or fully realizing cost savings and other benefits, (b) the inability to sustain revenue and earnings growth, and (c) customer and client reactions; (ii) the August 1, 2012 technology issue that resulted in Knight's broker-dealer subsidiary sending numerous erroneous orders in NYSE-listed and NYSE Arca securities into the market and the impact to Knight's capital structure and business as well as actions taken in response thereto and consequences thereof; (iii) the costs and risks associated with the sale of Knight's institutional fixed income sales and trading business, the pending sale of KCG's reverse mortgage origination and securitization business and the departure of the managers of KCG's listed derivatives group; (iv) the ability of KCG's broker-dealer subsidiary to recover all or a portion of the damages that are attributable to the manner in which NASDAQ OMX handled the Facebook IPO; (v) changes in market structure, legislative, regulatory or financial reporting rules, including the continuing legislative and regulatory scrutiny of high-frequency trading; (vi) past or future changes to organizational structure and management; (vii) KCG's ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by KCG's customers and potential customers; (viii) KCG's ability to keep up with technological changes; (ix) KCG's ability to effectively identify and manage market risk, operational risk, legal risk, liquidity risk, reputational risk, counterparty risk, international risk, regulatory risk, and compliance risk; (x) the cost and other effects of material contingencies, including litigation contingencies, and any adverse judicial, administrative or arbitral rulings or proceedings; and (xi) the effects of increased competition and KCG's ability to maintain and expand market share. The list above is not exhaustive. Readers should carefully review the risks and uncertainties disclosed in KCG's and Knight's reports with the SEC, including, without limitation, those detailed under "Certain Factors Affecting Results of Operations" in KCG's Quarterly Report on Form 10-Q for the period ended September 30, 2013, under "Risk Factors" in Knight's Annual Report on Form 10-K for the year-ended December 31, 2012 and the Current Report on Form 8-K filed by KCG on August 9, 2013, and in other reports or documents KCG files with, or furnishes to, the SEC from time to time.
CONTACTS
Sophie Sohn | Jonathan Mairs |
Communications & Marketing | Investor Relations |
312-931-2299 | 201-356-1529 |
media@kcg.com | jmairs@kcg.com |
KCG HOLDINGS, INC. | EXHIBIT 1 | |||||||||||||
CONSOLIDATED STATEMENTS OF OPERATIONS(1) | ||||||||||||||
(Unaudited) | ||||||||||||||
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||
(In thousands, except per share amounts) | ||||||||||||||
Revenues | ||||||||||||||
Trading revenues, net | $ | 230,471 | $ | 92,556 | $ | 415,495 | $ | 333,737 | ||||||
Commissions and fees | 109,079 | 25,542 | 164,391 | 79,487 | ||||||||||
Interest, net | (177) | (781) | (970) | (1,998) | ||||||||||
Investment income and other, net | 128,446 | 13,285 | 119,207 | 14,015 | ||||||||||
Total revenues | 467,819 | 130,602 | 698,123 | 425,241 | ||||||||||
Expenses | ||||||||||||||
Employee compensation and benefits | 129,631 | 31,875 | 236,983 | 111,395 | ||||||||||
Execution and clearance fees | 81,023 | 42,267 | 167,931 | 144,656 | ||||||||||
Communications and data processing | 44,046 | 21,681 | 86,040 | 67,380 | ||||||||||
Interest | 23,870 | 706 | 26,515 | 2,002 | ||||||||||
Depreciation and amortization | 20,091 | 7,574 | 36,004 | 27,180 | ||||||||||
Payments for order flow | 16,431 | 717 | 17,468 | 2,128 | ||||||||||
Professional fees | 9,077 | 2,575 | 38,928 | 7,690 | ||||||||||
Occupancy and equipment rentals | 8,898 | 3,240 | 15,454 | 8,865 | ||||||||||
Business development | 2,644 | 6 | 2,686 | 19 | ||||||||||
Writedown of assets and lease loss accrual | 936 | - | 4,248 | - | ||||||||||
Other | 11,318 | 5,349 | 30,028 | 19,002 | ||||||||||
Total expenses | 347,965 | 115,990 | 662,285 | 390,317 | ||||||||||
Income from continuing operations before income taxes | 119,854 | 14,612 | 35,838 | 34,924 | ||||||||||
Income tax (benefit) expense | (107,767) | 4,805 | (102,478) | 10,368 | ||||||||||
Income from continuing operations, net of tax | 227,621 | 9,807 | 138,316 | 24,556 | ||||||||||
Loss from discontinued operations, net of tax | (784) | - | (784) | - | ||||||||||
Net income | $ | 226,837 | $ | 9,807 | $ | 137,532 | $ | 24,556 | ||||||
Basic earnings per share from continuing operations | $ | 1.99 | $ | 0.21 | $ | 2.02 | $ | 0.49 | ||||||
Diluted earnings per share from continuing operations | $ | 1.98 | $ | 0.21 | $ | 2.01 | $ | 0.49 | ||||||
Basic loss per share from discontinued operations | $ | (0.01) | $ | - | $ | (0.01) | $ | - | ||||||
Diluted loss per share from discontinued operations | $ | (0.01) | $ | - | $ | (0.01) | $ | - | ||||||
Basic earnings per share | $ | 1.99 | $ | 0.21 | $ | 2.00 | $ | 0.49 | ||||||
Diluted earnings per share | $ | 1.98 | $ | 0.21 | $ | 2.00 | $ | 0.49 | ||||||
Shares used in computation of basic earnings (loss) per share | 114,113 | 46,411 | 68,632 | 49,619 | ||||||||||
Shares used in computation of diluted earnings (loss) per share | 114,773 | 46,411 | 68,855 | 49,619 | ||||||||||
(1) | Third quarter 2013 includes the results of KCG Holdings, Inc . Year to date 2013 includes three months of results of KCG Holdings, Inc. plus six months of GETCO Holding Company, LLC. All of 2012 reflect the results of GETCO Holding Company, LLC. Certain reclassifications have been made to the prior periods Consolidated Statements of Operations to conform to current presentation. |
KCG HOLDINGS, INC. | EXHIBIT 2 | |||||||
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION | ||||||||
(Unaudited) | ||||||||
September 30, 2013 | December 31, 2012(1) | |||||||
(Restated) | ||||||||
(In thousands) | ||||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 798,712 | $ | 427,631 | ||||
Cash and securities segregated under federal and other regulations | 216,442 | - | ||||||
Financial instruments owned, at fair value: | ||||||||
Equities | 2,156,466 | 378,933 | ||||||
Listed options | 288,227 | 92,305 | ||||||
Debt securities | 79,284 | 183,637 | ||||||
Total financial instruments owned, at fair value | 2,523,977 | 654,875 | ||||||
Collateralized agreements: | ||||||||
Securities borrowed | 1,370,921 | 52,261 | ||||||
Receivable from brokers, dealers and clearing organizations | 1,330,113 | 142,969 | ||||||
Fixed assets and leasehold improvements, | ||||||||
less accumulated depreciation and amortization | 161,865 | 83,341 | ||||||
Investments | 125,889 | 248,438 | ||||||
Goodwill | 18,398 | 4,645 | ||||||
Intangible assets, less accumulated amortization | 192,045 | 46,123 | ||||||
Deferred tax asset | 169,619 | 4,180 | ||||||
Assets within discontinued operations | 6,098,299 | - | ||||||
Other assets | 287,015 | 23,073 | ||||||
Total assets | $ | 13,293,295 | $ | 1,687,536 | ||||
LIABILITIES, REDEEMABLE PREFERRED MEMBER'S EQUITY AND EQUITY | ||||||||
Liabilities | ||||||||
Financial instruments sold, not yet purchased, at fair value: | ||||||||
Equities | $ | 1,848,728 | $ | 423,740 | ||||
Listed options | 229,722 | 69,757 | ||||||
Debt securities | 79,057 | 19,056 | ||||||
Other financial instruments | 5,431 | - | ||||||
Total financial instruments sold, not yet purchased, at fair value | 2,162,938 | 512,553 | ||||||
Collateralized financings: | ||||||||
Securities loaned | 543,451 | - | ||||||
Financial instruments sold under agreements to repurchase | 595,029 | - | ||||||
Total collateralized financings | 1,138,480 | - | ||||||
Payable to brokers, dealers and clearing organizations | 666,178 | 24,185 | ||||||
Payable to customers | 486,136 | - | ||||||
Accrued compensation expense | 130,158 | 27,728 | ||||||
Accrued expenses and other liabilities | 220,648 | 118,068 | ||||||
Capital lease obligations | 12,453 | 24,191 | ||||||
Liabilities within discontinued operations | 6,006,024 | - | ||||||
Short-term debt | 235,000 | - | ||||||
Long-term debt | 722,259 | 15,000 | ||||||
Total liabilities | 11,780,274 | 721,725 | ||||||
Redeemable preferred member's equity | - | 311,139 | ||||||
Equity | ||||||||
Members' equity | - | 654,672 | ||||||
Class A common stock | 1,235 | - | ||||||
Additional paid-in capital | 1,299,907 | - | ||||||
Retained earnings | 226,837 | - | ||||||
Treasury stock, at cost | (9,811) | - | ||||||
Accumulated other comprehensive loss | (5,147) | - | ||||||
Total equity | 1,513,021 | 654,672 | ||||||
Total liabilities, redeemable preferred member's equity and equity | $ | 13,293,295 | $ | 1,687,536 | ||||
(1) | GETCO Holding Company, LLC. - Certain reclassifications have been made to the prior period Consolidated Statement of Financial Condition to conform to current presentation. |
KCG HOLDINGS, INC. | EXHIBIT 3 | |||||||||||
PRE-TAX EARNINGS FROM CONTINUING OPERATIONS BY BUSINESS SEGMENT* | ||||||||||||
(In thousands) | ||||||||||||
(Unaudited) | ||||||||||||
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||
Market Making | ||||||||||||
Revenues | $ | 240,110 | $ | 107,672 | $ | 455,678 | $ | 383,203 | ||||
Expenses | 192,257 | 99,458 | 400,070 | 345,227 | ||||||||
Pre-tax earnings | 47,853 | 8,214 | 55,608 | 37,976 | ||||||||
Global Execution Services | ||||||||||||
Revenues | 91,366 | 9,258 | 113,701 | 27,248 | ||||||||
Expenses | 107,720 | 10,378 | 134,949 | 31,087 | ||||||||
Pre-tax loss | (16,354) | (1,120) | (21,248) | (3,839) | ||||||||
Corporate and Other | ||||||||||||
Revenues | 136,343 | 13,672 | 128,744 | 14,790 | ||||||||
Expenses | 47,988 | 6,154 | 127,266 | 14,003 | ||||||||
Pre-tax earnings | 88,355 | 7,518 | 1,478 | 787 | ||||||||
Consolidated | ||||||||||||
Revenues | 467,819 | 130,602 | 698,123 | 425,241 | ||||||||
Expenses | 347,965 | 115,990 | 662,285 | 390,317 | ||||||||
Pre-tax earnings | $ | 119,854 | $ | 14,612 | $ | 35,838 | $ | 34,924 | ||||
* Totals may not add due to rounding. | |
Third quarter 2013 includes the results of KCG Holdings, Inc. Year to date 2013 includes three months of results of KCG Holdings, Inc. plus six months of GETCO Holding Company, LLC. All of 2012 reflect the results of GETCO Holding Company, LLC. |
KCG HOLDINGS, INC. | EXHIBIT 4 | |||||||
Regulation G Reconciliation of Non-GAAP financial measures (Continuing operations)(1) | ||||||||
(in thousands) | ||||||||
Three months ended September 30, 2013 | Market Making | Global Execution Services | Corporate and Other | Consolidated | ||||
Reconciliation of GAAP Pre-Tax to Non-GAAP Pre-Tax: | ||||||||
GAAP Income (Loss) from continuing operations before income taxes | $ 47,853 | $ (16,354) | $ 88,355 | $ 119,854 | ||||
Gain on investment in Knight Capital Group, Inc. | - | - | (127,972) | (127,972) | ||||
Compensation and other expenses related to reduction in workforce | 2,309 | 15,132 | - | 17,441 | ||||
Professional and other fees related to Mergers and August 1st technology issue | - | - | 7,269 | 7,269 | ||||
Writedown of assets and lease loss accrual | 108 | - | 828 | 936 | ||||
Non GAAP Income (Loss) from continuing operations before income taxes | $ 50,270 | $ (1,222) | $ (31,520) | $ 17,528 | ||||
Nine months ended September 30, 2013 | Market Making | Global Execution Services | Corporate and Other | Consolidated | ||||
Reconciliation of GAAP Pre-Tax to Non-GAAP Pre-Tax: | ||||||||
GAAP Income (Loss) from continuing operations before income taxes | $ 55,608 | $ (21,248) | $ 1,478 | $ 35,838 | ||||
Gain on investment in Knight Capital Group, Inc. | - | - | (127,972) | (127,972) | ||||
Professional and other fees related to Mergers and August 1st technology issue | - | - | 44,398 | 44,398 | ||||
Compensation and other expenses related to reduction in workforce | 6,264 | 15,997 | - | 22,261 | ||||
Unit acceleration due to Mergers | - | - | 22,031 | 22,031 | ||||
Strategic asset impairment | - | - | 9,184 | 9,184 | ||||
Writedown of assets and lease loss accrual | 108 | - | 4,525 | 4,633 | ||||
Non GAAP Income (Loss) from continuing operations before income taxes | $ 61,980 | $ (5,251) | $ (46,356) | $ 10,373 | ||||
Three months ended September 30, 2012 | Market Making | Global Execution Services | Corporate and Other | Consolidated | ||||
Reconciliation of GAAP Pre-Tax to Non-GAAP Pre-Tax: | ||||||||
GAAP Income (Loss) from continuing operations before income taxes | $ 8,214 | $ (1,120) | $ 7,518 | $ 14,612 | ||||
Investment gain | - | - | (11,354) | (11,354) | ||||
Non GAAP Income (Loss) from continuing operations before income taxes | $ 8,214 | $ (1,120) | $ (3,836) | $ 3,258 | ||||
Nine months ended September 30, 2012 | Market Making | Global Execution Services | Corporate and Other | Consolidated | ||||
Reconciliation of GAAP Pre-Tax to Non-GAAP Pre-Tax: | ||||||||
GAAP Income (Loss) from continuing operations before income taxes | $ 37,976 | $ (3,839) | $ 787 | $ 34,924 | ||||
Investment gain | - | - | (11,354) | (11,354) | ||||
Non GAAP Income (Loss) from continuing operations before income taxes | $ 37,976 | $ (3,839) | $ (10,567) | $ 23,570 | ||||
* Totals may not add due to rounding | |
(1) | Third quarter 2013 includes the results of KCG Holdings, Inc. Year to date 2013 includes three months of results of KCG Holdings, Inc. plus six months of GETCO Holding Company, LLC. All of 2012 reflect the results of GETCO Holding Company, LLC. |
SOURCE KCG Holdings, Inc.
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