Press Release

KCG Holdings Revises Previously Issued Third Quarter Earnings Information To Reflect $128 Million Non-Cash Accounting Gain From GETCO's Investment In Knight
KCG Holdings also announces restatements of historical financial statements for GETCO

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.