As filed with the Securities and Exchange Commission on June 5, 1996.
Registration No.
--------
===========================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-1
Registration Statement Under
The Securities Act of 1933
--------------------
GKN HOLDING CORP.
(Exact Name of Registrant as Specified in its Charter)
Delaware 6211 13-3414302
(State of Incorporation) (Primary Standard Industrial (IRS Employer I.D. No.)
Classification Code Number)
61 Broadway
New York, New York 10006
(212) 509-3800
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
DAVID M. NUSSBAUM
Chairman of the Board
GKN Holding Corp.
61 Broadway
New York, New York 10006
212-509-3800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
DAVID ALAN MILLER, ESQ.
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
(212) 818-8800
Fax: (212) 682-2320
-------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended ("Act"), check the following box. [X]
Shares of Common Stock have also been registered on Registration Statement
no. 33-80224 on Form S-1 pursuant to Rule 429 of the Act.
Page _____ of ______
Exhibit Index Begins on Page _____
<PAGE>
(Cover Page Continued)
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Title of each Maximum Maximum
Class of Amount Offering Aggregate
Security Being Being Price Per Offering Amount of
Registered Registered Share(1) Price(1) Registration Fee
========== ============ ========== ======== ================
Shares of 1,495,000(3) Shares $8.00 $11,960,000 $4,124.14
Common
Stock(2)
Total $11,960,000 $4,124.14
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) and (o).
(2) Includes 375,000 Shares which may be issued upon exercise of a 45-day
option granted to the Underwriters to cover overallotments, if any.
See "Underwriting."
(3) By Registration Statement No. 33-80224 on Form S-1, the Registrant
registered 1,380,000 Shares and paid a registration fee based upon the
amount that was then believed to be the maximum offering price per
share, or $6.00, for a total registration fee of $3,128.27 ($2,855.17
for the Shares and $273.10 for Shares underlying Underwriter's Warrants
which are not being registered hereby). The Registrant is hereby
registering an additional 1,495,000 Shares at an initial public offering
price ranging from $6.00 to $8.00. Pursuant to Rule 429 of the Act, this
Registration Statement is also deemed to cover the Shares previously
covered by Registration Statement No. 33-80224 on Form S-1.
--------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
ii
<PAGE>
GKN HOLDING CORP.
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
Showing Location in Prospectus of Information
Required by Items of Form S-1
Item Number and Heading in
Form S-1 Registration Statement Caption or Location in Prospectus
------------------------------- -------------------------------------
1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus ..... Forepart of the Registration
Statement; Outside Front Cover
Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of
Prospectus . . . . . . . . . . Inside Front and Outside Back
Cover Pages of Prospectus
3. Summary Information, Risk
Factors and Ratio of
Earnings to Fixed Charges . . . Prospectus Summary; Investment
Considerations
4. Use of Proceeds . . . . . . . . Prospectus Summary; Use of
Proceeds
5. Determination of Offering Price Investment Considerations;
Underwriting
6. Dilution . . . . . . . . . . . Investment Considerations;
Dilution
7. Selling Securityholders . . . . Not Applicable
8. Plan of Distribution . . . . . Underwriting
9. Description of Securities to be
Registered . . . . . . . . . . Description of Capital Stock;
Dividend Policy
10. Interests of Named Experts and
Counsel . . . . . . . . . . . . Legal Matters; Experts
11. Information with Respect to the
Registrant . . . . . . . . . . Prospectus Summary; The
Company; Investment
Considerations; Use of
Proceeds; Dividend Policy;
Dilution; Capitalization;
Selected Financial Data;
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations; Business;
Management; Principal
Stockholders; Certain
Transactions; Description of
Securities; Shares Eligible
for Future Sale; Underwriting;
Legal Matters; Experts; Index
to Financial Statements
12. Disclosure of Commission
Position of Indemnification
for Securities Act
Liabilities. . . . . . . . . . Not Applicable
iii
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 5, 1996
PROSPECTUS
GKN HOLDING CORP.
2,500,000 Shares of Common Stock
Prior to this Offering, there has been no public market for the Common Stock of
GKN Holding Corp. (the "Company") and there can be no assurance that any such
market will develop. It is anticipated that the Common Stock will be quoted on
the Nasdaq National Market under the symbol "GKNS" upon issuance. It is
currently anticipated that the initial public offering price of the shares will
be between $6.00 and $8.00. For information regarding the factors considered in
determining the initial public offering price of the Common Stock, see
"Underwriting."
SEE "INVESTMENT CONSIDERATIONS" ON PAGE 6 FOR A DISCUSSION OF CERTAIN RISK
FACTORS WHICH SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting
Price Discounts Proceeds
to and to
Public Commissions Company(1)
Per Share . . . . . . . $ $_____ $_____
Total(2) . . . . . . . $ $_____ $_____
(1) Before deducting expenses payable by the Company, estimated at $__________.
(2)The Company has granted the Underwriters an option, exercisable within 45
days from the date of this Prospectus, to purchase up to 375,000 additional
shares on the same terms set forth above solely to cover over-allotments, if
any. If such over-allotment option is exercised in full, the total Price to
Public,Underwriting Discounts and Commissions and Proceeds to Company will be
$__________, $______________ and $____________, respectively. See
"Underwriting."
The shares of Common Stock are offered, subject to prior sale, when, as and if
delivered to and accepted by the Underwriters and subject to the approval of
certain legal matters by counsel and certain other conditions. The Underwriters
reserve the right to withdraw, cancel or modify this offering and to reject any
order in whole or in part. It is expected that delivery of certificates will be
made against payment therefor, at the offices of __________________________ in
New York City on or about _________, 1996.
GKN SECURITIES CORP.
____________________, 1996
THIS REGISTRATION STATEMENT AND THE INFORMATION CONTAINED HEREIN ARE SUBJECT TO
COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES
HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY AN OFFER TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. UNDER NO CIRCUMSTANCES SHALL THIS
REGISTRATION STATEMENT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER
TO BUY NOR SHALL THERE BY ANY SALE OF THESE SECURITIES IN ANY JURISDICTION IN
WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION
OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH JURISDICTION.
<PAGE>
-------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON NASDAQ, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
-------------------------
FURTHER INFORMATION
The Company intends to furnish to its stockholders annual reports containing
audited financial statements, quarterly reports containing unaudited
financial information and such other periodic reports as the Company may
determine to be appropriate or as may be required by law.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
financial statements (including the notes thereto) appearing elsewhere in this
Prospectus.
The Company
GKN Holding Corp.(the "Company") is primarily engaged in securities
brokerage, securities trading and investment banking through GKN Securities
Corp. ("GKN"), its principal operating subsidiary. GKN is a full service
securities brokerage and investment banking firm which is a registered
broker-dealer with the Securities and Exchange Commission ("Commission"), in 50
states , the District of Columbia and Puerto Rico and a member firm of the
National Association of Securities Dealers, Inc. ("NASD"). GKN's principal
office is located in New York City, New York and its branch offices are located
in Great Neck, New York, Boca Raton, Florida, Miami, Florida, and Stamford,
Connecticut.
The Company began operations in 1987 following the October market decline,
at which time the founders perceived an opportunity for the creation of a high
quality investment bank serving emerging growth and small and micro
capitalization corporate clients and investors. From its inception, the
Company's plan has been to develop a quality firm serving this market niche.
Since October 1990, when GKN managed its first underwriting, GKN has acted as
managing or co-managing underwriter in a total of 40 public offerings, raising
approximately $395 million. GKN also regularly participates as a selling group
member or participating underwriter in public offerings managed by other
underwriters, including national and regional firms. Thirteen of the offerings
managed or co-managed by GKN (raising approximately $170 million) were for
Specified Purpose Acquisition Companies(R) ("SPAC(R)"), a new publicly-traded
financing vehicle developed and introduced by GKN in 1993. A SPAC combines the
characteristics of a traditional acquisition or buyout fund and a more liquid,
publicly traded industry-specific investment vehicle. The Company believes that
the number and dollar amount of GKN's underwritings and the introduction of
SPACs have contributed significantly to increased public and industry awareness
of the Company and has resulted in increased demand for GKN's investment banking
services. See "Business - Investment Banking Activities."
The Company has grown significantly over the last five years, primarily
through increasing the size of its sales force, but more recently by acquisition
and expansion into new areas of business. In March 1995, GKN Fund Management,
Inc., a wholly-owned subsidiary of the Company, entered the money management
business by becoming the general partner and administrator of Kaleidoscope
Partners, L.P., a "fund of funds" with approximately $8.1 million in assets at
April 30, 1996. In November 1995, the Company acquired all of the outstanding
stock of Shochet Securities, Inc. ("Shochet"), a full-service discount brokerage
firm with four branches operating in Southern Florida. In February 1996, GKN
Securities AG ("GKN AG"), a wholly-owned subsidiary of the Company, commenced
operations in Zurich, Switzerland, distributing securities and providing
brokerage services to European institutional money managers.
As of April 30, 1996, the Company, through its three brokerage
subsidiaries, employed 260 registered representatives, serving primarily
retail and, to a lesser extent, institutional customers, representing more
than 54,000 active accounts.
The Company was incorporated under the laws of the State of Delaware on
January 30, 1987. GKN was incorporated under the laws of the State of New York
on May 31, 1985. The Company and GKN maintain their principal offices at 61
Broadway, New York, New York 10006, and their telephone number is (212)
509-3800.
3
<PAGE>
The Offering
Common Stock Offered ............................... 2,500,000 Shares
Common Stock Outstanding Prior to the
Offering.......................................... 5,559,125 Shares
Common Stock to be Outstanding After the
Offering.......................................... 8,059,125 Shares
Proposed Nasdaq National Market Symbol.............. GKNS
Use of Proceeds
The Company intends to apply the net proceeds of this Offering to expand
its existing business by: (i) increasing GKN's equity capital to permit it to
underwrite larger offerings and increase its principal trading and market making
activities; (ii) expanding GKN's and Shochet's retail and institutional sales
forces; (iii) enhancing GKN's investment banking and research capabilities; (iv)
expanding the Company's money management operations and commencing merchant
banking activities; and (v) expanding the Company's international operations.
See "Use of Proceeds."
4
<PAGE>
Summary Financial Data
The summary financial information set forth below is derived from the
financial statements appearing elsewhere in this Prospectus. This
information should be read in conjunction with such financial statements,
including the notes thereto.
<TABLE>
<CAPTION>
Statement of Operations Data:
Year Ended January 31, Three Months Ended April 30,
---------------------------------------- ----------------------------
1996 1995 1994 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total revenues . . . . $43,019,000 $32,410,000 $32,956,000 $18,444,000 $7,157,000
Total expenses . . . . 36,732,000 31,516,000 25,534,000 14,449,000 7,526,000
Income (loss) before
provision for income
taxes . . . . . . . . 6,287,000 894,000 7,422,000 3,995,000 (369,000)
Net income (loss) . . . $3,469,000 $381,000 $4,006,000 $2,246,000 $(256,000)
Primary earnings
(loss) per share(1) . $0.61 $0.07 $0.72 $0.40 $(0.04)
Primary weighted
average number of
shares outstanding(1). 5,729,000 5,695,000 5,530,000 5,638,000 5,784,000
Other Financial Data:
Ratio of total
assets to
stockholders'
equity . . . . . . 1.89 1.37 1.43 1.95 1.35
Pre-tax return on
average equity(2) . 47.4% 7.8% 80.0% 100.6% (12.7)%
Book value per common
share outstanding . $3.02 $2.30 $2.27 $3.42 $2.25
Balance Sheet Data:
</TABLE>
April 30, 1996
---------------
Actual As Adjusted(3)
------ --------------
Total assets . . . . . . . $33,117,000 $46,117,000
Total liabilities
(excluding subordinated
debt) . . . . . . . . . . 15,348,000 15,348,000
Subordinated debt . . . . 868,000 868,000
Total stockholders' equity $16,901,000 $29,901,000
_____________________________
(1) Fully diluted earnings per share and fully diluted average number of
shares outstanding are not materially different from the primary numbers
indicated above.
(2)Quarterly information is annualized.
(3)Gives effect to the sale of the shares of Common Stock offered hereby
("Shares") at an assumed price of $6.00 per Share and the application of net
proceeds therefrom .
Unless otherwise indicated, the information in this Prospectus does not give
effect to the exercise of the Underwriters' over-allotment option and does
not include (i) 5,000,000 shares of Common Stock reserved for issuance under
the Company's 1991 Employee Incentive Plan ("1991 Plan"), of which options
to purchase 874,138 shares of Common Stock have been granted and are
outstanding as of May 31, 1996; or (ii) 125,000 shares of Common Stock
issuable upon exercise of options and warrants issued outside of the 1991
Plan.
5
<PAGE>
INVESTMENT CONSIDERATIONS
The Shares offered hereby involve risk. Prospective purchasers of the
Shares should consider carefully the risk factors set forth below as well as the
other information set forth in this Prospectus.
Industry Factors; Economic and Market Conditions
The securities business is, by its nature, subject to various risks,
particularly in volatile or illiquid markets, including the risk of losses
resulting from the underwriting or ownership of securities, customer fraud,
employee errors and misconduct, failures in connection with the processing of
securities transactions and litigation. The Company's business and its
profitability are affected by many factors, including the volatility and price
level of the securities markets; the volume, size and timing of securities
transactions; the demand for investment banking services; the level and
volatility of interest rates; the availability of credit; legislation affecting
the business and financial communities; and the economy in general. Markets
characterized by low trading volumes and depressed prices generally result in
reduced commissions and investment banking revenues as well as losses from
declines in the market value of securities positions. Moreover, since a portion
of the Company's revenues are derived from underwriting the initial public
offerings ("IPOs") of companies, any decline in the general IPO market could
have a material adverse effect on the operations of the Company. See "Business
- - Brokerage and Distribution Activities," "- Investment Banking Activities" and
"- Principal Transactions."
Smaller Capitalization Companies
The Company's business is focused on the underwriting, brokerage and
trading of securities of smaller capitalization companies, a segment of the
securities industry which may be subject to greater risks than the securities
industry as a whole and, consequently, may be marketable to only a limited
segment of the investing public. The Company believes that certain smaller
capitalization companies have significant potential for growth, although such
companies generally have limited product lines, markets, market shares and
financial resources and their securities may trade less frequently and in more
limited volume than those of more established companies. Additionally, in recent
years, the stock market has experienced a high degree of price and volume
volatility for the securities of many smaller capitalization companies. In
particular, small capitalization companies that trade in the over-the-counter
markets have experienced wide price fluctuations not necessarily related to the
operating performance of such companies. See " Business - Brokerage and
Distribution Activities," "- Investment Banking Activities" and " - Principal
Transactions."
Investment Banking
The Company's investment banking activities subject the Company's capital
to certain risks. Such risks include market, credit and liquidity risks, which
risks arise primarily when underwritten securities cannot be resold, for any
reason, at anticipated price levels. Further, under applicable securities laws
and court decisions with respect to underwriters' liability and limitations on
indemnification by issuers, an underwriter may be exposed to substantial
securities liability arising out of public and private offerings of equity and
debt instruments. See "Business - Legal Proceedings."
Principal Transactions
As a market maker, the Company uses its capital to maintain substantial
inventories of long and/or short positions in securities in order to engage in
principal transactions with customers as well as with other broker-dealers.
These securities are marked to market with resulting unrealized gains and losses
reported as revenue from principal transactions. The maintenance of such
positions exposes the Company to the possibility of significant losses when
market prices of the securities comprising such positions change. See " Business
- -Principal Transactions."
6
<PAGE>
Investment Account
The Company maintains an investment account in which securities are held
for potential long-term appreciation. Securities in this account consist
principally of common stock and warrants and rights to purchase same, most of
which are restricted and non-marketable for varying periods of time. As required
by generally accepted accounting principles for broker-dealers, these securities
are marked to market with resulting unrealized gains and losses being reported
as revenue from the investment account. Values of the securities in the
investment account are volatile. Fluctuations due to general market conditions,
the fundamentals of the issuer of such securities, or otherwise, may have a
material effect on the Company's earnings. The recent increase in the value of
the securities in the investment account represented a substantial portion of
the Company's earnings for the year ended January 31, 1996 and quarter ended
April 30, 1996. See "Business - Principal Transactions."
Government Regulation; Net Capital Requirements
The Company's business, and the securities industry generally, are subject
to extensive regulation at both the federal and state levels. In addition,
self-regulatory organizations, such as the NASD, require strict compliance with
their rules and regulations. Among other things, these regulatory authorities
impose restrictions on sales methods, trading practices, use and safekeeping of
customer funds and securities, record keeping and the conduct of principals and
employees. The extensive regulatory framework applicable to broker-dealers, the
purpose of which is to protect customers and the integrity of the securities
markets, imposes significant compliance burdens on the Company. Failure to
comply with any of the laws, rules or regulations of any independent, state or
federal regulatory authority could result in a fine, injunction, suspension or
expulsion from the industry, which could have a material adverse impact upon the
Company. The Commission and the NASD also have stringent provisions with respect
to net capital requirements applicable to the operation of securities firms. A
significant operating loss or any charge against the net capital of the Company
could adversely affect its ability to operate, expand or, depending upon the
magnitude of the loss or charge, maintain its present level of business.
Furthermore, amendments to existing statutes and regulations or the adoption of
new statutes and regulations could require the Company to alter its methods of
operation at costs which could be substantial. See " Business - Government
Regulation," "- Net Capital Requirements" and "- Legal Proceedings."
Credit Risks
The Company's brokerage subsidiaries clear all transactions for their
customers on a fully disclosed basis with their clearing agent, which carries
and clears all customer securities accounts. The clearing firm also lends funds
to customers of the Company's brokerage subsidiaries through the use of margin
credit. These loans are made to customers on a secured basis, with the clearing
firm maintaining collateral in the form of saleable securities, cash or cash
equivalents. Pursuant to the terms of the agreement with the clearing agent, in
the event that customers fail to pay for their purchases, to supply the
securities that they have sold, or to repay funds they have borrowed, and the
clearing agent satisfies customer obligations, the Company's brokerage
subsidiaries would be obligated to indemnify the clearing agent for any
resulting losses. See " Business - Clearing Agent."
Legal Proceedings
Many aspects of the Company's business involve substantial risks of
potential liability and regulatory enforcement by state and federal regulators.
In recent years, there has been an increasing incidence of litigation involving
participants in the securities industry. Underwriters and agents are subject to
substantial potential liability for material misstatements and omissions in
prospectuses and other communications with respect to underwritten offerings of
securities. Claims by dissatisfied customers for fraud, unauthorized trading,
churning, mismanagement and breach of fiduciary duty are periodically made
against broker-dealers. GKN is the subject of an investigation by the
Securities and Exchange Commission arising primarily from certain sales
practices of GKN's registered representatives in 1991 and 1992. GKN is also the
subject of an investigation by the NASD staff arising primarily from mark-ups
and mark-downs taken on customer transactions in warrants of certain issuers
whose offerings were underwritten by GKN. There can be no assurance that any
such proceedings will not have a material adverse legal or economic effect on
the Company. Moreover, as a result of increased publicity
7
<PAGE>
regarding legal proceedings against broker-dealers and the resulting heightened
public awareness of such matters, it is possible that certain legal proceedings
which can be settled or otherwise disposed of without a material adverse
economic effect on the Company, could generate adverse publicity which in turn
could materially adversely affect the Company's operations. See " Business -
Legal Proceedings."
Current and Potential Reforms in the Nasdaq Market
The Nasdaq market has come under intense scrutiny in the media and
political arenas during the past few years and has been the subject of SEC
investigations into its operations. Concerns have been raised with respect to
the size of the spreads between the price paid by investors purchasing
Nasdaq-listed securities and the dealers who process the transactions. Concerns
also have been raised with respect to whether Nasdaq's listing requirements are
sufficiently stringent and whether the National Association of Securities
Dealers, Inc. ("NASD"), the trade organization controlling the Nasdaq market,
carefully polices Nasdaq-listed companies. In response, the NASD has begun to
boost its internal compliance and monitoring programs, including establishing a
new separate regulatory unit (NASDR). More specifically, the NASD
has been hiring numerous new enforcement aides to better monitor trading
activities among dealers and to scrutinize companies' compliance with applicable
listing standards, and heightening its overall monitoring of smaller
capitalization companies. Additionally, Nasdaq is in the process of developing
an electronic audit system, expected to be in place by 1997, that will enable
it to detect possible price manipulation and front running by brokerage firms
almost instantaneously. Nasdaq is also currently evaluating the thorough
revision of its listing standards for inclusion on the Nasdaq Market to
possibly make such requirements more stringent.
The effects of current and proposed Nasdaq reform on the operations of
brokerage firms, especially those specializing in the securities of smaller
capitalization companies, cannot be fully anticipated. The cost of compliance
with any new rules, regulations and procedures instituted by the NASD could be
significant. Additionally, the implementation of stricter standards for initial
and continued inclusion of companies on Nasdaq could adversely affect the
prospects of smaller capitalization companies, including those typically
underwritten by GKN, the stock performance of such companies, and the liquidity
of investors' investments in such companies. Increased compliance costs or the
inability to attain or maintain the listing of underwriting clients on the
Nasdaq system, or a combination thereof, could adversely affect the financial
performance of the Company.
International Operations
The Company has established a subsidiary office in Zurich, Switzerland,
operating through GKN AG, to facilitate the provision of the Company's financial
services and products in Europe. Although the Company attempts to structure its
international sales in dollar-denominated transactions only, certain
transactions may be denominated in the local currency. Accordingly, the
Company's foreign revenues may be disrupted by currency fluctuations or other
events beyond the Company's control, including political or regulatory changes.
The Company's Swiss branch is also subject to local rules and regulations which
can substantially affect the profitability or ability of the Company to operate
internationally. These statutes and regulations could have the effect of
delaying the introduction of new services or products to European customers, and
increase the cost of the Company's operations in Europe.
Competition
The Company encounters intense competition in all aspects of the securities
business and competes directly with other securities firms, a significant number
of which have greater capital and other resources than the Company. In addition
to competition from firms currently in the securities business, recently there
has been increasing competition from other sources, such as commercial banks and
insurance companies offering financial services, and from other investment
alternatives. See " Business - Competition."
8
<PAGE>
Potential Conflicts Caused by Self-Underwriting; Need for Qualified Independent
Underwriter
__________________________ and GKN (which is a wholly-owned subsidiary of
the Company), are acting as Underwriters of this Offering. As a wholly-owned
subsidiary of the Company, GKN's role as an Underwriter may involve certain
conflicts of interest. Pursuant to the by-laws of the NASD, the Shares are being
offered at a price no higher than that recommended by _____________________,
which, in addition to being an Underwriter of this Offering, is also acting as a
"qualified independent underwriter." Although _____________________ has
participated in the preparation of the Registration Statement of which this
Prospectus forms a part and is required to exercise the usual standards of " due
diligence" with respect thereto, there can be no assurance that certain
conflicts will not arise with respect to this Offering, or if conflicts do
arise, that they will be resolved in a manner favorable to investors. See "
Underwriting."
No Prior Public Market for and Possible Price Volatility of the Shares;
Limitations on Market Making Abilities
Prior to this Offering, there has been no public trading market for the
Shares and there is no assurance that an active public market for the Shares
will develop or, if developed, that it will continue after the Offering. In the
absence of an active public trading market, an investor may be unable to
liquidate his investment. The trading prices of the Shares could be subject to
wide fluctuations in response to quarterly variations in operating results,
announcements of material business events by the Company or its competitors and
other events or factors. Moreover, due to regulatory stances of both the
Commission and the NASD relating to the circumstances under which a company may
engage in market making transactions in its own securities, GKN will not be
able, in the absence of a current market making prospectus, to engage in trading
or market making activities relating to the Shares following consummation of
this Offering. GKN has no present intention of maintaining a current market
making prospectus. The Underwriters believe that there will be sufficient
additional market makers to sustain an orderly and liquid market for the Shares.
No firms, however, are under any obligation to make a market in the Shares and
any firm which commences market making activities may cease such activities at
any time. Further, other rules, including those relating to the use of " insider
information," may prevent GKN's registered representatives from recommending the
Shares to its customers. To the extent that GKN is unable to make a market in,
or recommendations regarding, the Shares following this Offering, the ability of
investors to sell the Shares in the secondary market may be limited and the
price of the Shares may be adversely affected. See " Underwriting."
Recent and Proposed Expansion
The Company recently expanded through the acquisition of Shochet and the
opening of GKN AG's office in Zurich, Switzerland. Although Shochet has been an
established business for over 16 years, there can be no assurance that the
business of Shochet will be successfully integrated with that of the Company.
GKN AG's business commenced in February 1996. Accordingly, GKN AG has only a
limited operating history upon which an evaluation of future performance can be
made. GKN AG's prospects must be considered in light of the risks, expenses,
delays and difficulties frequently encountered in the establishment of a new
business in an industry characterized by intense competition. See "Business -
Brokerage and Distribution."
The Company intends to apply a portion of the net proceeds of this Offering
to further expand its operations. There can be no assurance that the Company
will be able to expand its operations successfully. Moreover, the proposed
expansion of the Company's operations may materially increase the Company's
operating expenses and could adversely affect the Company's profits.
The Company may seek to expand its operations by acquiring suitable
broker-dealers, research and/or trading firms or other complementary businesses,
or by establishing or acquiring additional branch offices. As of the date of
this Prospectus, the Company has no agreements, understandings or commitments
and is not engaged in any negotiations relating to potential acquisitions. There
can be no assurance that the Company will effect any acquisitions or that the
Company will be able to successfully integrate into its operations any acquired
business or branch office.
9
<PAGE>
Dependence on Key Personnel
For the foreseeable future, the Company will place substantial reliance
upon the personal efforts and abilities of David M. Nussbaum, Chairman of the
Board of the Company and GKN, Roger N. Gladstone, President of the Company and
GKN, and Peter R. Kent, Chief Operating and Financial Officer of the Company and
GKN. The loss of the services of any of them likely would have a material
adverse effect on the business, operations, revenues and/or prospects of the
Company. The success of the Company is also dependent upon its ability to retain
and hire additional highly skilled personnel. Competition among broker-dealers
for experienced personnel is intense. There can be no assurance that the Company
will be able to retain such personnel or hire and retain additional qualified
and skilled personnel. See " Business - Competition" and " Management."
Control by Principals
David M. Nussbaum, Roger N. Gladstone and Robert Gladstone will
beneficially own approximately 36% of the outstanding shares of Common Stock
immediately after this Offering (assuming all options held by them are exercised
and no other options or warrants are exercised) and, accordingly, will have
significant influence over the outcome of all matters submitted to the
stockholders for approval, including the election of directors of the Company.
See " Management" and " Principal Stockholders."
Authorization and Discretionary Issuance of Preferred Stock
The Company's Certificate of Incorporation authorizes the issuance of
"blank check" preferred stock with such designations, rights and preferences as
may be determined from time to time by the Board of Directors. Accordingly, the
Board of Directors is empowered, without stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
that could adversely affect the voting power or other rights of the holders of
the Company's Common Stock. In the event of issuance, the preferred stock could
be utilized, under certain circumstances, as a method of discouraging, delaying
or preventing a change in control of the Company, which could have the effect of
discouraging bids for the Company and thereby prevent stockholders from
receiving the maximum value for their shares. Although the Company has no
present intention to issue any shares of its preferred stock, there can be no
assurance that the Company will not do so in the future. See "Description of
Capital Stock - Preferred Stock."
Shares Eligible for Future Sale
All of the shares of Common Stock outstanding prior to the date of this
Prospectus are "restricted securities," as that term is defined under Rule 144
promulgated under the Securities Act of 1933, as amended (the "Act").
Substantially all of the shares outstanding prior to this Offering will be
available for resale in the public market under Rule 144 commencing on the date
of this Prospectus (of which _____________ shares are subject to ______-month
lock-up agreements). See " Description of Capital Stock - Shares Eligible for
Future Sale."
Outstanding Options
As of the date of this Prospectus, the Company has outstanding options to
purchase 874,138 shares of Common Stock at an average exercise price of $4.64
per share, of which options to purchase 132,222 shares of Common Stock are
presently exercisable, options to purchase an additional 226,728 shares of
Common Stock will become exercisable during the balance of 1996 and 238,346 will
become exercisable during 1997. To the extent that such options are exercised,
dilution to the interests of the Company's stockholders will occur. Moreover,
the terms upon which the Company will be able to obtain additional equity
capital may be adversely affected since the holders of the outstanding options
can be expected to exercise them, to the extent they are able, at a time when
the Company would, in all likelihood, be able to obtain any needed capital on
terms more favorable to the Company than those provided in the options. See "
Management - Executive Compensation -1991 Employee Incentive Plan."
10
<PAGE>
No Dividends
To date, the Company has not paid any cash dividends on its Common Stock
and does not expect to declare or pay any cash dividends in the foreseeable
future. The Company intends to retain all earnings in the foreseeable future for
the Company's continued growth. Moreover, the Company's ability to pay dividends
in the future may be restricted by its brokerage subsidiaries' obligations to
comply with the net capital rules applicable to broker-dealers. See " Dividend
Policy" and " Business - Net Capital Requirements."
Dilution
This Offering involves immediate and substantial dilution of $2.49 per
share, or 41.5%, to investors because the net tangible book value per share of
Common Stock of the Company after completion of this Offering will be
substantially less than the per-share offering price, assuming a $6.00 per share
offering price. See " Dilution."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Shares offered hereby,
assuming a $6.00 per share offering price, are estimated to be $13,000,000
($15,025,000 if the Underwriters' over-allotment option is exercised in full).
The Company expects to use the net proceeds principally to expand its existing
business , approximately as follows: (i) $4,000,000 to increase GKN's equity
capital to permit it to underwrite larger offerings of securities and increase
its principal trading and market making activities; (ii) $3,000,000 to expand
GKN's retail and institutional sales forces and Shochet's retail sales force;
(iii) $2,000,000 to expand GKN's investment banking and research capabilities;
(iv) $2,000,000 to expand the Company's money management operations and commence
merchant banking activities; and (v) $1,000,000 to expand the Company's
international operations. The balance of $1,000,000 of the net proceeds of this
Offering will be used by the Company for working capital and general corporate
purposes of the Company and its subsidiaries. If the Underwriters exercise their
over-allotment option in full, the Company will realize additional net proceeds
of $2,025,000, which will be added to the Company's working capital.
The Company may seek to expand its operations by acquiring suitable
broker-dealers, research and/or trading firms or other complementary businesses,
or by establishing or acquiring additional branch offices. As of the date of
this Prospectus, the Company has no agreements, understandings or commitments
and is not engaged in any negotiations relating to potential acquisitions. There
can be no assurance that the Company will effect any acquisitions or that the
Company will be able to successfully integrate into its operations any acquired
business or branch office.
The allocation of net proceeds of this Offering represents the Company's
best estimates based upon its current plans and certain assumptions regarding
industry and general economic conditions and the Company's future revenues and
expenditures. If any of these factors change, the Company may find it necessary
or advisable to reallocate some of the proceeds within the above-described
categories or to use portions thereof for other purposes or may be required to
seek additional financing. There can be no assurance that additional financing
will be available to the Company on acceptable terms, or at all. Any failure to
obtain additional financing, if required, could have an adverse effect on the
Company, including possibly requiring the Company to curtail its operations.
Proceeds not immediately required for the purposes described above will be
invested principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term interest-bearing
investments.
12
<PAGE>
DILUTION
The difference between the public offering price per share of Common Stock
and the net tangible book value per share of Common Stock after this Offering
constitutes the dilution to investors in this Offering. Net tangible book value
per share is determined by dividing the net tangible book value (total tangible
assets less total liabilities) by the number of outstanding shares of Common
Stock.
At April 30, 1996 and after giving effect to subsequent exercise of
options, the Company had a net tangible book value of $15,320,000 or $2.76 per
share of Common Stock (based on 5,559,125 shares outstanding). After giving
effect to the sale of the Shares offered hereby at a price of $6.00 per share
(less underwriting discounts and estimated expenses of this Offering) the pro
forma net tangible book value at that date would have been $28,320,000 or $3.51
per share. This represents an immediate increase in net tangible book value of
$0.75 per share to existing stockholders and an immediate dilution of $2.49 per
share to new investors.
The following table illustrates the per share dilution without giving
effect to results of operations of the Company subsequent to April 30, 1996:
Public offering price . . . . . . . . . . . . . . $6.00
Net tangible book value before this offering. . $2.76
Increase attributable to new investors 0.75
-------
Pro forma net tangible book value after this offering 3.51
------
Dilution to new investors $2.49
======
The following table summarizes the number and percentage of shares of
Common Stock purchased from the Company, the amount and percentage of
consideration paid and the average price per share paid by existing stockholders
and by new investors pursuant to this Offering, assuming a $6.00 per share
offering price:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
-------------------- ----------------------- Average
Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders. . . . 5,559,125 69.0% $ 3,636,000 19.5% $0.65
New investors. . . . . . . . 2,500,000 31.0% 15,000,000 80.5% $6.00
--------- ------ ----------- ------
Total. . . . . . . . . 8,059,125 100.0% $18,636,000 100.0%
========= ====== =========== ======
</TABLE>
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at April
30, 1996, and as adjusted to give effect to the exercise of options after April
30, 1996, the sale of the Shares offered hereby at an assumed price of $6.00 per
share and the application of the estimated net proceeds therefrom:
AS
ACTUAL ADJUSTED
------ --------
Long Term Borrowings:
Subordinated seller notes . . . . . . . . . $868,000 $868,000
Stockholders' equity:
Common stock - $.0001 par value;
35,000,000 shares authorized,
5,602,875 shares issued
(5,054,125 shares outstanding);
8,842,875 shares issued
(8,059,125 shares outstanding),
as adjusted . . . . . . . . . . . . . . . . $ 1,000 $ 1,000
Preferred stock - $.10 par value;
5,000,000 shares authorized,
0 shares issued or outstanding. . . . . . . --- ---
Additional paid-in capital . . . . . . . . . 3,487,000 16,691,000
Retained earnings . . . . . . . . . . . . . 14,164,000 14,164,000
Cumulative translation adjustment . . . . . (18,000) (18,000)
Less cost of treasury stock (548,750
shares; 783,750 shares as
adjusted) . . . . . . . . . . . . . . . . . $ (733,000) $ (937,000)
----------- -----------
Total stockholders' equity . . . . . . . $16,901,000 $29,901,000
----------- -----------
Total capitalization . . . . . . . . $17,769,000 $30,769,000
=========== ===========
DIVIDEND POLICY
The Company has never declared or paid cash or other dividends on its
Common Stock and does not anticipate doing so in the foreseeable future. The
payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend upon the Company's earnings, its capital
requirements and financial condition, and other relevant factors. The Company
intends to retain all earnings in the foreseeable future for the Company's
continued growth. The Company's ability to pay dividends in the future also may
be restricted by its brokerage subsidiaries' obligation to comply with the net
capital requirements imposed on broker-dealers under regulations and rules
promulgated by both the Commission and the NASD.
14
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below, as of and for the years ended
January 31, 1996, 1995, 1994, 1993 and 1992 have been derived from the Company's
Financial Statements which have been audited by KPMG Peat Marwick LLP for 1996
and 1995, and Goldstein Golub Kessler & Company, P.C. for 1994, 1993 and 1992,
each independent certified public accountants. The data for the three months
ended April 30, 1996 and 1995 has been derived from unaudited financial
statements of the Company. In the opinion of management, the unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the results of
these periods. This data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements, including the notes thereto, appearing elsewhere in
this Prospectus.
Statement of Operations Data:
<TABLE><CAPTION>
Three Months Ended
Year Ended January 31, April 30,
----------------------------------------------------------------- --------------------
1996 1995 1994 1993 1992 1996 1995
---- ---- ----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues............. $43,019,000 $32,410,000 $32,956,000 $25,278,000 $18,284,000 $18,444,000 $7,157,000
Total
expenses................... 36,732,000 31,516,000 25,534,000 21,657,000 13,590,000 14,449,000 7,526,000
Income (loss)
before income
taxes and
extraordinary
item .......,............. 6,287,000 894,000 7,422,000 3,621,000 4,694,000 3,995,000 (369,000)
Net income (loss) ......... 3,469,000 381,000 4,006,000 2,189,000 2,779,000(1) 2,246,000 (256,000)
Primary earnings (loss)
per share(2) ............. $0.61 $0.07 $0.72 $0.42 $0.58 $0.40 $(0.04)
Primary weighted
average number of
shares outstanding(2) .... 5,729,000 5,695,000 5,530,000 5,153,000 4,820,000 5,638,000 5,784,000
Other Financial Data:
Ratio of total
assets to total
stockholder equity ....... 1.89 1.37 1.43 1.81 2.95 1.95 1.35
Pre-tax return
on average
equity(3) ................ 47.4% 7.8% 80.0% 65.2% 223.3% 100.6% (12.7)%
Book Value per Common
Share outstanding ........ $3.02 $2.30 $2.27 $1.47 $0.81 $3.42 $2.25
Balance Sheet Data:
</TABLE>
<TABLE><CAPTION>
January 31, April 30, 1996
----------------------------------------------------------------- --------------------
As
1996 1995 1994 1993 1992 Actual Adjusted(4)
---- ---- ----- ----- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets .............. $27,853,000 $16,096,000 $16,123,000 $13,055,000 $11,278,000 $33,117,000 $46,117,000
Total liabilities
(excluding
subordinated debt) ....... 12,143,000 4,339,000 4,685,000 5,683,000 7,224,000 15,348,000 15,348,000
Subordinated debt ......... 934,000 -0- -0- -0- -0- 868,000 868,000
Convertible subordinated
notes .................... -0- -0- 162,000 162,000 225,000 -0- -0-
Total stockholder's
equity ................... $14,776,000 $11,757,000 $11,276,000 $7,210,000 $3,829,000 $ 16,901,000 $29,901,000
________________________________
</TABLE>
(1) Includes an extraordinary item of income tax benefits of $270,527
arising from the utilization of net operating loss carryforwards.
(2) Fully diluted earnings per share and fully diluted average number of
shares outstanding is not materially different from the primary numbers
indicated above.
(3) Quarterly information is annualized.
(4) Gives effect to the sale of the Shares offered hereby at an assumed
price of $6.00 per share and the application of net proceeds therefrom.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements, including the notes thereto, and the Selected Financial Data
included elsewhere in this Prospectus.
Overview and General Industry Conditions
While the Company was incorporated in 1987, it began meaningful operations
in the fiscal year ended January 31, 1991 ("Fiscal 1991"); the year in which GKN
underwrote one public equity offering, raising $2.8 million for the issuer, and
the Company's financial results reflected $2.6 million of revenues and a net
loss of $511,000. As of April 30, 1996, GKN has managed or co-managed a total of
40 public offerings, raising approximately $395,000,000 for the issuers. In the
fiscal year ended January 31, 1996 ("Fiscal 1996"), the Company generated
revenues of $43,019,000, net profits of $3,469,000, and a pre-tax return on
average equity of 47.4%.
As did many comparable firms in the investment banking and securities
brokerage industry, the Company has experienced a significant increase in the
volume of activity during the quarter ended April 30, 1996. During the quarter,
the Company experienced record revenues, income and returns on equity. First
quarter financial results reflected revenues of $18,444,000, net income of
$2,246,000, and an annualized pre-tax return on average equity of 100.6%.
The Company's principal business activities are, by their nature, affected
by many factors, including general economic and financial conditions, the level
and volatility of interest rates, security valuations in the marketplace,
competitive conditions, transactional volume and market liquidity. Consequently,
commission revenues and investment results can be volatile. While the Company
maintains stringent cost controls, a significant portion of the Company's
expenses are fixed and do not vary with market activity. As a result,
substantial fluctuations can occur in the Company's revenues and net income from
period to period.
Results of Operations
The tables which follow reflect items in the Statements of Income as dollar
amounts, percentages of total revenues, and the percentage increase (decrease)
of the current period's amounts versus the prior period's respective amounts.
The initial table compares the three months ended April 30, 1996 ("First Quarter
Fiscal 1997") versus the same period of the prior fiscal year, or the three
months ended April 30, 1995 ("First Quarter Fiscal 1996"). The second table
compares the twelve months ended January 31, 1996, 1995 and 1994 (respectively,
"Fiscal 1996, 1995, and 1994"). Any and all differences from the amounts set
forth in the tables and those amounts set forth in the financial statements
appearing elsewhere in this Prospectus are due to rounding.
16
<PAGE>
Three Months Ended April 30, 1996 Compared to Three Months Ended April 30,
1995
GKN HOLDING CORP.
COMPARATIVE INCOME STATEMENTS
FIRST QUARTER 1997 v. 1996
Quarter Ended Quarter Ended
------------- -------------
30-Apr-96 30-Apr-95
--------- ---------
DESCRIPTION $000's % Inc. By $000's %
----------- ------ - ------- ------ -
Revenues
Commissions 12,068 65.43% 129.08% 5,268 73.61%
Investment 3,413 18.50% 138.50% 1,431 19.99%
Banking
Principal 2,477 13.43% 831.20% 266 3.72%
Transactions
Interest 337 1.83% 167.46% 126 1.76%
Other 149 0.81% 125.76% 66 0.92%
--- ----- ------- -- -----
TOTAL 18,444 100.00% 157.71% 7,157 100.00%
------- ------- ------- ----- -------
Expenses
Compensation 10,728 58.17% 104.69% 5,241 73.23%
& Benefits
Communications 839 4.55% 35.54% 619 8.65%
Brokerage & 631 3.42% 136.33% 267 3.73%
Clearing Fees
Occupancy 655 3.55% 26.20% 519 7.25%
Business 273 1.48% 31.25% 208 2.91%
Development
Professional 733 3.97% 209.28% 237 3.31%
Fees
Other 590 3.20% 35.63% 435 6.08%
--- ----- ------ --- ------
TOTAL 14,449 78.34% 91.99% 7,526 105.16%
------ ------ ------ ----- -------
Income (loss) 3,995 21.66% NM -369 -5.16%
before income
taxes
Income Taxes 1,749 9.48% NM -113 -1.58%
----- ----- ---- ------
Net Income 2,246 12.18% NM -256 -3.58%
(loss) ----- ------ -- ---- ------
Total revenues for the first three months of Fiscal 1997 increased by 158%
over the first three months of Fiscal 1996. Revenues increased to $18,444,000
from $7,157,000, or an increase of $11,287,000. Revenues increased in all of the
Company's major areas of activity during the first three months of Fiscal 1997.
17
<PAGE>
Commission revenues increased by $6,800,000, or 129.1%, to $12,068,000 over
the first three months of Fiscal 1996 as a result of increased business with the
Company's retail customers. The Company's total volume of trades processed
during the three months increased by 147.6% over the same period in Fiscal 1996.
Investment banking revenues increased to $3,413,000 from $1,431,000,
reflecting an increase of $1,982,000, or 138.5%. During the first three months
of Fiscal 1997, the Company raised $31,900,000 for corporate clients through two
public offerings and three private placements. During the same period of the
prior year the Company raised $12,700,000 for corporate clients through one
public offering and one private placement.
Principal transaction revenue increased by $2,211,000 from $266,000 to
$2,477,000. This increase was primarily generated through market making
activities for over-the-counter equity securities, which increased by $1,437,000
to $1,553,000. This increase was generated by widespread gains across the
Company's market making universe and is reflective of general market conditions
which saw the Nasdaq Composite Index and Russell 2000 Index increase by 41.1%
and 30.8%, respectively, year over year. Additionally, revenue from the
Company's investment account was $924,000 during the quarter, reflecting a
$774,000 increase over the same period in the prior year. The increase was
directly reflective of the increases in the prices of the shares underlying the
underwriters warrants the Company holds, all of which are issued by companies
which are or were investment banking clients.
Interest increased by $211,000 to $337,000. The increase is the result of
interest income on increased Company cash balances, the increased utilization of
margin loans by the Company's customers, and a renegotiated interest sharing
arrangement with the Company's clearing firm.
Total expenses for the first three months of Fiscal 1997 were $14,449,000,
representing an increase of $6,923,000, or 92.0%, over the same period in Fiscal
1996. Of the increase, $5,487,000, or 79.3%, is attributable to increased
employee compensation and benefit costs. As a percentage of revenues, total
expenses for the period decreased to 78.3% of revenues as compared to 105.2% of
revenues for the same period in the prior year.
Compensation and benefit expenses increased by $5,487,000, or 104.7%, to
$10,728,000. These expenses as a percentage of revenues decreased to 58.2% of
revenues from 73.2% for the prior period. Compensation and benefit expenses are
primarily variable, as they are primarily based on a percentage payout on
commission revenues. The reduction in the percentage of expenses to revenues is
the direct result of the increasingly variable nature of these expenses. As of
April 30, 1996, the Company had 469 employees, of which 260, or 55.4%, were
registered representatives. As of April 30, 1995, the Company had 321 employees,
of which 193, or 60.1%, were registered representatives.
Communications expenses increased by 35.7% to $839,000, from $619,000. This
was caused by the 46.1% increase in the number of employees and the 147.6%
increase in the number of trades processed for the comparable periods.
Brokerage and clearing costs increased by 136.3% to $631,000, from
$267,000. This increase is attributable to the aforementioned increase in the
number of trades processed and registered representatives employed by the
Company.
Occupancy expenses increased by 26.2%, to $655,000 from $519,000, due to
the four new locations acquired in the Shochet acquisition.
Business development expenses increased by $65,000, or 31.3% due to
increased promotional activities.
Professional fees increased to $733,000 from $237,000, or by $496,000, as
the result of increased legal fees and reserves provided for potential
settlement of the SEC and NASD investigations. Management believes
18
<PAGE>
that the Company has adequately provided for any financial exposure related to
these matters (see "Business -Legal Proceedings").
Other expenses increased by $155,000 to $590,000, or by 35.6%. This
increase was attributable to the first two months of operation of GKN AG and
interest expense of $26,000 as a result of the note issued in the Shochet
acquisition.
The Company's income tax provision for the first three months of Fiscal
1997 was $1,749,000, representing an effective income tax rate of 43.8%,
compared to an income tax benefit recognized in the same period of the prior
year of $113,000.
Net income for the first three months of Fiscal 1997 was $2,246,000, an
increase of $2,502,000 over a loss of $256,000 for the first three months of
Fiscal 1996.
Fiscal 1996 Compared to Fiscal 1995
GKN HOLDING CORP.
COMPARATIVE INCOME STATEMENTS
FISCAL YEARS 1996, 1995 & 1994
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1995 FISCAL 1994
------------------------ ------------------------ ---------------
DESCRIPTION $000's % Inc By $000's % Inc By $000's %
----------- ------ - ------ ------ - ------ ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Commissions 30,418 70.71% 39.51% 21,804 67.28% 10.10% 19,803 60.09%
Investment 6,003 13.95% -37.51% 9,607 29.64% -4.19% 10,027 30.43%
Banking
Principal
Transactions 5,683 13.21% 1212.47% 433 1.34% -84.19% 2,739 8.31%
Interest 717 1.67% 173.66% 262 0.81% 29.06% 203 0.62%
Other 198 0.46% -34.87% 304 0.94% 65.22% 184 0.56%
------ ------- ------ ------ ------ ------- ------ -------
TOTAL 43,019 100.00% 32.73% 32,410 100.00% -1.66% 32,956 100.00%
------ ------- ------ ------ ------ ------- ------ -------
19
<PAGE>
<CAPTION>
FISCAL 1996 FISCAL 1995 FISCAL 1994
----------------------- ---------------------- ---------------
DESCRIPTION $000's % Inc By $000's % Inc By $000's %
----------- ------ - ------ ------ - ------ ------ -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Expenses
Compensation
& Benefits 27,121 63.04% 18.66% 22,856 70.52% 21.45% 18,819 57.10%
Communications 2,631 6.12% 2.65% 2,563 7.91% 28.79% 1,990 6.04%
Brokerage & 1,350 3.14% 48.68% 908 2.80% 30.65% 695 2.11%
Clearing Fees
Occupancy 2,180 5.07% 27.41% 1,711 5.28% 35.79% 1,260 3.82%
Business
Development 851 1.98% 9.10% 780 2.41% 11.11% 702 2.13%
Professional 703 1.63% -43.80% 1,251 3.86% 36.42% 917 2.78%
Fees
Other 1,896 4.41% 31.03% 1,447 4.46% 25.72% 1,151 3.49%
------ ------- ------ ------ ----- ------- ------ -------
TOTAL 36,732 85.39% 16.55% 31,516 97.24% 23.43% 25,534 77.48%
------ ------- ------ ------ ----- ------- ------ -------
Income before 6,287 14.61% 603.24% 894 2.76% -87.95% 7,422 22.52%
income taxes
Income Taxes 2,818 6.55% 449.32% 513 1.58% -84.98% 3,416 10.37%
------ ------- ------ ------ ---- ------- ------ -------
Net Income 3,469 8.06% 810.50% 381 1.18% -90.49% 4,006 12.16%
------ ------- ------- ------ ---- ------- ------ -------
</TABLE>
20
<PAGE>
Revenues for the twelve months ended January 31, 1996 ("Fiscal 1996")
totaled $43,019,000 versus $32,410,000 for the twelve months ended January 31,
1995 ("Fiscal 1995"), representing an increase of $10,609,000, or 32.7%. The
overall increase is entirely attributable to an increase in commission revenue
of $8,614,000 and increases in revenue from the investment account of
$4,873,000.
Commissions increased by $8,614,000, or 39.5%, from $21,804,000 to
$30,418,000. The increase reflects an overall change in general market
conditions, a 23.6% increase in the number of registered representatives
employed by the Company, and a 35.3% increase in the volume of trades processed
by the Company.
Revenues from investment banking decreased from $9,607,000 to $6,003,000,
or $3,604,000 and 37.5%. During Fiscal 1996 the Company raised $61,516,000 for
its investment banking clients through four public underwritings and five
private placements, representing a significant decrease from Fiscal 1995 when
the Company raised $122,032,000 for its investment banking clients through
eleven public underwritings and six private placements. The decrease in
underwriting activity was the result of general market conditions and the
reorientation of the Company's underwriting efforts from the SPAC program to
operating companies (see "Business - Investment Banking Activities").
Revenues associated with principal transactions increased by $5,250,000,
from $433,000. Market making activities contributed to the increase by $377,000,
or 85.5%, from $441,000 to $818,000. The increase was attributable to an
increased capital commitment by the Company to trading operations and a general
improvement in market conditions in Fiscal 1996 versus Fiscal 1995. More
significantly, the Company's investment account generated revenues of
$4,865,000 in Fiscal 1996 versus a loss of $8,000 in Fiscal 1995. The increase
is due to the general stock price performance of the Company's underwriting
clients during the year, which, in turn, is reflected in the valuation of the
underwriter warrants contained in the Company's investment account.
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Interest income increased by $455,000, from $262,000 to $717,000. The
increase was due to increased cash and cash equivalent positions held by the
Company and increased utilization of margin loans by the Company's customers.
Other revenues decreased by $106,000, from $304,000 to $198,000.
Total expenses for Fiscal 1996 were $36,732,000 versus $31,516,000 for
Fiscal 1995, an increase of $5,216,000, or 16.5%. The increase is primarily due
to increases in compensation and benefit expenses and brokerage and clearing
fees.
Compensation and benefit expenses increased $4,265,000, or 18.7%, from
$22,856,000 to $27,121,000. As a percent of revenues, compensation and benefit
expenses decreased from Fiscal 1995 to Fiscal 1996, from 70.5% to 63.0%.
Compensation expenses are largely variable in nature as they represent
percentage payments on commissions generated. Commissions, including sales
concessions on underwritings, which serve as the basis for making such payments
increased by 23% in Fiscal 1996 compared to Fiscal 1995.
Communications expenses for Fiscal 1996 were $2,631,000, compared to
$2,563,000 for Fiscal 1995, reflecting an increase of $68,000, or 2.7%. During
Fiscal 1996 the Company negotiated an improved cost structure with its long
distance voice communications carrier.
Brokerage and clearing fees increased by $442,000, or 48.7%, from $908,000
to $1,350,000. This was caused by a 35.3% increase in the volume of trades
processed by the Company and an overall decrease in the amounts charged to
brokers for processing trades.
Occupancy expenses increased by 27.4%, or $469,000, from $1,711,000 to
$2,180,000. Contractual increases in the per square foot lease rate in the
Company's New York location and the impact of a full year's lease expense for
the Company's Stamford, Connecticut location caused the majority of the
increase.
Business development expenses were $851,000 in Fiscal 1996 versus $780,000
in Fiscal 1995, an increase of $71,000, or 9.1%. The increase was due to
additional promotional expenses.
Professional fees decreased by $548,000, or 43.8%, from $1,251,000 to
$703,000. This was primarily caused by the costs related to the filing of
documents for an initial public offering of the Company's securities, which was
postponed until market conditions improved during Fiscal 1995.
Other expenses increased from $1,447,000 to $1,896,000, an increase of
$449,000, or 31%, reflecting the recognition of recruiting payments made to new
registered representatives.
The Company's Fiscal 1996 income tax provision was $2,818,000 and
represented an effective tax rate of 44.8%. In Fiscal 1995 the income tax
provision was $513,000 and represented an effective tax rate of 57.4%. The
effective rate in Fiscal 1995 was the result of minimum taxes due on a
significantly lower tax base.
Net income for Fiscal 1996 was $3,469,000, an increase of $3,088,000
compared to Fiscal 1995.
Fiscal 1995 Compared to Fiscal 1994
Revenues for the twelve months ended January 31, 1995 totaled $32,410,000
versus $32,956,000 for the twelve months ended January 31, 1994 ("Fiscal 1994"),
representing a decrease of $546,000, or 1.7%. The decrease is entirely
attributable to a decrease in revenue generated from principal transactions and
the investment account.
Commissions increased by $2,001,000, or 10.1%, from $19,803,000 to
$21,804,000. The increase represents the impact of a 30.0% increase in the
number of registered representatives and a 7.1% increase in the volume of trades
processed by the Company.
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Revenues from investment banking activities decreased from $10,027,000 to
$9,607,000, a change of $420,000, or 4.2%. In Fiscal 1995 the Company raised
$122,032,000 for its investment banking clients through eleven public offerings
and six private placements, while in Fiscal 1994 the Company raised $115,196,000
for its investment banking clients through eleven public offerings. While the
gross amounts raised for clients increased, the average underwriters' discount
decreased; thereby causing the decrease in the associated revenue.
Principal transactions generated revenues of $433,000 in Fiscal 1995 and
$2,739,000 in Fiscal 1994, a decrease of $2,306,000, or 84.2%. This decrease was
in part attributable to a decrease in revenues generated by market activities of
$1,266,000 from Fiscal 1994 to Fiscal 1995. Similarly, the investment account
generated a loss of $8,000 in Fiscal 1995 versus revenues of $1,032,000 in
Fiscal 1994. These significant decreases were caused by weak general market
conditions, particularly as they applied to small capitalization stocks. The
Nasdaq Composite Index and the Russell 2000 both decreased by 5.7% and 7.4%,
respectively, in Fiscal 1995 versus Fiscal 1994.
Interest income increased by $59,000, or 29.1%, from $203,000 to $ 262,000.
This increase was primarily due to higher average cash balances held by the
Company during Fiscal 1995 versus Fiscal 1994.
Other income increased from $184,000 to $304,000.
Total expenses increased to $31,516,000 in Fiscal 1995 from $25,534,000 in
Fiscal 1994, an increase of $5,982,000, or 23.4%. The increase was primarily due
to higher levels of compensation and benefit expenses, communications expenses,
occupancy expenses, and professional fees.
Compensation and benefit expenses increased from $18,819,000 to
$22,856,000, an increase of $4,037,000, or 21.5%. Fiscal 1995 was a year in
which the Company experienced substantial growth. Employees increased from 231
at January 31, 1994 to 335 at January 31, 1995, an increase of 45.0%. The
increase in the employee base was the primary cause for the increase in these
expenses. Additionally, the increase in commission revenues by 10.1% contributed
to the increased levels of compensation.
During Fiscal 1994 and Fiscal 1995 the Company significantly expanded its
physical facilities, through the opening of its Great Neck, New York office in
June 1993, a doubling of its office space in Boca Raton, Florida in November
1993, and the opening of its Stamford, Connecticut office in June 1994. This
expansion, in conjunction with the aforementioned increase in employees, was the
direct cause of the increases in communication expenses and occupancy expenses.
Communication expenses increased from $1,990,000 to $2,563,000, an increase of
$573,000, or 28.8%, while occupancy expenses increased by $451,000, or 35.8%,
from $1,260,000 to $1,711,000.
Brokerage and clearing fees increased from $695,000 to $908,000, an
increase of $213,000, or 30.6%. This was directly related to the 7.1% increase
in the volume of trades processed by the Company.
Business development expenses stayed relatively constant as a percentage of
revenues from Fiscal 1994 to Fiscal 1995, as the absolute dollar amounts
increased by $78,000, or 11.1%, from $702,000 to $780,000.
Professional fees increased significantly in Fiscal 1995 to $1,251,000 from
$917,000 in Fiscal 1994, an increase of $334,000, or 36.4%. This increase was
primarily caused by the costs related to the filing of documents for an initial
public offering of the Company's securities, which was postponed until market
conditions improved during Fiscal 1995.
Other operating expenses remained relatively constant as a percentage of
revenues, from $1,151,000, or 3.5% of revenues to $1,447,000 or 4.5% of
revenues.
The Company's income tax provision for Fiscal 1995 was $513,000,
representing an effective tax rate of
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57.4%, while its income tax provision for Fiscal 1994 was $3,416,000,
representing an effective tax rate of 46.0%. The high effective rate in Fiscal
1995 was the result of minimum taxes due on a significantly lower tax base.
Net income for Fiscal 1995 was $381,000, a decrease of $3,625,000 over
Fiscal 1994.
Liquidity and Capital Resources
The Company's assets are highly liquid with the majority consisting of
securities inventories, receivables from other broker-dealers and the Company's
clearing firm, and cash and cash equivalents, all of which fluctuate depending
upon the levels of customer business and trading activity. Receivables from
broker-dealers and the Company's clearing firm turn over rapidly. As a
securities dealer, the Company may carry significant levels of trading
inventories to meet customer needs. The Company's inventory of market
making securities is readily marketable; however, holding large blocks of the
same security may limit liquidity and prevent realization of full market value
for the securities. Securities owned, but not readily marketable, represent
underwriter warrants and the securities underlying such warrants. The liquidity
of these securities is limited. A relatively small percentage of the Company's
total assets are fixed. The Company's total assets or the individual components
of total assets may vary significantly from period to period because of changes
relating to customer demand, economic and market conditions, and proprietary
trading strategies. The Company's total assets at April 30, 1996, January 31,
1996 and January 31, 1995 were $33,117,000, $27,853,000, and $16,096,000,
respectively.
GKN and Shochet, the Company's operating broker-dealer subsidiaries, are
subject to the net capital rules of the NASD (see "Business - Government
Regulations"). As such, they and the Company are subject to certain restrictions
on the use of capital and its related liquidity. GKN's and Shochet's respective
net capital positions as of April 30, 1996 were $10,807,000 and $491,000, which
were $10,557,000 and $391,000 in excess of their respective net capital
requirements.
Historically, the Company has financed its operations through the private
placement of debt and equity securities and cash flow from operations. The
Company has not employed the use of any significant leverage or debt. In
conjunction with the Company's acquisition of Shochet, the Company issued the
seller a subordinated note for $934,000 as part of the purchase price. The
Company intends to use debt prudently in the future and intends to arrange for
lines of credit following this Offering. During the twelve months ended April
30, 1996, the Company has repurchased outstanding shares from certain
stockholders. These repurchases totaled 261,250 shares at a price of $2.00 per
share, resulting in a total repurchase of $522,500. These repurchases were
funded through cash flow from operations .
The Company's overall capital and funding needs are continually reviewed to
ensure that its capital base can support the estimated needs of its business
units. These reviews take into account business needs as well as regulatory
capital requirements of the subsidiaries. Based upon these reviews, management
believes that the Company's capital structure is adequate for current
operations.
Cash Flows
The Company's statements of consolidated cash flows classify cash flow into
three broad categories: cash flows from operating activities, investing
activities and financing activities. The Company's net cash flows are
principally associated with operating and investing activities, which support
the Company's brokerage and distribution, investment banking and principal
transactions activities.
Three Months Ended April 30, 1996 and 1995
Cash and cash equivalents at April 30, 1996 and 1995 totaled $10,923,000
and $5,358,000, respectively, an increase of $3,050,000 and $2,235,000,
respectively, for the comparable three month periods. The increases are all
primarily the result of cash provided by operating activities.
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Cash provided by operating activities totaled $3,381,000 in the three
months ended April 30, 1996. This was primarily generated from $2,026,000 of
net cash from net income, a decrease in securities owned, at
market value of $2,460,000, and increases in securities sold, not yet
purchased, of $2,152,000, commissions payable of $657,000, and income taxes
payable of $1,790,000. These amounts were partially offset by an increase in
receivables due from the Company's clearing firm of $5,388,000 and a decrease
in accrued expenses and liabilities of $1,500,000. For the three months ended
April 30, 1995, cash provided from operating activities totaled $2,277,000.
This was primarily generated by decreases in receivables from the Company's
clearing firm of $543,000, securities owned, at market value, of $3,155,000,
and an increase in deferred compensation of $684,000. These amounts were
partially offset by a decrease in net cash from a net loss of $163,000,
increases in loans receivable of $460,000 and other assets of $754,000, and a
decrease in accrued expenses and other liabilities of $585,000.
Cash used in investing activities was $162,000 and $42,000 in the periods,
respectively. Both of these amounts represent purchases of office furniture,
equipment and leasehold improvements.
For the three months ended April 30, 1996, cash used in financing
activities totaled $169,000. This amount primarily reflects the repayment of
promissory notes. No cash was generated or used in financing activities during
the three months ended April 30, 1995.
Fiscal Years 1996, 1995 and 1994
Cash and cash equivalents at January 31, 1996, 1995, and 1994 totaled
$7,873,000, $3,123,000, and $2,922,000, respectively, reflecting increases of
$4,750,000, $201,000, and $208,000 in each of the respective years. The
increases are all the result of cash provided by operating activities, partially
offset by the use of cash in investing activities.
Cash provided by operating activities totaled $6,078,000, $909,000, and
$528,000 in Fiscal 1996, 1995, and 1994, respectively. In Fiscal 1996, cash
provided by operating activities was primarily generated from $5,090,000 of net
cash from net income, and increases in securities sold, not yet purchased, of
$2,222,000, commissions payable of $788,000, and accrued expenses and other
liabilities of $3,418,000. These were partially offset through increases in
amounts due from the Company's clearing firm of $1,209,000, securities owned,
at market value, of $2,712,000, and securities owned, not readily marketable,
of $1,270,000. In Fiscal 1995, cash provided from operating activities was
primarily generated through a decrease in securities purchased under agreements
to resell of $3,057,000, which was partially offset by increases in securities
owned, at market value, of $1,867,000 and loans receivable of $1,205,000, and
a decrease in accrued expenses and other liabilities of $568,000. In Fiscal
1994, cash provided from operating activities was generated from $4,349,000 of
net cash from net income, a decrease in the receivable from the Company's
clearing firm of $1,888,000, and an increase in accrued expenses and
liabilities of $598,000. These amounts were offset by increases in securities
purchased under agreements to resell of $3,057,000, securities owned, not
readily marketable of $550,000, and other assets of $645,000, and a decrease
in securities sold, not yet purchased, of $1,993,000.
In Fiscal 1996, 1995, and 1994, the Company used cash in investing
activities of $1,812,000, $646,000, and $380,000, respectively. All of these
amounts represent the purchase of office furniture, equipment, and leasehold
improvements, except that in Fiscal 1996 the Company used cash of $1,606,000 in
its acquisition of Shochet resulting in goodwill.
The Company generated cash from financing activities of $484,000 in Fiscal
1996 and $60,000 in Fiscal 1994, while it used cash in financing activities of
$62,000 in Fiscal 1995. In Fiscal 1996, the Company generated cash through the
issuance of a subordinated note of $934,000, in conjunction with its acquisition
of Shochet, which was partially offset by the purchase of stock into treasury.
The amounts provided by, or used in financing activities for Fiscal 1995 and
1994, represent the issuance or retirement of common shares.
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Effects of Inflation
The Company's assets are, to a large extent, liquid in nature, and, as a
result, are not significantly affected by inflation. To the contrary, market
prices of securities are generally influenced by changes in inflation. Moreover,
the rate of inflation affects the Company's expenses, such as employee
compensation, occupancy expenses and communications costs, which may not be
readily recoverable in the prices of services offered to the Company's
customers. To the extent inflation results in rising interest rates or has
adverse effects upon the securities markets, it may adversely affect the
Company's financial position and results of operations.
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BUSINESS
GENERAL
The business of GKN Holding Corp. (the "Company") is transacted primarily
through four operating subsidiaries: GKN Securities Corp. ("GKN"), Shochet
Securities, Inc. ("Shochet"), GKN Securities AG ("GKN AG") and GKN Fund
Management, Inc. ("GKN Fund"). Collectively, GKN, Shochet and GKN AG are all
involved in various aspects of the investment banking and stock brokerage
business. GKN Fund is involved in money management.
The Company began operations in 1987 following the October market decline,
at which time the founders perceived an opportunity for the creation of a high
quality investment bank serving emerging growth and small and micro
capitalization corporate clients and investors. Since its inception, the
Company's plan has been to develop a high quality firm serving this market
niche. Since October 1990, when GKN managed its first underwriting , GKN has
acted as managing or co-managing underwriter in a total of 40 public offerings,
raising approximately $395 million.
The Company anticipates that acquisitions will be an integral part of its
future growth. In November 1995, the Company acquired all of the outstanding
stock of Shochet, a full-service discount brokerage firm with four branches
operating in Southern Florida. Shochet has been in business since 1980. During
the twelve-month period ended January 31, 1996, Shochet generated approximately
$5.5 million in revenue (only $1,128,000 of which is included in the Company's
financial statements for the year ended January 31, 1996). The Shochet
acquisition was the Company's first in the investment banking and securities
brokerage business.
GKN AG and GKN Fund both began operations in Fiscal 1996. GKN AG, located
in Zurich, Switzerland, distributes securities and provides brokerage services
to European institutional money managers. GKN Fund serves as the general partner
and administrator of Kaleidoscope Partners, L.P., a "fund of funds" with
approximately $8.1 million in assets at April 30, 1996.
The Company intends to continue its emphasis on investment banking
opportunities for emerging growth and small and micro capitalization companies.
While enhancing this core capability, the Company plans to further expand its
related distribution, brokerage, research, money management and merchant banking
functions, either through internal growth or by acquisition.
Brokerage and Distribution Activities
A significant portion of the Company's revenues are derived from
commissions, concessions, mark-ups and mark-downs (collectively " commissions").
For the fiscal year ended January 31, 1996, commissions accounted for
approximately 70.7% of the Company's revenues. Commissions are charged to the
Company's individual and institutional clients for executing buy and sell orders
of securities on national and regional exchanges and in the over-the-counter
("OTC") markets. When a buy or sell order for a security in which GKN makes a
market or has inventory is received, GKN may act as a principal and purchase
from, or sell to, its customers the desired security on a disclosed basis at a
price set in accordance with applicable securities regulations. The Company's
brokerage and distribution activities are performed through GKN, Shochet and GKN
AG, its brokerage subsidiaries. As of April 30, 1996, these brokerage
subsidiaries employed an aggregate of 260 registered representatives and
serviced more than 54,000 active customer accounts. Each of these brokerage
subsidiaries serves a diverse clientele with different investment
characteristics.
GKN
As of April 30, 1996, GKN had 214 registered representatives located in
five offices in New York City, Great Neck, New York, Stamford, Connecticut, and
Boca Raton and Miami, Florida. During fiscal 1996, GKN's registered
representatives generated approximately $29,500,000 in commissions on secondary
trades and $6,000,000 in sales concessions on public offerings and private
placements (such $6,000,000 are included
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<PAGE>
in Investment Banking Revenues on the Company's Financial Statements). GKN's
sales force serves a clientele which is primarily composed of high net worth
individuals who invest primarily in OTC equity securities. GKN intends to
expand its brokerage business through the continued recruitment and hiring of
additional registered representatives for existing offices, as well as
potentially opening or acquiring additional offices in new geographic
locations. GKN believes that it can add an aggregate of approximately 45
brokers in its various branch offices without acquiring any additional space.
Shochet
As of April 30, 1996, Shochet had 45 registered representatives located in
four offices in Hallandale, Miami Beach, South Miami and Tamarac, Florida.
During fiscal 1996, Shochet's registered representatives generated approximately
$5 million in commissions, primarily on secondary trades. Shochet sets
commissions to its customers on a discounted basis. The clientele served by
Shochet's registered representatives is generally older, retired, high net worth
individuals who invest in exchange-listed equity securities, fixed income
securities and mutual funds. The Company intends to expand Shochet's business
through the recruitment and hiring of additional registered representatives for
existing offices, as well as potentially opening or acquiring additional offices
in new geographic locations.
GKN AG
In February 1996, the Company opened its first international office in
Zurich, Switzerland, through GKN AG. The primary emphasis of this office is to
serve European institutional money managers and clients investing in U.S.-traded
small capitalization equity securities. GKN AG currently has one registered
representative. The Company plans to expand its international operations through
the recruitment and hiring of additional registered representatives and
potentially opening additional international offices.
Institutional Sales
Historically, institutional sales has been a small source of revenue for
GKN. During 1995, GKN established an Institutional Sales Department to develop
and service institutional money manager clients. The firm intends to expand this
business through the recruitment and hiring of additional registered
representatives, the development of new institutional client relationships and
the potential acquisition of brokerage firms whose primary emphasis is serving
institutional clients.
Investment Banking Activities
Corporate Finance
GKN's investment banking revenues are principally derived from managing or
co-managing public offerings of equity securities, although the private
placement of equity or equity-related securities for both private and
publicly-held companies has recently become an increasingly important source of
investment banking revenues. For the fiscal year ended January 31, 1996,
investment banking activities, including sales concessions, accounted for
approximately 13.9% of the Company's revenues. The Company's underwriting
activities have historically focused on public equity underwritings for
smaller capitalization, emerging growth companies in a variety of industries.
GKN believes that its expertise and proven ability to assist emerging growth
companies (which often have limited access to other sources of capital) has
created a significant source of ongoing and potential new investment banking
clients. GKN intends to continue this small capitalization emphasis,
concentrating its activities on certain core industries, initially the
communications/technology and leisure/entertainment/recreation industries.
In 1993, GKN developed and introduced a new publicly-traded financing vehicle
known as the Specified Purpose Acquisition Company(R) ("SPAC(R)"). A SPAC
combines the characteristics of a traditional acquisition or buyout fund and a
more liquid, publicly traded industry-specific investment vehicle. The purpose
of a SPAC is to acquire an operating business in a specified target industry.
Each SPAC is managed by a management team
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combining operating experience and mergers and acquisitions expertise in the
specified target industry. SPACs feature important investor safeguards,
including (i) a conversion right which entitles SPAC common stock investors to
the return of a substantial portion of their initial investment should a target
acquisition not be made within 24 months from the closing of the SPAC's public
offering, (ii) a requirement that 90% of the net proceeds of the SPAC offering
be placed in trust and invested in short-term government securities and
released only upon the successful consummation by the SPAC of the acquisition
of a target business or the liquidation of the SPAC, (iii) a requirement for
stockholder approval by the outside stockholders of the target acquisition and
(iv) various other requirements eliminating or reducing potential conflicts of
interests between SPAC management and the investors in SPAC offerings. Since
the introduction of the SPAC, GKN has lead-managed public offerings for
thirteen SPACs, raising approximately $170 million in aggregate gross proceeds.
As of the date of this Prospectus, nine of the 13 SPACs have consummated their
mergers, one SPAC is in the process of liquidation, one merger is pending and
two SPAC management teams continue their acquisition searches.
Corporate Advisory
To date, the Company has not derived significant revenues from corporate
advisory services. Through its relationships with its investment banking
clients, GKN intends to expand this business with a concentration on mergers and
acquisitions, strategic partnering, fairness opinions and corporate
recapitalizations.
Syndicate
GKN has a Syndicate Department which has historically served as an
additional source of product (through selling group or underwriter
participation) for distribution through the Company's various distribution
channels. GKN anticipates that the emphasis of this department will shift to
enhance the marketing and distribution of GKN's underwritings to other
broker-dealers. To date, revenues generated by the Syndicate Department have
been insignificant.
Principal Transactions
A portion of GKN's revenue is derived from various principal trading
activities, including making markets in equity securities, proprietary position
trading, and the results of an investment account. For the fiscal year ended
January 31, 1996, these activities accounted for 13.2% of the Company's
revenues.
Market Making
GKN's market making activities have been primarily an accommodation to its
retail customers. Inventories of securities are carried to facilitate brokerage
transactions with customers and other dealers and principal transactions with
customers are effected at prices in accordance with applicable security
regulations. As of April 30, 1996, GKN made markets in more than 80 securities.
For the fiscal year ended January 31, 1996, principal transactions related to
securities in which GKN makes a market, including realized and unrealized gains
and losses, accounted for $818,000, or 2%, of the Company's revenues.
Proprietary Trading
Historically, GKN has devoted insignificant amounts of capital and derived
insignificant revenues from taking proprietary trading positions. During fiscal
1996, GKN employed a maximum of $1 million of capital at any one time to
proprietary trading positions. GKN intends to increase its capital allocation to
principal trading activities after this Offering.
Investment Account
In connection with its investment banking activities, GKN usually receives
warrants which entitle it to purchase securities of the companies for which GKN
raises capital or provides advisory services. These warrants, which are placed
in GKN's investment account, vary in value based upon the market prices of the
underlying
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securities. Warrants are usually exercisable for four years beginning one year
after issuance and are valued by management based on a significant discount to
the current market values of the underlying securities. As of April 30, 1996,
GKN owns warrants to purchase securities of 45 companies for which it has
performed investment banking services. These warrants have an underlying market
value of $3,143,000, of which GKN has recognized $1,779,000 in value, or 56.6%.
During the fiscal year ended January 31, 1996 and quarter ended April 30, 1996,
GKN recognized gains (both realized and unrealized) on such warrants of
$4,865,000, or 11.3% of revenues, and $924,000, or 5.0% of revenues,
respectively. From inception through April 30, 1996, GKN has recognized, in the
aggregate, more than $9,100,000 in realized and unrealized gains from such
warrants.
Research Services
GKN's research activities are an integral part of, and provide significant
support to, its investment banking, and securities brokerage activities.
Research services are directed primarily towards creating support, sponsorship
and independent analysis for the securities of companies which have been
underwritten by GKN and identifying attractive investment opportunities in the
securities of other companies. The research department conducts a review and
analysis of fundamental elements of individual company performance, industry
trends and economic events and incorporates its findings into published reports.
GKN distributes its research publications through each of its brokerage
subsidiaries - GKN, Shochet and GKN AG.
Other Retail Products and Services
GKN is a registered Investment Advisor under the Investment Act of 1940 and
provides retirement planning and mutual fund investment services through its
Retirement Services department. This department assists clients with
establishing retirement plans tailored to their specific needs, solving problems
with their existing plans, locating appropriate plan administrators, and
performing asset allocation studies for investment allocations. Retirement
services also sources and administers the relationships with third party mutual
funds, as well as advising customers concerning such investments. In February
1996, GKN introduced a "wrap-investment" product known as "Navigator(TM)."
Navigator performs asset allocation models for customers based on their
individual risk profiles. Based upon each investor's specific model results,
investments are made in a number of specified third party mutual funds. To date,
revenues generated by retirement services and mutual fund investments have been
insignificant.
Both Shochet and GKN source and execute buy and sell orders for fixed
income securities, which are purchased on an agency or principal basis. Amounts
retained in inventory overnight and on an intraday basis are not significant.
During fiscal 1996, the execution of buy and sell orders for fixed income
securities accounted for 12% of Shochet's revenues and an insignificant
percentage of GKN's revenues.
Money Management
In 1995, the Company entered the money management business through the
establishment of GKN Fund Management, Inc., which serves as the general partner
and administrator of Kaleidoscope Partners, L.P. ("Kaleidoscope"), a "fund of
funds" investment partnership which invests its capital in other funds managed
by independent money managers. The primary investment objective of Kaleidoscope
is to achieve superior investment returns and diversification by placing its
capital in a number of different carefully selected investment funds. As of
April 30, 1996, Kaleidoscope had total assets of approximately $8.1 million
invested in eight independent funds. GKN intends to expand its money management
activities after this Offering.
Merchant Banking
The Company intends to enter into the merchant banking business by using a
portion of the proceeds of this Offering to invest in development-stage and
operating companies. Such investments may represent a minority or controlling
interest in the subject companies. It is anticipated that most companies in
which investments would be made will be privately-held at the time of the
investment . The Company will attempt to focus on those companies for which GKN
might be willing to manage offerings sometime after the Company's original
30
<PAGE>
investment. As of the date of this Prospectus, the Company has no specific plans
with respect to any particular investment opportunity .
Clearing Agent
The Company's brokerage subsidiaries currently utilize, on a fully
disclosed basis, the services of Schroder Wertheim & Co. Incorporated as its
clearing agent, which, on a fee basis, processes all securities transactions and
maintains the accounts of its customers. Customer accounts are protected through
the Securities Investor Protection Corporation for up to $500,000, of which
coverage for cash balances is limited to $100,000. Additional protection is
provided by the clearing agent through Aetna Casualty and Surety Co. for up to
$25,000,000 per account. The services of the clearing agent include billing,
credit control, receipt, and custody and delivery of securities. The clearing
agent provides operational support necessary to process, record, and maintain
securities transactions for the Company's brokerage and distribution activities.
The clearing agent provides these services to the Company and its customers at a
total cost which is less than it would cost the Company to process such
transactions on its own.
Customer Credit
The clearing firm for the Company's brokerage subsidiaries lends funds to
the Company's customers through the use of margin credit. These loans are made
to customers on a secured basis, with the clearing firm maintaining collateral
in the form of saleable securities, cash or cash equivalents. Under the terms of
the clearing arrangement, the Company's brokerage subsidiaries indemnify the
clearing firm for any loss on these credit arrangements. As of April 30, 1996,
the Company had $52 million of margin credit outstanding to its customers
through its clearing firm. In the fiscal year ended January 31, 1996, the
Company's losses from the margin credit activity were de minimus, while net
interest earned totaled $199,000.
Risk Management/Control Structure
The Company maintains a rigorous and comprehensive risk management and
control structure for all three operating brokerage subsidiaries through its
risk management group, legal and compliance departments, and financial control
mechanisms.
Risk Management Group
In conjunction with the staff of the clearing agent, the Company monitors
and maintains firm-wide and customer margin credit and securities concentration
exposure, and monitors firm adherence to the appropriate securities and lending
regulations.
Legal and Compliance
The Company currently maintains a full time staff of seven individuals,
including two attorneys, in its legal and compliance departments to monitor the
Company's compliance position. These individuals are supplemented by the daily
compliance and control functions of the local branch managers. As the Company
continues to expand, it intends to appropriately increase the relative size of
these departments.
Financial Control Group
The Company's finance and accounting department, consisting of nine
full-time staff, maintains a comprehensive system of internal controls
concerning its financial, operational and trading activities.
Government Regulation
The securities business is subject to extensive and frequently changing
federal and state laws and substantial regulation under such laws by the
Commission and various state agencies and self-regulatory organizations, such
31
<PAGE>
as the NASD. GKN and Shochet are registered as broker-dealers with the
Commission and are member firms of the NASD. Much of the regulation of
broker-dealers has been delegated to self-regulatory organizations, principally
the NASD, which has been designated by the Commission as the Company's primary
regulator. The NASD adopts rules (which are subject to approval by the
Commission) that govern its members and conducts periodic examinations of
member firms' operations. Securities firms are also subject to regulation by
state securities administrators in those states in which they conduct business.
GKN is registered as a broker-dealer in all 50 states , the District of
Columbia and Puerto Rico. Shochet is registered as a broker-dealer in 15
states.
Broker-dealers are subject to regulations which cover all aspects of the
securities business, including sales methods and supervision, trading practices
among broker-dealers, use and safekeeping of customers' funds and securities,
capital structure of securities firms, record keeping and the conduct of
directors, officers and employees. Additional legislation, changes in rules
promulgated by the Commission and self-regulatory organizations, or changes in
the interpretation or enforcement of existing laws and rules, may directly
affect the mode of operation and profitability of broker-dealers. The
Commission, self-regulatory organizations and state securities commissions may
conduct administrative proceedings which can result in censure, fine, the
issuance of cease-and-desist orders or the suspension or expulsion of a
broker-dealer, its officers or employees. The principal purpose of regulation
and discipline of broker-dealers is the protection of customers and the
integrity of the securities markets.
GKN AG is subject to certain Swiss Federal and Cantonal (State) laws.
Securities trading and brokerage in Switzerland is governed by the provisions of
Cantonal law. Residing in Zurich, Switzerland, GKN AG is regulated by The Law on
Professional Trading of Securities in the Canton of Zurich. In order to transact
security trades in Switzerland or on the Zurich Stock Exchange, GKN AG must be
granted a "B-license." GKN AG has made application for such license and believes
that it will be granted the license in the near future; however, there can be no
assurances that GKN AG will receive the license. In the interim, the brokerage
of securities generated by GKN AG are executed and settled through GKN's
principal office in New York City.
Under The Law on Professional Trading of Securities, GKN AG must initially
have equity capital equal to 500,000 Swiss francs (approximately $396,000). As
of January 1, 1997, initial equity capital must be equal to 1,000,000 Swiss
francs (approximately $792,000). Distributions of equity capital by GKN AG are
governed by the Swiss Code of Obligations, wherein any distributions are limited
to profits. GKN AG was initially capitalized in February 1996 with $500,000
Swiss francs (approximately $396,000). If the equity capital of GKN AG falls to
less than half the initial requirement, it must be recapitalized.
Net Capital Requirements
As registered broker-dealers and member firms of the NASD, GKN and Shochet
are subject to the Commission's net capital rule. The net capital rule, which
specifies minimum net capital requirements for registered brokers and dealers,
is designed to measure the general financial integrity and liquidity of a
broker-dealer and requires that at least a minimum part of its assets be kept in
relatively liquid form. Net capital is essentially defined as net worth (assets
minus liabilities), plus qualifying subordinated borrowings and less certain
mandatory deductions that result from excluding assets not readily convertible
into cash and from valuing certain other assets, such as a firm's positions in
securities, conservatively. Among these deductions are adjustments in the market
value of securities to reflect the possibility of a market decline prior to
disposition.
GKN has elected to compute its net capital using the alternative method
permitted by the Rule, which requires that GKN maintain minimum net capital, as
defined, to be greater than or equal to, $250,000. At April 30, 1996, GKN had
net capital of $10,807,000, which was $10,557,000 in excess of required net
capital of $250,000.
Shochet has elected to compute net capital under the standard aggregate
indebtedness method permitted by the Rule, which requires that the ratio of
aggregate indebtedness to net capital, both as defined, shall not exceed
15-to-1. At April 30, 1996, Shochet had net capital and a net capital
requirement of $491,000 and $100,000, respectively. Shochet's net capital ratio
was 0.75-to-1.
32
<PAGE>
Failure to maintain the required net capital may subject a firm to
suspension or expulsion by the NASD, the Commission and other regulatory bodies
and ultimately may require its liquidation. The net capital rule also prohibits
payments of dividends, redemption of stock and the prepayment or payment in
respect of principal of subordinated indebtedness if net capital, after giving
effect to the payment, redemption or repayment, would be less than specified
percentages of the minimum net capital requirement (120%). Compliance with the
net capital rule could limit those operations of the Company's brokerage
subsidiaries that require the intensive use of capital, such as underwriting and
trading activities, and also could restrict the Company's ability to withdraw
capital from its operating subsidiaries, which in turn, could limit the
Company's ability to pay dividends, repay debt and redeem or purchase shares of
its outstanding capital stock.
Competition
The Company encounters intense competition in all aspects of the securities
business and competes directly with other securities firms, a significant number
of which have greater capital and other resources. In addition to competition
from firms currently in the securities business, there has recently been
increasing competition from other sources, such as commercial banks and
insurance companies offering financial services, and from other investment
alternatives. The Company believes that the principal factors affecting
competition in the securities industry are the quality and abilities of
professional personnel, including their ability to effectuate a firm's
commitments, and the quality, range and relative prices of services and products
offered.
Other Operations
Historically, the Company has maintained limited operations in the
acquisition, management, syndication and operation of real estate projects,
through its subsidiaries, GKN Realty Corp. and GKN Property Management, Inc. To
date, the operations of GKN Realty and GKN Property have had no significant
impact on the Company. The Company intends to wind down its real estate
operations over the next several years.
Personnel
At April 30, 1996, the Company had 469 full-time employees, including 260
registered representatives. None of the Company's personnel is covered by a
collective bargaining agreement. The Company considers its relationships with
its employees to be very good.
Properties
The principal executive offices of the Company and GKN are located at 61
Broadway, New York, New York 10006 where the Company leases or subleases
approximately 25,000 square feet of office space . The sublease and leases for
these premises all expire in February 1998. The following information relates to
the branch offices of GKN and Shochet:
33
<PAGE>
GKN
Office Location Approximate Square Footage Expiration
---------------- -------------------------- ----------
Boca Raton, 10,000 October 1999
Florida 1,500 October 1997
Great Neck, New 5,000 September 1998
York
Stamford, 5,000 November 2004
Connecticut
Miami, 4,000 June 2003
Florida
Shochet
Office Location Approximate Square Footage Expiration
---------------- -------------------------- ----------
Hallandale, Florida 5,000 February 2006
Miami Beach, 3,000 April 1998
Florida
South Miami, 3,000 November 1998
Florida
Tamarac, Florida 3,000 month-to-month
Legal Proceedings
Many aspects of the Company's business involve substantial risks of
liability, including exposure under federal and state securities laws in
connection with the underwriting and distribution of securities. The Company
does not presently maintain an errors and omissions insurance policy insuring it
against these risks. In recent years, there has been an increasing incidence of
litigation involving the securities industry, including class actions which
generally seek rescission and substantial damages. Additionally, securities
brokerage firms, including the Company, become parties to arbitrations brought
by disgruntled customers in the general course of business.
GKN is the subject of an SEC staff investigation that arose primarily from
certain sales practices and the supervision of certain registered
representatives in 1991 and 1992. GKN expects to submit to the Commission
shortly an Offer of Settlement that has been discussed with the SEC staff. There
is no assurance that the SEC staff will support the proposed settlement nor that
the Commission will agree to it. Under the proposed Offer of Settlement, without
admitting or denying the findings, GKN will agree to the entry of an Order
finding that, during 1991 and 1992, GKN and Robert Gladstone failed reasonably
to supervise a number of registered representatives with a view to preventing
certain securities law violations. The proposed Order would recite that from
1990 through 1992, GKN hired a large number of registered representatives and
that the number of customer complaints received by GKN rose substantially and
included multiple complaints against certain of the registered representatives.
The proposed Order would also contain GKN's representation that, since the
latter part of 1992, it has undertaken a number of specific efforts to improve
its supervisory and compliance systems and its undertaking to maintain these
policies and procedures. Under the terms of the proposed settlement, GKN will
pay a penalty of $100,000, implement and maintain the policies and procedures
previously undertaken, and retain an independent consultant to conduct a review
of the firm's policies and procedures and report its recommendations to GKN and
the SEC staff. GKN has agreed (subject to certain safeguards) to adopt the
independent consultant's recommendations. Robert Gladstone, under the proposed
settlement, will pay a $50,000 penalty and agree not to be associated in a
supervisory capacity with a brokerage firm (with a right to reapply after 18
months). Mr. Gladstone remains an officer and principal stockholder of the
Company.
34
<PAGE>
GKN is the subject of an NASD staff investigation which, the Company
believes, arises primarily from mark-ups and mark-downs taken on customer
transactions in warrants of certain issuers whose offerings were managed by GKN.
The purpose of the investigation is to determine whether GKN or any persons
associated with the firm have engaged in any violation of the federal securities
laws. The NASD staff has not advised GKN whether it intends to recommend any
enforcement action and GKN cannot predict when the investigation might end, or
its outcome. GKN is cooperating fully with the NASD staff in the investigatory
process. The NASD has broad authority to sanction persons subject to its
jurisdiction, including the levying of financial penalties, the imposition of
censures, suspensions or bars on its supervisors and principals, and the
imposition of sanctions that could restrict GKN's business activities and have a
material adverse effect on the Company .
35
<PAGE>
MANAGEMENT
The directors and executive officers of the Company are as follows:
Name Age Position
- ---- --- --------
David M. Nussbaum 42 Chairman of the Board and Chief
Executive Officer of the Company and GKN
Roger N. Gladstone 42 President and director of the Company
and GKN
Peter R. Kent 43 Chief Operating Officer, Chief Financial
Officer and director of the Company and
GKN
Lester Rosenkrantz 55 Executive Vice President and director of
the Company and GKN
Robert H. Gladstone 38 Executive Vice President of the Company
and GKN
James Krantz 41 Director of the Company
John P. Margaritis 47 Director of the Company*
Arnold B. Pollard 53 Director of the Company*
______________________
*Nominee
DAVID M. NUSSBAUM has been Chairman of the Board and Chief Executive
Officer of the Company since September 1990 and a director of the Company since
January 1987. He is also Chairman of the Board and Chief Executive Officer of
GKN and is the principal executive officer of GKN's New York operations. He is
also a director of Shochet and a director and executive officer of GKN Fund. Mr.
Nussbaum serves on the Board of Arbitrators of the National Association of
Securities Dealers, Inc. He is also a member of the Young Presidents
Organization and a member of the Board of Directors of the Sid Jacobson Jewish
Community Center in Roslyn, New York. From 1984 through 1986, Mr. Nussbaum was
engaged primarily in the acquisition, management, syndication and operation of
real estate projects. In connection with Mr. Nussbaum's real estate activities,
he was an executive officer and director of the corporate general partners of
River Village Associates ("River Village") and Frontage Realty Limited
Partnership ("Frontage"), limited partnerships formed to acquire real estate.
River Village and Frontage filed for protection under Chapter 11 of the
bankruptcy law in 1992 and 1993, respectively. From 1980 through 1984, Mr.
Nussbaum was engaged in the private practice of law at the firm of Rosenman
Colin Freund Lewis & Cohen in New York. Mr. Nussbaum graduated from the
University of Michigan, magna cum laude. He received his law degree (cum laude;
Order of the Coif) from New York University School of Law.
ROGER N. GLADSTONE has been President and a director of the Company since
January 1987. He is also President and a director of GKN and is the principal
executive officer of GKN's Florida operations. He is also a director and
executive officer of Shochet, GKN AG and GKN Fund. Mr. Gladstone serves on the
Board of Arbitrators of the National Association of Securities Dealers, Inc. He
is also a member of the Young Presidents Organization and a member of the Board
of Directors of the Sid Jacobson Jewish Community Center in Roslyn, New York.
Mr. Gladstone is the Director of No Small Affair South, a charitable foundation
which provides positive experiences for disadvantaged children. From 1984
through 1986, Mr. Gladstone was engaged primarily in the acquisition,
management, syndication and operation of real estate projects. Mr. Gladstone
was an executive officer and director of the corporate general partners of
River Village and Frontage. River Village and Frontage filed for protection
under Chapter 11 of the Bankruptcy law in 1992 and 1993, respectively. From
1980 through 1984, Mr. Gladstone was engaged in the private practice of law in
New York. Mr. Gladstone graduated from Stanford
36
<PAGE>
University. He received his Masters Degree in Business Administration from New
York University and his law degree from the Benjamin N. Cardozo School of Law,
Yeshiva University.
PETER R. KENT has been Chief Financial Officer of the Company and GKN since
July 1995, Chief Operating Officer of the Company and GKN since February 1996
and a director of the Company and GKN since May 1996. He has also served as
Chief Financial Officer and director of Shochet since its acquisition in
November 1995. From September 1991 through February 1995, Mr. Kent served
initially as Chief Financial Officer, and subsequently as President, Chairman of
the Board, and Chief Executive Officer, of Consolidated Waste Services of
America, Inc., a solid waste management and recycling company. From 1988 until
1991, Mr. Kent was employed by the securities firm of Wessels, Arnold &
Henderson, where he served as a member of the Corporate Finance Department in
charge of its Environmental Services Group. From 1984 to 1988, Mr. Kent was
employed by Henry Ansbacher, Inc., a firm involved in the field of media mergers
and acquisitions, initially as Chief Financial Officer and subsequently, as its
President and Chief Operating Officer. Previous to 1984, Mr. Kent had been
employed by Sutro & Co. Incorporated, Wells Fargo Bank, and Arthur Andersen &
Co. Mr. Kent is a Certified Public Accountant. Mr. Kent graduated from the
University of California at Berkeley, where he also received his Masters in
Business Administration.
LESTER ROSENKRANTZ has been a director and Executive Vice President of the
Company and GKN since February 1994. Mr. Rosenkrantz was Vice Chairman and
Director of Corporate Finance of Reich & Co., Inc. (formerly Vantage
Securities), a member of the New York Stock Exchange ("NYSE"), from November
1990 until January 1994. He has also served in various management positions at
Rosenkrantz, Lyon and Ross, Incorporated, a NYSE member firm from 1973 to 1990,
serving as Vice Chairman at the time of completion of his tenure. Mr.
Rosenkrantz was employed by Andresen & Company from 1963 to 1973, lastly as a
General Partner and head of institutional and retail sales. Mr. Rosenkrantz
graduated from Pennsylvania State University.
ROBERT H. GLADSTONE has been the Executive Vice President of the Company
since November 1993 and a director of the Company from January 1992 to May 1996.
He has also been an executive officer of GKN since January 1990 and is now
Executive Vice President of GKN. Mr. Gladstone was employed by Stuart James &
Co. from July 1984 until December 1989, starting as an account executive,
becoming Branch Manager of the Darien, Connecticut office in January 1986 and
Area Manager supervising four branch offices employing more than 100 registered
representatives in 1989. Prior to July 1984, Mr. Gladstone was an account
executive at Ladenburg, Thalmann & Co. (October 1983 to June 1984) and at
Advest, Inc. (October 1980 to September 1983). Mr. Gladstone graduated from
Boston University. See "Legal Proceedings."
JAMES I. KRANTZ has been a director of the Company since September 1990.
Since 1977, Mr. Krantz has served as a Property, Casualty and Life Insurance
Broker and has been engaged in real estate management and investment. Mr. Krantz
was an executive officer and director of the corporate general partner of River
Village . Mr. Krantz is currently President and Chief Executive Officer of York
International Agency, Inc., a full service insurance agency located in
Westchester, New York. Mr. Krantz graduated from Syracuse University . He
received his Chartered Property Casualty Underwriter (CPCU) designation in 1989.
JOHN P. MARGARITIS will become a director of the Company upon consummation
of this Offering. Mr. Margaritis has been the President and Chief Executive
Officer of Ogilvy Adams & Rinehart, a public relations firm, since January 1994,
and was the President and Chief Operating Officer from January 1992 to January
1994. From July 1988 until January 1992, Mr. Margaritis was Chairman and Chief
Executive Officer of Ogilvy & Mathers, Public Relations. Mr. Margaritis is a
director of the Young President's Organization/Metro Chapter, the Arthur Ashe
Institution for Urban Health and Research America, a non-profit organization to
promote government's support of medical research. Mr. Margaritis is a member of
the President's Advisory Counsel for the Museum of Television and Radio. Mr.
Margaritis is also a trustee of Washington and Jefferson College. Mr. Margaritis
graduated from Washington and Jefferson College and received his masters degree
from the New School for Social Research.
ARNOLD B. POLLARD will become a director of the Company upon consummation
of this Offering. Since 1993, he has been the President and Chief Executive
Officer of Chief Executive Group, which publishes "Chief
37
<PAGE>
Executive" magazine. For nearly 20 years, he has been President of Decision
Associates, a management consulting firm. Mr. Pollard also served as an adjunct
professor at the Columbia School of Business. Mr. Pollard graduated from
Cornell University (Tau Beta Pi).
The Board of Directors of the Company is divided into three classes, each
of which generally serves for a term of three years, with only one class of
directors being elected in each year. The term of the office of the first class
of directors (Class I), presently consisting of Lester Rosenkrantz , James
Krantz and Arnold Pollard will expire in 1997; the term of the second class of
directors (Class II), presently consisting of Peter R. Kent and John Margaritis,
will expire in 1998; and the term of office of the third class of directors
(Class III), presently consisting of David M. Nussbaum and Roger N. Gladstone,
will expire in 1999. In each case, each director will hold office until the next
meeting of stockholders at which his/her class of directors is to be elected or
until his/her successor is duly appointed and qualified. Roger N. Gladstone is
the brother of Robert H. Gladstone and the brother-in-law of David M. Nussbaum.
No other family relationships exist between any executive officers or directors
of the Company or its subsidiaries.
The Board of Directors intends to establish an Audit Committee and a
Compensation Committee within 90 days after the completion of this Offering. The
Audit Committee will review the performance of the independent accountants as
auditors for the Company, discuss and review the scope and the fees of the
prospective annual audit and review the results with the auditors. The
Compensation Committee will review and make recommendations to the Board
regarding salaries, compensation and benefits of executive officers and key
employees of the Company.
It is anticipated that Messrs. Margaritis and Pollard will be paid $2,500
per fiscal quarter during their terms as directors.
Executive Compensation
The following table shows the cash compensation paid by the Company and its
subsidiaries, as well as certain other compensation paid or accrued, during the
fiscal years ended January 31, 1996, 1995 and 1994, to the Chief Executive
Officer of the Company and the four most highly compensated executive officers
(other than the Chief Executive Officer) whose compensation was $100,000 or
greater during the fiscal year ended January 31, 1996.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------
Long-Term
Compensation
Annual Compensation Awards
- ----------------------------------------------------------------------------------------------------------------
Fiscal Salary Bonus Securities All Other
Name and principal position Year ($) ($) Underlying Compensation ($)*
Options/SARS
(#)
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
David M. Nussbaum 1996 240,000 250,000 20,000 521,000
Chairman of the Board and Chief 1995 240,000 50,000 -0- 482,000
Executive Officer of the 1994 163,000 -0- -0- 811,000
Company and GKN
- ----------------------------------------------------------------------------------------------------------------
Roger N. Gladstone 1996 240,000 250,000 20,000 534,000
President of the Company and GKN 1995 240,000 50,000 -0- 505,000
1994 163,000 -0- -0- 775,000
- ----------------------------------------------------------------------------------------------------------------
Peter R. Kent 1996 92,000 85,000 70,000 -0-
Chief Operating and Financial 1995 -0- -0- -0- -0-
Officer of the Company 1994 -0- -0- -0- -0-
and GKN**
- ----------------------------------------------------------------------------------------------------------------
Lester Rosenkrantz 1996 150,000 20,000 -0- 19,000
Executive Vice President of the 1995 150,000 15,000 25,000 26,000
Company and GKN*** 1994 -0- -0- -0- -0-
- ----------------------------------------------------------------------------------------------------------------
Robert H. Gladstone 1996 240,000 250,000 20,000 549,000
Executive Vice President of the 1995 240,000 50,000 -0- 553,000
Company and GKN 1994 138,000 -0- -0- 829,000
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
--------------------
* All other compensation is primarily composed of commissions paid on the
brokerage of securities.
** Mr. Kent began employment with the Company on July 24, 1995.
*** Mr. Rosenkrantz began employment with the Company on February 1, 1994.
38
<PAGE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
Name of Percent of
Securities Total Options/
Underlying SARS Granted to Exercise Price
Option/SARs Employees in or Base Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date 5% 10%
(1) (1)
<S> <C> <C> <C> <C> <C> <C>
David M. Nussbaum 20,000 (2) 5.42 % $ 4.95 1/31/00 $ 27,400 $ 60,800
Chairman of the Board and
Chief Executive Officer
of the Company and GKN
Roger N. Gladstone 20,000 (2) 5.42 % $ 4.95 1/31/00 $ 27,400 $ 60,800
President of the Company
and GKN
Peter R. Kent 70,000 (3) 18.98 % $ 4.50 7/23/05 $ 198,800 $ 504,000
Chief Operating and
Financial Officer of the
Company and GKN
Lester Rosenkrantz - 0 - 0% - 0 - - - -
Executive Vice President
of the Company and GKN
Robert H. Gladstone 20,000 (4) 5.42 % $ 4.50 1/31/05 $ 56,800 $ 144,000
Executive Vice President
of the Company and GKN
</TABLE>
(1) Represents potential realizable value at the indicated assumed annual
rates of stock price appreciation for the term of the options.
(2) Options become exercisable in three equal annual installments on
December 31, 1996, December 31, 1997, and December 31, 1998.
(3) 22,222 of these options are exercisable. 22,222 become exercisable
on each of July 23, 1996 and July 23, 1997. The remainder become
exercisable on July 23, 1998.
(4) Options become exercisable on February 1, 2000. However, in May 1996
these options were converted into 6,666 options which become exercisable
in three equal annual installments on December 31, 1996, December 31, 1997,
and December 31, 1998. The exercise price and expiration date remain
the same.
39
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Value of
Acquired Number of Securities Underlying Unexercised in-the-
on Unexercised Options/SARs at Fiscal Money Options/SARs
Exercise Year-End (#)(2) Fiscal Year-End(1)
- ------------------------------------------------------------------------------------------------------------------------------------
Name (#) Exercisable(3) Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
David M. Nussbaum -0- 250,000 20,000 $1,280,000 $21,000
Chairman of the Board and Chief Executive
Officer of the Company and GKN
- ------------------------------------------------------------------------------------------------------------------------------------
Roger N. Gladstone -0- 250,000 20,000 $1,280,000 $21,000
President of the Company and GKN
- ------------------------------------------------------------------------------------------------------------------------------------
Peter R. Kent -0- 22,222 47,778 $33,333 $71,667
Chief Operating and Financial Officer of the
Company and GKN
- ------------------------------------------------------------------------------------------------------------------------------------
Lester Rosenkrantz -0- -0- 25,000 -0- -0-
Executive Vice President of the Company
and GKN
- ------------------------------------------------------------------------------------------------------------------------------------
Robert H. Gladstone -0- 125,000 20,000 $650,000 $30,000
Executive Vice President of the Company
and GKN
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
________________________
(1) Based on the difference between the $6.00 assumed initial offering price
of the Shares and the exercise price of the option multiplied by the
number of shares of Common Stock subject to the option.
(2) Represents shares issuable upon exercise of options granted under the 1991
Plan. See " Management - 1991 Employee Incentive Plan."
(3) In May 1996, David Nussbaum, Roger Gladstone and Robert Gladstone exercised
options to purchase 250,000, 250,000 and 125,000 shares, respectively,
at an exercise price of $0.88 per share for David Nussbaum and Roger
Gladstone, and $0.80 per share for Robert Gladstone.
Employment Agreements
The Company has entered into employment agreements, dated as of May 1,
1996, with each of David M. Nussbaum, Roger N. Gladstone and Robert H. Gladstone
which expire on December 31, 1999. The agreements provide for an annual salary
of $240,000 to each and the issuance to each of up to 15% of any underwriter
warrants issuable to the Company in connection with its corporate finance and
investment banking activities. Messrs. Nussbaum, Gladstone and Gladstone each
receive payments of 20% of the gross brokerage commissions generated under any
of his or each other's customer accounts and they are also entitled to bonuses
under the 1996 Incentive Compensation Plan, described below. The Company has
entered into an employment agreement, dated as of May 1, 1996, with
Peter R. Kent, providing for an annual salary of $200,000 and quarterly
incentive compensation payments equal to 2-1/2% of the Company's earnings
before interest and taxes. Lester Rosenkrantz, the Company's and GKN's
Executive Vice President, is paid an annual salary of $157,500, plus
commissions earned, plus bonuses at the discretion of the Board of Directors.
Underwriter Warrants
As discussed under " Employment Agreements" above, each of David M.
Nussbaum, Roger N. Gladstone and Robert H. Gladstone are issued up to 15% of
the underwriter warrants issuable to GKN in connection with its corporate
finance and investment banking activities (prior to May 1996, each were issued
between 15-20% of such warrants). Generally, 20% of the aggregate number of
underwriter warrants issuable to GKN are issued to its personnel involved in
the transaction. The balance of the underwriter warrants (approximately 50%)
are generally retained by GKN.
40
<PAGE>
1996 Incentive Compensation Plan
The Company has established its 1996 Incentive Compensation Plan ("IC
Plan") effective August 1, 1996. The IC Plan establishes an incentive
compensation pool equal to 25% of all pre-tax, pre-incentive compensation
profits, once a 10% pre-tax, pre-incentive return on beginning equity has been
achieved. The pool will be distributed to executive management and business unit
managers on the basis of business unit and individual performance, as determined
by the Board of Directors.
1991 Employee Incentive Plan
In June 1991, the Company adopted and its stockholders approved the 1991
Plan which, as amended, provides for the issuance of stock, stock options and
other stock purchase rights to executive officers and other key employees and
consultants who render significant services to the Company and its subsidiaries.
The 1991 Plan was adopted to provide the Board of Directors with sufficient
flexibility regarding the forms of incentive compensation which the Company will
have at its disposal to reward these persons. Under the 1991 Plan, both options
intended to qualify as incentive stock options under Section 422 of the Internal
Revenue Code of 1986, as amended, and non-qualified options may be granted.
Directors of the Company who are not employees of the Company or its
subsidiaries are not eligible to receive any awards under the 1991 Plan.
Management believes that, in view of the anticipated expansion of the
Company's operations over the next several years, the Company will be faced with
an increasing need for additional qualified personnel. The Company believes that
its ability to offer employees potential equity ownership through the grant of
stock, stock options and other stock purchase rights will enhance the Company's
ability to attract and retain qualified personnel, without unnecessarily de-
pleting the Company's cash reserves.
A total of 5,000,000 shares of Common Stock is currently reserved for
issuance under the Plan. As of the date of this Prospectus, there were
outstanding options under the 1991 Plan to purchase an aggregate of 874,138
shares, exercisable at an average exercise price of $4.64 per share, of which
more than half are held by non-executive officers and other employees of the
Company. The Company's executive officers and directors own options to purchase
an aggregate of 152,666 shares of Common Stock at exercise prices ranging from
$2.20 per share to $6.00 per share with expiration dates ranging from January
2000 through July 2005.
Other Options and Warrants
Messrs. Margaritis and Pollard, each of whom will become a director upon
the consummation of this Offering, were awarded options to purchase 10,000
shares of Common Stock at a price equal to the per share offering price. These
options become exercisable on the day they become directors of the Company and
remain exercisable for a period of ten years.
In connection with the Company's acquisition of Shochet, the Company agreed
to issue to the sellers, upon consummation of this Offering, five year warrants
to purchase 25,000 shares of Common Stock at an exercise price equal to the
per-share offering price.
In February 1996, the Company issued warrants to purchase 80,000 shares of
the Company's Common Stock to Mr. Joachim Stahler, the Managing Director of GKN
AG, in connection with his employment by GKN AG. These warrants are exercisable
until January 30, 2001 at a per share price equal to the per share offering
price.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law ("DGCL" ), the
Company's Restated Certificate of Incorporation limits the personal liability of
a director of the Company for monetary damages for breach of fiduciary duty of
care as a director. Liability is not eliminated for (i) any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct
41
<PAGE>
or a knowing violation of law, (iii) unlawful payment of dividends or stock
purchases or redemptions pursuant to Section 174 of the DGCL, or (iv) any
transaction from which the director derived an improper personal benefit. The
Company also has entered into indemnification agreements with each of its
directors and executive officers. The indemnification agreement provide that
the directors and executive officers will be indemnified to the fullest extent
permitted by applicable law against all expense (including attorneys' fees),
judgment, fines and amounts reasonably paid or incurred by them for settlement
in any threatened, pending or completed action, suit or proceeding, including
any derivative action, on account of their services as a director or officer of
the Company or of any subsidiary of the Company or of any other company or
enterprise in which they are serving at the request of the Company. No
indemnification will be provided under the indemnification agreements, however,
to any director or executive officer in certain limited circumstances,
including on account of knowingly fraudulent, deliberately dishonest or willful
misconduct. To the extent the provisions of the indemnification agreements
exceed the indemnification permitted by applicable law, such provisions may be
unenforceable or may be limited to the extent they are found by a court of
competent jurisdiction to be contrary to public policy.
42
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of the Company's Common Stock as of May 31, 1996, and as
adjusted to reflect the sale of the Shares offered hereby by (i) each person
known by the Company to own beneficially 5% or more of its outstanding shares of
Common Stock, (ii) each director and director-nominee, (iii) the Chief Executive
Officer and each of the Company's next four most highly compensated executive
officers whose individual compensation exceeded $100,000 in the fiscal year
ended January 31, 1996, and (iv) all directors and executive officers of the
Company as a group. Except as otherwise indicated, the Company believes that the
beneficial owners of the Common Stock listed below, based on information
furnished by such owners, have sole voting and investment power with respect to
such shares, subject to community property laws where applicable.
Percentage
Beneficially Owned
-------------------
Shares Beneficially
Name and Address of Owned Prior to Before After
Beneficial Owner(1) Offering(2) Offering Offering
---------------------- -------------------- -------- --------
David M. Nussbaum(3) 1,226,111(4) 21.7% 15.0%
Roger N. Gladstone(3) 1,226,111(5) 21.7% 15.0%
c/o GKN Securities Corp.
433 Plaza Real
Suite 245
Boca Raton, Florida 33432
Peter R. Kent 44,444(6) * *
Lester Rosenkrantz -0-(7) * *
Robert H. Gladstone(3) 452,778(8) 8.0% 5.5%
James Krantz 152,375(9) 2.7% 1.9%
c/o York International Agency, Inc.
1 Executive Boulevard
Yonkers, NY 10701
John P. Margaritis 10,000(10) * *
c/o Ogilvy, Adams & Rinehart
708 Third Avenue
New York, NY 10017
Arnold B. Pollard 10,000(10) * *
c/o Chief Executive Magazine
733 Third Avenue
New York , NY 10017
All Executive Officers and Directors 3,121,819 54.9% 38.1%
(8 persons)(11)
43
<PAGE>
______________________________
* Represents beneficial ownership of less than 1% of the Common Stock.
(1) Unless otherwise indicated, the holders' address is c/o GKN Holding Corp.,
61 Broadway, New York, New York 10006.
(2) Each stockholder has sole voting and sole investment power with respect to
all shares for which beneficial ownership is shown, except where otherwise
indicated.
(3) Roger N. Gladstone and Robert H. Gladstone are brothers. David M. Nussbaum
is Roger N. Gladstone's brother-in-law.
(4) Does not include shares issuable upon exercise of options to purchase
20,000 shares at $4.95 per share, which become exercisable in three annual
installments commencing December 31, 1996.
(5) Does not include shares issuable upon exercise of options to purchase
20,000 shares at $4.95 per share, which become exercisable in three annual
installments commencing December 31, 1996.
(6) Includes 44,444 shares issuable upon exercise of options at $4.50 per share
through July 2005. Does not include 25,556 shares issuable upon exercise
of options exercisable at $4.50 per share, which become exercisable in two
annual installments beginning in July 1997.
(7) Does not include 25,000 shares issuable upon exercise of options
exercisable at $6.00 per share, which become exercisable in three equal
annual installments beginning in January 1997.
(8) Includes 50,000 shares issuable upon exercise of options held by Shawn
Gladstone, Robert H. Gladstone's wife, exercisable at $2.20 per share
through January 2002. Does not include 2,500 shares issuable upon exercise
of other options held by Ms. Gladstone, which do not become exercisable
until December 1996, and options to purchase 6,666 shares at $4.50 per
share, which become exercisable in three annual installments commencing
December 31, 1996.
(9) Includes 3,125 shares held by Mr. Krantz' wife and 10,000 shares issuable
upon exercise of options, 5,000 of which are exercisable at $2.20 per share
and the remaining 5,000 of which are exercisable at $6.00 per share .
Does not include shares issuable upon exercise of options to purchase
1,000 shares at $4.50 per share, which become exercisable February 2000.
(10) Includes 10,000 shares issuable upon exercise of options at $6.00 per
share through July 2006,
(11) Includes the shares subject to options and included in the table, as set
forth in footnotes (6), (8), (9), and (10), and excludes those shares
indicated in footnotes (4), (5), (6), (7), (8) and (9) as being excluded
therefrom.
CERTAIN TRANSACTIONS
In March 1991, the Company agreed to lend to David M. Nussbaum, Roger N.
Gladstone, James Krantz and Jonathan Krantz (James Krantz' brother) up to an
aggregate of $250,000 to cover capital calls made on them in their capacity as
limited partners of Heather Croft Associates Limited Partnership ("Heather
Croft"). All such loans are due and payable three years from the date each loan
was made, together with interest at 10% per annum. All such loans had been
repaid as of January 31, 1996. Prior to such repayment, the maximum amount
outstanding under this arrangement, including accrued interest was $305,000.
Messrs. Nussbaum, Gladstone, Krantz and Krantz, in the aggregate, own 66% of
the limited partnership interests of Heather Croft. In consideration of the
Company agreeing to make the above-described loans, each of Messrs. Nussbaum
and Gladstone agreed to pay
44
<PAGE>
to the Company, when and as received by him, 25% of any distributions from
Heather Croft (other than repayment of indebtedness) over and above his
original capital contribution to Heather Croft ("Partner's Profits") and each
of James Krantz and Jonathan Krantz agreed to pay 10% of his Partner's Profits
to the Company. As of the date hereof, no Partner's Profits have been
distributed.
The Company has purchased and continues to purchase insurance using York
International Agency, Inc. ("York") as its agent. James Krantz, a director of
the Company, is President and Chief Executive Officer, a director and a
stockholder of York. In the years ended January 31, 1994, 1995 and 1996, the
Company paid premiums for insurance policies purchased through York (a portion
of which amounts are paid by the insurer to York) of $92,000, $114,000 and
$98,000, respectively.
In the fiscal year ended January 31, 1995, the Company loaned Mr. Lester
Rosenkrantz, Executive Vice President and a Director of the Company, an
aggregate of $99,000. An additional $25,000 loan was made in the year ended
January 31, 1996. Mr. Rosenkrantz repaid $10,000 in December 1995 and $20,000 in
March 1996, leaving an aggregate outstanding principal balance as of May 31,
1996 of $94,000. These loans are payable without interest and are collateralized
through the pledge by Mr. Rosenkrantz of his interest in certain underwriter
warrants.
In March 1995, the Company loaned Mr. Roger Gladstone $200,000, which was
repaid by Mr. Gladstone by offset against his salary over a period of ten
months, without interest.
In October 1995, the Company repurchased from the mother of Mr. Roger
Gladstone an aggregate of 100,000 shares of Common Stock for $200,000, or $2.00
per share. The shares were originally purchased at a price of $.80 per share.
In May 1996, David Nussbaum, Roger Gladstone and Robert Gladstone exercised
stock options to purchase 250,000 shares, 250,000 shares and 125,000 shares of
Common Stock, respectively, at purchase prices of $.88, $.88 and $.80,
respectively, which purchase prices were paid by delivery to the Company of
shares of the Company's Common Stock owned by optionholders, valued for this
purpose at $4.50 per share.
In connection with its corporate finance and investment banking activities,
GKN is often issued warrants to purchase securities of the issuer for whom its
services are rendered ("Underwriter Warrants"). Generally, at least 50% of the
aggregate number of Underwriter Warrants issuable to GKN are issued to its
executive officers and other personnel involved in the transaction (collectively
the "Individual Holders"). GKN has, in the past, and may, in the future,
purchase Underwriter Warrants from the Individual Holders at a price equal to
the market price of the underlying securities less the exercise price of the
Underwriter Warrants. Additionally, GKN has, in the past, and may, in the
future, lend to the Individual Holders funds to pay the exercise price of the
Underwriter Warrants, which loans are repaid, without interest, within a period
of no more than two weeks.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 35,000,000 shares
of Common Stock, par value $.0001 per share, and 5,000,000 shares of Preferred
Stock, par value $.10 per share ("Preferred Stock").
Common Stock
There are currently 5,559,125 shares of Common Stock issued and outstanding
(excluding 783,750 shares held in the Company treasury), held of record by 77
stockholders. After completion of this Offering, there will be 8,059,125 shares
of Common Stock issued and outstanding.
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Stockholders do not
have cumulative voting rights. Subject to preferences that may be applicable to
any then outstanding Preferred Stock, holders of Common Stock are entitled to
receive ratably such
45
<PAGE>
dividends as may be declared from time to time by the Board of Directors out of
funds legally available therefor. See "Dividend Policy." In the event of a
dissolution, liquidation or winding-up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding Preferred
Stock. Holders of Common Stock have no right to convert their Common Stock into
any other securities. The Common Stock has no preemptive or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are, and the Common Stock
to be outstanding upon completion of this Offering will be, duly authorized,
validly issued, fully paid and nonassessable.
Preferred Stock
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series. The issuance of Preferred Stock could
adversely affect the voting power of holders of Common Stock and could have the
effect of delaying, deferring or preventing a change in control of the Company.
Delaware Law and Certain Charter Provisions
Upon the closing of this offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law. In general,
this statute prohibits a publicly-held Delaware corporation from engaging, under
certain circumstances, in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person becomes an interested stockholder, unless either (i) prior to
the date at which the stockholder became an interested stockholder the Board of
Directors approved either the business combination or the transaction in which
the person becomes an interested stockholder, (ii) the stockholder acquires more
than 85% of the outstanding voting stock of the corporation (excluding shares
held by directors who are officers or held in certain employee stock plans) upon
consummation of the transaction in which the stockholder becomes an interested
stockholder or (iii) the business combination is approved by the Board of
Directors and by two-thirds of the outstanding voting stock of the corporation
(excluding shares held by the interested stockholder) at a meeting of
stockholders (and not by written consent) held on or subsequent to the date of
the business combination. An "interested stockholder" is a person who, together
with affiliates and associates, owns (or at any time within the prior three
years did own) 15% or more of the corporation's voting stock. Section 203
defines a "business combination" to include, without limitation, mergers,
consolidations, stock sales and asset based transactions and other transactions
resulting in a financial benefit to the interested stockholder.
The Company's Amended and Restated Certificate of Incorporation and its
By-laws also contain provisions relating to corporate governance and to the
rights of stockholders. Certain of these provisions may be deemed to have a
potential "anti-takeover" effect, in that such provisions may delay, defer or
prevent a change of control of the Company. These provisions include the
authority of the Board of Directors to issue series of Preferred Stock with such
voting rights and other powers as the Board of Directors may determine, a
staggered board of directors consisting of three classes, such that after the
next annual meeting of stockholders only one class of directors is elected at
any one annual meeting of stockholders, and a provision requiring that
notification of nominations for directors made by stockholders be furnished to
the Company at least 90 days prior to the date of the meeting at which the
election of such nominees is to be considered and voted upon by the stockholders
of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company, New York, New York.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
8,059,125 shares of Common Stock. All shares acquired in this Offering, other
than shares that may be acquired by "affiliates" of the Company as defined by
Rule 144 under the Act, will be freely transferable without restriction or
further registration under the Act.
All of the shares of Common Stock outstanding prior to the date of this
Prospectus are " restricted securities," as that term is defined under Rule 144
promulgated under the Act. Substantially all of the 5,559,125 shares outstanding
prior to this Offering will be available for resale in the public market under
Rule 144 commencing on the date of this Prospectus; however, David M. Nussbaum,
the Chairman of the Board and Chief Executive Officer of the Company and GKN,
Roger N. Gladstone, the President of the Company and GKN, and Robert H.
Gladstone, an Executive Vice President of the Company and GKN, have agreed not
to sell the shares they currently own (an aggregate of ____________ shares of
Common Stock) for a period of ______ months from the date of this Prospectus
without the unanimous consent of the Company's independent directors. No
prediction can be made as to the effect, if any, that sales of shares of Common
Stock or the availability of such shares for sale will have on the market prices
prevailing from time to time. Nevertheless, the possibility that substantial
amounts of Common Stock may be sold in the public market may adversely affect
the prevailing market price for the Common Stock and could impair the Company's
ability to raise capital through the sale of its equity securities.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated), including any affiliate of the
Company, who beneficially owns "restricted shares" for a period of at least two
years is entitled to sell within any three-month period, shares equal in number
to the greater of (i) 1% of the then-outstanding shares of Common Stock
(approximately 80,591 shares immediately after this Offering) or (ii) the
average weekly trading volume of the Common Stock during the four calendar weeks
preceding the filing of the required notice of sale with the Securities and
Exchange Commission. The seller also must comply with the notice and manner of
sale requirements of Rule 144, and there must be current public information
available about the Company. In addition, any person (or persons whose shares
are aggregated) who is not, at the time of the sale, nor during the preceding
three months, an affiliate of the Company, and who has beneficially owned
restricted shares for at least three years, can sell such shares under Rule
144 without regard to notice, manner of sale, public information or the volume
limitations described above.
UNDERWRITING
________________ and GKN (collectively, the "Underwriters") have severally
agreed, subject to the terms and conditions of the Underwriting Agreement, to
purchase from the Company a total of 2,500,000 Shares. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
approval of certain legal matters by counsel and various other conditions
precedent, and that the Underwriters are obligated to purchase all of the Shares
offered by this Prospectus (other than the Shares covered by the over-allotment
option described below), if any are purchased.
The Underwriters have advised the Company that they propose to offer the
Shares to the public at the initial offering price set forth on the cover page
of this Prospectus and to certain dealers at that price less a concession not
in excess of $_____ per Share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $_____ per Share to certain other
dealers. After the initial public offering, the offering price and other
selling terms may be changed by the Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Act. The Company has also agreed to
pay to the Underwriters an expense allowance on a nonaccountable basis equal to
_____% of the gross proceeds derived from the sale of the Shares underwritten
(including the sale of any Shares subject to the Underwriters' over-allotment
option). The Company also has agreed to pay all expenses in connection with
qualifying the Shares offered hereby for sale under the laws of such states as
the Underwriters may designate, including fees and expenses of counsel retained
for such purposes by the Underwriters.
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<PAGE>
The Company has granted to the Underwriters an option, exercisable during
the 45-day period after the date of this Prospectus, to purchase from the
Company at the offering price, less underwriting discounts and the
nonaccountable expense allowance, up to an aggregate of 375,000 additional
Shares for the sole purpose of covering over-allotments, if any.
Determination of Public Offering Price
Under Schedule E of the By-Laws of the NASD, when a member of the NASD,
such as GKN, participates in the public distribution of securities of an
"affiliate," such as the Company, the public offering price can be no higher
than recommended by a qualified independent underwriter. In accordance with this
requirement, _________ has agreed to act in such role and to recommend an
initial public offering price in compliance with the requirements of Schedule E.
_________, in its role as qualified independent underwriter, has participated in
the preparation of the Registration Statement of which this Prospectus forms a
part and has performed "due diligence" with respect thereto. ___________ has
agreed to undertake the legal responsibilities and liabilities of an underwriter
under the Act, specifically including those inherent in Section 11 thereof. The
Company and GKN have agreed to indemnify _____________ against certain
liabilities under the Act.
LEGAL MATTERS
The legality of the securities offered hereby has been passed upon for the
Company by Graubard Mollen & Miller, New York, New York. ______________, has
acted as counsel for the Underwriters in connection with this offering.
EXPERTS
The financial statements of the Company as of January 31, 1995 and 1996 and
for each of the two years in the period ended January 31, 1996 have been
included herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. The financial
statements of the Company for the year ended January 31, 1994 have been included
herein in reliance upon the report of Goldstein Golub Kessler & Company, P.C.,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission in Washington, D.C., a
Registration Statement under the Act with respect to the Shares offered by this
Prospectus. This Prospectus does not contain all of the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and this Offering, reference is made to the Registration
Statement, including the exhibits filed therewith, copies of which may be
obtained at prescribed rates from the Commission at the public reference
facilities maintained by the Commission at Judiciary Plaza Building, 450 Fifth
Street, N.W., Washington, D.C. 20549; and its regional offices located at Suite
1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois
60661, and Seven World Trade Center, 13th Floor, New York, New York 10048.
Descriptions contained in this Prospectus as to the contents of any contract or
other documents filed as an exhibit to the Registration Statement are not
necessary complete and each such description is qualified by reference to such
contract or document.
48
<PAGE>
GKN HOLDING CORP. AND SUBSIDIARIES
Consolidated Financial Statements
Years ended January 31, 1996, 1995 and 1994
(With Independent Auditors' Reports Thereon)
<PAGE>
GKN HOLDING CORP. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Pages
-----
Consolidated Statements of Financial Condition as of January 31, 1996
and 1995, and as of April 30, 1996 (Unaudited) F-2
Consolidated Statements of Operations for the years ended January 31,
1996, 1995 and 1994, and the three months ended April 30, 1996 and
1995 (Unaudited) F-3
Consolidated Statements of Changes in Stockholders' Equity for the years
ended January 31, 1994, 1995 and 1996, and the three months ended
April 30, 1996 (Unaudited) F-4
Consolidated Statements of Cash Flows for the years ended January 31,
1996, 1995 and 1994, and the three months ended April 30, 1996 and
1995 (Unaudited) F-6
Notes to Consolidated Financial Statements F-7
Independent Auditors' Report (KPMG Peat Marwick LLP) F-16
Independent Auditor's Report (Goldstein Golub Kessler & Company, P.C.) F-17
F-1
<PAGE>
GKN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Financial
Condition
<TABLE><CAPTION>
January 31, April 30,
1996 1995 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 7,873,000 $ 3,123,000 $ 10,923.000
Due from clearing firm 4,338,000 3,129,000 9,726,000
Commissions receivable 106,000 128,000 152,000
Syndicate fees receivable 369,000 - 43,000
Securities owned, at market value 8,152,000 5,440,000 5,692,000
Securities owned, not readily
marketable, at fair value 1,744,000 474,000 1,781,000
Investments, at cost 292,000 - 160,000
Office furniture, equipment and
leasehold improvements
(net of accumulated depreciation
and amortization of $1,027,000,
$690,000 and $1,109,000,
respectively) 964,000 1,162,000 1,008,000
Goodwill (net of accumulated
amortization of $11,000 at
January 31, 1996 and $27,000 at
April 30, 1996) 1,595,000 - 1,581,000
Loans receivable 1,435,000 1,566,000 761,000
Income taxes receivable (including
deferred taxes of $22,000 at
January 31, 1995) - 448,000 -
Other assets 985,000 626,000 1,290,000
----------- ----------- -----------
Total assets $ 27,853,000 $ 16,096,000 $ 33,117,000
=========== =========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Securities sold, not yet
purchased, at market value $ 4,015,000 $ 1,793,000 $ 6,167,000
Commissions payable 1,992,000 1,204,000 2,649,000
Deferred compensation 331,000 144,000 789,000
Income taxes payable
(including deferred taxes
of $1,292,000 and $940,000
at January 31, 1996
and April 30, 1996) 1,610,000 - 3,048,000
Accrued expenses and other
liabilities 4,195,000 1,198,000 2,695,000
----------- ----------- -----------
12,143,000 4,339,000 15,348,000
Liability subordinated to the
claims of general creditors 934,000 - 868,000
----------- ----------- -----------
Total liabilities 13,077,000 4,339,000 16,216,000
----------- ----------- -----------
Stockholders' equity:
Common stock, $.0001 par value;
35,000,000 shares authorized,
5,397,875, 5,397,875 and
5,602,875 shares issued,
respectively, and 4,885,375,
5,110,375 and 5,054,125
shares outstanding, respectively 1,000 1,000 1,000
Series A preferred stock $.10
par value; 5,000,000 shares
authorized, 1,000 shares issued
and outstanding at January 31,
1995 (liquidation value $1 per share) - - -
Additional paid-in capital 3,487,000 3,487,000 3,487,000
Retained earnings 11,918,000 8,449,000 14,164,000
Cumulative translation adjustment - - (18,000)
----------- ----------- -----------
15,406,000 11,937,000 17,634,000
Less treasury stock - at cost
512,500, 287,500 and 548,750
shares, respectively (630,000) (180,000) (733,000)
----------- ----------- -----------
Total stockholders'
equity 14,776,000 11,757,000 16,901,000
----------- ----------- -----------
Total liabilities and
stockholders' equity $ 27,853,000 $16,096,000 $33,117,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
GKN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
Three months ended
Year ended January 31, April 30.
1996 1995 1994 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Commissions $ 30,418,000 21,804,000 19,803,000 12,068,000 5,268,000
Investment banking 6,003,000 9,607,000 10,027,000 3,413,000 1,431,000
Principal transactions 5,683,000 433,000 2,739,000 2,477,000 266,000
Interest 717,000 262,000 203,000 337,000 126,000
Other 198,000 304,000 184,000 149,000 66,000
------------ ----------- ----------- ------------ -----------
Total revenues 43,019,000 32,410,000 32,956,000 18,444,000 7,157,000
------------ ----------- ----------- ------------ -----------
Expenses:
Compensation and
benefits 27,121,000 22,856,000 18,819,000 10,728,000 5,241,000
Communications 2,631,000 2,563,000 1,990,000 839,000 619,000
Brokerage, clearing and
exchange fees 1,350,000 908,000 695,000 631,000 267,000
Occupancy and equipment 2,180,000 1,711,000 1,260,000 655,000 519,000
Business development 851,000 780,000 702,000 273,000 208,000
Professional fees 703,000 1,251,000 917,000 733,000 237,000
Other 1,896,000 1,447,000 1,151,000 590,000 435,000
------------ ----------- ----------- ------------ -----------
Total expenses 36,732,000 31,516,000 25,534,000 14,449,000 7,526,000
------------ ----------- ----------- ------------ -----------
Income (loss) before provision
(benefit) for income taxes 6,287,000 894,000 7,422,000 3,995,000 (369,000)
------------ ----------- ----------- ------------ -----------
Income tax expense (benefit):
Current 1,612,000 747,000 3,262,000 2,101,000 (117,000)
Deferred 1,206,000 (234,000) 154,000 (352,000) 4,000
------------ ----------- ----------- ------------ -----------
Provision (benefit) for
income taxes 2,818,000 513,000 3,416,000 1,749,000 (113,000)
------------ ----------- ----------- ------------ -----------
Net income (loss)
$3,469,000 381,000 4,006,000 2,246,000 (256,000)
============ =========== =========== ============ ===========
Income (loss) per common share * $ .61 .07 .72 .40 (.04)
============ =========== =========== ============ ===========
Weighted average common shares
outstanding 5,729,360 5,694,966 5,529,684 5,638,260 5,784,300
============ =========== =========== ============ ===========
</TABLE>
* Represents primary earnings per share. The difference between primary and
fully diluted earnings per share is not material.
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
GKN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended January 31, 1994, 1995 and 1996 and three months ended April 30, 1996 (Unaudited)
Common Stock Preferred Stock Additional
------------ --------------- Paid-in Retained
Shares Amount Shares Amount Capital Earnings
------ ------ ------ ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1993 5,241,000 $1,000 1,000 $ - $ 3,327,000 $ 4,062,000
Stock issued 10,000 - - - 60,000 -
Net income - - - - - 4,006,000
--------- ------ --------- -------- -------------- -------------
Balance at January 31, 1994 5,251,000 1,000 1,000 - 3,387,000 8,068,000
Net income - - - - - 381,000
Stock issued in conversion of
subordinated debt 162,500 - - - 162,000 -
Retirement of shares issued (15,625) - - - (62,000) -
--------- ------ --------- -------- -------------- -------------
Balance at January 31, 1995 5,397,875 1,000 1,000 - 3,487,000 8,449,000
Net income - - - - - 3,469,000
Expiration of preferred shares - - (1,000) - - -
Purchase of treasury shares - - - - - -
--------- ------ --------- -------- -------------- -------------
Balance at January 31, 1996 5,397,875 1,000 - - 3,487,000 11,918,000
Net income - - - - - 2,246,000
Stock issued 205,000 - - - 342,000 -
Subscription receivable - - - - (121,000) -
Notes receivable - - - - (221,000) -
Purchase of treasury shares - - - - - -
Translation adjustment - - - - - -
--------- ------ --------- -------- -------------- -------------
Balance at April 30, 1996 5,602,875 $1,000 - $ - $ 3,487,000 $ 14,164,000
========= ====== ========= ======== ============== =============
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
GKN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended January 31, 1994, 1995 and 1996 and three months ended April 30, 1996 (Unaudited)
(Continued)
<CAPTION>
Cumulative Treasury Stock
Translation --------------
Adjustment Shares Amount Total
---------- ------ ------ -----
<S> <C> <C> <C>
Balance at January 31, 1993 $ - 287,500 $ (180,000) $7,210,000
Stock issued - - - 60,000
Net income - - - 4,006,000
--------- -------- --------- -----------
Balance at January 31, 1994 - 287,500 (180,000) 11,276,000
Net income - - - 381,000
Stock issued in conversion of
subordinated debt - - - 162,000
Retirement of shares issued - - - (62,000)
--------- -------- --------- -----------
Balance at January 31, 1995 - 287,500 (180,000) 11,757,000
Net income - - - 3,469,000
Expiration of preferred shares - - - -
Purchase of treasury shares - 225,000 (450,000) (450,000)
--------- -------- --------- -----------
Balance at January 31, 1996 - 512,500 (630,000) 14,776,000
Net income - - - 2,246,000
Stock issued - - - 342,000
Subscription receivable - - - (121,000)
Notes receivable - - - (221,000)
Purchase of treasury shares - 36,250 (103,000) (103,000)
Translation adjustment (18,000) - - (18,000)
--------- -------- --------- -----------
Balance at April 30, 1996 $ (18,000) 548,750 $ (733,000) $16,901,000
========= ======== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
GKN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three months ended
Year ended January 31, April 30
1996 1995 1994 1996 1995
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,469,000 $ 381,000 $ 4,006,000 $ 2,246,000 $(256,000)
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Deferred taxes 1,206,000 (234,000) 154,000 (352,000) 4,000
Depreciation 138,000 287,000 189,000 68,000 33,000
Amortization 277,000 - - 64,000 56,000
----------- ----------- ---------- ---------- ----------
5,090,000 434,000 4,349,000 2,026.000 (163,000)
(Increase) decrease in operating assets:
Securities purchased under agreements to resell - 3,057,000 (3,057,000) - -
Due from clearing firm (1,209,000) 404,000 1,888,000 (5,388,000) 543,000
Commissions receivable 22,000 (20,000) - (46,000) (17,000)
Syndicate fees receivable (369,000) - - 326,000 -
Securities owned, at market value (2,712,000) (1,867,000) (303,000) 2,460,000 3,155,000
Securities owned, not readily marketable (1,270,000) 277,000 (550,000) (37,000) (127,000)
Investments (292,000) - - 132,000 -
Loans receivable 131,000 (1,205,000) - 674,000 (460,000)
Income taxes receivable 448,000 (448,000) - - 448,000
Other assets (359,000) 387,000 (645,000) (305,000) (754,000)
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased 2,222,000 171,000 (1,993,000) 2,152,000 (137,000)
Commissions payable 788,000 178,000 156,000 657,000 (306,000)
Deferred compensation 187,000 (27,000) - 458,000 684,000
Income taxes payable (17,000) 136,000 85,000 1,790,000 (4,000)
Accrued expenses and other liabilities 3,418,000 (568,000) 598,000 (1,500,000) (585,000)
Translation adjustment - - - (18,000) -
----------- ----------- ---------- ---------- ----------
Net cash provided by operating activities 6,078,000 909,000 528,000 3,381,000 2,277,000
----------- ----------- ---------- ---------- ----------
Cash flows from investing activities:
Purchase of office furniture, equipment and
leasehold improvements (206,000) (646,000) (380,000) (162,000) (42,000)
Goodwill resulting from acquisition (1,606,000) - - - -
----------- ----------- ---------- ---------- ----------
Net cash used in investing activities (1,812,000) (646,000) (380,000) (162,000) (42,000)
----------- ----------- ---------- ---------- ----------
Cash flows from financing activities:
Issuance (retirement) of common shares - (62,000) 60,000 - -
Purchase of treasury stock (450,000) - - (103,000) -
Issuance in subordinated debt 934,000 - - - -
Repayment of subordinated debt - - - (66,000) -
----------- ----------- ---------- ---------- ----------
Net cash provided by (used) in financing
activities 484,000 (62,000) 60,000 (169,000) -
----------- ----------- ---------- ---------- ----------
Net increase in cash and cash equivalents 4,750,000 201,000 208,000 3,050,000 2,235,000
Cash and cash equivalents at beginning of period 3,123,000 2,922,000 2,714,000 7,873,000 3,123,000
----------- ----------- ---------- ---------- ----------
Cash and cash equivalents at end of period $ 7,873,000 $ 3,123,000 $2,922,000 $10,923,000 $5,358,000
=========== =========== =========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes $ 900,000 $ 1,456,000 $2,837,000 $1,551,000 $ -
=========== =========== =========== ========== ==========
Cash paid during the period for interest $ - $ - $ 25,000 $ 17,000 $ -
=========== =========== =========== ========== ==========
Non cash financing activities:
Conversion of subordinated notes to common shares $ - $ 162,000 $ - $ - $ -
=========== =========== =========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
GKN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information as of April 30, 1996 and for the three months ended April 30, 1996
and 1995 is Unaudited)
(1) Organization and Business
GKN Holding Corp. and subsidiaries (the "Company") are primarily engaged in
securities brokerage, investment banking and trading. The Company's
principal wholly owned subsidiaries, GKN Securities Corp. ("GKN
Securities") and Shochet Securities, Inc. ("Shochet"), are both broker-
dealers registered with the Securities and Exchange Commission. Through its
broker-dealer subsidiaries, the Company executes principal and agency
transactions, makes markets in over-the-counter securities and performs
underwriting and investment banking services. GKN Securities' and Shochet's
customers are located throughout the United States. Both companies execute
and clear all customer transactions with the same unaffiliated broker-
dealer on a fully disclosed basis. As discussed in note 12, Shochet was
acquired at the close of business, November 30, 1995.
(2) Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of GKN Holding
Corp. and its subsidiaries. All intercompany accounts and transactions are
eliminated in consolidation. These consolidated financial statements
reflect, in the opinion of management, all adjustments (consisting of
normal, recurring accruals) necessary for a fair presentation of the
consolidated financial position of the Company.
The Company records securities transactions, including due from clearing
firm, income from security transactions and commission revenue and expense
on a trade-date basis.
Securities owned and securities sold, not yet purchased, principally
comprised of equities, are stated at quoted market values. Securities
owned, not readily marketable, principally comprised of warrants, are
carried at management's estimate of fair value based on a percentage of the
market value of the underlying securities. Changes in unrealized
appreciation (depreciation) arising from fluctuations in market value or
upon realization of security positions are reflected in the statements of
operations.
Investment banking revenues from management fees and underwriting fees are
recognized on a trade-date basis. Advisory fee revenues are recorded when
services are substantially completed and the revenues are reasonably
determinable.
Primary income per common share is calculated based on the weighted average
number of shares of common stock and common stock equivalents outstanding.
Common stock equivalents represent the dilutive effect of the assumed
exercise of certain outstanding stock options. All assumed exercises of the
outstanding stock options were done using the treasury stock method.
Investments primarily represent the Company's investment in limited
partnerships which are shown at cost.
(Continued)
F-7
<PAGE>
GKN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Office furniture and equipment is depreciated using the modified
accelerated cost recovery method over their estimated useful lives.
Leasehold improvements are amortized over the terms of the applicable
leases or the useful lives of the assets, whichever is less. Goodwill,
representing the difference between the purchase price of Shochet and the
underlying net assets at the date of acquisition, is amortized over 25
years on a straight-line basis.
For purposes of the consolidated statements of cash flows, the Company
considers all demand deposits held in banks and highly liquid investments
with maturities of 90 days or less to be cash equivalents.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
Certain reclassifications have been made to prior year financial statements
to conform to the 1996 presentation.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 ("FAS 123"), Accounting for Stock Based
Compensation, in October, 1995. The adoption of FAS 123, which will become
effective for fiscal years beginning after December 15, 1995, would not
have a material effect on the Company's consolidated financial statements.
(3) Due from Clearing Firm
The clearing and depository operations for brokerage transactions are
provided by an unaffiliated broker-dealer. At January 31, 1996 and 1995,
substantially all of the securities owned, securities sold, not yet
purchased, and the amount due from the clearing firm reflected in the
consolidated statements of financial condition are positions with and
amounts due from this firm.
The Company's broker-dealer subsidiaries have agreed to indemnify its
clearing firm for losses that the clearing firm may sustain from the
customer accounts introduced by the broker-dealers. As of January 31, 1996
and 1995, substantially all of the amounts owed to the clearing firm by
these customers are collateralized by securities owned by the customers.
(4) Related Party Transactions
Included in loans receivable, at January 31, 1996 and 1995, and at April
30, 1996, are amounts due from officers of the Company amounting to
approximately $198,000, $186,000 and $94,000, respectively. At January 31,
1996 and 1995, and at April 30, 1996, $557,000, $939,000 and $382,000,
respectively, included in loans receivable represent payments made to
brokers in anticipation of these brokers generating commission revenue
(Continued)
F-8
<PAGE>
GKN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
in accordance with the loan agreement over the life of the agreement. Until
the specified amount of commission revenue is generated, the broker is
liable to the Company for all amounts advanced to the broker. These
advances are not collateralized, nor do they bear interest. All amounts are
amortized on a monthly basis over the time period specified in the
agreement. At January 31, 1996 advances were being amortized over a period
of five months to three years.
(5) Net Capital Requirements
The broker-dealers are subject to the Securities and Exchange Commission's
Uniform Net Capital Rule 15c3-1 (the "Rule"), which requires the
maintenance of minimum net capital.
GKN Securities has elected to compute its net capital using the alternative
method permitted by the Rule, which requires that GKN Securities maintain
minimum net capital, as defined, to be greater than or equal to $250,000.
At January 31, 1996, GKN Securities had net capital of $9,407,000, which
was $9,157,000 in excess of required net capital of $250,000. At January
31, 1995, GKN Securities had net capital of $4,327,000, which was
$4,077,000 in excess of required net capital of $250,000. At April 30,
1996, GKN Securities had net capital of $10,807,000, which was $10,557,000
in excess of required net capital of $250,000.
Shochet has elected to compute net capital under the standard aggregate
indebtedness method permitted by the Rule, which requires that the ratio of
aggregate indebtedness to net capital, both as defined, shall not exceed 15
to 1. At January 31, 1996, Shochet had net capital of $314,000 and a net
capital requirement of $100,000. Shochet's net capital ratio at January 31,
1996 was 1.4 to 1.
(6) Commitments and Contingencies
The Company is obligated under noncancelable leases or subleases for office
facilities. The leases are subject to escalations for the Company's share
of increases in operating costs. Rent expense included in occupancy and
equipment expense for the years ended January 31, 1996, 1995 and 1994, and
for the three months ended April 30, 1996 and 1995 totaled $1,218,000,
$977,000, $752,000, $362,000 and $319,000, respectively.
(Continued)
F-9
<PAGE>
GKN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The future aggregate minimum rental commitments under these leases are as
follows:
Year ending January 31, Amount
----------------------- ------
1997 $ 1,146,000
1998 1,089,000
1999 482,000
2000 243,000
2001 127,000
Thereafter 506,000
-------
$ 3,593,000
=========
Various legal proceedings are pending against the broker-dealers.
Management believes that, other than as reflected in the consolidated
financial statements, the aggregate liability resulting from these
proceedings will not be material.
(7) Stockholders' Equity
Effective May 31, 1994, the Company approved a 1-for-2 reverse stock split
of its common stock (the "Reverse Split") and amended and restated the
Certificate of Incorporation to effect such Reverse Split and to reduce the
number of authorized shares to 40,000,000, consisting of 35,000,000 shares
of common stock, $.0001 par value ("Common Stock") and 5,000,000 shares of
preferred stock, $.10 par value ("Preferred Stock"). All references in the
consolidated financial statements and related notes to number of shares and
exercise, conversion and purchase prices have been restated to reflect the
Reverse Split on a retroactive basis.
The 1991 Employee Incentive Plan of the Company (the "Incentive Plan")
currently provides for the granting of up to 5,000,000 shares of common
stock by the Board of Directors, at its discretion, in the form of
incentive stock rights, stock options, stock appreciation rights, limited
stock appreciation rights or the sale of shares of common stock pursuant to
restricted stock purchase agreements (collectively such rights, options and
shares are referred to herein as "Awards"). Stock options granted under the
Incentive Plan may qualify as "Incentive Stock Options" under Section 422
of the Internal Revenue Code of 1986, as amended. Awards may be granted to
executive officers, employees and consultants of the Company and its
subsidiaries.
The exercise price of all stock options granted under the Incentive Plan is
determined by the Board of Directors of the Company at the time of grant.
However, the exercise price of all Incentive Stock Options granted under
the Incentive Plan must be at least equal to the fair market value of the
common stock on the date of grant or, in the case of Incentive Stock
Options granted to a holder of more than 10% of the Company's common stock,
at least 110% of the fair market value of such shares on the date of the
grant. In the case of other options granted under the Incentive Plan, the
exercise price must be at least equal to 65% of the fair market value of
the common stock on the date of grant. The maximum
(Continued)
F-10
<PAGE>
GKN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
exercise period for which options may be granted under the Incentive Plan
is ten years from the date of grant for Incentive Stock Options (five years
in the case of Incentive Stock Options granted to an individual owning more
than 10% of the Company's common stock) and 13 years for other options. At
January 31, 1996, the Company had 1,896,673 stock options outstanding, of
which 1,813,173 are Incentive Stock Options and 83,500 are nonqualified
stock options. At January 31, 1995, the Company had 1,662,086 stock options
outstanding, of which 1,579,586 are Incentive Stock Options and 82,500 are
nonqualified stock options.
The following table summarizes activity in the Company' s stock options:
Number of Exercise price
shares per share
------ ---------
Balance at January 31, 1994 1,814,249 $ .80 - $ 6.00
Options granted during the year 105,000 $ 6.00
Options canceled during the year (257,163) $ 2.20- $ 6.00
--------
Balance at January 31, 1995 1,662,086 $ .80 - $ 6.00
Options granted during the year 368,825 $ 2.00- $ 2.30
Options canceled during the year (134,238) $ 2.20- $ 6.00
---------
Balance at January 31, 1996 1,896,673 $ .80 - $ 6.00
---------
Note 13, Subsequent Events, discusses a subsequent event related to the
change in terms of certain options previously granted.
(8) Income Taxes
The Company files consolidated Federal income tax returns and combined New
York State and New York City income tax returns.
The deferred income tax asset of $22,000 at January 31, 1995, included in
income taxes receivable, principally results from depreciation expense. No
valuation allowance was recorded as management has established a plan by
which the Company will be able to utilize the deferred tax asset. The
deferred tax liability of $1,292,000 and $940,000 at January 31, 1996 and
April 30, 1996, included in income taxes payable, results primarily from
unrealized gains on securities.
(Continued)
F-11
<PAGE>
GKN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The provision for income taxes consists of:
1996 1995 1994
---- ---- ----
Current:
Federal $ 1,110,000 $ 492,000 $ 2,011,000
State and local 502,000 255,000 1,251,000
----------- ------- ---------
Total current 1,612,000 747,000 3,262,000
Deferred tax expense (benefit) 1,206,000 (234,000) 154,000
----------- ------- ---------
Total $ 2,818,000 $ 513,000 $ 3,416,000
----------- ------- ---------
The difference between income taxes computed at the statutory Federal
rate of 34% for the years ended January 31, 1996, 1995 and 1994 and the
provision for income taxes relates to the following:
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ------------------- ----------------------
Percent Percent Percent
of pre-tax of pre-tax of pre-tax
Amount income Amount income Amount income
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Provision at Federal
statutory rate $ 2,138,000 34% $ 304,000 34% $2,523,000 34%
State income taxes,
net of Federal
income tax benefit 326,000 5 166,000 18 853,000 11
Other 354,000 6 43,000 5 40,000 1
----------- ---- --------- --- ----------- ---
Total $ 2,818,000 45% $ 513,000 57% $ 3,416,000 46%
=========== ==== ========= === =========== ====
</TABLE>
(9) Concentration of Credit Risk and Off-Balance-Sheet Risks
In the normal course of business, the broker-dealers execute securities
transactions on behalf of customers through a clearing broker. The
execution of these transactions includes the purchase and sale
(including "short sales") of securities. These activities may expose
the Company to off-balance-sheet risk in the event the customer is
unable to fulfill its contractual obligations and margin requirements
are not sufficient to fully cover losses. In these situations, the
Company may be required to purchase or sell financial instruments at
prevailing market prices which may not fully cover the obligations
of its customers. The Company limits its risk by requiring customers to
maintain margin collateral that is in compliance with regulatory and
internal guidelines and by making credit inquiries when establishing
customer relationships.
(Continued)
F-12
<PAGE>
GKN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Additionally, securities sold, not yet purchased, expose the
broker-dealers to off-balance-sheet market risk, in that, subsequent
market fluctuations may require purchasing the securities at prices which
differ from the market value reflected in the consolidated statements of
financial condition.
(10) Fair Value of Financial Instruments
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 107, Disclosures About Fair Value of Financial
Instruments, which requires that all entities disclose the fair value of
financial instruments, as defined, for both assets and liabilities
recognized and not recognized in the statement of financial condition.
Virtually all of the Company's financial instruments, as defined, are
carried at, or approximate, fair value because of their short-term nature.
Fair value for these financial instruments is based on quoted market
prices for similar financial instruments.
(11) 401(k) Plan
The Company, excluding Shochet, is covered under the GKN Securities Corp.
401(k) Plan (the "Plan"). Under the provisions of the Plan, all covered
employees who have attained the age of 21 are eligible to participate in
the plan after one full year of employment. Contributions to the Plan by
employees are determined based on an elected percentage of annual
compensation, subject to an annual limit prescribed by the Internal
Revenue Service. GKN Securities may make contributions on behalf of the
employees, which are determined on an annual basis, but in no event can
such contributions exceed 1% of a participant's annual compensation or 25%
of the elected deferral, as defined, of a participant. GKN Securities has
reserved the right to terminate the Plan at its discretion. For the years
ended January 31, 1996, 1995 and 1994 and for the three months ended April
30, 1996 and 1995, GKN Securities made contributions of approximately
$62,000, $31,000, $20,000, $16,000 and $15,000 to the Plan, respectively.
(12) Acquisition of Shochet
As of the close of business, November 30, 1995 the Company acquired 100%
of the issued and outstanding shares of Shochet for approximately
$2,099,000. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the Company's results of operations include
the results of Shochet from the acquisition date.
In connection with the purchase of Shochet, the Company has signed a 7%
$1,000,000 subordinated note due in three years. Payments are made
quarterly. The estimated fair value of the subordinated note is $934,000
and $868,000 at January 31, 1996 and April 30, 1996, respectively.
Pro forma information with respect to this acquisition has not been
presented in the accompanying consolidated financial statements as it
would not differ materially from historical information.
(Continued)
F-13
<PAGE>
GKN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Subsequent Events
Commitments and Contingencies
The Company has entered into employment arrangements with three officers
of the Company who are also stockholders of the Company. These
arrangements provide for annual salaries and bonuses at the discretion of
the Board of Directors, up to 18% each of the stock purchase warrants or
options that may be issued to GKN Securities in connection with any public
offering and private placement or other transactions, as well as certain
other benefits. In May, 1996, the percentage was changed to 10%.
Stockholders' Equity
In May, 1996, the Board of Directors set the exercise price of options
granted during the year ended January 31, 1996 at $4.50 per share.
At April 30, 1996, the Company had 1,758,673 stock options outstanding, of
which 1,675,173 are Incentive Stock Options and 83,500 are nonqualified
stock options.
During May, 1996, the Company offered certain of its option holders the
opportunity to swap their options for new options. Option holders could
receive one new option for every two or three options exchanged, depending
upon the original grant date. The new options have accelerated vesting
dates and lower or equal strike prices equal to the estimated fair value
of $4.50 at April 30, 1996.
During May, 1996, 625,000 options were exercised by certain of the firm's
principals. 120,000 shares of previously owned stock were deliverable as
payment for the option exercise. The shares accepted as payment were valued
at $4.50 per share.
(Continued)
F-14
<PAGE>
GKN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes activity in the Company's stock options during
the first quarter of fiscal year 1997 and to May 28, 1996, the last day of the
option swap offer:
Number of Exercise price
shares per share
------ ---------
Balance at January 31, 1996 1,896,673 $ .80 -- $ 6.00
Options granted during the period -
Options canceled during the period (13,000) $ 2.20 -- $ 6.00
Options exercised during the period (125,000) $.80
---------
Balance at April 30, 1996 1,758,673 $ .80 -- $ 6.00
Options granted during the period 184,845 $ 4.50
Options canceled during the period (444,380) $ 4.50 -- $ 6.00
Options exercised during the period (625,000) $ .80 -- $ .88
---------
Balance at May 28, 1996 874,138 $ 2.20 -- $ 6.00
=========
At January 31, 1995, the Company had outstanding 1,000 shares of Preferred
Stock designated as Series A Preferred Stock, which were held by the two
largest common stockholders of the Company, and are entitled to one vote per
share. These preferred shares and their respective fights expired on October 4,
1995.
401(k) Plan
On May 1, 1996 the Shochet 401(k) Plan merged into the GKN Securities Corp.
401(k) Plan. All account balances of former participants in the Shochet 401(k)
Plan were transferred into the GKN Securities Corp. 401(k) Plan.
F-15
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders of
GKN Holding Corp.:
We have audited the accompanying consolidated statements of financial condition
of GKN Holding Corp. and subsidiaries as of January 31, 1996 and 1995 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the years in the two-year period ended January 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. The accompanying
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year ended January 31, 1994 were audited by other auditors whose
report thereon dated March 29, 1994 expressed an unqualified opinion on those
financial statements. A copy of the report of the other auditors is attached
hereto.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 1996 and 1995 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of GKN
Holding Corp. and subsidiaries as of January 31, 1996 and 1995 and the results
of their operations and their cash flows for each of the years in the two-year
period ended January 31, 1996 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
New York, New York
April 12, 1996,
except as to Note 13, which is
as of May 28, 1996
F-16
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of
GKN Holding Corp.
We have audited the accompanying consolidated statements of income, changes in
stockholders' equity, and cash flows of GKN Holding Corp. and Subsidiaries for
the year ended January 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
GKN Holding Corp. and Subsidiaries for the year ended January 31, 1994 in
conformity with generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
March 29, 1994
F-17
<PAGE>
========================================= ====================================
No dealer, salesperson or any
other person is authorized to
give any information or make
any representations in
connection with this Offering
other than those contained in 2,500,000 Shares
this Prospectus and, if given
or made, such information or
representations must not be GKN HOLDING CORP.
relied upon as having been
authorized by the Company or
the Underwriters. This
Prospectus does not constitute Common Stock
an offer to sell or a
solicitation of an offer to
buy any security other than
the securities offered by this
Prospectus, or an offer to
sell or a solicitation of an
offer to buy any securities by
anyone in any jurisdiction in
which such offer or
solicitation is not authorized
or is unlawful. The delivery
of this Prospectus shall not,
under any circumstances,
create any implication that
the information herein is
correct as of any time
subsequent to the date of this
Prospectus.
TABLE OF CONTENTS -----------------------
Page PROSPECTUS
Prospectus Summary . 3 -----------------------
Investment Considerations 6
Use of Proceeds . . . 12
Dilution . . . . . . 13
Capitalization . . . 14
Dividend Policy . . . 14
Selected Financial Data 15 GKN SECURITIES
Management's Discussion and
Analysis
of Financial Condition and
Results
of Operations . . . 16
Business . . . . . . . 27
Management . . . . . 36
Principal Stockholders 43
Certain Transactions 44
Description of Capital Stock 45 , 1996
Shares Eligible for Future
Sale . . . . . . . . . 47
Underwriting . . . . 47
Legal Matters . . . . . 48
Experts . . . . . . . 48
Additional Information 48
Index to Financial Statements F-1
Until , 1996 (25
days after the date of this
Prospectus), all dealers
effecting transactions in the
shares of Common Stock offered
hereby, whether or not
participating in the
distribution, may be required
to deliver a Prospectus. This
is in addition to the
obligation of dealers to
deliver a Prospectus when
acting as underwriters and
with respect to their unsold
allotments or subscriptions.
========================================= ====================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The Registrant estimates that expenses payable by it in connection with the
offering described in this registration statement (other than the
underwriting discount and commissions and reasonable expense allowance) will
be as follows:
SEC registration fee $ 4,124.14
=========
NASD filing fee 1,196.00
=========
Printing and engraving expenses *
Accounting fees and expenses *
Legal fees and expenses *
Blue sky qualification fees and expenses *
Miscellaneous *
---------------
Total . . . . . . . . . . . $400,000.00
============
_____________________________
* To be supplied by amendment.
Item 14. Indemnification of Directors and Officers.
The Registrant's Restated Certificate of Incorporation eliminates, to
the fullest extent permitted by Delaware law, personal liability of directors
to the Registrant and its stockholders for damages arising out of certain
alleged breaches of the directors' duty to the corporation.
Section 145(a) of the Delaware General Corporation Law (the "DGCL")
provides in relevant part that "a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful." With respect to
derivative actions, Section 145(b) of the DGCL provides in relevant part that
"[a] corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its
favor ... [by reason of his service in one of the capacities specified in the
preceding sentence] against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation and
except that no indemnification shall be made in respect of any claim, issue
or matter as to which such person shall have been adjudged to be liable to
the corporation unless and only to the extent that the Court of Chancery or
the court in which such action or suit was brought shall
II-1
<PAGE>
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnify for such expenses which the Court of
Chancery or such other court shall deem proper."
Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement, the Registrant has agreed to indemnify the
Underwriters and the Underwriters have agreed to indemnify the Registrant and
its directors, officers and controlling persons against certain civil
liabilities that may be incurred in connection with this offering, including
certain liabilities under the Securities Act of 1933, as amended (the
"Securities Act").
Item 15. Recent Sales of Unregistered Securities.
During the past three years, the following securities were issued by
the Registrant without registration under the Securities Act:
From February 1, 1993 to April 30, 1996, the Registrant, in the usual
course of its business, issued options to purchase 948,243 shares of its
Common Stock to its employees and consultants under its 1991 Employee
Incentive Plan at prices ranging from $4.50 to $6.00 per share. A number of
such options were terminated and in May 1996, the Registrant offered
employees the opportunity to convert their options into options for a fewer
number of shares, but with lower exercise prices and/or shorter vesting
periods. As a result of such offer, the aggregate number of outstanding
options under the Plan decreased (after giving effect to the exercises
described below) from 1,758,673 (the aggregate amount of shares, subject to
options issued since inception of the plan) to 874,138 shares (which is the
number of shares subject to outstanding options at May 31, 1996).
In February 1993, the Registrant issued 10,000 shares of Common Stock
pursuant to a private placement offering in the aggregate amount of $60,000.
In June 1994, the Registrant issued 162,500 shares of Common Stock in the
conversion of $162,500 of subordinated debt.
In connection with Registrant's acquisition of Shochet in November 1995,
Registrant agreed to issue to the sellers of the Shochet business, upon
consummation of this Offering, five-year warrants to purchase 25,000 shares
of Common Stock at an exercise price equal to the per-share offering price.
In April 1996, Registrant sold 80,000 shares of Common Stock to Mr.
Joachim Stahler, the Managing Director of GKN AG, in connection with his
employment by GKN AG, at a purchase price of $3.02 per share, payable 50% in
cash and 50% by promissory note. Registrant also issued to Mr. Stahler, in
connection with his employment, warrants to purchase 80,000 shares of Common
Stock, exercisable until January 30, 2001, at a purchase price equal to the
per-share offering price.
In February 1996, Richard Buonocore, a Vice President and the head
trader of GKN, exercised an option to purchase 125,000 shares of Common Stock
at $.80 per share, which purchase price was paid by promissory note.
In May 1996, David Nussbaum, Roger Gladstone and Robert Gladstone
exercised stock options to purchase 250,000 shares, 250,000 shares and
125,000 shares of Common Stock, respectively, at purchase prices of $.88,
$.88 and $.80, respectively, which purchase prices were paid by delivery to
Registrant of shares of Registrant's Common Stock owned by optionholders,
valued for this purpose at $4.50 per share.
In May 1996, the Company agreed to issue to Messrs. Margaritis and
Pollard, each of whom will become a director upon the consummation of this
Offering, options to purchase 10,000 shares of Common Stock, at a price equal
to the per-share offering price.
All of the foregoing securities were issued under exemption from the
registration requirements of the Securities Act pursuant to Section 4(2) of
the Securities Act and the rules and regulations promulgated under Section
II-2
<PAGE>
4(2), Rule 701 promulgated under the Securities Act, and/or Section 3(a)(9)
of the Securities Act.
Item 16. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed as part of this Registration
Statement:
Exhibit No. Description
------------ -----------
1.1 * Form of Underwriting Agreement.
1.2 * Form of Selected Dealers Agreement
3.1 + Registrant's Restated Certificate of Incorporation.
3.1(a) + Amendment, effective as of May 31, 1994, to Registrant's
Restated Certificate of Incorporation.
3.2 + Registrant's By-laws.
4.1 * Form of Common Stock Certificate.
5.1 * Opinion of Graubard Mollen & Miller.
10.1 * Lease for 61 Broadway, New York, New York 10006.
10.2 * Lease for Mizner Park (Suite 245), Boca Raton, Florida
office space.
10.3 * Lease for Mizner Park (Suite 405), Boca Raton, Florida
office space.
10.4 * Lease for Great Neck, New York office space.
10.5 * Lease for Stamford, Connecticut office space.
10.6 * Lease for Hallandale, Florida office space.
10.7 * Lease for Miami Beach, Florida office space.
10.8 * Lease for South Miami Beach, Florida office space.
10.9 * Agreement between GKN Securities Corp. and managers of
Miami, Florida branch office.
10.10 * Employment Agreement between the Company and David M.
Nussbaum.
10.11 * Employment Agreement between the Company and Roger N.
Gladstone.
10.12 * Employment Agreement between the Company and Robert
Gladstone.
10.13 * Employment Agreement between the Company and Peter R.
Kent.
II-3
<PAGE>
10.14 * Warrant Agreement with Joachim Stahler.
10.15 * Stock Purchase Agreement with Marvin and Sally Shochet,
including form of Option Agreement
10.16 * Option Agreement with director nominees.
10.17 * 1991 Employee Incentive Plan.
10.18 * Clearing Agent Agreement.
10.19 * Form of Stock Option Agreement.
21 Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Goldstein Golub Kessler & Company, P.C.
23.3 * Consent of Graubard Mollen & Miller (included in
Exhibit 5.1).
23.4 * Consent of John P. Margaritis.
23.5 * Consent of Arnold B. Pollard.
27 Financial Data Schedule.
___________________________
* To be filed by amendment.
+ Previously filed.
(b) Financial Statement Schedules: None
Other schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the related instructions
or are not applicable, and therefore have been omitted.
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement;
(i)To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii)To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
II-4
<PAGE>
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the Offering.
(b) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting
agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery
to each purchaser.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
(d) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of
prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be
part of this Registration Statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "Act"), the registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on June 5, 1996.
GKN HOLDING CORP.
By: /s/ David Nussbaum
----------------------------------------
David Nussbaum, Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David Nussbaum and/or Peter Kent his true and
lawful attorneys-in-fact and agents, each acting alone, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to this Registration
Statement, including post-effective amendments, and to file the same, with all
exhibits thereto, and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, and hereby ratifies
and confirms all that said attorneys-in-fact and agents, each acting alone, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Act, the Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
/s/ David Nussbaum Chairman of the June 5, 1996
-------------------- Board, Chief
David Nussbaum Executive Officer
and Director
(Principal Executive
Officer)
/s/ Roger Gladstone President and June 5, 1996
-------------------- Director
Roger Gladstone
/s/ Peter R. Kent Chief Operating June 5, 1996
-------------------- Officer, Chief
Peter R. Kent Financial Officer
and Director
(Principal Accounting
and Financial Officer)
/s/Lester Rosenkrantz Executive Vice June 5, 1996
--------------------- President and
Lester Rosenkrantz Director
/s/ James Krantz Director June 5, 1996
--------------------
James Krantz
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Page No.
----------- ------- --------
21 Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Goldstein Golub
Kessler & Company, P.C.
27 Financial Data Schedule
Exhibit 21
List of Subsidiaries
--------------------
Name of Subsidiary Jurisdiction of Incorporation
------------------ -----------------------------
GKN Securities Corp. New York
GKN Securities AG Switzerland
Shochet Securities, Inc. Florida
GKN Fund Management, Inc. New York
GKN Property Management, Inc. New Jersey
GKN Realty Corp. New Jersey
GKN Dalewood Corp. New York
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
The Board of Directors and Stockholders of
GKN Holding Corp.:
We consent to the use of our report included herein and to the reference to
our firm under the headings "Selected Financial Data" and "Experts" in the
Prospectus.
/s/ KPMG Peat Marwick LLP
New York, New York
June 4, 1996
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
The Board of Directors and Stockholders of
GKN Holding Corp.:
We hereby consent to the use in the Prospectus constituting part of the
Registration Statement of our report dated March 29, 1994 relating to the
consolidated statements of income, changes in stockholders' equity, and cash
flow for the year ended January 31, 1994 of GKN Holding Corp. and
Subsidiaries which appears in such Prospectus. We also consent to the
reference of our firm under the caption "Experts" which also appears in such
Prospectus.
/s/ Goldstein Golub Kessler & Company, P.C.
New York, New York
June 4, 1996
<TABLE> <S> <C>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> APR-30-1996
<CASH> 10,923,000
<RECEIVABLES> 10,682,000
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 7,633,000
<PP&E> 1,008,000
<TOTAL-ASSETS> 33,117,000
<SHORT-TERM> 0
<PAYABLES> 0
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 6,167,000
<LONG-TERM> 868,000
0
0
<COMMON> 1,000
<OTHER-SE> 16,900,000
<TOTAL-LIABILITY-AND-EQUITY> 33,117,000
<TRADING-REVENUE> 2,477,000
<INTEREST-DIVIDENDS> 337,000
<COMMISSIONS> 12,068,000
<INVESTMENT-BANKING-REVENUES> 3,413,000
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 26,000
<COMPENSATION> 10,728,000
<INCOME-PRETAX> 3,995,000
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,246,000
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
</TABLE>