GKN HOLDING CORP, 10-K, 1997-05-01

GKN HOLDING CORP
10-K, 1997-05-01
SECURITY BROKERS, DEALERS & FLOTATION COMPANIES

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the fiscal year ended January 31, 1997
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the transition period from ________ to ________

Commission file number 0-21105

GKN HOLDING CORP.
(Exact name of registrant as specified in its charter)

Delaware 13-3414302
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

61 Broadway, New York, New York 10006
- ------------------------------- -----
(Address of principal executive offices) (Zip Code)

(212)509-3800
- -------------
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: none

Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.0001 par value

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value (based upon the last sale price) of the registrant's
Common Stock held by nonaffiliates on April 18, 1997, was $28,964,000.

On April 18, 1997, 8,213,899 shares of the registrant's Common Stock were
outstanding.

Documents incorporated by reference:
Part III incorporates by reference portions of the definitive proxy statement
for the annual meeting of shareholders to be held June 4, 1997.

<PAGE>

GKN HOLDING CORP.
Form 10-K Annual Report
For the fiscal year ended January 31, 1997

Page
----
Part I

Item 1. Business 2

Item 2. Properties 8

Item 3. Legal Proceedings 8

Item 4. Submission of Matters to a Vote of Security Holders 9

Executive Officers of the Registrant 10

Part II

Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 11

Item 6. Selected Financial Data 13

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14

Item 8. Financial Statements and Supplementary Data 21

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 36

Part III

Item 10. Directors and Executive Officers 37

Item 11. Executive Compensation 37

Item 12. Security Ownership of Certain Beneficial Owners and
Management 37

Item 13. Certain Relationships and Related Transactions 37

Part IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 38

1
<PAGE>

PART I

ITEM 1. BUSINESS

GKN Holding Corp. (the Company) provides securities brokerage, investment
banking, and trading services to emerging growth and small capitalization
corporate clients and investors through its principal operating subsidiaries. In
the fiscal year ended January 31, 1997, these subsidiaries consisted of GKN
Securities Corp. (GKN Securities), Shochet Securities, Inc. (Shochet), and GKN
Securities AG (GKN AG). In March 1997 the Company acquired Southeast Research
Partners, Inc. (Southeast), a research and institutional brokerage boutique
which maintains research coverage on small and mid-capitalization companies. The
Company also has operations in the money management business, through its GKN
Fund Management, Inc. subsidiary, which began operations in March 1995, and in
merchant banking, through its Dalewood Associates, Inc. (Dalewood) subsidiary,
which it acquired in December 1996.

The Company, which became a public company in July 1996, was incorporated
in Delaware in January 1987. It began operations through GKN Securities in
October 1987, and has since grown significantly through increasing its sales
force and more recently by acquisition. The Company acquired Shochet in November
1995, commenced operations at GKN AG in Switzerland in February 1996, and
acquired Southeast in March 1997. The Company plans to continue growing both
internally and through acquisitions.

The Company derives revenues primarily from brokerage and investment
banking services. These activities generate commission and fee income, as well
as revenues from market making and principal transactions. The following table
indicates the percentage of total revenues represented by each of the Company's
principal activities during the past three fiscal years ended January 31:

1997 1996 1995
---- ---- ----
Commissions 74% 71% 67%
Investment banking 17% 14% 30%
Market making and principal transactions 6% 13% 1%
Interest and other 3% 2% 2%

Brokerage and Distribution
- --------------------------

A significant portion of the Company's revenues are generated from
commissions. The Company charges commissions to its 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 the Company receives a
buy or sell order for a security in which it makes a market or has inventory, it
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. In fiscal 1997 the Company's brokerage and distribution
activities were performed through its brokerage subsidiaries: GKN Securities,
Shochet, and GKN AG. At January 31, 1997, they employed a total of 275
registered representatives and serviced 29,000 active customer accounts with
approximately $1 billion in assets. On March 31, 1997, Southeast, the brokerage
subsidiary acquired in March 1997, employed 13 registered representatives and

2
<PAGE>

serviced 1,000 active customer accounts. The brokerage subsidiaries serve a
diverse clientele with varying investment characteristics.

GKN Securities, Shochet, and GKN AG currently use the services of Schroder
Wertheim & Co. Incorporated (Schroder Wertheim) as their clearing agent on a
fully disclosed basis. Southeast currently uses the services of Bear, Stearns
Securities Corp. (Bear Stearns) as its clearing agent on a fully disclosed
basis. The clearing agents process all securities transactions and maintain
customer accounts on a fee basis. 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 agents. The services of the clearing agents include billing, credit
control, receipt, and custody and delivery of securities. The clearing agents
provide operational support necessary to process, record, and maintain
securities transactions for the Company's brokerage and distribution activities.
The clearing agents provide 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.

Both Schroder Wertheim and Bear Stearns lend 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 firms maintaining collateral in the form of
saleable securities, cash or cash equivalents. Under the terms of the clearing
agreements, the brokerage subsidiaries indemnify their clearing firm for any
loss on these credit arrangements. At March 31, 1997, the Company had
approximately $68 million of margin credit outstanding to its customers through
its two clearing firms. In fiscal 1997 the Company's losses from the margin
credit activity were insignificant, while net interest earned from margin credit
activity totaled $740,000.

GKN Securities

GKN Securities, a full service securities brokerage and investment banking firm,
is a member of the National Association of Securities Dealers, Inc. (NASD). At
January 31, 1997, GKN Securities operated five branch offices in New York City
and Great Neck, New York; Stamford, Connecticut, and Boca Raton and Miami,
Florida, with a total of 231 registered representatives. During fiscal 1997 GKN
Securities generated approximately $43 million in commissions from executing
customers' secondary trades. GKN Securities' sales force serves a clientele
which primarily consists of individuals who invest in OTC equity securities. GKN
Securities intends to expand its brokerage business further 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.

Shochet

Shochet, a full service discount brokerage firm, is a member of the NASD. At
January 31, 1997, Shochet operated four branch offices in Hallandale, Miami
Beach, South Miami, and Tamarac, Florida, with a total of 42 registered
representatives. During fiscal 1997 Shochet generated approximately $6 million
in commissions, primarily from executing customers' secondary trades. The
clientele served by Shochet's registered representatives is generally retired
individuals who invest in exchange-listed equity securities, fixed income
securities and mutual funds. The Company intends to expand Shochet's business

3
<PAGE>

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 Securities AG

The Company opened its first international office in Zurich, Switzerland,
in February 1996, with the commencement of operations of GKN AG. The primary
emphasis of the office is to serve European institutional money managers and
clients investing in small capitalization equity securities publicly traded in
U.S. markets. At January 31, 1997, GKN AG employed two registered
representatives. The Company plans to expand its international operations
through the recruitment and hiring of additional registered representatives and
potentially opening additional international offices. The revenues and operating
profit generated by GKN AG during fiscal 1997 did not represent a material
percentage of the Company's total revenues and operating profit.

Southeast Research Partners

The Company acquired Southeast on March 13, 1997. Southeast, a research and
institutional brokerage boutique, is a member of the NASD. The firm's clientele
primarily consists of institutional investors who invest in listed and OTC
equity securities. At March 31, 1997, Southeast operated branch offices in Boca
Raton, Florida, and Boston, Massachusetts, with a total of 13 registered
representatives. Southeast expects to open a New York City branch office in the
spring of 1997.

Investment Banking
- ------------------

Corporate Finance

GKN Securities' 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. The Company's underwriting activities have
historically focused on public equity underwritings for small capitalization,
emerging growth companies in a variety of industries. GKN Securities believes
that its expertise and proven ability to assist emerging growth companies, which
often have limited access to other sources of capital, have created a
significant source of ongoing and potential new investment banking clients. The
Company intends to continue this small capitalization emphasis, and to develop
an industry specialization focus based upon the specific industry expertise
brought to the Company by Southeast.

Corporate Advisory

To date, the Company has not derived significant revenues from corporate
advisory services. Through its relationships with its investment banking
clients, GKN Securities intends to expand this business with a concentration on
mergers and acquisitions, strategic partnering, fairness opinions and corporate
recapitalizations.

4
<PAGE>

Syndicate

GKN Securities' Syndicate Department has historically served as an additional
source of product, through selling group or underwriter participation, for
distribution through the Company's various distribution channels. To date,
revenues generated by the Syndicate Department have been insignificant. The
Company expects that the emphasis of this department will expand to increase
the participation of other broker-dealers in the marketing and distribution of
GKN Securities' underwritings.

Principal Transactions
- ----------------------

Market Making

GKN Securities' market making activities primarily serve as an accommodation to
its retail customers. The firm carries inventories of securities to facilitate
brokerage transactions with customers and other dealers. Principal transactions
with customers are effected at prices in accordance with applicable security
regulations. At March 31, 1997, GKN Securities made markets in more than 70
securities. In the fiscal year ended January 31, 1997, principal transactions
related to securities in which GKN Securities makes a market, including realized
and unrealized gains and losses, accounted for $2.8 million, or 4.1%, of the
Company's revenues.

Proprietary Trading

GKN Securities has historically devoted insignificant amounts of capital and
derived insignificant revenues from taking proprietary trading positions. During
fiscal 1997 the Company employed a maximum of approximately $1.2 million of
capital at any one time to proprietary trading positions. The Company expects to
increase the capital allocated to proprietary trading in the future if market
conditions are appropriate.

Investment Account

In connection with its investment banking activities of raising capital and
providing advisory services for client companies, GKN Securities usually
receives warrants which entitle it to purchase securities of these client
companies. These warrants, which are held in GKN Securities' investment account,
vary in value based upon the market prices of the underlying 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. At March 31, 1997, GKN
Securities owned warrants to purchase securities of 48 companies for which it
has performed investment banking services. These warrants had an underlying
market value of $2.6 million, of which the firm recognized $1.3 million in
value, or 50%. During fiscal 1997 GKN Securities recognized total realized and
unrealized gains on its investment account warrants of $1.5 million, or 2.2% of
the Company's revenues.

5
<PAGE>

Research
- --------

GKN Securities' research services serve as an integral part of and provide
significant support to the Company's investment banking and securities brokerage
activities. Research activities have historically been directed toward creating
support, sponsorship, and independent analysis for the securities of companies
underwritten by the Company and identifying attractive investment opportunities
in the securities of other companies. The Company's recent acquisition of
Southeast enhances its research capabilities by providing it with institutional
quality research for institutional investors. At March 31, 1997, the Company
employed a total of 15 research analysts at Southeast and GKN Securities. The
industries covered by the Company's research include technology, healthcare,
energy, financial services, consumer/leisure, building and infrastructure,
pharmaceutical and retail.

Other Retail Products and Services
- ----------------------------------

GKN Securities is a registered Investment Adviser under the Investment Advisers
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. To date,
revenues generated by retirement services and mutual fund investments have been
insignificant.

Both GKN Securities and Shochet 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 1997, the execution of buy and sell orders for fixed income
securities accounted for an insignificant percentage of GKN Securities' revenues
and 11% of Shochet's revenues.

Money Management
- ----------------

The Company entered the money management business in 1995 through the
establishment of GKN Fund Management, Inc., which serves as the managing partner
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. At March 31, 1997,
Kaleidoscope had total assets of approximately $9.2 million invested in nine
independent funds. The Company intends to expand its money management
activities.

Merchant Banking
- ----------------

The Company entered the merchant banking business in 1996 with the acquisition
of Dalewood. Dalewood is the managing partner of Dalewood Associates L.P., an
investment partnership which makes equity investments in companies which are
viewed as suitable candidates for future initial public offerings. At March 31,
1997, Dalewood Associates L.P. had total assets of approximately $5 million, of
which $2 million was invested in 18 companies. The Company had a $1.9 million

6
<PAGE>

investment in Dalewood Associates L.P. at March 31, 1997. The Company intends
to expand its merchant banking activities.

Government Regulation
- ---------------------

The securities industry in the United States is subject to extensive and
frequently changing federal and state laws and substantial regulation under such
laws by the Securities and Exchange Commission (SEC) and various state agencies
and self-regulatory organizations, such as the NASD. GKN Securities, Shochet,
and Southeast are registered as broker-dealers with the SEC and are member firms
of the NASD. Much of the regulation of broker-dealers has been delegated to
self-regulatory organizations, principally NASD Regulation, Inc., (NASDR), the
regulatory arm of the NASD, which has been designated by the SEC as the
Company's primary regulator. The NASDR adopts rules, which are subject to
approval by the SEC, 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 Securities is registered as a broker-dealer in all 50 states, the District
of Columbia, and Puerto Rico. Shochet and Southeast are registered as
broker-dealers in 29 and 37 states, respectively.

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 SEC 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 SEC,
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 federal
law. GKN AG is regulated by the Swiss Federal Act on Stock Exchanges and
Securities Trading (SESTA) and the Ordinance on Stock Exchanges and Securities
Trading, which were both enacted in February 1997. During a two-year transition
period GKN AG is also subject to the law on Professional Trading of Securities
in the Canton of Zurich. Under these laws GKN AG must maintain certain equity
capital levels and the distribution of equity capital is limited by the Swiss
Code of Obligations. In order to transact security trades in Switzerland, GKN AG
currently operates under a B-license which was granted by the Zurich Stock
Exchange in July 1996. GKN AG intends to obtain the required securities dealers
license under SESTA by the January 1999 deadline.

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

7
<PAGE>

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, and the quality, range, and relative prices of services
and products offered.

Employees
- ---------

At January 31, 1997, the Company had a total of 476 employees, including 275
registered representatives. On March 31, 1997, Southeast had a total of 30
employees, including 13 registered representatives.

ITEM 2. PROPERTIES

The Company's and GKN Securities' principal executive offices are presently
located at 61 Broadway, New York, New York and occupy approximately 33,000
square feet under leases expiring in February 1998. The Company anticipates that
these offices will relocate to a new location in New York City prior to the
expiration of the leases. The Company's subsidiaries currently lease ten
additional offices in the United States and one office in Switzerland.

ITEM 3. LEGAL PROCEEDINGS

The NASDR recently conducted an investigation of GKN Securities. The NASDR staff
informed the Company that it intends to recommend to a District Business Conduct
Committee that a complaint be filed against GKN Securities, members of GKN
Securities' senior management, supervisory personnel, and current and former
brokers. The Company expects that the complaint will allege that GKN Securities
violated the anti-fraud provisions of the Securities Exchange Act and the fair
pricing provisions of NASD rules by charging excessive markups in the sale of
certain warrants it underwrote and for which it acted as a market maker. The
Company also anticipates that the complaint will seek monetary restitution from
GKN Securities to its customers and monetary and non-monetary sanctions and
other relief against GKN Securities and individuals. The NASDR staff has not
suggested to the Company that it will seek any sanctions that would restrict the
business activities of GKN Securities. The Company does not believe that the
resolution of the NASDR investigation will result in a monetary settlement in
excess of amounts provided for in the consolidated financial statements.

On January 15, 1997, GKN Securities and Robert Gladstone, Executive Vice
President of GKN Securities, concluded a settlement with the SEC resolving an
SEC investigation arising out of customer complaints against ten brokers and
alleged related supervisory failures during 1991 and 1992. The Offer of
Settlement was entered into by GKN Securities and Robert Gladstone, both without
admitting or denying the SEC's findings. The SEC stated in its findings that
from 1990 through 1992 GKN Securities hired a large number of registered
representatives and that the number of customer complaints received by GKN
Securities rose substantially. The SEC stated that GKN Securities and Robert
Gladstone failed to establish adequate supervisory procedures to monitor the
sales practices of GKN Securities' registered representatives and that they
failed to have in place procedures to track customer complaints, to identify
multiple complaints against particular registered representatives and to
adequately respond to the sales practice violations reflected by the customer
complaints. The SEC's order also contained GKN Securities' representation that,
since the latter part of 1992, it has undertaken a number of specific efforts to

8
<PAGE>

improve its supervisory and compliance systems and to maintain these policies
and procedures. Under the terms of the settlement agreement, GKN Securities paid
a penalty of $100,000 and has engaged an independent consultant to review the
firm's supervisory and compliance policies and procedures. GKN Securities also
agreed to implement any recommendations made by the independent consultant.
Robert Gladstone paid a penalty of $50,000, and was suspended from all
association in any capacity with any broker, dealer, investment adviser,
investment company or municipal securities dealer for a period of thirty days
(which period has expired), and thereafter may not be so associated in a
supervisory capacity for the next eleven months. Robert Gladstone remains an
officer of GKN Securities and the Company and a principal stockholder of the
Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal 1997.

9
<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company are as follows:

Name Age Position
- ---- --- --------

David M. Nussbaum 43 Chairman of the Board and Chief
Executive Officer
Roger N. Gladstone 43 President
Peter R. Kent 44 Chief Operating Officer and Chief
Financial Officer
Lester Rosenkrantz 56 Executive Vice President
Robert H. Gladstone 39 Executive Vice President

David M. Nussbaum has been Chairman of the Board and Chief Executive Officer
of the Company since September 1990, was Executive Vice President of the
Company from January 1987 to September 1990, and has been a director of the
Company since January 1987. He is also Chairman of the Board and Chief Executive
Officer of GKN Securities, and an executive officer of Dalewood, GKN Fund
Management, and Southeast.

Roger N. Gladstone has been President and a director of the Company since
January 1987. He is also President of GKN Securities, and an executive officer
of Dalewood, GKN Fund Management, and Shochet.

Peter R. Kent has been Chief Financial Officer of the Company and GKN Securities
since July 1995, Chief Operating Officer of the Company and GKN Securities since
February 1996, and a director of the Company since May 1996. He is also an
executive officer of Dalewood, Shochet, and Southeast. From September 1991
through February 1995, he 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 and recycling
company.

Lester Rosenkrantz has been Executive Vice President and a director of the
Company and GKN Securities since February 1994. He was Vice Chairman and
Director of Corporate Finance of Reich & Co., Inc. (formerly Vantage
Securities), a member of the New York Stock Exchange, from November 1990 until
January 1994.

Robert H. Gladstone has been 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 Securities since January 1990 and is
now Executive Vice President of GKN Securities. On January 15, 1997, Robert
Gladstone concluded a settlement with the SEC resolving an SEC investigation.
See Item 3, Legal Proceedings.

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. There are no
arrangements or understandings between any Company officer and another person
pursuant to which the officer was elected.

10
<PAGE>

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

Market Information

The Company's common stock is traded on the Nasdaq National Market System under
the symbol GKNS. The following table sets forth the high and low sales prices
for the Company's common stock, as reported by Nasdaq, for the two full quarters
following the Company's July 30, 1996, initial public offering:

High Low
---- ---
Quarter ended October 31, 1996 $6.63 $6.00
Quarter ended January 31, 1997 6.38 6.00

Holders of Common Stock

On March 31, 1997, there were 84 holders of record of the Company's common
stock. The Company believes there are in excess of 1,400 beneficial owners of
the Company's common stock.

Dividends

To date, the Company has not paid any dividends on its common stock. 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's
ability to pay dividends in the future also may be restricted by its brokerage
subsidiaries' obligations to comply with the net capital requirements imposed on
broker-dealers by the SEC and NASD. The Company does not intend to declare any
dividends in the foreseeable future, but instead intends to retain all earnings
for use in the Company's business.

Sales of Unregistered Securities

During the fiscal year ended January 31, 1997, the Company issued securities
without registration under the Securities Act of 1993, as amended (the
Securities Act) as described below.

In May 1996 through September 1996 the Company issued options to purchase
322,345 shares of its common stock to employees under its 1991 Employee
Incentive Plan at prices ranging from $4.50 to $6.125 per share. Included in
this total are 164,845 options which were issued in May 1996 to employees
accepting the Company's offer to convert certain of their options into options
for a fewer number of shares, but with lower exercise prices and/or shorter
vesting periods. No consideration will be received by the Company until the
options are exercised. The options vest over periods from two months to three
years and have maximum terms of ten years. The exemptions claimed for these
issuances are Sections 3(a)(9) and 4(2) of the Securities Act and SEC Rule 701.
Section 3(a)(9) exempts from registration requirements any security that a

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<PAGE>

company exchanges voluntarily and exclusively for its outstanding securities,
with no commission or other remuneration for soliciting such an exchange.
Section 4(2) exempts from registration requirements a security sold in
accordance with its criteria for private offerings. Rule 701 provides an
exemption for offers and sales of securities pursuant to certain compensatory
benefit plans and contracts relating to compensation.

In February 1996, in connection with his employment as the Managing Director of
GKN AG, the Company sold to Joachim Stahler for $800 warrants to purchase 80,000
shares of common stock at a price of $6.00 per share. The warrants are
exercisable for a period of five years. In March 1996, also in connection with
his employment, the Company sold to Joachim Stahler 80,000 shares of common
stock at a purchase price of $3.02 per share, paid 50% in cash and 50% by
promissory note. The exemption claimed for these issuances is Section 4(2) of
the Securities Act.

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 $0.88, $0.88, and $0.80 per
share, respectively. The purchase prices were paid in shares of the Company's
common stock, which were valued at $4.50 per share. The exemption claimed for
the issuance of shares pursuant to the option exercises is Section 4(2) of the
Securities Act.

In July 1996 the Company granted options to purchase 25,000 shares to the seller
of Shochet in accordance with the Shochet purchase agreement. The options are
exercisable for a period of five years at a price of $6.00 per share. The
exemption claimed for this issuance is Section 4(2) of the Securities Act.

In July 1996 the Company granted options to purchase 10,000 shares to each of
John Margaritis and Arnold Pollard in conjunction with their becoming directors
of the Company. The options are exercisable for a period of ten years at a
price of $6.00 per share. The exemption claimed for these issuances is
Section 4(2) of the Securities Act.

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<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
The following table summarizes five years of consolidated financial data of the
Company (in thousands, except per share amounts and other data):
<CAPTION>
Year ended January 31,
-------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Total revenues $67,750 $43,019 $32,410 $32,956 $25,278
Total expenses $56,394 $36,732 $31,516 $25,534 $21,657
Pre-tax income $11,356 $ 6,287 $ 894 $ 7,422 $ 3,621
Net income $ 6,329 $ 3,469 $ 381 $ 4,006 $ 2,189
Earnings per common share $ 0.89 $ 0.61 $ 0.07 $ 0.72 $ 0.42
Weighted average shares
outstanding 7,132 5,729 5,695 5,530 5,153

Balance Sheet Data:
Total assets $51,633 $27,853 $16,096 $16,123 $13,055
Total liabilities (excluding
subordinated debt) 15,869 12,143 4,339 4,685 5,683
Subordinated debt 738 934 -- -- --
Convertible subordinated notes -- -- -- 162 162
Stockholders' equity 35,026 14,776 11,757 11,276 7,210

Other Data:
Ratio of assets to stockholders'
equity 1.47 1.89 1.37 1.43 1.81
Return on average equity 25.0% 26.1% 3.3% 43.3% 39.7%
Pre-tax return on average equity 44.9% 47.4% 7.8% 80.3% 65.6%
Book value per share $ 4.26 $ 3.02 $ 2.30 $ 2.27 $ 1.46
Registered representatives 275 224 163 126 108

</TABLE>

13
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Business Environment

GKN Holding Corp. and its subsidiaries (the Company) are primarily engaged in
providing securities brokerage, investment banking, and trading services.
Through its principal broker-dealer subsidiary, GKN Securities Corp. (GKN
Securities), the Company is focused on serving emerging growth and small
capitalization corporate clients and investors. The Company's profitability is
affected by many factors, including general economic and market conditions and
the volatility of trading markets, specifically the small capitalization market.

The securities industry as a whole experienced record-setting results during
calendar year 1996 and the Company's fiscal year ended January 31, 1997. The
small capitalization market shared in the gains during the first half of fiscal
1997, but experienced high levels of volatility mid-year and lagged the
larger-capitalization market during the second half.

The Company's brokerage and investment banking activities and revenues have
grown significantly since it began meaningful operations in 1990. This growth
was achieved primarily through increasing its sales force and more recently by
acquisition. During the fourth quarter of fiscal 1996, the Company acquired
Shochet Securities, Inc. (Shochet), a discount brokerage firm with four
branches, and in February 1996 the Company opened a new brokerage subsidiary in
Switzerland. The Company has also expanded into new areas of business on a
smaller scale. It entered the money management business with the beginning of
operations of GKN Fund Management in March 1995, the general partner of a "fund
of funds" with approximately $10 million in assets at January 31, 1997. The
Company entered the merchant banking business with the December 1996 acquisition
of Dalewood Associates, Inc., the general manager of an investment partnership
which makes equity investments in companies which are viewed as suitable
candidates for future initial public offerings. The Company plans to continue
growing both internally and through acquisitions. On March 13, 1997, the Company
acquired Southeast Research Partners, Inc., a research and institutional
brokerage boutique. See Note 3 of Notes to Consolidated Financial Statements for
descriptions of the Company's acquisitions.

The Company sold 2,875,000 shares of its common stock in an initial public
offering on July 30, 1996. The Company plans to use the net proceeds of
$15,264,000 principally to expand its existing business and also for working
capital and general corporate purposes.

Results of any individual period should not be considered representative of
future profitability. A significant portion of the Company's expenses are fixed
and do not vary with market activity. As a result, substantial fluctuations
could occur in the Company's revenues and net income from period to period.

14
<PAGE>

Results of Operations

Year Ended January 31, 1997 vs. Year Ended January 31, 1996
- -----------------------------------------------------------

Earnings per share of common stock for the year ended January 31, 1997, were
$0.89 as compared to $0.61 for the year ended January 31, 1996. The increase in
earnings was the result of a strong investment climate in the first half of
fiscal 1997 combined with the Company's growth, resulting in increased
securities brokerage and investment banking volumes.

Revenues

Total revenues increased by $24,731,000, or 57%, to $67,750,000 for the fiscal
year, led by significant increases in commission and investment banking
revenues.

Commission revenues increased by $19,735,000, or 65%. The increase reflects
strong market conditions in the small capitalization stock sector in the first
five months of fiscal 1997, as well as a 23% increase in the number of
registered representatives employed by the Company. These two factors served to
increase the volume of trades processed by 69%.

Investment banking revenues increased by $5,388,000, or 90%. The Company raised
$136.3 million for its clients in fiscal 1997 through ten public offerings and
ten private placements, an increase from fiscal 1996 during which the Company
raised $72.7 million through five public offerings and five private placements.
The increase in underwriting activity was the result of stronger market
conditions and a more concentrated effort to develop a quality investment
banking clientele.

Revenues from principal transactions decreased by $1,406,000, or 25%. Market
making activities generated increased revenues of $1,991,000, which were more
than offset by a revenue decrease of $3,397,000 from the Company's investment
account. The market making revenues, which amounted to $2,809,000 in fiscal
1997, were generated almost entirely during the strong market conditions
experienced in February through June 1996. Market making revenues were
negligible in the subsequent periods of market volatility and weakness,
specifically in the small capitalization stock sector. The high degree of
volatility experienced in the markets during fiscal 1997 adversely impacted the
stock prices of the Company's underwriting clients, which was reflected in the
valuation of underwriter warrants held in the Company's investment account.
Investment account revenues for the year totaled $1,468,000.

Interest income increased by $1,080,000 due to higher cash balances primarily
resulting from the initial public offering proceeds, a greater use of margin
loans by the Company's brokerage customers, and a renegotiated interest sharing
arrangement with the Company's clearing broker.

Expenses

Total expenses for fiscal 1997 were $56,394,000, a 54% increase over fiscal
1996. Total expenses as a percentage of revenues decreased to 83% from 85%.

Compensation and benefits expense increased 52% to $41,187,000. These expenses
are primarily variable as commissions to brokers are paid as a percentage of

15
<PAGE>

commission revenues generated. The expense increase in fiscal 1997 is consistent
with the increases in commission and investment banking revenues. In accordance
with the Company's 1996 Incentive Compensation Plan, a portion of annual
incentive awards payable to executive management and business unit managers are
to be made in restricted shares of the Company's common stock, which are subject
to a minimum three-year vesting period. In March 1997 the Company awarded
$1,782,000 in restricted shares under this plan. The award will be recognized as
compensation expense over the three-year vesting period ending March 2000.

Communications expense increased by $1,215,000, or 46%, as a result of the
Company's growth and increased level of business activity. The 275 registered
representatives employed by the Company at January 31, 1997, represent a 23%
increase from January 31, 1996. During the same period total employees increased
by 27% to 476.

Brokerage, clearing and exchange fees increased by 72% primarily due to the 69%
increase in trade volume in fiscal 1997.

Occupancy and equipment expenses increased by 31% as a result of the Company's
growth through the Shochet acquisition and internal growth at GKN Securities.

Business development expenses increased 73% to $1,507,000 due to additional
promotional activities implemented as part of the Company's growth strategy.

Professional fees increased by $1,688,000 primarily due to higher expenses
incurred for regulatory matters as well as higher costs associated with the
increase in business activities undertaken by the Company in fiscal 1997.

Other expenses increased 18% primarily as a result of the Company's growth
through the Shochet acquisition and internal growth at GKN Securities.

Weighted average common shares outstanding

The average number of common shares and common stock equivalents outstanding
used in the computation of earnings per common share was 7,131,976 in fiscal
1997, compared with 5,729,360 in fiscal 1996. The 24% increase in the weighted
average in fiscal 1997 resulted from the 2,875,000 shares of common stock issued
in the Company's initial public offering on July 30, 1996.

Year Ended January 31, 1996 vs. Year Ended January 31, 1995
- -----------------------------------------------------------

Earnings per share of common stock for the year ended January 31, 1996, were
$0.61 as compared to $0.07 for the year ended January 31, 1995. The significant
increase in earnings was the result of strong market conditions during fiscal
1996 combined with the Company's growth, resulting in increased securities
brokerage volumes and investment account revenues.

Revenues

Total revenues increased by $10,609,000, or 33%, to $43,019,000 for the fiscal
year, led by significant increases in commission and principal transactions
revenues.

16
<PAGE>

Commission revenues increased by $8,614,000, or 40%. The increase reflects an
overall improvement in stock market conditions and a 37% increase in the number
of registered representatives employed by the Company, resulting in a 35%
increase in the volume of trades processed.

Investment banking revenues decreased by $3,604,000, or 38%. The Company raised
$72.7 million for its clients in fiscal 1996 through five public offerings and
five private placements, a significant decrease from fiscal 1995 when the
Company raised $122.0 million through eleven public offerings and six private
placements. The decrease in underwriting activity was the result of weaker
underwriting market conditions and a reorientation of the Company's underwriting
efforts from its Specified Purpose Acquisition Companies(R) (SPAC(R)) program to
operating companies. SPACs, which are publicly traded financing vehicles
developed by GKN Securities in 1993, combine the characteristics of a
traditional acquisition or buyout fund and a more liquid, publicly traded
industry-specific investment vehicle.

Revenues from principal transactions increased by $5,250,000. Market making
activities generated increased revenues of $377,000, while the Company's
investment account resulted in $4,873,000 of increased revenues. The market
making revenues, which amounted to $818,000 in fiscal 1996, were positively
impacted by an increased capital commitment by the Company to market making
activities and improved stock market conditions in fiscal 1996 as compared to
fiscal 1995. The stock price performance of the Company's underwriting clients
greatly improved during fiscal 1996, which was reflected in the valuation of
underwriter warrants held in the Company's investment account. Investment
account revenues for the year totaled $4,865,000.

Interest income increased by $278,000 due to higher cash balances and a greater
use of margin loans by the Company's brokerage customers.

Expenses

Total expenses for fiscal 1996 were $36,732,000, a 17% increase over fiscal
1995. Total expenses as a percentage of revenues decreased to 85% from 97%.

Compensation and benefits expense increased 19% to $27,038,000. These expenses
are primarily variable as commissions to brokers are paid as a percentage of
commission revenues generated. The expense increase in fiscal 1996 is consistent
with the overall increase in commission and investment banking revenues.

Brokerage, clearing and exchange fees increased by 49% due to a 35% increase in
trade volume and a decrease in the amounts charged to brokers for processing
trades. Occupancy and equipment expenses increased by 29% primarily due to
contractual lease increases and the Company's expansion. Business development
expenses increased 11% to $869,000 due to increased promotional activities.

Professional fees decreased by $577,000, or 44%. The Company incurred higher
costs in fiscal 1995 related to the filing of documents for an initial public
offering of the Company's common stock, which was postponed until market
conditions improved.

17
<PAGE>

Other expenses increased 24% primarily due to recruiting payments made to new
registered representatives. The effective income tax rate in fiscal 1996 was
44.8%, a decrease from fiscal 1995's effective rate of 57.4%. The higher rate in
fiscal 1995 was the result of minimum taxes due.

Liquidity and Capital Resources

On July 30, 1996, the Company raised $15,264,000, net of underwriters' discounts
and commissions and associated costs, in an initial public offering of the
Company's common stock. The Company plans to use the net proceeds from the
offering, which are currently invested in short-term interest-bearing
investments, principally to expand its existing business and also for working
capital and general corporate purposes.

The Company's assets are highly liquid with the majority consisting of cash and
cash equivalents, securities inventories, and receivables from other
broker-dealers, all of which fluctuate depending upon the levels of customer
business and trading activity. Approximately 81% of the Company's assets at
January 31, 1997, are highly liquid. Receivables from broker-dealers, which are
primarily from the Company's clearing broker, 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.

GKN Securities and Shochet, the Company's domestic operating broker-dealer
subsidiaries, are subject to the net capital rules of the National Association
of Securities Dealers, Inc. (NASD) and the Securities and Exchange Commission
(SEC). As such, they and the Company are subject to certain restrictions on the
use of capital and its related liquidity. GKN Securities' and Shochet's
respective net capital positions as of January 31, 1997, were $13,404,000 and
$377,000, which were $13,154,000 and $277,000 in excess of their respective net
capital requirements.

Prior to its initial public offering, the Company financed its operations
through the private placement of debt and equity securities and cash flow from
operations. The Company has not employed any significant leverage or debt. In
conjunction with the Company's November 1995 acquisition of Shochet, the Company
issued the seller a subordinated note as part of the purchase price, of which
$738,000 was outstanding at January 31, 1997. The Company intends to use debt
prudently in the future and to arrange for lines of credit in the near future.

The Company repurchased a total of 511,250 shares of its common stock at a
cost of $2,615,000 during fiscal 1997. Of this total, 271,250 shares at a cost
of $1,130,000 were repurchased in private transactions prior to the Company's
initial public offering. In October 1996 the Company authorized the repurchase
of up to $600,000 of its common stock on the open market in order to fund the

18
<PAGE>

common stock portion of awards due under the Company's 1996 Incentive
Compensation Plan. In December 1996 it authorized the repurchase of an
additional 150,000 shares. From October 1996 through January 1997 the Company
repurchased 240,000 shares on the open market at a cost of $1,485,000. All
repurchases were funded from cash flows from operations. In March 1997 the
Company authorized the repurchase of an additional 1,045,000 shares. Of these
shares, approximately 60,000 were designated for employee stock bonus issuances
and 160,000 were designated for issuance as part of the acquisition of Southeast
Research Partners.

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
and reasonably foreseeable future needs.

Other Matters
- -------------

Regulatory Issues

On January 15, 1997, GKN Securities and Robert Gladstone, Executive Vice
President of GKN Securities, concluded a settlement with the SEC resolving an
SEC investigation arising out of customer complaints against ten brokers and
alleged related supervisory failures during 1991 and 1992. The Offer of
Settlement was entered into by GKN Securities and Robert Gladstone, both without
admitting or denying the SEC's findings. Under the terms of the settlement
agreement, GKN Securities paid a penalty of $100,000 and has engaged an
independent consultant to review the firm's supervisory and compliance policies
and procedures. GKN Securities also agreed to implement any recommendations made
by the independent consultant. Robert Gladstone paid a penalty of $50,000, and
was suspended from all association in any capacity with any broker, dealer,
investment adviser, investment company or municipal securities dealer for a
period of thirty days (which period has expired), and thereafter may not be so
associated in a supervisory capacity for the next eleven months. Robert
Gladstone remains an officer of GKN Securities and the Company and a principal
stockholder of the Company.

The National Association of Securities Dealers Regulation, Inc. (NASDR) recently
conducted an investigation of GKN Securities. The NASDR staff informed the
Company that it intends to recommend to a District Business Conduct Committee
that a complaint be filed against GKN Securities, members of GKN Securities'
senior management, supervisory personnel, and current and former brokers. The
Company expects that the complaint will allege that GKN Securities violated the
anti-fraud provisions of the Securities Exchange Act and the fair pricing
provisions of NASD rules by charging excessive markups in the sale of certain
warrants it underwrote and for which it acted as a market maker. The Company
also anticipates that the complaint will seek monetary restitution from GKN
Securities to its customers and monetary and non-monetary sanctions and other
relief against GKN Securities and individuals. The NASDR staff has not suggested
to the Company that it will seek any sanctions that would restrict the business
activities of GKN Securities. The Company does not believe that the resolution
of the NASDR investigation will result in a monetary settlement in excess of
amounts provided for in the consolidated financial statements.

19
<PAGE>

New Accounting Pronouncement

In March 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share (SFAS 128), effective
beginning in the fiscal year ending January 31, 1998. This statement changes the
calculation and presentation of earnings per common share (EPS). The new
presentation will consist of basic EPS, which includes no dilution and is
computed by dividing net income by the weighted-average number of common shares
outstanding for the period, and diluted EPS, which is similar to the current
fully diluted EPS. The implementation of SFAS 128 will result in basic EPS
results higher than EPS as calculated under the current method.

Safe Harbor Cautionary Statement

The Company occasionally makes forward-looking statements such as forecasts and
projections of expected future performance or statements of its plans and
objectives. When used in this annual report and in future filings by the Company
with the SEC, in the Company's press releases and in oral statements made with
the approval of an authorized executive officer of the Company, the words or
phrases "will likely result," "the Company expects," "will continue," "is
anticipated," "estimated," "project," or "outlook" or similar expressions
(including confirmations by an authorized executive officer of the Company of
any such expressions made by a third party with respect to the Company) are
intended to identify forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements, each
of which speak only as of the date made. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. Factors
which could affect the Company's results of operations and cause its results to
differ from these statements include 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. For a more complete
discussion of these and other factors, see the Company's registration statement
filed on Form S-1, as amended (No. 333-05273). The Company has no obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect anticipated or unanticipated events or
circumstances occurring after the date of such statements.

20
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>

GKN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<CAPTION>

January 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 17,856,000 $ 7,873,000
Receivable from brokers and dealers 9,357,000 4,813,000
Securities owned, at market value 14,610,000 8,152,000
Securities owned, not readily marketable,
at fair value 1,365,000 1,744,000
Investments 2,692,000 292,000
Office furniture, equipment and leasehold
improvements, net 1,251,000 964,000
Goodwill, net 1,619,000 1,595,000
Loans receivable 1,451,000 1,435,000
Other assets 1,432,000 985,000
------------ ------------

Total assets $ 51,633,000 $ 27,853,000
============ ============

Liabilities and Stockholders' Equity
Liabilities:
Securities sold, not yet purchased,
at market value $ 6,997,000 $ 4,015,000
Commissions payable 2,186,000 1,992,000
Deferred compensation 1,409,000 331,000
Income taxes payable 238,000 318,000
Deferred tax liability 636,000 1,292,000
Accrued expenses and other liabilities 4,403,000 4,195,000
------------ ------------
15,869,000 12,143,000
Liability subordinated to the claims
of general creditors 738,000 934,000
------------ ------------
Total liabilities 16,607,000 13,077,000
------------ ------------

Stockholders' equity:
Common stock, $.0001 par value; 35,000,000
shares authorized; 9,217,875 and 5,397,875
shares issued; 8,225,512 and 4,885,375
shares outstanding 1,000 1,000
Additional paid-in capital 19,928,000 3,487,000
Retained earnings 18,247,000 11,918,000
------------ ------------
38,176,000 15,406,000
Less treasury stock, at cost; 992,363 and
512,500 shares (3,150,000) (630,000)
------------ ------------
Total stockholders' equity 35,026,000 14,776,000
------------ ------------

Total liabilities and stockholders' equity $ 51,633,000 $ 27,853,000
============ ============

</TABLE>

See accompanying notes to consolidated financial statements.

21
<PAGE>
<TABLE>

GKN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Income
<CAPTION>

Year ended January 31,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------

<S> <C> <C> <C>
Revenues:
Commissions $50,153,000 $30,418,000 $21,804,000
Investment banking 11,391,000 6,003,000 9,607,000
Principal transactions 4,277,000 5,683,000 433,000
Interest 1,620,000 540,000 262,000
Other 309,000 375,000 304,000
----------- ----------- -----------
Total revenues 67,750,000 43,019,000 32,410,000
----------- ----------- -----------

Expenses:
Compensation and benefits 41,187,000 27,038,000 22,713,000
Communications 3,846,000 2,631,000 2,563,000
Brokerage, clearing and
exchange fees 2,324,000 1,350,000 908,000
Occupancy and equipment 2,757,000 2,112,000 1,633,000
Business development 1,507,000 869,000 780,000
Professional fees 2,426,000 738,000 1,315,000
Other 2,347,000 1,994,000 1,604,000
----------- ----------- -----------
Total expenses 56,394,000 36,732,000 31,516,000
----------- ----------- -----------

Income before income taxes 11,356,000 6,287,000 894,000

Income taxes 5,027,000 2,818,000 513,000
----------- ----------- -----------

Net income $ 6,329,000 $ 3,469,000 $ 381,000
=========== =========== ===========

Earnings per common share $ 0.89 $ 0.61 $ 0.07
=========== =========== ===========

Weighted average common
shares outstanding 7,131,976 5,729,360 5,694,966
=========== =========== ===========

</TABLE>

See accompanying notes to consolidated financial statements.

22
<PAGE>
<TABLE>

GKN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
<CAPTION>

Preferred
Common Stock Stock Additional Treasury Stock
------------------ ------------- Paid-in Retained ----------------------
Shares Amt. Shares Amt. Capital Earnings Shares Amount Total
--------- ------ ------ ---- ----------- ----------- -------- ----------- -----------

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 31, 1994 5,251,000 $1,000 1,000 $-- $ 3,387,000 $ 8,068,000 (287,500) $ (180,000) $11,276,000
Net income -- -- -- -- -- 381,000 -- -- 381,000
Stock issued in
conversion of
subordinated debt 162,500 -- -- -- 162,000 -- -- -- 162,000
Retirement of
common stock (15,625) -- -- -- (62,000) -- -- -- (62,000)
--------- ------ ------ ---- ----------- ----------- -------- ----------- -----------

Balance at
January 31, 1995 5,397,875 1,000 1,000 -- 3,487,000 8,449,000 (287,500) (180,000) 11,757,000
Net income -- -- -- -- -- 3,469,000 -- -- 3,469,000
Expiration of
preferred stock -- -- (1,000) -- -- -- -- -- --
Purchase of
treasury stock -- -- -- -- -- -- (225,000) (450,000) (450,000)
--------- ------ ------ ---- ----------- ----------- -------- ----------- -----------

Balance at
January 31, 1996 5,397,875 1,000 -- -- 3,487,000 11,918,000 (512,500) (630,000) 14,776,000
Net income -- -- -- -- -- 6,329,000 -- -- 6,329,000
Stock issued 3,070,000 -- -- -- 16,008,000 -- -- -- 16,008,000
Warrants issued -- -- -- -- 1,000 -- -- -- 1,000
Stock options granted -- -- -- -- 36,000 -- -- -- 36,000
Notes receivable -- -- -- -- (221,000) -- -- -- (221,000)
Stock options
exercised 750,000 -- -- -- 617,000 -- 31,387 95,000 712,000
Purchase of
treasury stock -- -- -- -- -- -- (511,250) (2,615,000) (2,615,000)
--------- ------ ------ ---- ----------- ----------- -------- ----------- -----------

Balance at
January 31, 1997 9,217,875 $1,000 -- $-- $19,928,000 $18,247,000 (992,363) $(3,150,000) $35,026,000
========= ====== ====== ==== =========== =========== ======== =========== ===========

</TABLE>

See accompanying notes to consolidated financial statements.

23
<PAGE>
<TABLE>

GKN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<CAPTION>

Year ended January 31,
-------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Operating activities:
Net income $ 6,329,000 $3,469,000 $ 381,000
Adjustments to reconcile net
income to net cash (used in)
provided by operating activities:
Depreciation and amortization 578,000 442,000 320,000
Deferred taxes and other (607,000) 1,206,000 (234,000)
----------- ---------- ----------
6,300,000 5,117,000 467,000
(Increase) decrease in operating
assets:
Securities purchased under agreements
to resell -- -- 3,057,000
Receivable from brokers and dealers (4,544,000) (1,556,000) 384,000
Securities owned, at market value (6,458,000) (2,711,000) (1,867,000)
Securities owned, not readily
marketable 379,000 (1,271,000) 277,000
Loans receivable (16,000) 130,000 (1,205,000)
Income taxes receivable -- 427,000 (448,000)
Other assets (514,000) (405,000) 354,000
Increase (decrease) in operating
liabilities:
Securities sold, not yet purchased 2,982,000 2,221,000 171,000
Commissions payable 194,000 788,000 178,000
Deferred compensation 1,078,000 187,000 (27,000)
Income taxes payable (80,000) 426,000 136,000
Accrued expenses and other liabilities 208,000 2,997,000 (568,000)
----------- ---------- ----------
Net cash (used in) provided by
operating activities (471,000) 6,350,000 909,000
----------- ---------- ----------

Investing activities:
Purchase of office furniture,
equipment and leasehold
improvements (745,000) (187,000) (646,000)
Limited partnerships (2,400,000) (292,000) --
Goodwill resulting from acquisition (55,000) (1,605,000) --
----------- ---------- ----------
Net cash used in investing activities (3,200,000) (2,084,000) (646,000)
----------- ---------- ----------

Financing activities:
Issuance (retirement) of common stock 16,499,000 -- (62,000)
Issuance of common stock warrants 1,000 -- --
Purchase of treasury stock (2,615,000) (450,000) --
Issuance of subordinated debt -- 934,000 --
Repayment of subordinated debt (231,000) -- --
----------- ---------- ----------
Net cash provided by (used in)
financing activities 13,654,000 484,000 (62,000)
----------- ---------- ----------

Net increase in cash and cash equivalents 9,983,000 4,750,000 201,000

Cash and cash equivalents at beginning
of year 7,873,000 3,123,000 2,922,000
----------- ---------- ----------

Cash and cash equivalents at end of year $17,856,000 $7,873,000 $3,123,000
=========== ========== ==========

</TABLE>
See accompanying notes to consolidated financial statements.

24
<PAGE>

GKN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

1. Basis of Presentation

The consolidated financial statements include the activities of GKN Holding
Corp. and its subsidiaries (the Company). The Company is primarily engaged in
providing securities brokerage, investment banking, and trading services for
individuals, institutions and corporations. These services are provided through
its principal broker-dealer subsidiary, GKN Securities Corp. (GKN Securities),
and other wholly owned subsidiaries.

All significant intercompany accounts and transactions are eliminated in
consolidation. Where appropriate, prior year amounts have been reclassified to
conform to the current presentation.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

2. Summary of Significant Accounting Policies

Fair value of financial instruments
Substantially all of the Company's financial assets and liabilities are carried
at market or fair values or at amounts which approximate current fair value due
to their short-term nature.

Cash and cash equivalents
Cash equivalents are highly liquid securities with maturities of three months or
less when purchased.

Receivable from brokers and dealers
Receivable from brokers and dealers consists primarily of amounts due from the
Company's clearing organization, which provides clearing and depository services
for brokerage transactions on a fully disclosed basis.

Securities
Securities transactions and the related revenues and expenses, including
commission revenues and expenses, are recorded on a trade-date basis. Securities
owned and securities sold, not yet purchased, consist primarily of equities and
are stated at quoted market values. Securities owned, not readily marketable,
consist primarily of warrants and are stated at management's estimate of fair
value based on a percentage of the market value of the underlying securities.
Unrealized gains and losses are included in revenues from principal
transactions.

Investments
Investments consist primarily of investments in limited partnerships, which are
accounted for using the equity method.

25
<PAGE>

Depreciation and amortization
Office furniture, equipment and leasehold improvements are stated at cost, net
of accumulated depreciation and amortization of $1,449,000 and $1,027,000, at
January 31, 1997 and 1996, respectively. Office furniture and equipment are
depreciated using an accelerated method over their estimated useful lives.
Leasehold improvements are amortized over the lesser of the life of the lease or
estimated useful life of the improvement.

Goodwill
Goodwill represents the excess of the purchase price over the net assets
acquired upon the Company's acquisition of Shochet Securities, Inc. (Shochet) in
November 1995. The goodwill is being amortized over 25 years on a straight line
basis. Accumulated amortization was $77,000 and $11,000 at January 31, 1997 and
1996, respectively. Management reviews goodwill for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset may
not be recoverable.

Deferred compensation
Deferred compensation represents amounts due to certain employees of the Company
upon the sale of certain equity securities held by the Company. Employment
agreements for the employees provide them with a percentage of the proceeds from
the sale of the securities, which were issued to the Company in connection with
investment banking transactions.

Investment banking fees
Investment banking management and underwriting fee revenues are recognized on a
trade-date basis.

Stock-based compensation
The Company uses the intrinsic value method to account for stock-based employee
compensation plans. Under this method, compensation cost is recognized for stock
option awards only if the quoted market price (or estimated fair market value of
the stock prior to the stock becoming publicly traded) is greater than the
amount the employee must pay to acquire the stock. Pro forma disclosures
required by Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), based on the fair value-based method are
presented in note 9.

Earnings per common share
Weighted average common shares outstanding used in the calculation of earnings
per common share reflects common stock equivalents, consisting of stock options
and warrants, when their effect is dilutive. The difference between primary and
fully diluted earnings per share is not material.

26
<PAGE>

3. Business Acquisitions

On November 30, 1995, the Company acquired Shochet, a broker-dealer, for
approximately $2,135,000, including a three-year, 7% $1,000,000 subordinated
note. The acquisition was accounted for under the purchase method of accounting.
Accordingly, Shochet's results of operations have been included from the
acquisition date.

On December 31, 1996, the Company acquired Dalewood Associates, Inc., the
general manager of an investment partnership which makes equity investments in
companies which are viewed as suitable candidates for future initial public
offerings. The acquisition, which is not material to the Company's results of
operations and financial position, was accounted for under the purchase method.

On March 13, 1997, the Company acquired Southeast Research Partners, Inc., a
research and institutional brokerage boutique, for approximately $3,000,000 in
cash, common stock and a new series of preferred stock. The acquisition will be
accounted for under the purchase method of accounting.

4. Related Party Transactions

Loans receivable from officers and employees of the Company are included in
loans receivable at January 31, 1997 and 1996. Loans receivable from officers
were $94,000 in 1997 and $198,000 in 1996. Receivables representing advances to
brokers in anticipation of their continued employment and generating commission
revenue in accordance with loan agreements were $1,062,000 in 1997 and $308,000
in 1996. The brokers are liable to the Company for the advances until the
minimum employment period is completed and the specified commission revenue is
generated. The advances are not collateralized and do not bear interest. The
advances are amortized to compensation expense over the life of the loan
agreements, which ranged from periods of one to five years at January 31, 1997.

5. Commitments and Contingencies

The Company leases office facilities under noncancelable operating leases.
Certain leases have renewal options and clauses for escalation and operating
cost adjustments. At January 31, 1997, future minimum rental commitments under
such leases were as follows for the fiscal years ending in January:

1998 $1,470,000
1999 678,000
2000 393,000
2001 266,000
2002 252,000
Thereafter 861,000
----------
$3,920,000
==========

27
<PAGE>

Total rent expense was $1,672,000, $1,218,000, and $977,000 in fiscal years
1997, 1996, and 1995, respectively.

The National Association of Securities Dealers Regulation, Inc. (NASDR) recently
conducted an investigation of GKN Securities. The NASDR staff informed the
Company that it intends to recommend to a District Business Conduct Committee
that a complaint be filed against GKN Securities, members of GKN Securities'
senior management, supervisory personnel, and current and former brokers. The
Company expects that the complaint will allege that GKN Securities violated the
anti-fraud provisions of the Securities Exchange Act and the fair pricing
provisions of the rules of the National Association of Securities Dealers, Inc.
(NASD) by charging excessive markups in the sale of certain warrants it
underwrote and for which it acted as a market maker. The Company also
anticipates that the complaint will seek monetary restitution from GKN
Securities to its customers and monetary and non-monetary sanctions and other
relief against GKN Securities and individuals. The NASDR staff has not suggested
to the Company that it will seek any sanctions that would restrict the business
activities of GKN Securities. The Company does not believe that the resolution
of the NASDR investigation will result in a monetary settlement in excess of
amounts provided for in the consolidated financial statements.

The Company's broker-dealer subsidiaries are involved in various other legal
proceedings arising from its securities activities. Management believes that
resolution of these proceedings will have no material adverse effect on the
Company's consolidated financial position or results of operations.

6. Employee Benefits

The Company has a defined contribution 401(k) plan covering substantially all
employees meeting certain eligibility requirements. Prior to May 1, 1996,
Shochet employees were covered by a separate 401(k) plan. The Company makes
discretionary matching contributions to the plan annually, which amounted to
$116,000, $62,000, and $31,000 for fiscal years 1997, 1996, and 1995,
respectively.

7. Income Taxes

<TABLE>
The components of income tax expense were as follows for the years ended January
31,:

<CAPTION>
1997 1996 1995
----------- ---------- ---------
<S> <C> <C> <C>
Current:
Federal $3,905,000 $1,110,000 $ 492,000
State and local 1,769,000 502,000 255,000
---------- ---------- ---------
5,674,000 1,612,000 747,000
Deferred (647,000) 1,206,000 (234,000)
---------- ---------- ---------
$5,027,000 $2,818,000 $ 513,000
========== ========== =========

</TABLE>

28
<PAGE>
<TABLE>
The effective tax rates reflected in the consolidated financial statements
differ from the statutory federal income tax rate as follows:

<CAPTION>
1997 1996 1995
------ ------ ------

<S> <C> <C> <C>
Statutory tax rate 35.0% 34.0% 34.0%
State and local taxes, net of federal
tax benefit 9.0 5.2 18.6
Other 0.3 5.6 4.8
------ ------ ------
Effective tax rate 44.3% 44.8% 57.4%
====== ====== ======
</TABLE>

Deferred income taxes reflect temporary differences in the basis of the
Company's assets and liabilities for income tax purposes and for financial
reporting purposes, using current tax rates. These temporary differences result
in taxable or deductible amounts in future years. The deferred tax liabilities
of $636,000 and $1,292,000 at January 31, 1997 and 1996, respectively, resulted
primarily from unrealized gains on securities.

The Company files consolidated federal and combined New York State and New York
City income tax returns.

8. Stockholders' Equity

In July 1996 the Company sold 2,875,000 shares of its common stock in an initial
public offering at a price of $6.00 per share. The proceeds from the public
offering were $16,375,000 after underwriting discounts and commissions, and
$15,264,000 after other expenses of the offering totaling $1,111,000. GKN
Securities served as a co-manager of the offering. GKN Securities received
underwriting discounts and commissions of $850,000, which were eliminated in
consolidation. The Company plans to use the net proceeds, which are currently
invested in short-term interest-bearing investments, principally to expand its
existing business and also for working capital and general corporate purposes.
The amount expended as of January 31, 1997, was not material.

During the fiscal year ended January 31, 1997, the Company repurchased a total
of 511,250 shares of its common stock. Of these, 271,250 shares were repurchased
in private transactions prior to the Company's initial public offering at a cost
of $1,130,000. In October 1996 the Company authorized the repurchase of up to
$600,000 of its common stock on the open market and in December 1996 it
authorized the repurchase of an additional 150,000 shares. The stock repurchases
were authorized in order to provide for future issuances of stock bonuses to
employees. From October 1996 through January 1997 the Company repurchased
240,000 shares on the open market at a cost of $1,485,000. In March 1997 the
Company authorized the repurchase of an additional 1,045,000 shares. Of these
shares, approximately 60,000 were designated for employee stock bonus issuances
and 160,000 were designated for issuance as part of the acquisition of Southeast
Research Partners.

Effective in May 1994 the Company approved a 1-for-2 reverse stock split of its
common stock and amended and restated the Certificate of Incorporation to effect
the reverse split and to reduce the number of authorized shares to 40,000,000,
consisting of 35,000,000 shares of common stock, $0.0001 par value, and
5,000,000 shares of preferred stock, $0.10 par value. All references in the

29
<PAGE>

consolidated financial statements and accompanying notes to the number of shares
and exercise, conversion and purchase prices have been restated to reflect the
reverse split.

All of the 1,000 outstanding shares of the Company's preferred stock expired in
October 1995 and such series of authorized preferred stock was terminated in
January 1997.

9. Stock Compensation Plans

At January 31, 1997, the Company has two stock-based compensation plans, which
are described below. The Company has also granted stock options outside of the
plans. The Company has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for stock options granted
under or outside of the plans. Had compensation cost been determined based on
the fair value at the grant dates for stock option awards consistent with the
method of SFAS 123, there would have been no material effect on the Company's
net income and earnings per share.

Fixed stock option plan and other fixed stock option awards
The Company's 1991 Employee Incentive Plan (the 1991 Plan) provides for the
issuance of stock, stock options and other stock purchase rights to executive
officers, other key employees and consultants of the Company and its
subsidiaries. The Company may grant options for up to five million shares of
common stock under the 1991 Plan. The options may qualify as incentive stock
options under Section 422 of the Internal Revenue Code of 1986, as amended. The
exercise price of each option granted under the 1991 Plan is determined by the
Company's Board of Directors at the time of grant. The exercise price of
incentive stock options must be at least equal to the fair market value of the
Company's stock on the date of grant. The exercise price of non-qualified
options must be at least equal to 65% of the fair market value of the Company's
stock on the date of grant. The vesting period is at least one year for all
grants and incentive stock options have maximum terms of ten years and
non-qualified options have maximum terms of 13 years.

In May 1996 the Company offered employees holding certain options issued in
December 1992 through February 1995 under the 1991 Plan the opportunity to
convert their options into options for a fewer number of shares, but with lower
exercise prices and/or shorter vesting periods. Options for 432,000 shares were
canceled and new options for 165,000 shares were granted in the conversion.

The Company has also granted stock options outside of the 1991 Plan. The stock
options are authorized under specific agreements when the Company enters into
employment agreements or when a director joins the Board of Directors. The
number of shares subject to options, the exercise price, vesting, termination
and other provisions of such awards are determined by the Board of Directors and
specified in each individual stock option agreement. At January 31, 1997, the
Company has entered into three agreements awarding options for a total of
100,000 shares of common stock.

30
<PAGE>

A summary of the status of the Company's 1991 Plan and other options granted
outside of the 1991 Plan as of January 31, 1997, 1996, and 1995, and changes
during the years then ended is presented below:
<TABLE>

1997 1996 1995
------------------------- ------ ------
Shares Weighted-Average Shares Shares
Stock Options (000) Exercise Price (000) (000)
- ------------- ------ ---------------- ------ ------

<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,897 $3.35 1,662 1,814
Granted 422 4.90 369 105
Exercised (781) 0.91 -- --
Forfeited (493) 5.39 (134) (257)
----- ----- -----

Outstanding at end of year 1,045 4.84 1,897 1,662
===== ===== =====

Options exercisable at year-end 459

Weighted-average fair value of
options granted during the year $0.62
</TABLE>

<TABLE>
The following table summarizes information about stock options outstanding at
January 31, 1997:

<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 1/31/97 Life Price at 1/31/97 Price
- --------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$2.20 138,000 4.9 years $2.20 138,000 $2.20
$4.50 to $5.00 478,000 7.5 4.56 170,000 4.59
$6.00 to $6.125 429,000 6.2 6.00 151,000 6.00
--------- -------
1,045,000 6.6 4.84 459,000 4.34
========= =======
</TABLE>

In March 1997 the Company granted options for 276,000 shares with an exercise
price of $6.00.

Stock award plan
The Company's 1996 Incentive Compensation Plan provides for a portion of annual
incentive awards payable to executive management and business unit managers to
be made in restricted shares of the Company's common stock. All awards are
subject to a minimum three-year vesting period. The maximum number of shares
which may be awarded under the plan is one million. As of January 31, 1997, no
awards had been made under the plan. Approximately 297,000 shares were awarded
in March 1997.

Non-employee stock compensation
The Company granted stock options to purchase 25,000 shares to the seller of
Shochet on the date of the Company's initial public offering in accordance with
the Shochet purchase agreement. The fair value of the options, which was

31
<PAGE>

recorded as an adjustment to the Shochet purchase price, was estimated to be
$36,000 on the date of grant using the Black-Scholes option-pricing model with
the following assumptions: dividend yield of 0%, expected volatility of 27%,
risk-free interest rate of 6.4%, and expected life of 2.5 years. All of the
options were outstanding at January 31, 1997.

10. Concentration of Credit Risk and Off-Balance Sheet Risk

In the normal course of business, the Company's broker-dealer subsidiaries
execute securities transactions on behalf of customers through a clearing
broker. The execution of these transactions includes the purchase and sale of
securities, including the sale of securities not currently owned. These
activities expose the Company to off-balance sheet risk in the event that
customers fail to fulfill their contractual obligations and margin requirements
are not sufficient to fully cover losses. The Company is obligated to its
clearing broker for losses sustained from the Company's customers. Should a
customer fail to deliver cash or securities as agreed, the Company may be
required to purchase or sell securities at unfavorable market prices. 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.

Securities sold, not yet purchased, represent the Company's obligations to
deliver specified securities at contracted prices. The Company is exposed to
risk of loss if securities prices increase prior to closing the transactions.

11. Net Capital Requirements

GKN Securities and Shochet are registered broker-dealers with the Securities and
Exchange Commission (SEC) and member firms of the NASD. As such, GKN Securities
and Shochet are subject to the SEC's net capital rule, which requires the
maintenance of minimum net capital.

GKN Securities has elected to compute net capital using the alternative method
permitted by the net capital rule, which requires that it maintain minimum net
capital, as defined, to be greater than or equal to $250,000. At January 31,
1997, GKN Securities had net capital of $13,404,000.

Shochet has elected to compute net capital under the standard aggregate
indebtedness method permitted by the net capital rule, which requires that the
ratio of aggregate indebtedness to net capital, both as defined, shall not
exceed 15 to 1. At January 31, 1997, Shochet had net capital of $377,000 and a
net capital requirement of $100,000. Shochet's net capital ratio at January 31,
1997, was 1.7 to 1.

32
<PAGE>
<TABLE>

12. Supplemental Cash Flow Information
<CAPTION>

Year ended January 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------

<S> <C> <C> <C>
Cash paid for:
Income taxes $5,763,000 $900,000 $1,456,000
Interest 48,000 -- --

Non-cash financing activities:
Conversion of subordinated notes
to common stock $ -- $ -- $ 162,000

</TABLE>

33
<PAGE>
<TABLE>

GKN HOLDING CORP. AND SUBSIDIARIES
Schedule II
Valuation and Qualifying Accounts
<CAPTION>

Additions
Charged to
Balance at Additions Other Balance
Beginning Charged to Accounts Deductions at End of
Description of Period Expense (Note 2) (Note 3) Period
- ----------- ---------- ---------- ---------- ---------- --------

<S> <C> <C> <C> <C> <C>
Year ended January 31, 1995:

Reserve for loan
losses (Note 1) $ -- $ -- $ -- $ -- $ --
========= ======== ======== ========= ========

Year ended January 31, 1996:

Reserve for loan
losses (Note 1) $ -- $452,000 $ -- $ -- $452,000
======== ======== ======== ========= ========

Year ended January 31, 1997:

Reserve for loan
losses (Note 1) $452,000 $446,000 $169,000 $(125,000) $942,000
======== ======== ======== ========= ========

<FN>

Notes:
(1) The reserve is offset against the corresponding assets on the
consolidated statement of financial condition.
(2) The additions represent adjustments to prior charge-offs.
(3) The deductions represent charge-offs for the purpose for which the
reserve was established.

</FN>
</TABLE>
34
<PAGE>

Independent Auditors' Report

To 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 (the Company) as of January 31, 1997 and
1996, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended January 31, 1997. In connection with our audits of the consolidated
financial statements, we also have audited the related financial statement
schedule. These consolidated financial statements and the related financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.

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 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended January 31, 1997, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.

KPMG Peat Marwick LLP

New York, New York
March 13, 1997

35
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

36
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated herein by reference to
the information included in the Company's proxy statement under the caption
Election of Directors, with the exception of certain information regarding
executive officers of the registrant, which is included at the end of Part I of
this Form 10-K under the caption Executive Officers of the Registrant.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference to the
information included in the proxy statement under the caption Executive
Compensation.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT

The information required by this item is incorporated herein by reference to the
information included in the proxy statement under the caption Voting Securities.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by reference to the
information included in the proxy statement under the caption Certain
Transactions.

37
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K

(a) The following documents are filed as a part of this Form 10-K:
Page
----
1. Financial Statements:

Consolidated Statements of Financial Condition as of
January 31, 1997 and 1996 21

Consolidated Statements of Income for the three years ended
January 31, 1997, 1996 and 1995 22

Consolidated Statements of Changes in Stockholders' Equity for
the three years ended January 31, 1997, 1996 and 1995 23

Consolidated Statements of Cash Flows for the three years
ended January 31, 1997, 1996 and 1995 24

Notes to Consolidated Financial Statements 25

Independent Auditors' Report 35

2. Financial Statement Schedule:

Schedule II - Valuation and Qualifying Accounts 34

Schedules other than the one listed above are omitted for the reason that
they are not required or are not applicable.

3. Exhibits:

Exhibit No. Description
----------- -----------
3.1 Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1, File
No. 333-05273 (Registration Statement))
3.1(a) Amendment, effective as of May 31, 1994, to the
Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1(a) to
the Registration Statement)
3.2 By-laws (incorporated by reference to Exhibit 3.2
to the Registration Statement)
4.1 Form of Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to the Registration
Statement)
10.1 Lease for 61 Broadway, New York, New York 10006
(incorporated by reference to Exhibit 10.1 to the
Registration Statement)

38
<PAGE>

10.2 Agreement between GKN Securities Corp. and
managers of Miami, Florida branch office
(incorporated by reference to Exhibit 10.8 to the
Registration Statement)
10.3 Employment Agreement between the Company and David
M. Nussbaum (incorporated by reference to Exhibit
10.10 to the Registration Statement)
10.4 Employment Agreement between the Company and Roger
N. Gladstone (incorporated by reference to
Exhibit 10.11 to the Registration Statement)
10.5 Employment Agreement between the Company and
Robert H. Gladstone (incorporated by reference to
Exhibit 10.12 to the Registration Statement)
10.6 Employment Agreement between the Company and Peter
R. Kent (incorporated by reference to Exhibit
10.13 to the Registration Statement)
10.7 Warrant Agreement with Joachim Stahler
(incorporated by reference to Exhibit 10.14 to the
Registration Statement)
10.8 Stock Purchase Agreement with Marvin and Sally
Shochet, including form of Option Agreement
(incorporated by reference to Exhibit 10.15 to the
Registration Statement)
10.9 Stock Option Agreement with Arnold B. Pollard
(incorporated by reference to Exhibit 4.2 to the
Company's Form S-8 filed on January 23, 1997, File
No. 333-20273)
10.10 Stock Option Agreement with John P. Margaritis
(incorporated by reference to Exhibit 4.3 to the
Company's Form S-8 filed on January 23, 1997, File
No. 333-20273)
10.11 1991 Employee Incentive Plan (incorporated by
reference to Exhibit 10.17 to the Registration
Statement)
10.12 1996 Employee Incentive Plan (incorporated by
reference to Exhibit 10.20 to the Registration
Statement)
10.13 Amendment, effective as of December 19, 1996, to
the 1996 Employee Incentive Plan
10.14 Clearing Agent Agreement with Wertheim Schroder &
Co. Incorporated (incorporated by reference to
Exhibit 10.18 to the Registration Statement)
10.15 Form of Stock Option Agreement (incorporated by
reference to Exhibit 10.19 to the Registration
Statement)
10.16 Form of Indemnification Agreement (incorporated by
reference to Exhibit 10.21 to the Registration
Statement)
21 Subsidiaries of the Company
23.1 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule

39
<PAGE>

(b) Reports on Form 8-K:

The Company filed a report on Form 8-K on January 16, 1997, reporting under
Item 5, Other Events, in connection with a settlement concluded between GKN
Securities Corp. and Robert Gladstone, Executive Vice President of GKN
Securities Corp., and the SEC, resolving an SEC investigation.

40
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

GKN HOLDING CORP.

By: /s/ Peter R. Kent
Peter R. Kent
Chief Operating Officer and
Chief Financial Officer

Date: April 30, 1997

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on April 30, 1997.

/s/ David M. Nussbaum Chairman of the Board and
David M. Nussbaum Chief Executive Officer

/s/ Roger N. Gladstone President and Director
Roger N. Gladstone

/s/ Peter R. Kent Chief Operating Officer, Chief
Peter R. Kent Financial Officer and Director
(Principal Accounting and Financial
Officer)

/s/ Lester Rosenkrantz Executive Vice President and Director
Lester Rosenkrantz

/s/ James I. Krantz Director
James I. Krantz

/s/ John P. Margaritis Director
John P. Margaritis

/s/ Arnold B. Pollard Director
Arnold B. Pollard

41
<PAGE>

Exhibit 10.13

Amendment to GKN Holding Corp.
1996 Incentive Compensation Plan
(effective December 19, 1996)

The text of Section 6 (Payment of Awards) of the GKN Holding Corp. 1996
Incentive Compensation Plan, is hereby amended to read as follows:

Awards shall be made no later than 60 days following the end of the
company's fiscal year. Awards shall be made to Participants in cash;
provided, however, that in the discretion of the Committee, up to 50% of
the value of any Award may be paid by the issuance of restricted shares of
Common Stock, and up to 100% with the consent of the Participant. Such
Award shall be valued for this purpose at the closing sale price of the
Common Stock on its principal trading market on the last trading day prior
to the date of issuance (or as determined by the Committee if there is no
public trading market). All shares of restricted stock granted to
Participants under the Plan shall be subject to the following terms and
conditions (and to such other terms and conditions prescribed by the
Committee):

42
<PAGE>

Exhibit 21

GKN HOLDING CORP.

List of Subsidiaries

Name of Subsidiary Jurisdiction of Incorporation
------------------ -----------------------------
Dalewood Associates, Inc. New York
GKN Fund Management, Inc. New York
GKN Property Management, Inc. New Jersey
GKN Realty Corp. New Jersey
GKN Securities AG Switzerland
GKN Securities Corp. New York
Shochet Securities, Inc. Florida
Southeast Research Partners, Inc. Delaware

43
<PAGE>

Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
GKN Holding Corp.:

We consent to incorporation by reference in the registration statement (File
No. 333-20273) on Form S-8 of GKN Holding Corp. of our report dated March 13,
1997, relating to the consolidated statements of financial condition of GKN
Holding Corp. and subsidiaries as of January 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended January 31, 1997,
which report appears in the January 31, 1997, annual report on Form 10-K of GKN
Holding Corp.

/s/ KPMG Peat Marwick LLP

KPMG Peat Marwick LLP

New York, New York
April 30, 1997

44
<PAGE>

<ARTICLE> BD

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0
0
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</TABLE>