U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-5703
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SIEBERT FINANCIAL CORP.
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(Name of small business issuer in its charter)
NEW YORK 11-1796714
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
885 THIRD AVENUE, NEW YORK, NEW YORK 10022
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (212) 644 - 2400
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
NONE NONE
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Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $25,661,000
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As of March 17, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $57,077,005 based on the
closing price of the Common Stock on the Nasdaq SmallCap Market on that date.
As of March 17, 1999, there were 22,194,553 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
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UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS FORM 10-K HAS BEEN
ADJUSTED TO REFLECT A 4-FOR-1 STOCK SPLIT EFFECTED APRIL 7, 1998 (THE "STOCK
SPLIT"). UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" OR "SIEBERT" SHALL
MEAN SIEBERT FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARIES.
THE COMPANY'S QUARTERLY AND ANNUAL OPERATING RESULTS ARE AFFECTED BY A
WIDE VARIETY OF FACTORS THAT COULD MATERIALLY AND ADVERSELY AFFECT ACTUAL
RESULTS, INCLUDING: CHANGES IN GENERAL ECONOMIC AND MARKET CONDITIONS,
FLUCTUATIONS IN VOLUME AND PRICES OF SECURITIES, CHANGES AND PROSPECTS FOR
CHANGES IN INTEREST RATES AND DEMAND FOR BROKERAGE AND INVESTMENT BANKING
SERVICES, INCREASES IN COMPETITION WITHIN AND WITHOUT THE DISCOUNT BROKERAGE
BUSINESS THROUGH BROADER SERVICES OFFERINGS OR OTHERWISE, COMPETITION FROM
ELECTRONIC DISCOUNT BROKERAGE FIRMS OFFERING GREATER DISCOUNTS ON COMMISSIONS
THAN THE COMPANY, PREVALENCE OF A FLAT FEE ENVIRONMENT, DECLINE IN PARTICIPATION
IN EQUITY OR MUNICIPAL FINANCE UNDERWRITINGS, DECREASED TICKET VOLUME IN THE
DISCOUNT BROKERAGE DIVISION, LIMITED TRADING OPPORTUNITIES, INCREASES IN
EXPENSES, CHANGES IN NET CAPITAL OR OTHER REGULATORY REQUIREMENTS AND RISKS
RELATED TO THE YEAR 2000.
AS A RESULT OF THESE AND OTHER FACTORS, THE COMPANY MAY EXPERIENCE
MATERIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS ON A QUARTERLY OR ANNUAL
BASIS, WHICH COULD MATERIALLY AND ADVERSELY AFFECT ITS BUSINESS, FINANCIAL
CONDITION, OPERATING RESULTS, AND STOCK PRICE. FURTHERMORE, THIS DOCUMENT AND
OTHER DOCUMENTS FILED BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION
(THE "SEC") CONTAIN CERTAIN FORWARD LOOKING STATEMENTS WITH RESPECT TO THE
BUSINESS OF THE COMPANY, INCLUDING PROSPECTIVE FINANCING ARRANGEMENTS. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES,
INCLUDING THOSE MENTIONED ABOVE, WHICH MAY CAUSE ACTUAL RESULTS TO DIFFER
SIGNIFICANTLY FROM THESE FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO
OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES
AFTER THE DATE WHEN SUCH STATEMENTS WERE MADE OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS. AN INVESTMENT IN THE COMPANY INVOLVES VARIOUS RISKS,
INCLUDING THOSE MENTIONED ABOVE AND THOSE WHICH ARE DETAILED FROM TIME TO TIME
IN THE COMPANY'S SEC FILINGS.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Siebert Financial Corp. (the "Company") is a holding company which
conducts all of its business activities in the retail discount brokerage and
investment banking business through its wholly-owned subsidiary, Muriel Siebert
& Co., Inc., a Delaware corporation ("Siebert"). Muriel Siebert, the first woman
member of the New York Stock Exchange, is the Chair and President and owns
approximately 92% of the outstanding common stock, par value $.01 per share (the
"Common Stock"), of the Company.
The Company has acquired accounts from other discount brokerage firms
and, from time to time, the Company has considered acquisitions of other
discount brokerage firms or their
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accounts. Although the Company intends to pursue these opportunities, there can
be no assurance that the Company will be able to successfully consummate any
such acquisitions in the future.
The Company was ranked third among discount brokerage firms in the July
1998 issue of Smart Money Magazine in part based upon "a huge advance in its
responsiveness and solid gains in on-line trading, mutual funds and breadth of
products." In addition, unlike many discount brokerage firms, the firm offers a
wide variety of underwriting and investment banking services Such services,
offered through its Capital Markets division, include acting as senior manager,
co-manager or otherwise participating in the underwriting or sales syndicates of
municipal, corporate debt and equity, government agency and mortgage/asset back
securities issues.
Siebert Financial Corp. became a reporting company through a merger
with J. Michaels, Inc. ("JMI"), a company with which it was not previously
associated, effective on November 8, 1996 Following the merger, JMI's fiscal
year was changed to December 31 and its name was changed to Siebert Financial
Corp.
BUSINESS OVERVIEW
Siebert provides services to its customers through two main divisions.
Through its Retail division, Siebert provides discount brokerage and related
services to more than 70,000 retail investor accounts. Through its Capital
Markets division, Siebert offers institutional clients equity execution services
on an agency basis, as well as equity, fixed income and municipal underwriting,
and investment banking services. In addition, the Capital Markets division
participates in the secondary markets for Municipal and U.S. Treasury securities
and also trades listed closed-end bond funds and certain other securities for
its own account. This proprietary trading business is strictly segregated from
that of the agency business executed on behalf of institutional clients.
The Company believes that it is the largest Woman-Owned Business
Enterprise ("WBE") in the capital markets business in the country through
Siebert and the largest Minority and Women's Business Enterprise ("MWBE") in the
tax-exempt underwriting business in the country through its investment in
Siebert Brandford Shank & Co., LLC.
THE RETAIL DIVISION
DISCOUNT BROKERAGE AND RELATED SERVICES. The Securities and Exchange
Commission (the "SEC") eliminated fixed commission rates on securities
transactions on May 1, 1975, a date that would later come to be known as "May
Day", spawning the discount brokerage industry; that very day, on the opening
bell, Siebert executed its first discounted commission trade. The firm has been
in business and a member of The New York Stock Exchange, Inc. (the "NYSE")
longer than any other discount broker.
Siebert's focus in its discount brokerage business is to serve retail
clients who seek a wide selection of quality investment services at commissions
that are substantially lower than those of
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full-commission firms and competitive with those of national discounters. In
fact, many of Siebert's new customer accounts come from such full-commission
firms.
Siebert clears all securities transactions on a fully-disclosed basis
through National Financial Services Corp. ("NFSC"), a wholly owned subsidiary of
Fidelity Investments. NFSC, with over $11.9 billion in assets, adds
state-of-the-art technology as well as back-office experience to the operations
of Siebert supplementing Siebert's in-house systems.
Siebert serves investors who make their own investment decisions.
Siebert seeks to assist its customers in their investment decisions by offering
a number of value added services, including quick and easy access to account
information. The firm provides its customers with information via toll-free 800
service direct to its representatives, Monday through Friday between 7:30 a.m.
and 7:30 p.m. Eastern Time. Through its SierbertNet, Siebert OnLine,
MobileBroker and Siebert MarketPhone services, 24-hour access is available to
customers.
INDEPENDENT RETAIL EXECUTION SERVICES. Siebert is independent of the
Over-the-Counter ("OTC") and Third Market market makers and consequently offers
what it believes to be the best possible trade executions for customers. Siebert
does not make markets in securities, nor does it position against customer
orders. Most of the firm's listed orders are routed to the primary exchange for
execution; however, all such customer orders are afforded the opportunity for
price improvement. Through a service called NYSE Prime1, Siebert also has the
ability to document to customers all price improvements received on orders
executed on the NYSE when orders are filled at better than the National Best
Bid/Offer.
The firm's OTC orders are executed through a network of unaffiliated
NASDAQ market makers with no single market maker executing all trades.
Additionally, the firm offers customers execution services through the
SelectNet2 and Instinet3 systems for an additional fee. These systems give
customers access to extended trading hours. Siebert believes that its OTC
executions afford its customers the best possible opportunity for consistent
price improvement. Siebert does not have any affiliation with market makers and
therefore does not execute OTC trades through affiliated market makers.
Siebert executes trades of fixed income securities through its Capital
Markets division. Representatives of this division assist clients in buying,
selling or shopping for competitive yields of fixed income securities, including
municipal bonds, corporate bonds, U.S. Treasuries, mortgage-backed securities,
Government Sponsored Enterprises, Unit Investment Trusts ("UITs") or
Certificates of Deposit ("CDs"). See "Description of Business-Capital Markets
Division."
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(1) NYSE Prime is a service mark of the New York Stock Exchange, Inc.
(2) SelectNet is a trademark of NASDAQ Stock Market, Inc.
(3) Instinet is a trademark of Reuters Group PLC.
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RETAIL CUSTOMER SERVICE. Siebert provides retail customers, at no
additional charge, with personal service via toll-free access to dedicated
customer support personnel for all of its products and services. The Company's
customer service personnel also respond to customer inquiries made via
SiebertNet, also at no additional cost. The customer service department is
located in its home office in New York City. The department is staffed and
supervised by securities professionals qualified to address all of the clients'
needs. Each representative is equipped with powerful workstations running
multiple software programs simultaneously for quick response to customer
inquiries. The workstations display real-time quotes, market information,
up-to-date equity and margin balances, positions and account history. The
Company recently upgraded the software used by its discount trading
representatives to a Windows NT platform from an existing terminal emulation
program. The Company believes that this should result in additional efficiencies
with respect to order entry and execution.
PRODUCTS AND SERVICES. Siebert offers retail customers a variety of
products and services designed to assist them with their investment needs and
allow them the convenience of maintaining a single brokerage account for
simplicity and security. The firm backs up its order execution service with a
guarantee that states, "If you are dissatisfied with a trade for any reason,
that trade is commission free," which excludes losses due to fluctuations in the
market value of securities and applies only to commissions.
Siebert's products and services include the Siebert Asset Management
account featuring no-fee, no minimum check writing with payee detail; a dividend
reinvestment program that allows for the automatic reinvestment of cash
dividends as well as capital gains distribution; retirement accounts that are
free of fees if the account maintains assets of at least $10,000; $100 million
in account protection per account consisting of $500,000 in standard insurance
and $99.5 million in additional protection at no charge; and free safekeeping
services.
ELECTRONIC SERVICES. Siebert provides customers with electronic
delivery of services through a variety of means, as discussed below. Siebert
believes, however, that electronic delivery services, while cost efficient, do
not offer a customer the ultimate in flexibility. Siebert believes a combination
of electronic services and personalized telephonic service maintains customer
loyalty and best serves the needs of most customers. To that end, all of the
services of the firm are supported by trained licensed securities professionals.
SIEBERTNET - Internet access with features including the efficiency and
manageability of placing low commission stock and option orders, obtaining
research and real time quotes, confirmation of pending and executed orders,
access to late breaking news and valuable financial reports, as well as current
account information including balances and positions. SiebertNet features have
been upgraded to include news provided by CBS MarketWatch and research from
Zacks Investment Research. Additionally, the Company has signed a license
agreement with Geo Interactive Media Group Ltd., whose Emblaze technology
enables the delivery of true streaming, real-time multimedia over SiebertNet,
including audio, video, animation and interactive content at existing "low
bandwidth" modem speeds and without plug-ins or server software. In addition,
the
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Company has retained Gomez Advisors, Inc., a source of strategic research for
brokerages, mutual funds, banks, and other commercial firms that utilize the
Internet to enhance their customer relationships, to advise the Company with
respect to SiebertNet.
SIEBERT MARKETPHONE(R) - allows customers to trade at their convenience
through touch-tone phones and to check balances and executions and receive free
real-time quotes (including closed end mutual funds). The service also permits
automatic transfer to a live broker or the use of the fax-on-demand feature to
select an investment report to be delivered to a fax machine through the firm's
Research by Fax7 service.
SELECTNET and INSTINET - gives customers access to extended trading
hours.
PERFORMANCEFAX - allows customers to receive a comprehensive profit and
loss analysis of their portfolios faxed each morning before the market opens.
Alternatively, the customer can select from weekly and monthly schedules for
receipt of PerformanceFax reports.
SIEBERT FUNDEXCHANGE(R) - the FundExchange(R) Mutual Fund service
provides customers with access to approximately 7,000 mutual funds, including
7,000 no-load funds, approximately 1,000 of which have no transaction fees.
ON-LINE STATEMENT IMAGING SYSTEM - electronic imaging of customer
statements are displayed directly on the screen of Siebert representatives for
fast accurate detail of customer accounts.
VISA(R)4 DEBIT CARD - allows customers to make purchases with a Siebert
VISA debit card.
SIEBERT RESEARCH BY FAX - customers are able to call toll free from any
touch tone telephone and select from a list of research reports that will be
faxed 24 hours a day. Upon request, such reports will be mailed to customers or
made available for customer pick-up at any branch.
VIP PREMIERE STATEMENT - these statements offer a more sophisticated
view of the brokerage account information including an account valuation
section, an asset allocation pie chart, an enhanced activity section and a
detailed income summary section.
MOBILEBROKER - In January 1999, the Company, unveiled its new
interactive palm-top service that allows Siebert clients to make equity trades,
receive confirmations, get real-time quotes and alerts, access account data,
send and receive e-mail and more B all without a phone or computer.5 Using the
newest wireless two-way interactive beeper technology, this beeper-sized,
4.9-ounce battery-operated device can be programmed to provide instant account
updates and quotes. The Company, through its clearing agent, expects to roll out
its voice recognition technology in the
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(4) VISA is a registered trademark of VISA International, Inc.
(5) Services provided pursuant to an agreement with the Company's clearing
agent.
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second quarter of 1999, which will allow its customers to use "natural language"
to obtain stock quotes, make trades and check balances.
NEW ACCOUNTS DEPARTMENT. Siebert maintains a separate New Accounts
department to familiarize each customer with Siebert's array of services,
policies and procedures. The department assists in the development of new
business received through the firm's print and broadcast advertising as well as
its referral programs.
The New Accounts department assesses the credit worthiness of customers
and monitors control procedures for each new customer. These procedures include
the use of a combination of nationally recognized fraud prevention services and
internal controls developed and maintained by Siebert. Management feels that
these procedures minimize Siebert's exposure to customers' fraudulent
activities. The New Accounts department staff also assists customers in document
management and compliance with regulatory requirements.
RETIREMENT ACCOUNTS. Siebert offers customers a variety of
self-directed retirement accounts for which it acts as agent on all
transactions. Custodial services are provided through an affiliate of NFSC, the
firm's clearing agent, which also serves as trustee for such accounts. IRA, SEP
IRA, ROTH IRA, 401(k) and KEOGH accounts can be invested in a wide array of
mutual funds, stocks, bonds and other investments all through one consolidated
account. Cash balances in these accounts are swept daily to the money market
fund chosen by the customer. Retirement accounts in excess of $10,000 in assets
are free of maintenance fees. Retirement accounts also enjoy free dividend
reinvestment in more than 12,000 publicly traded securities and mutual funds
allowing customers to automatically reinvest cash dividends and capital gains
distributions for additional shares of the same security.
CUSTOMER FINANCING. Customers' securities transactions are effected on
either a cash or margin basis. Generally, a customer buying securities in a
cash-only brokerage account is required to make payment by the settlement date,
generally three business days after the trade is executed. However, for
purchases of certain types of securities, such as options, a customer must have
a cash or a money market fund balance in his or her account sufficient to pay
for the trade prior to its execution. When selling securities, a customer is
required to deliver the securities, and is entitled to receive the proceeds, on
the settlement date. In an account authorized for margin trading, Siebert
arranges for the clearing agent to lend its customer a portion of the market
value of certain securities up to the limit imposed by the Federal Reserve
Board, which for most equity securities is initially 50%. Such loans are
collateralized by the securities in the customer's account. Short sales of
securities represent sales of borrowed securities and create an obligation to
purchase the securities at a later date. Customers may sell securities short in
a margin account subject to minimum equity and applicable margin requirements
and the availability of such securities to be borrowed.
In permitting a customer to engage in transactions, Siebert assumes the
risk of its customer's failure to meet his or her obligations in the event of
adverse changes in the market value of the
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securities positions in his or her account. Both Siebert and its clearing agent
reserve the right to set margin requirements higher than those established by
the Federal Reserve Board.
CURRENT DEVELOPMENTS. In June 1998, Siebert signed a new one-year
agreement with NFSC which provides, among other things, for reduced ticket
charges and execution fees. The agreement granted retroactive effect to the new
charges and execution fees resulting in a refund to Siebert of $1,000,000.
Siebert has reduced clearing costs and execution fees for the remainder of the
contract term based on the volume of trades and customer account balances. The
new agreement also provides increasing volume discounts as the monthly number of
trades increases.
Siebert's commission per customer trade is trending down as the number
of trades executed electronically increases.6 For the year ended December 31,
1998, electronic trades accounted for an average of 25% of all Siebert trades.
This trend has continued during 1999, with electronic trading accounting for
approximately 45% of all trades during the current fiscal year. Siebert's online
trading system was in the early stage of implementation in 1997.
OFFICES. Siebert currently maintains seven retail discount brokerage
offices. See "Properties." Customers can visit the Company's offices to obtain
market information, place orders, open accounts, deliver and receive checks and
securities, and obtain related customer services in person. Nevertheless, most
of Siebert's activities are conducted by telephone and mail.
The New York office remains open Monday through Friday from 7:30 a.m.
to 7:30 p.m., Eastern Time, while branch offices remain open from 9 a.m. to 5
p.m., Eastern Time, to service customers in person and by telephone.
RISK MANAGEMENT. The principal credit risk to which the Company is
exposed on a regular basis is to customers who fail to pay for their purchases
or who fail to maintain the minimum required collateral for amounts borrowed
against securities positions.
Siebert has established policies with respect to maximum purchase
commitments for new customers or customers with inadequate collateral to support
a requested purchase. Managers have some flexibility in the allowance of certain
transactions. When transactions occur outside normal guidelines, such accounts
are monitored closely until their payment obligation is completed; if the
customer does not meet the commitment, steps are taken to close out the purchase
and minimize any losses.
Siebert has a risk unit specifically responsible for monitoring all
customer positions for the maintenance of required collateral. The unit also
monitors accounts that may be concentrated unduly in one or more securities
whereby a significant decline in the value of a particular concentrated
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(6) Electronic trading includes: SiebertNet, MarketPhone, Siebert Online
and MobileBroker.
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security could reduce the value of the account's collateral below the account's
loan obligation. Siebert has not had significant credit losses in the last five
years.
CERTAIN RISKS RELATED TO ELECTRONIC COMMERCE. The Company presently
receives and processes up to 45% of its trade orders electronically (includes
SiebertNet, MarketPhone, Siebert OnLine and MobileBroker). This method of
trading is heavily dependent on the integrity of the electronic systems
supporting it. While the Company has never experienced a significant failure of
its trading systems, heavy stress placed on the Company's systems during peak
trading times could cause the Company's systems to operate at unacceptably low
speeds or fail altogether. Any significant degradation or failure of the
Company's systems or any other systems in the trading process (e.g., online and
Internet service providers, record keeping and data processing functions
performed by third parties and third-party software such as Internet browsers),
even for a short time, could cause customers to suffer delays in trading. Such
delays could cause substantial losses for customers and could subject the
Company to claims from customers for losses, including litigation claiming fraud
or negligence. There can be no assurance that the Company's network structure
will operate appropriately in the event of a subsystem, component or software
failure or that, in the event of an earthquake, fire or any other natural
disaster, power or telecommunications failure, act of God or act of war, the
Company will be able to prevent an extended systems failure. Any systems failure
that causes interruptions in the Company's operations could have a material
adverse effect on the Company's business, financial condition and operating
results.
Adoption of online commerce, particularly by those individuals that
have historically relied upon traditional means of commerce, will require a
broad acceptance by such individuals of new and substantially different methods
of conducting business. Moreover, the Company's brokerage services over the
Internet involve a relatively new approach to securities trading and, as a
result, increased marketing and sales efforts may be necessary to educate
prospective customers regarding the uses and benefits of the Company's brokerage
services and products. Moreover, the security and privacy concerns of existing
and potential users of the Company's services may inhibit the growth of online
commerce generally, and online brokerage trading in particular, which could have
a material adverse effect on the Company's business, financial condition and
operating results.
The Company relies on encryption and authentication technology to
provide the security and authentication necessary to effect secure transmission
of confidential information. There can be no assurance that advances in computer
capabilities, new discoveries in the field of cryptography or other events or
developments will not result in a compromise or breach of the algorithms used by
the Company to protect customer transaction data. If any such compromise of the
Company's security were to occur, it could have a material adverse effect on the
Company's business, financial condition and operating results.
OTHER INFORMATION SYSTEMS. Siebert's operations rely heavily on
information processing and communications systems. The system for processing
securities transactions is highly automated. Registered representatives equipped
with online computer terminals can access customer account information, obtain
securities prices and related information and enter and confirm orders online.
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To support its customer service delivery systems, as well as other
applications such as clearing functions, account administration, record keeping
and direct customer access to investment information, Siebert maintains a
computer network in New York. Through its clearing agent, Siebert's computers
are also linked to the major registered United States securities exchanges, the
National Securities Clearing Corporation and The Depository Trust Company.
Failure of the information processing or communication systems for a significant
period of time could limit the ability to process a large volume of transactions
accurately and rapidly. This could cause Siebert to be unable to satisfy its
obligations to customers and other securities firms, and could result in
regulatory violations. External events, such as an earthquake or power failure,
loss of external information feeds, such as security price information, as well
as internal malfunctions, such as those that could occur during the
implementation of system modifications, could render part or all of such systems
inoperative.
To enhance the reliability of the system and integrity of data, Siebert
maintains carefully monitored backup and recovery functions. These include
logging of all critical files intra-day, duplication and storage of all critical
data outside of its central computer site each evening, and maintenance of
facilities for backup and communications located offsite.
CAPITAL MARKETS DIVISION
In 1991, Siebert formalized its commitment to its institutional
customer base by creating the Capital Markets division (the "Capital Markets
Division"). This group has served as a co-manager, selling group member or
underwriter on a full spectrum of new issue offerings by municipalities,
corporations and Federal agencies.
The two principal areas of the Capital Markets Division are investment
banking and institutional equity execution services.
INVESTMENT BANKING. Siebert offers investment banking services to
corporate and municipal clients through its Capital Markets Division which
participates in public offerings of equity and debt securities with
institutional and individual investors.
Siebert has participated as an underwriter for taxable and tax-exempt
debt, raising capital for many types of issuers including states, counties,
cities, transportation authorities, sewer and water authorities and housing and
education agencies. Since it began underwriting in 1989, the firm has co-managed
over $100 billion in municipal debt. Siebert has participated as an underwriter
in several of the largest common stock offerings that have come to market,
including Conrail, Allstate, PacTel Corporation, Estee Lauder and Lucent
Technologies. To date, the firm has participated as an underwriter and or
selling group member in over 210 offerings, including corporate debt issuances
totaling over $137 billion.
During 1996, Siebert formed the Siebert, Brandford, Shank division of
the investment banking group to add to the former activities of Siebert's tax
exempt bond underwriting department.
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This division is primarily comprised of a group of investment banking
professionals who were previously employed by the 13th largest tax exempt bond
underwriting firm in the country. The operations of the Siebert, Brandford,
Shank division were moved on July 1, 1998 to a newly formed entity, Siebert,
Brandford, Shank & Co., L.L.C. or "SBS". Two individuals, Mr. Napoleon Brandford
and Ms. Suzanne F. Shank, own 51% of the equity and are entitled to 51% of the
net profits, after Siebert's recovery of start-up expenses, while Siebert is
entitled to the balance. The group has made Siebert a more significant factor in
the tax exempt underwriting area, and is expected to enhance Siebert's
government and institutional relationships, as well as the breadth of products
that can be made available to retail clients.
In addition to occupying a portion of Siebert's existing offices in New
York, SBS operates out of offices in San Francisco, Seattle, Houston, Chicago,
Detroit, Los Angeles and Dallas.
To date, the Siebert, Brandford, Shank division and SBS have co-managed
offerings of approximately $44 billion and senior managed offerings of
approximately $1.7 billion. Clients include the States of California, Texas and
Washington and the Cities of Chicago, Detroit and St. Louis.
The success of the Company's municipal bond underwriting business is
dependent on the services of two of its principals, Napoleon Brandford III and
Suzanne Shank, the loss of whose services would adversely affect the Company.
Certain risks are involved in the underwriting of securities.
Underwriting syndicates agree to purchase securities at a discount from the
initial public offering price. If the securities must be sold below the
syndicate cost, an underwriter is exposed to losses on the securities that it
has committed to purchase. In the last several years, investment banking firms
have increasingly underwritten corporate and municipal offerings with fewer
syndicate participants or, in some cases, without an underwriting syndicate. In
such cases, the underwriter assumes a larger part or all of the risk of an
underwriting transaction. Under Federal securities laws, other laws and court
decisions, an underwriter is exposed to substantial potential liability for
material misstatements or omissions of fact in the prospectus used to describe
the securities being offered. While municipal securities are exempt from the
registration requirements of the Securities Act of 1933, as amended,
underwriters of municipal securities nevertheless are exposed to substantial
potential liability in connection with material misstatements or omissions of
fact in the offering documents prepared in connection with offerings of such
securities.
The Company's Capital Markets division underwriting and trading
activities involve the purchase, sale or short sale of securities as principal.
These activities involve the risks of changes in the market prices of such
securities and of decreases in the liquidity of the securities markets, which
could limit the Company's ability to resell securities purchased or to
repurchase securities sold short. In addition, these activities subject the
Company's capital to significant risks that counter parties will fail to perform
their obligations. From time to time, the Company establishes short positions
during the course of its trading activities. It is a characteristic of short
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positions that any loss sustained on closing out the position may exceed the
liability related thereto as shown on the Company's financial statements.
INSTITUTIONAL EQUITY EXECUTION SERVICES. The firm emphasizes
personalized service, professional order handling and client satisfaction to
approximately 400 institutional accounts. It utilizes up to 15 independent floor
brokers that use an extensive network linked via direct "ring down" circuits.
Each broker is strategically located on a major exchange which allows Siebert to
execute orders in all market environments. Utilizing its clearing arrangement,
Siebert has the ability to provide foreign execution and clearing services to
institutional customers. Although the firm has a propriety trading function, it
does not execute customer orders against such propriety positions because
Siebert believes its client's interest in a transaction should always be placed
above any other interest. The firm's institutional client list includes some of
the largest pension funds, investment managers and banks across the country.
The Institutional Equity Execution Services department utilizes the
Siebert Real-Time List Execution ("SRLX") system. The SRLX system is designed
exclusively for institutional customers who employ the use of basket trading
strategies in their portfolio management. This system enables the Capital
Markets Division to simultaneously manage an array of baskets for multiple
clients while providing real-time analysis. The SRLX system can be integrated
into an existing local area network. It is built with the latest 32 bit
technology to take advantage of today's Pentium7-based PCs running Microsoft
Windows958 or Windows NT6. Data integrity is assured through a private digital
T1 line with built-in network redundancy.
The SRLX system is built for institutional customers with features
designed to add significant value to their trading capabilities. This system's
features include: design and development by in-house professionals for
reliability and speed; sophisticated graphical interface allowing exceptional
control and monitoring; real-time order entry, reporting and messaging from the
inter-market trading network; real-time basket analysis including average
pricing and liquidity; multiple basket management from a single window; account
allocation and automated report uploading; customized client reports; active
intervention for large blocks or inactive stocks; and built-in fail-safe and
recovery system.
CERTAIN RISKS RELATING TO MARKET CONDITIONS
The securities business is, by its nature, subject to significant
risks, particularly in volatile or illiquid markets, including the risk of
trading losses, losses resulting from the ownership or underwriting of
securities, counter party failure to meet commitments, customer fraud, employee
fraud, issuer fraud, errors and misconduct, failures in connection with the
processing of securities transactions and litigation.
- ----------
(7) Pentium is a trademark of the Intel Corporation.
(8) Microsoft Window95 and Windows NT are trademarks of the Microsoft
Corporation.
12
<PAGE>
The Company's principal business activity, retail broker-dealer
operations, as well as its investment banking, institutional sales and other
services, are highly competitive and subject to various risks, volatile trading
markets and fluctuations in the volume of market activity. The securities
business is directly affected by many factors, including economic and political
conditions, broad trends in business and finance, legislation and regulation
affecting the national and international business and financial communities,
currency values, inflation, market conditions, the availability and cost of
short-term or long-term funding and capital, the credit capacity or perceived
creditworthiness of the securities industry in the marketplace and the level and
volatility of interest rates. These and other factors can contribute to lower
price levels for securities and illiquid markets.
Lower price levels of securities may result in (i) reduced volumes of
securities, options and futures transactions, with a consequent reduction in
commission revenues, and (ii) losses from declines in the market value of
securities held in trading, investment and underwriting positions. In periods of
low volume, levels of profitability are further adversely affected because
certain expenses remain relatively fixed. Sudden sharp declines in market values
of securities and the failure of issuers and counter parties to perform their
obligations can result in illiquid markets which, in turn, may result in the
Company having difficulty selling securities. Such negative market conditions,
if prolonged, may also lower the Company's revenues from investment banking and
other activities.
As a result of the varied risks associated with the securities
business, which are beyond the Company's control, the Company's commission and
other revenues could be adversely affected. A reduction in revenues or a loss
resulting from the underwriting or ownership of securities could have a material
adverse effect on the Company's results of operations and financial condition.
In addition, as a result of such risks, the Company's revenues and operating
results may be subject to significant fluctuations from quarter to quarter and
from year to year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Business Environment."
ADVERTISING, MARKETING AND PROMOTION
Siebert develops and maintains its retail customer base through printed
advertising in financial publications, broadcast commercials over national and
local cable TV channels as well as promotional efforts and public appearances by
Ms. Siebert. Additionally, a significant portion of the firm's new business is
developed directly from referrals by satisfied customers. Many of the firm's
competitors expend substantial funds in advertising and direct solicitation of
prospects and customers to increase their share of the market.
The Capital Markets Division maintains a practice of announcing in
advance that it will contribute a portion of the net commission revenues it
derives from sales of certain negotiated new issue equity, municipal and
government bonds to charitable organizations. Siebert is certified as a WBE with
numerous states, agencies and authorities. Siebert is the only WBE which offers
both retail and institutional product distribution capabilities. It is also the
largest WBE with significant
13
<PAGE>
minority participation. Although it has been a member of the New York Stock
Exchange since 1967, new business opportunities have become available to it
based upon its status as a WBE. Minority and Women-owned business programs
generally operate under the authority of state and local governments or their
related agencies. Changes in laws or policies of such governments or their
agencies with respect to such programs may adversely affect the Company's
participation in municipal bond and equity underwritings as well as the
Company's execution of institutional equity transactions. Management believes
that, irrespective of the legal requirements, as long as there is a "sensitivity
to diversity and competitive equality," opportunities will be available for
qualified minority and women-owned businesses, especially in those locales that
have a significant minority population. See "Description of
Business-Regulation."
COMPETITION
Siebert encounters significant competition from full-commission and
discount brokerage firms, as well as from financial institutions, mutual fund
sponsors and other organizations many of which are significantly larger and
better capitalized than Siebert. The general financial success of the securities
industry over the past several years has strengthened existing competitors.
Siebert believes that such success will continue to attract additional
competitors such as banks, insurance companies, providers of online financial
and information services and others as they expand their product lines. Many of
these competitors are larger, more diversified, have greater capital resources,
and offer a wider range of services and financial products than Siebert. Some
such firms are offering their services over the facilities of the Internet and
have devoted more resources to and have more elaborate web sites than the
Company's. Siebert competes with a wide variety of vendors of financial services
for the same customers. Siebert believes that its main competitive advantages
are quality of execution and service, responsiveness, price of services and
products offered and the breadth of its product line.
There are currently over 100 principal competitors with Siebert in the
discount brokerage business. Siebert charges commissions generally lower than
other discount brokers but more than some others. In investment banking,
Siebert's principal competitors for business include both national and regional
firms, some of whom have resources substantially greater than Siebert's. Siebert
believes that it is one of the largest independent discount brokerage firms, as
most firms that were previously independent have been purchased by or merged
into larger financial institutions.
REGULATION
The securities industry in the United States is subject to extensive
regulation under both Federal and state laws. The SEC is the Federal agency
charged with administration of the Federal securities laws. Siebert is
registered as a broker-dealer with the SEC, the NYSE and the National
Association of Securities Dealers ("NASD"). Much of the regulation of
broker-dealers has been delegated to self-regulatory organizations, principally
the NASD and national securities exchanges such as the NYSE which is Siebert's
primary regulator with respect to financial and operational compliance. These
self-regulatory organizations adopt rules (subject to approval by the SEC)
14
<PAGE>
governing the industry and conduct periodic examinations of broker-dealers.
Securities firms are also subject to regulation by state securities authorities
in the states in which they do business. Siebert is registered as a
broker-dealer in 48 states, the District of Columbia and Puerto Rico.
The principal purpose of regulations and discipline of broker-dealers
is the protection of customers and the securities markets, rather than
protection of creditors and stockholders of broker-dealers. The regulations to
which broker-dealers are subject cover all aspects of the securities business,
including training of personnel, sales methods, trading practices among
broker-dealers, uses and safekeeping of customers' funds and securities, capital
structure of securities firms, record keeping, fee arrangements, disclosure to
clients, and the conduct of directors, officers and employees. Additional
legislation, changes in rules promulgated by the SEC and by self-regulatory
organizations or changes in the interpretation or enforcement of existing laws
and rules may directly affect the method of operation and profitability of
broker-dealers and investment advisers. The SEC, self-regulatory organizations
and state securities and other authorities may conduct administrative
proceedings which can result in censure, fine, cease and desist orders or
suspension or expulsion of a broker-dealer or an investment adviser, its
officers or its employees. Neither the Company nor Siebert has been the subject
of any such administrative proceedings.
As a registered broker-dealer and NASD member organization, Siebert is
required by Federal law to belong to the Securities Investor Protection
Corporation ("SIPC") which provides, in the event of the liquidation of a
broker-dealer, protection for securities held in customer accounts held by the
firm of up to $500,000 per customer, subject to a limitation of $100,000 on
claims for cash balances. The SIPC is funded through assessments on registered
broker-dealers. In addition, Siebert, through its clearing agent, has purchased
from private insurers additional account protection of up to $99.5 million per
customer, as defined, for customer securities positions only. Stocks, bonds,
mutual funds and money market funds are considered securities and are protected
on a share basis for the purposes of SIPC protection and the additional
protection. Neither SIPC protection nor the additional protection applies to
fluctuations in the market value of securities.
Siebert is also authorized by the Municipal Securities Rulemaking Board
to effect transactions in municipal securities on behalf of its customers and
has obtained certain additional registrations with the SEC and state regulatory
agencies necessary to permit it to engage in certain other activities incidental
to its brokerage business.
Margin lending arranged by Siebert is subject to the margin rules of
the Board of Governors of the Federal Reserve System and the NYSE. Under such
rules, broker-dealers are limited in the amount they may lend in connection with
certain purchases and short sales of securities and are also required to impose
certain maintenance requirements on the amount of securities and cash held in
margin accounts. In addition, those rules and rules of the Chicago Board Options
Exchange govern the amount of margin customers must provide and maintain in
writing uncovered options.
In 1996, voters in the State of California approved Proposition 209, a
proposed statewide constitutional amendment by initiative, and the Governor
issued an executive order requiring state
15
<PAGE>
officials to immediately implement the initiative. Proposition 209 bans
preferential treatment for women and minorities in state programs. Under
Proposition 209, state agencies have been ordered to end all quotas or
set-asides. A number of lawsuits were filed challenging the constitutionality of
the proposition under the Fourteenth Amendment and the equal protection clause
and a court in San Francisco has issued an injunction blocking the
implementation of the proposition. The Court of Appeals for the Ninth Circuit is
currently considering the appeal of the injunction blocking Proposition 209's
implementation. It is unclear at this point whether the proposition will be
implemented or what the impact of the proposition will be on the new business
opportunities that may have become available to Siebert in California based upon
its status as a WBE. Ms. Siebert believes that, irrespective of the legal
requirements, as long as there is a "sensitivity to diversity and competitive
equality," opportunities will be available for WBEs and MWBEs. See "Description
of Business-Advertising, Marketing and Promotion."
In addition, securities trading conducted on the Internet recently has
been the subject of increased Federal and state regulatory interest. See
"Description of Business-Risks Related to the Internet."
NET CAPITAL REQUIREMENTS
As a registered broker-dealer, Siebert is subject to the SEC's Uniform
Net Capital Rule (Rule 15c3-1) (the "Net Capital Rule"), which has also been
adopted through incorporation by reference in NYSE Rule 325. Siebert is a member
firm of the NYSE and the NASD. The Net Capital Rule specifies minimum net
capital requirements for all registered broker-dealers and is designed to
measure financial integrity and liquidity. Failure to maintain the required
regulatory net capital may subject a firm to suspension or expulsion by the NYSE
and the NASD, certain punitive actions by the SEC and other regulatory bodies
and, ultimately, may require a firm's liquidation.
Regulatory net capital is defined as net worth (assets minus
liabilities), plus qualifying subordinated borrowings, less certain deductions
that result from excluding assets that are not readily convertible into cash and
from conservatively valuing certain other assets. These deductions include
charges that discount the value of firm security positions to reflect the
possibility of adverse changes in market value prior to disposition.
The Net Capital Rule requires notice of equity capital withdrawals to
be provided to the SEC prior to and subsequent to withdrawals exceeding certain
sizes. The Net Capital Rule also allows the SEC, under limited circumstances, to
restrict a broker-dealer from withdrawing equity capital for up to 20 business
days.
The firm falls within the provisions of Rule 240.15c3-1(a)(1)(ii)
promulgated by the SEC. Siebert has elected to use the alternative method,
permitted by the rule, which requires that Siebert maintain minimum net capital,
as defined, equal to the greater of $250,000 or 2 percent of aggregate debit
balances arising from customer transactions, as defined. (The net capital rule
of the NYSE also provides that equity capital may not be withdrawn or cash
dividends paid if resulting net capital
16
<PAGE>
would be less than 5 percent of aggregate debits.) At December 31, 1998 and
1997, Siebert had net capital of $11.1 million and $9.1 million, respectively,
and net capital requirements of $250,000 under Regulation 240.15c3-1(a)(1)(ii).
Siebert is not subject to SEC Rule 15c3-3 and claims exemption from the reserve
requirement under Section 15c3-3(k)(2)(ii). The firm maintains net capital in
excess of the SEC Rule 17a-11 requirement.
EMPLOYEES
As of March 10, 1999, the Company had approximately 100 employees, all
of whom were full time and four of whom were corporate officers. None of the
employees are represented by a union, and the Company believes that its
relations with its employees are good.
ITEM 2. PROPERTIES
Siebert operates its business out of the following fourteen leased
offices:
<TABLE>
<CAPTION>
Expiration
Approximate Office Date of
Location Area in Square Feet Current Lease Renewal Terms
- -------- ------------------- ------------- -------------
<S> <C> <C> <C>
Corporate Headquarters, Retail and
Investment Banking Office
- -------------------------
885 Third Ave. 7,828 SF 4/30/03 None
New York, NY 10022
Retail Offices
- --------------
9693 Wilshire Boulevard 1,000 SF 12/31/00 None
Beverly Hills, CA 90212
4400 North Federal Highway 1,038 SF 2/28/02 None
Boca Raton, FL 33431
55 Madison Avenue 140 SF Month to month None
Morristown, NJ 07960
400 Fifth Avenue - South 1,008 SF 4/22/99 None
Naples, FL 33940
240A South County Road 770 SF 10/14/00 2 year option
Palm Beach, FL 33480
9569 Harding Avenue 1,150 SF Month to month None
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Expiration
Approximate Office Date of
Location Area in Square Feet Current Lease Renewal Terms
- -------- ------------------- ------------- -------------
<S> <C> <C> <C>
Surfside, FL 33154 month
Investment Banking Offices
- --------------------------
30 N. LaSalle Street 1,613 SF 8/31/99 None
Chicago, IL 60602
1845 Woodall Rodgers Freeway 224 SF Month to month None
Dallas, TX 75201
400 Renaissance Center 1,500 SF Month to month None
Detroit, MI 48243
400 Louisiana 1,513 SF 6/29/99 None
Houston, TX 77002
523 West 6th Street 1,138 SF Month to month None
Los Angeles, CA 90014
220 Sansome Street 3,250 SF 2/28/00 None
San Francisco, CA 94104
601 Union Street 325 SF Month to month None
Seattle, WA 98101
</TABLE>
The Company believes that its properties are in good condition and are
suitable and adequate for the Company's business operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various routine lawsuits of a nature deemed
by the Company customary and incidental to its business. In the opinion of
management, the ultimate disposition of such actions will not have a material
adverse effect on its financial position or results of operations.
18
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its regular annual meeting on December 16, 1998. At
that meeting, the following matters were voted upon and received the votes
indicated:
(1) Election of Directors
For Withheld
--- --------
Muriel F. Siebert 20,262,712 800
Nicholas P. Dermigny 20,262,712 800
Patricia L. Francy 20,262,712 800
Jane H. Macon 20,262,712 800
Monte E. Wetzler* 20,262,712 800
- ----------
* Subsequently resigned as a Director of the Company.
(2) Ratification and approval of the Company's Restricted Stock Award Plan:
Abstentions and
For Against Broker Non-Votes
--- ------- ----------------
20,258,484 3,828 1,200
(3) Ratification and approval of selection of Richard A. Eisner & Company,
LLP as independent auditors for 1998:
Abstentions and
For Against Broker Non-Votes
--- ------- ----------------
20,262,312 800 400
19
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock trades on the Nasdaq SmallCap Market under the symbol
"SIEB" on November 12, 1996. The high and low sales prices of the Common Stock
reported by the Nasdaq SmallCap Market during the following periods were:
High Low
---- ---
First Quarter - 1997 ................................... $3.09 $2.31
Second Quarter - 1997................................... $2.38 $2.31
Third Quarter - 1997.................................... $2.75 $1.31
Fourth Quarter - 1997................................... $2.25 $1.88
First Quarter - 1998.................................... $12.06 $2.42
Second Quarter - 1998................................... $19.00 $7.38
Third Quarter - 1998.................................... $13.50 $5.75
Fourth Quarter - 1998................................... $19.00 $5.75
The closing price of the Common Stock on the Nasdaq SmallCap Market on
March 17, 1999 was $24.875 per share.
As of March 17, 1999, there were approximately 194 holders of record of
the Common Stock.
The Company currently meets the criteria for listing of its Common
Stock on the Nasdaq National Market System. Notwithstanding its meeting the
applicable criteria, there can be no assurance that the Company will, in fact,
either apply for listing or be listed on the Nasdaq National Market System.
DIVIDEND POLICY
To date, the Company has established a practice of paying quarterly cash
dividends to its shareholders. On December 22, 1997, March 16, 1998, June 23,
1998, September 25, 1998, and
20
<PAGE>
December 30, 1998 dividends of $.0225, $.0225, $.03, $.03, and $.04 per share
were declared for all stockholders of record as of December 30, 1997, March 20,
1998 July 9, 1998, October 9, 1998, and January 18, 1999 respectively. Ms.
Siebert, as the majority shareholder of the Company, waived her right to receive
the cash dividends described above and has indicated to the Company that she
intends to waive her right to receive future cash dividends declared through
1999, if any.
Subject to statutory, regulatory and contractual constraints,
prevailing financial conditions and future earnings, the Company may pay cash
dividends on its Common Stock. In considering whether to pay such dividends, the
Company's Board of Directors will review the earnings of the Company, its
capital requirements, its economic forecasts and such other factors as are
deemed relevant. Some portion of the Company's earnings will be retained to
provide capital for the operation and expansion of its business. There can be no
assurance that the Company will declare or pay any dividends in the future.
OFFERINGS OF SHARES
In January 1997, the Company offered to "odd lot" shareholders the
opportunity to round up to the closest 100 shares any holdings of an odd amount
at a price of $2.344 per share. The offer expired March 21, 1997. 6,852 shares
of Common Stock were issued pursuant to the offer.
On January 5, 1999, the Company completed a rights offering in which
existing shareholders received one right to purchase one share of Common Stock
at $7.50 for each share owned of record as of July 29, 1998. Approximately
961,000 shares of Common Stock were issued pursuant to the offering, generating
net proceeds to the Company of approximately $7,000,000, after the payment of
offering expenses of approximately $270,000.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
This discussion should be read in conjunction with the Company's
audited Consolidated Financial Statements and the Notes thereto contained
elsewhere in this Annual Report.
BUSINESS ENVIRONMENT
Market conditions during the first six months of 1998 reflected a
continuation of the 1996 bull market characterized by record volume and record
high market levels. During the second half of 1998, the markets were extremely
volatile, with large daily swings in the market averages. Meanwhile, competition
has continued to intensify both among all classes of brokerage firms and within
the discount brokerage business, as well as from new firms not previously in the
discount brokerage business. Electronic trading continues to grow as a retail
discount market segment with
21
<PAGE>
some firms offering very low flat rate trading execution fees that are difficult
for any conventional discount firm to meet. Many of the flat fee brokers,
however, impose charges for services such as mailing, transfers and handling
exchanges which the Company does not impose and also direct their executions to
captive market makers. Continued competition from ultra low cost flat fee
brokers and broader service offerings from other discount brokers could limit
the Company's growth or even lead to a decline in the Company's customer base
which would adversely affect its results of operations. Industry-wide changes in
trading practices are expected to cause continuing pressure on fees earned by
discount brokers for the sale of order flow.
The Company, like other securities firms, is directly affected by
general economic and market conditions including fluctuations in trading volume
and prices of securities, changes and prospects for changes in interest rates,
and demand for brokerage and investment banking services, all of which can
affect the Company's results of operations. In periods of reduced market
activity, profitability is likely to be adversely affected because certain
expenses, including salaries and related costs, portions of communications costs
and occupancy expenses, remain relatively fixed. Accordingly, earnings for any
period should not be considered representative of earnings to be expected for
any other period.
CURRENT DEVELOPMENTS
In June 1998, Siebert signed a new one-year agreement with its clearing
broker, NFSC which provides, among other things, for reduced ticket charges and
execution fees. The new arrangement also provided for retroactive effect being
given to the new rates and resulted in a refund to Siebert of $1,000,000.
Siebert recognized $750,000 of that amount as pre-tax income in the quarter
ended June 31, 1998 and $250,000 in the quarter ended September 30, 1998, when
all contingencies relating to the payments lapsed.
In July 1998, Siebert, Brandford, Shank & Co., L.L.C. ("SBS") began
operating as a separate broker/dealer and, accordingly, the Company began
reporting its investment in, and the operations of, SBS using the equity method
of accounting. Prior to July 1998, the operations of what is now SBS were fully
consolidated with those of Siebert.
Siebert's commission per customer trade is trending down as the number
of trades executed electronically increases.9 For the year ended December 31,
1998, electronic trades accounted for an average of 25% of all Siebert trades.
This trend has continued during 1999, with electronic trading accounting for
approximately 45% of all trades during the current fiscal year. Siebert's online
trading system was in the early stage of implementation in 1997.
- ----------
(9) Electronic trading includes: SiebertNet, MarketPhone, Siebert OnLine
and MobileBroker.
22
<PAGE>
In December 1998, the Company signed a letter of intent to purchase
100% of the outstanding common stock of a discount brokerage firm, Andrew Peck
Associates, Inc. The parties currently are negotiating the terms of the proposed
acquisition.
In December 1998, Siebert acquired the retail customer accounts of
Donald K. Cowles and of Cowles, Sabol & Co., Inc. of Encino, California.
On January 5, 1999 the Company completed a rights offering in which
existing shareholders received one right to purchase one share of Common Stock
at $7.50 for each share owned of record as of July 29, 1998. Approximately
961,000 shares of Common Stock were issued pursuant to the rights offering,
generating net proceeds to the Company of approximately $7,000,000, after the
payment of offering expenses of approximately $270,000. The Company intends to
use the proceeds to build up and promote the Company's Internet trading service
and for general corporate purposes.
In January 1999, the Company, through its clearing agent, unveiled its
new interactive palm-top service that allows Siebert clients to make equity
trades, receive confirmations, get real-time quotes and alerts, access account
data, send and receive e-mail and more B all without a phone or computer. Using
the newest wireless two-way interactive beeper technology, this beeper-sized,
4.9-ounce battery-operated device can be programmed to provide instant account
updates and quotes.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Total revenues for 1998 were $25.7 million, a decrease of
$207,000, or 0.8%, over 1997. Commission and fee income increased $385,000, or
2%, over the prior year to $19.3 million due to higher trading volume partially
offset by lower commissions earned per trade resulting from the increased use of
lower priced electronic trading, reductions on other related services caused by
increased competition from ultra low cost flat fee brokers and a reduction of
order flow fees. The portion of trades executed on the Company's SiebertNet web
site continues to increase at a rapid pace, representing approximately 33% of
trades executed since the beginning of 1999.
Investment banking revenues decreased $1.2 million, or 26.6%, from the
prior year to $3.3 million as the Company began reporting its investment in, and
the operations of, SBS using the equity method of accounting in July 1998. Prior
to that time, the operations of what is now SBS were fully consolidated with
those of Siebert. SBS generates a majority of its revenues in the tax exempt
underwriting area.
Income from equity investee increased $1.2 million as the Company began
for its investment in SBS using the equity method starting in July 1998.
23
<PAGE>
Trading profits declined $509,000, or 28.4%, from the prior year to
$1.3 million primarily due to reduced income opportunities in the trading of
listed bond funds, the firm's principal trading activity.
Income from interest and dividends decreased $71,000, or 10.1%, from
the prior year to $634,000 primarily due to trading strategies which generated
lower dividend income, coupled with generally lower interest rates.
Expenses. Total expenses for 1998 were $18.2 million, a decrease of
$2.9 million, or 14.1%, from the prior year.
Employee compensation and benefit costs decreased $268,000, or 3.3%,
from the prior year to $7.9 million primarily due to the treatment of SBS as a
separate entity, with a commensurate decrease in the number of employees on the
Company's payroll.
Clearing and floor brokerage fees decreased $1.7 million, or 37.4%,
from the prior year to $2.9 million primarily due to the retroactive effect
given to the Company's new clearing agreement with its clearing broker which,
among other things, reduced ticket charges, execution fees and a resulted in a
refund to the Company of $1.0 million.
Advertising and promotion expense decreased $956,000, or 34.7%, from
the prior year to $1.8 million due to a decreased level of promotional
advertising.
Communications expense increased $218,000, or 15.1%, over the prior
year, to $1.7 million primarily due increased quote and news services.
Occupancy costs decreased $49,000, or 7.5%, from the prior year to
$601,000 principally due to the treatment of SBS as a separate entity, partially
offset by a lease extension option cancellation fee of approximately $33,000
paid during 1998.
Interest expense decreased $91,000, or 21.8%, from the prior year to
$327,000, primarily due to the decreased use of short positions in proprietary
trading activities coupled with generally lower interest rates.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased $94,000, or 3.1%, from the prior year to $2.9 million primarily due to
the treatment of SBS as a separate entity.
TAXES. Provision for income taxes increased $1.1 million, or 52.8%,
from the prior year to $3.1 million primarily due to an increase in net income
before income tax to $7.5 million in 1998 from $4.7 million in 1997, partially
offset by a refund of local taxes.
24
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Total revenues for 1997 were $25.9 million, an increase of
$1.7 million, or 7.1%, from the prior year.
Commission and fee income decreased $1.2 million, or 6.1%, from the
prior year to $18.9 million due to lower commissions earned per trade resulting
from the increase of lower priced electronic trading, price reductions on other
related services caused by increased competition from ultra low cost flat fee
brokers and a reduction of order flow fees.
Investment banking revenues increased $2.0 million, or 77%, from the
prior year to $4.5 million primarily due to the inclusion of a whole year of tax
exempt underwriting revenues from the predecessor to SBS in 1997. The
predecessor to SBS operated for only three months of the year in 1996.
Trading profits increased $926,000, or 107%, from the prior year to
$1,795,000 primarily due to increased activity in secondary municipal bond
trading by SBS and improved trading opportunities in the principal listed bond
funds trading activity.
Interest and dividends increased $48,000, or 7.4%, from the prior year
to $705,000 primarily due to trading strategies which generated greater dividend
income.
EXPENSES. Total expenses for 1997 were $21.2 million, a decrease of
$806,000, or 3.7%, from the prior year.
Employee compensation and benefit costs decreased $1.5 million, or
15.5%, from the prior year to $8.2 million primarily due to a compensation
reduction for Muriel Siebert, offset by a full year's worth of compensation for
SBS' principals, municipal investment banking staff and commission-based
municipal trading personnel.
Clearing and brokerage fees increased $90,000, or 2.0%, from the prior
year to $4.7 million. Such costs increased due to higher trading volume.
Advertising and promotion expense decreased $514,000, or 15.7%, from
the prior year to $2.8 million due to decreased branch and services promotion.
Such expenses for 1996 included several one-time expenses related to branch
expansion and on-line trading services.
Communications expense increased $87,000, or 6.4%, from the prior year
to $1.4 million as the Company's client base and trading volume increased and
more services were offered on-line, as well as increased activities of the
investment banking staff. These increases were partially offset by telephone
contract price reductions.
25
<PAGE>
Occupancy costs increased $245,000, or 60.5%, from the prior year to
$650,000 principally due to a full year's worth of rent in 1997 for new retail
and investment banking branch offices opened during 1996.
Interest expense increased $128,000, or 44.1%, from the prior year to
$418,000 primarily due to greater use of margin borrowings and short positions
in proprietary trading activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased $704,000, or 30.7%, from the prior year to $3.0 million primarily due
to travel and entertainment expenses related to the new municipal investment
banking staff and a range of miscellaneous costs associated with increased
volume.
TAXES. Current and pro forma provision for income taxes increased $1.1
million, or 116%, from the prior year, due to an increase in net income before
taxes to $4.7 million in 1997 from pro forma net income before taxes of $2.2
million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's assets are highly liquid, consisting generally of cash,
money market funds and securities freely saleable in the open market. Siebert's
total assets at December 31, 1998 were $20.2 million, of which $2.0 million took
the form of a secured demand note issued by Muriel Siebert bearing interest at
an annual rate of 4.0%. As of December 31, 1998, $13.5 million, or 67%, of total
assets were regarded by the Company as highly liquid. See "Market For Common
Equity and Related Stockholder Matters C Offerings of Shares."
Siebert is subject to the net capital requirements of the SEC, the NYSE
and other regulatory authorities. At December 31, 1998, Siebert's regulatory net
capital was $11.1 million, $10.9 million in excess of its minimum capital
requirement of $250,000.
YEAR 2000
Many existing computer programs use only two digits to identify a
specific year and therefore may not accurately recognize the upcoming change in
the century. If not corrected, many computer applications could fail or create
erroneous results by or at the Year 2000. Due to the Company's dependence on
computer technology in its operations, and the dependence of the financial
services industry on computer technology, the nature and impact of Year 2000
processing failures on the Company's business, financial position, results of
operations or cash flows could be material. The Company is currently modifying
its computer systems in order to enable its systems to process data and
transactions incorporating Year 2000 dates without material errors or
interruptions. Because systems critical to the Company's functioning other than
its computer systems also may be affected by the century change, the Company's
Year 2000 compliance efforts also encompass facilities and equipment which rely
on date-dependent technology, such as, building equipment that contains embedded
technology.
26
<PAGE>
Siebert utilizes both systems housed primarily on its own computer
network and systems housed on the computers of third parties, such as its
clearing broker and payroll vendor, to conduct its normal business activities.
Some of the systems on its network are proprietary but many are off the shelf
programs acquired from vendors. Siebert has inventoried those systems it
believes are critical to its operations and has received assurances from the
developers, vendors and third parties that those systems are, or will be prior
to December 31, 1999, Year 2000 compliant. Although nothing has come to
Siebert's attention which would cause it to believe that the assurances it has
received are not accurate, the failure of one or more critical systems to be
Year 2000 compliant could have a material adverse effect on the results of its
operations. Siebert intends to test all critical systems during 1999. The costs
incurred to date and in the future relating to this issue are not expected to be
material in the aggregate.
IMPACT OF INFLATION
General inflation in the economy increases operating expenses of most
businesses. The Company has provided compensation increases generally in line
with the inflation rate and incurred higher prices for goods and services. While
the Company is subject to inflation as described above, management believes that
inflation currently does not have a material effect on the Company's operating
results, but there can be no assurance that this will continue to be so in the
future. See "Description of Business-Certain Risks Relating to Market
Conditions."
NEW ACCOUNTING PRINCIPLES
During 1997, and 1998, the Financial Accounting Standards Board issued
the following account standards: Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS No. 130), Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No. 131), Statement of Financial Accounting Standards
No. 132 "Employers Disclosures about Pension and other Post retirement Benefit
Plans" (SFAS No. 132) and Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities. The Company does
not expect any material effect from adoption of SFAS Nos. 131, 132 and 133. The
Company will report comprehensive income as a component of equity. During the
year ended December 31, 1998, the Company did not have any items that would be
reportable as a component of comprehensive income other than its net income.
ITEM 7. FINANCIAL STATEMENTS.
See financial statements and supplementary data required pursuant to
this Item beginning on page F-1 of this Report on Form 10-KSB.
27
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
28
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The executive officers and directors of the Company are:
Name Age Position
- ---- --- --------
Muriel F. Siebert 66 Chair of the Board and President
Nicholas P. Dermigny 41 Executive Vice President and Chief
Operating Officer; Director
Mitchell M. Cohen 43 Executive Vice President, Chief Financial
Officer and Assistant Secretary
Daniel Iesu 39 Secretary
Patricia L. Francy 53 Director
Jane H. Macon 52 Director
Certain information regarding each executive officer's business
experience is set forth below.
MURIEL F. SIEBERT has been Chair, President and a director of Siebert
since 1967 and the Company since November 8, 1996. The first woman member of the
New York Stock Exchange on December 28, 1967, Ms. Siebert served as
Superintendent of Banks of the State of New York from 1977 to 1982. She is a
director of the New York State Business Council, and the Boy Scouts of Greater
New York, and President of the New York Woman's Agenda.
NICHOLAS P. DERMIGNY has been Executive Vice President and Chief
Operating Officer of Siebert since joining the firm in 1989 and the Company
since November 8, 1996. Prior to 1993, he was responsible for the retail
division. Mr. Dermigny became an officer and director of the Company on November
8, 1996.
MITCHELL M. COHEN has been Executive Vice President, Chief Financial
Officer and Assistant Secretary of Siebert since November 9, 1998. From December
1996 to October 1998, Mr. Cohen served as Chief Financial Officer of
Everything's Jake. From May 1994 to November 1996, Mr. Cohen served as Chief
Financial Officer of three firms including two broker-dealers. From January 1993
to May 1994, Mr. Cohen was an audit manager for Goldstein, Golub, Kessler & Co.
P.C, a
29
<PAGE>
public accounting firm. Prior to these positions, Mr. Cohen was Chief Financial
Officer of Ehrlich Bober Financial Corp., an investment banking firm listed on
the American Stock Exchange.
DANIEL IESU has been Secretary of Siebert since October 1996 and the
Company since November 8, 1996. He has been Controller of Siebert since 1989.
PATRICIA L. FRANCY is Treasurer and Controller of Columbia University.
She previously served as the University's Director of Finance and Director of
Budget Operations and has been associated with the University since 1969. Ms.
Francy became a director of the Company on March 11, 1997.
JANE H. MACON is a partner with the law firm of Fulbright & Jaworski
L.L.P., San Antonio, Texas. Ms. Macon has been associated with the firm since
1983. Ms. Macon became a director of the Company on November 8, 1996.
The Board of Directors has standing Audit and Compensation Committees
consisting of Ms. Francy and Ms. Macon with Ms. Siebert serving as a non-voting
member.
Directors are elected by the shareholders at each annual meeting or, in
the case of a vacancy, appointed by the directors then in office, to serve until
the next annual meeting or until their successors are elected and qualified.
Pursuant to the Company's bylaws, its officers are chosen annually by the Board
of Directors and hold office until their respective successors are chosen and
qualified.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
To the Company's knowledge, the Company's directors, executive officers
and beneficial owners of more than ten percent of the Company's Common Stock are
in compliance with the reporting requirements of Section 16(a) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). During 1998,
each of Nicholas Dermigny and Daniel Iesu inadvertently did not timely report
one transaction on Form 4, which transactions were subsequently reported.
ITEM 10. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The following table sets forth information concerning all cash and
non-cash compensation awarded to, earned by or paid to the Company's Chief
Executive Officer and each of the Company's most highly compensated executive
officers for services rendered to the Company during the fiscal year ended
December 31, 1998 whose total annual compensation for such year exceeded
$100,000 (the "Named Executive Officers").
30
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-term
Annual Compensation Compensation
-------------------------------------------------------
Securities
Underlying
Other Annual Stock
Name and Principal Position Year Salary Bonus Compensation Options
=======================================================================================================
<S> <C> <C> <C> <C>
Muriel F. Siebert 1998 150,000 -- -- --
Chair and President 1997 150,000 -- -- --
1996 150,000 2,975,000 -- --
Nicholas P. Dermigny 1998 185,000 175,000 -- 40,000
Executive Vice President and 1997 125,000 187,500 -- 200,000
Chief Operating Officer 1996 125,000 205,000 -- --
Daniel Iesu 1998 70,000 65,000 -- 8,000
Secretary 1997 50,000 65,000 -- 60,000
1996 50,000 53,250 -- --
</TABLE>
STOCK OPTION PLAN
The Company's 1997 Stock Option Plan (the "Stock Option Plan") was
adopted by the Board of Directors in March 1997 and approved by the shareholders
on December 1, 1997. The Stock Option Plan permits the issuance of either
options intended to qualify as incentive stock options ("Incentive Stock
Options") under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), or options not intended to so qualify ("Nonstatutory Stock
Options"). The aggregate fair market value of Common Stock for which a
participant is granted Incentive Stock Options that first become exercisable
during any given calendar year will be limited to $100,000. To the extent such
limitation is exceeded, an option will be treated as a Nonstatutory Stock
Option.
The Stock Option Plan provides for the grant of options to purchase up
to 2,100,000 shares of Common Stock to employees of the Company and its
subsidiaries. The Stock Option Plan is administered by a committee of the Board
of Directors consisting of Patricia L. Francy and Jane H. Macon (the
"Committee") that selects persons to receive awards under the Stock Option Plan,
determines the amount of each award and the terms and conditions governing such
award, interprets the Stock Option Plan and any awards granted thereunder,
establishes rules and regulations for the administration of the Stock Option
Plan and takes any other action necessary or desirable for the administration of
the Stock Option Plan. The Stock Option Plan may be amended by the Board of
Directors as it deems advisable; provided, however, that no amendment will
become effective unless approved by the affirmative vote of the Company's
shareholders if such approval is necessary for the continued validity of the
Stock Option Plan or if the failure to obtain such approval would adversely
affect the compliance of the Stock Option Plan under any applicable rule or
regulation. No amendment may, without the consent of a participant, impair such
participant's rights under any option previously granted under the Stock Option
Plan.
31
<PAGE>
The price for which shares of Common Stock may be purchased upon the
exercise of an option will be the fair market value of such shares on the date
of the grant of such option; provided, however, that an Incentive Stock Option
granted to an employee who owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company shall have a
purchase price for the underlying shares equal to 110% of the fair market value
of the Common Stock on the date of grant. An option may be granted for a term
not to exceed ten years from the date such option is granted. An Incentive Stock
Option awarded to an employee who owns stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company may not, in
any event, be exercisable after the expiration of five years from the date such
Incentive Stock Option is granted. All options will be exercisable in accordance
with the terms and conditions set forth in the option agreements evidencing the
grant of such options. Except under limited circumstances involving termination
of employment due to retirement or death or disability, a participant may not
exercise any option granted under the Stock Option Plan within the first year
after the date of the grant of such option.
Full payment of the purchase price for shares of Common Stock purchased
upon the exercise, in whole or in part, of an option granted under the Stock
Option Plan must be made at the time of such exercise. The Stock Option Plan
provides that the purchase price may be paid in cash or in shares of Common
Stock valued at their fair market value on the date of purchase. Alternatively,
an option may be exercised in whole or in part by delivering a properly executed
exercise notice, together with irrevocable instructions to a broker to deliver
promptly to the Company the amount of sale or loan proceeds necessary to pay the
purchase price and applicable withholding taxes, and any other documents that
the Committee deems necessary.
During a participant's lifetime, options granted under the Stock Option
Plan will be exercisable only by such participant. Furthermore, any options
granted under the Stock Option Plan may not be transferred, other than by will
or by the laws of descent and distribution. Notwithstanding the foregoing, a
participant may transfer a Nonstatutory Stock Option granted under the Stock
Option Plan to his or her spouse, children and/or grandchildren, or to one or
more trusts for the benefit of such family members, if the agreement evidencing
such option so provides and the participant does not receive any consideration
for the transfer.
The following table sets forth certain summary information concerning
individual grants of stock options made during the year ended December 31, 1998
to each of the Company's executive officers named in the Summary Compensation
Table.
32
<PAGE>
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Potential
Realizable Value
At Assumed
Number of % of Total Annual Rates of
Shares Options Exercise Stock Price
Underlying Granted to or Base Appreciation for
Options Employees Price Per Expiration Option Term
Name Granted in 1998 Share Date 5% 10%
- --------------------------- ---------- ----------- ---------- ---------- ------- --------
<S> <C> <C> <C> <C> <C>
Muriel F. Siebert -- -- -- -- -- --
Nicholas P. Dermigny 40,000 31.7% $2.6875 1/9/08 $67,606 $171,327
Daniel Iesu 8,000 6.3% $2.6875 1/9/08 $13,521 $ 34,264
Mitchell M. Cohen 10,000 7.9% $6.625 11/9/08 $41,664 $105,585
</TABLE>
- ------------
(1) These amounts represent assumed rates of appreciation in the price of
the Company's Common Stock during the terms of the options in
accordance with rates specified in applicable federal securities
regulations. Actual gains, if any, on stock option exercises will
depend on the future price of the Common Stock and overall stock market
conditions. There is no representation that the rates of appreciation
reflected in this table will be achieved.
The following table sets forth at December 31, 1998 the number of
options and the value of unexercised options held by each of the executive
officers named in the Summary Compensation Table:
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
Number of Unexercised Options at Value of Unexercised In-the-Money
Year End Options at Fiscal Year End (1)
-------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ----------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Muriel F. Siebert -- -- -- --
Nicholas P. Dermigny 40,000 200,000 $282,500 $1,397,500
Daniel Iesu 12,000 56,000 $ 84,750 $392,500
Mitchell M. Cohen -- 10,000 -- $27,500
</TABLE>
- ----------
(1) The dollar values have been calculated by determining the difference
between the closing price of the Common Stock at December 31, 1998,
$9.375, and the exercise prices of the options.
33
<PAGE>
RESTRICTED STOCK AWARD PLAN
The 1998 Restricted Stock Award Plan (the "Plan"), provides for awards
of not more than 60,000 shares of Common Stock, subject to adjustments for stock
splits, stock dividends and other changes in the Company's capitalization, to
key employees, to be issued either immediately after the award or at a future
date. As of December 31, 1998, 38,000 shares of Common Stock under the Plan had
been awarded and were outstanding. As provided in the Plan and subject to
restrictions, shares awarded may not be disposed of by the recipients for a
period of one year from the date of the award. Cash dividends on shares awarded
are held by the Company for the benefit of the recipients, subject to the same
restrictions as the award. Such dividends (without interest) are paid to the
recipients upon lapse of the restrictions.
The following table sets forth at December 31, 1998 the number of
shares awarded under the Plan to each of the Company's executive officers named
in the Summary Compensation Table.
<TABLE>
<CAPTION>
LONG-TERM INCENTIVE PLANS B AWARDS
IN LAST FISCAL YEAR
Number of Shares, Units or Performance or Other Period Until
Name Other Rights Maturation or Payout
- ---------------------------- -------------------------- ----------------------------------
<S> <C> <C>
Muriel F. Siebert -- --
Nicholas P. Dermigny 400 1 year
Daniel Iesu 400 1 year
</TABLE>
34
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock of the Company as of December 31, 1998
by: (i) each person known to the Company to beneficially own more than 5% of the
outstanding shares of Common Stock; (ii) each of the Company's directors; (iii)
each named executive officer; and (iv) all directors and executive officers of
the Company as a group. Unless otherwise indicated below, the persons named
below have sole voting and investment power with respect to the number of shares
set forth opposite their names, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership of Percentage of
Name and Address of Beneficial Owner (1) Common Stock Common Stock(2)
- ---------------------------------------- ----------------------- ---------------
<S> <C> <C>
Muriel F. Siebert (3)................................. 20,122,000 95.8%
Nicholas P. Dermigny (4).............................. 48,800 *
Daniel Iesu (5)........................................ 12,400 *
Patricia L. Francy (6)................................ 40,000 *
Jane H. Macon (6)..................................... 40,000 *
Mitchell M. Cohen..................................... 10,000 *
All directors and executive officers as a *
group (5 persons) (7).................................. 20,263,200 95.8%
</TABLE>
- ----------
* Less than 1.0%
(1) Except as otherwise noted, the address of the named stockholder is c/o
Siebert Financial Corp., 885 Third Avenue, New York, New York 10022.
(2) Percentages computed in accordance with Rule 13d-3 promulgated under
the Exchange Act.
(3) Includes 222,000 shares of Common Stock owned by the Muriel F. Siebert
Foundation, Inc. as to which shares Ms. Siebert has voting and
investment power.
(4) Includes 48,000 shares of Common Stock which Mr. Dermigny has the right
to acquire pursuant to a stock option grant.
(5) Includes 12,000 shares of Common Stock which Mr. Iesu has the right to
acquire pursuant to a stock option grant.
(6) Consists of 40,000 shares of Common Stock which the director has the
right to acquire pursuant to a stock option grant.
(7) Includes options to purchase an aggregate of 140,000 shares of Common
Stock.
35
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
As a registered broker-dealer, the Company is subject to the Uniform
Net Capital Rule (Rule 15c3-1) promulgated by the SEC. "Net capital" is defined
as net worth (assets minus liabilities), plus qualifying subordinated
borrowings, less certain deductions. Ms. Siebert has executed subordinated notes
in favor of the Company in the principal amount of $3 million which bear
interest at rates ranging from 4% to 8%.
In 1998, the Company loaned an aggregate of $4 million to SBS pursuant
to Temporary Subordinated Loan Agreements entered into under the rules of the
NASD. These loans were subsequently repaid. Siebert holds 49% of the equity
interests of SBS.
The foregoing relationship and transactions have been approved by the
Board or a committee of the Board or by the shareholders and, to the extent that
such arrangements are available from non-affiliated parties, are on terms no
less favorable to the Company than those available from non-affiliated parties.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The Financial Statements and Financial Statement Schedules are listed
in the accompanying index to financial statements beginning on page F-1
of this report.
2. Financial Statement Schedules.
None.
3. Exhibits
The exhibits required by Item 601 of the Regulations S-K filed as part
of, or incorporated by reference in, this report are listed in the
accompanying Exhibit Index.
(b) 1. Reports on Form 8-K
None.
36
<PAGE>
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
SIEBERT FINANCIAL CORP.
<S> <C>
Report of Independent Auditors F-1
Consolidated Statements of Financial Condition at December 31, 1998
and 1997 and Pro Forma Consolidated Statement of Financial
Condition at December 31, 1998 F-2
Consolidated Statements of Income for the years ended December 31, 1998
and 1997 F-3
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the
years ended December 31, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
SIEBERT, BRANDFORD, SHANK & CO., LLC
Report of Independent Auditors F-16
Statement of Financial Condition at December 31, 1998 F-17
Statement of Operations for the year ended December 31, 1998 F-18
Statement of Changes in Members' Capital for the year ended December 31, 1998 F-19
Statements of Cash Flows for the year ended December 31, 1998 F-20
Notes to Financial Statements F-21
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Siebert Financial Corp.
New York, New York
We have audited the accompanying consolidated statements of financial condition
of Siebert Financial Corp. and its wholly owned subsidiary as of December 31,
1998 and December 31, 1997, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Siebert Financial
Corp. and its wholly owned subsidiary as of December 31, 1998 and December 31,
1997, and the consolidated results of their operations and their cash flows for
each of the years then ended, in conformity with generally accepted accounting
principles.
Richard A. Eisner & Company, LLP
New York, New York
February 11, 1999
F-1
<PAGE>
SIEBERT FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31,
1998 -------------------------
ASSETS (NOTE A) 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash and cash equivalents $13,707,000 $ 6,499,000 $ 4,394,000
Cash equivalents - restricted 1,300,000 1,300,000 1,300,000
Receivable from clearing broker 2,572,000 2,572,000 2,135,000
Securities owned, at market value 4,490,000 4,490,000 6,565,000
Secured demand notes receivable from stockholder 2,000,000 2,000,000 2,000,000
Furniture, equipment and leasehold improvements, net 657,000 657,000 476,000
Investment in affiliate 1,572,000 1,572,000 392,000
Deferred financing costs 270,000
Prepaid expenses and other assets 850,000 850,000 620,000
----------- ----------- -----------
$27,148,000 $20,210,000 $17,882,000
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Securities sold, not yet purchased, at market value $ 567,000 $ 567,000 $ 2,038,000
Accounts payable and accrued liabilities 2,688,000 2,688,000 3,172,000
----------- ----------- -----------
3,255,000 3,255,000 5,210,000
----------- ----------- -----------
Commitments and contingent liabilities
Subordinated borrowings payable to stockholder 3,000,000 3,000,000 3,000,000
----------- ----------- -----------
Stockholders' equity:
Common stock, $.01 par value; 49,000,000 shares authorized,
21,965,960 (pro forma) and 21,004,960 shares outstanding
at December 31, 1998 and 20,950,440 shares outstanding
at December 31, 1997 219,000 209,000 209,000
Additional paid-in capital 13,642,000 6,714,000 6,585,000
Retained earnings 7,032,000 7,032,000 2,878,000
----------- ----------- -----------
20,893,000 13,955,000 9,672,000
----------- ----------- -----------
$27,148,000 $20,210,000 $17,882,000
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997
----------- -----------
Revenues:
Commissions and fees $19,265,000 $18,880,000
Investment banking 3,296,000 4,488,000
Trading profits 1,286,000 1,795,000
Income from equity investee 1,180,000
Interest and dividends 634,000 705,000
----------- -----------
25,661,000 25,868,000
Expenses:
Employee compensation and benefits 7,940,000 8,208,000
Clearing fees, including floor brokerage 2,927,000 4,675,000
Advertising and promotion 1,796,000 2,752,000
Communications 1,665,000 1,447,000
Occupancy 601,000 650,000
Interest 327,000 418,000
Other general and administrative 2,949,000 3,043,000
----------- -----------
18,205,000 21,193,000
Income before provision for income taxes 7,456,000 4,675,000
Provision for income taxes - current 3,143,000 2,057,000
----------- -----------
NET INCOME $ 4,313,000 $ 2,618,000
=========== ===========
NET INCOME PER SHARE OF COMMON STOCK - BASIC $ .21 $ .12
NET INCOME PER SHARE OF COMMON STOCK - DILUTED $ .20 $ .12
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 20,998,406 20,949,484
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 21,641,860 20,949,484
See notes to consolidated financial statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------
NUMBER ADDITIONAL
OF $.01 PAR PAID-IN RETAINED
SHARES VALUE CAPITAL EARNINGS TOTAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1997 20,943,588 $ 209,000 $ 6,614,000 $ 278,000 $ 7,101,000
Net income -- -- -- 2,618,000 2,618,000
Issuance of shares in connection with
offering, net of expenses 6,852 -- (29,000) -- (29,000)
Dividend on common stock ($.02 per
share) -- -- -- (18,000) (18,000)
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 1997 20,950,440 209,000 6,585,000 2,878,000 9,672,000
Net income -- -- -- 4,313,000 4,313,000
Issuance of shares in connection with
Restricted Stock Award Plan, net of
7,200 shares forfeited 38,000 -- -- -- --
Non-cash compensation in connection
with Restricted Stock Award Plan -- -- 91,000 -- 91,000
Issuance of shares in connection with
exercise of employee stock options 16,520 -- 38,000 -- 38,000
Dividends on common stock ($.12 per
share) -- -- -- (159,000) (159,000)
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 1998 21,004,960 209,000 6,714,000 7,032,000 13,955,000
Issuance of shares in connection with
rights offering, net of expenses 961,000 10,000 6,928,000 -- 6,938,000
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 1998
(PRO FORMA) 21,965,960 $ 219,000 $ 13,642,000 $ 7,032,000 $ 20,893,000
============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 4,313,000 $ 2,618,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 177,000 157,000
Income from equity investee (1,180,000)
Non-cash compensation 91,000
Changes in operating assets and liabilities:
Net decrease in securities owned, at market value 2,075,000 3,552,000
Net change in receivable from clearing broker (437,000) (993,000)
Increase in prepaid expenses and other assets (500,000) (187,000)
Net increase (decrease) in securities sold, not yet purchased, at market value (1,471,000) 590,000
Increase (decrease) in accounts payable and accrued liabilities (563,000) 348,000
----------- -----------
Net cash provided by operating activities 2,505,000 6,085,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in cash equivalents-restricted (1,300,000)
Purchase of furniture, equipment and leasehold improvements (358,000) (182,000)
Investment in affiliate (392,000)
Loans to affiliate (4,000,000)
Repayment of loans - affiliate 4,000,000
----------- -----------
Net cash used in investing activities (358,000) (1,874,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of shares, net of expenses (29,000)
Proceeds from exercise of options 38,000
Dividend on common stock (80,000) (18,000)
----------- -----------
Net cash used in financing activities (42,000) (47,000)
----------- -----------
Net increase in cash and cash equivalents 2,105,000 4,164,000
Cash and cash equivalents - beginning of year 4,394,000 230,000
----------- -----------
Cash and cash equivalents - end of year $ 6,499,000 $ 4,394,000
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for:
Interest $ 382,000 $ 405,000
Income taxes $ 3,522,000 $ 1,796,000
NONCASH INVESTING AND FINANCING ACTIVITIES:
Dividends declared $ 79,000
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
SIEBERT FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] ORGANIZATION AND BASIS OF PRESENTATION:
Siebert Financial Corp. ("Financial"), through its wholly owned
subsidiary, Muriel Siebert & Co., Inc. ("Siebert"), engages in the
business of providing discount brokerage services for customers,
investment banking services for institutional clients and trading
securities for its own account. All significant intercompany accounts
have been eliminated. Financial and Siebert collectively are referred
to herein as the "Company".
The municipal bond investment banking business was conducted by the
Siebert Brandford Shank division until July 1, 1998. Since that date it
is being conducted by Siebert Brandford Shank & Co., LLC ("SBS"), an
investee, which is accounted for by the equity method of accounting
(see Note B).
The pro forma statements of financial condition and changes in
stockholders' equity at December 31, 1998 give effect to a rights
offering which the Company completed on January 15, 1999, in which
shareholders received one right to purchase one share of the Company's
common stock at $7.50 for each share that they owned as of the record
date, July 29, 1998. 961,000 shares were exercised raising $6,938,000,
net of expenses of $270,000; the balance expired unexercised.
[2] SECURITY TRANSACTIONS:
Security transactions, commissions, revenues and expenses are recorded
on a trade date basis.
Siebert clears all its security transactions through an unaffiliated
clearing firm on a fully disclosed basis. Accordingly, Siebert does not
hold funds or securities for or owe funds or securities to its
customers. Those functions are performed by the clearing firm which is
highly capitalized.
[3] INCOME TAXES:
The Company accounts for income taxes utilizing the asset and liability
approach requiring the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between the basis of assets and liabilities for financial
reporting purposes and tax purposes. Financial files a consolidated
federal income tax return which includes Siebert.
[4] FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Property and equipment is stated at cost and depreciation is calculated
using the straight-line method over the lives of the assets, generally
five years. Leasehold improvements are amortized over the period of the
lease.
F-6
<PAGE>
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[5] CASH EQUIVALENTS:
For purposes of reporting cash flows, cash equivalents include money
market funds.
[6] ADVERTISING COSTS:
Advertising costs are charged to expense as incurred.
[7] USE OF ESTIMATES:
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 financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
[8] EARNINGS PER SHARE:
Earnings per basic share are calculated by dividing net income by the
weighted average outstanding shares during the period. Earnings per
diluted share are calculated by dividing net income by the basic shares
and all dilutive securities, which consist of options. The treasury
stock method is used to reflect the dilutive effect of outstanding
options, which, for 1998, amounts to 643,454 additional shares added to
the basic weighted average outstanding shares of 20,998,406. There were
no dilutive securities in 1997.
[9] INVESTMENT BANKING:
Investment banking revenues include gains and fees, net of syndicate
expenses. Investment banking management fees are recorded on offering
date, sales concessions on settlement date and underwriting fees at the
time the underwriting is completed and the income is reasonably
determinable.
[10] CASH EQUIVALENTS - RESTRICTED:
Cash equivalents - restricted represents cash invested in a money
market account which is pledged as collateral for a secured demand note
in the amount of $1,200,000 executed in favor of SBS.
[11] ACCOUNTING FOR STOCK OPTIONS:
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25 ("APB Opinion 25"), "Accounting for
Stock Issued to Employees" using intrinsic values with appropriate
disclosures in conformity with the fair values based method of
Statement of Financial Accounting Standards No. 123 (See Note G).
F-7
<PAGE>
NOTE B - INVESTMENT IN AFFILIATE
In March 1997, Siebert and two individuals (the "Principals") formed SBS to
succeed to the tax exempt underwriting business of the Siebert Brandford Shank
division of Siebert when regulatory requirements permitted. The agreements with
the Principals provide that profits will be shared 51% to the Principals and 49%
to Siebert. Losses incurred in the amount of approximately $631,000 through June
30, 1998 were recouped by Siebert prior to any profit allocation to the
Principals. Siebert invested $392,000 as its share of the members' capital of
SBS. Through June 30, 1998, Siebert operated the division's business in
accordance with the terms of the agreements with the Principals. Effective July
1, 1998, SBS met the regulatory requirements and commenced operations.
In 1998, the Company loaned an aggregate of $4,000,000 to SBS, which was
subsequently repaid, pursuant to Temporary Subordination Agreements.
Summarized financial data of SBS as of December 31, 1998 and for the period July
1, 1998 (commencement of operations) through December 31, 1998 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Total assets $ 6,234,000
Total liabilities including subordinated liability of $1,200,000 3,685,000
Total members' capital 2,549,000
Total revenues 4,817,000
Net income 1,750,000
</TABLE>
During 1998, Siebert charged SBS $150,000 for rent and general and
administrative services, which Siebert believes approximates the cost of
furnishing such services.
NOTE C - SUBORDINATED BORROWINGS AND SECURED DEMAND NOTE RECEIVABLE
The subordinated borrowings at December 31, 1998 are payable to the principal
stockholder and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Secured demand note collateral agreement, 4%, due
December 31, 2000 $ 2,000,000 $ 2,000,000
Subordinated note, 8%, due January 31, 2000 500,000 500,000
Subordinated note, 8%, due October 31, 2000 500,000 500,000
-------------- --------------
$ 3,000,000 $ 3,000,000
============== ==============
</TABLE>
The long-term borrowings are automatically renewed for a period of one year if
notice of demand for payment is not given thirteen months prior to maturity.
F-8
<PAGE>
NOTE C - SUBORDINATED BORROWINGS AND SECURED DEMAND NOTE RECEIVABLE (CONTINUED)
The subordinated borrowings are available in computing net capital under the
Securities and Exchange Commission's (the "SEC") Uniform Net Capital Rule. To
the extent that such borrowings are required for Siebert's continued compliance
with minimum net capital requirements, they may not be repaid.
Interest paid on subordinated borrowings was approximately $160,000 in each of
the years ended December 31, 1998 and 1997.
The secured demand note receivable of $2,000,000 at December 31, 1998 and 1997
is collateralized by marketable securities with a market value of approximately
$2,227,000 and $2,446,000, respectively.
NOTE D - FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Furniture, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Equipment $ 882,000 $ 639,000
Leasehold improvements 132,000 129,000
Furniture and fixtures 84,000 84,000
------------ ------------
1,098,000 852,000
Less accumulated depreciation and amortization 441,000 376,000
------------ ------------
$ 657,000 $ 476,000
============ ============
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1998 and
1997 amounted to $177,000 and $157,000, respectively.
F-9
<PAGE>
NOTE E - INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Federal income tax $ 2,233,000 $ 1,360,000
State and local income tax 910,000 697,000
-------------- -------------
Income tax expense $ 3,143,000 $ 2,057,000
============== =============
</TABLE>
A reconciliation between the income tax expense and income taxes computed by
applying the statutory Federal income tax rate to income before taxes is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1998 1997
--------------- -------------
<S> <C> <C>
Expected income tax provision at statutory Federal tax rate $ 2,535,000 $ 1,590,000
State and local taxes, net of Federal tax effect 718,000 467,000
Effect of refund of prior years' local taxes, net of
Federal and state tax effect (110,000)
--------------- -------------
Income tax expense $ 3,143,000 $ 2,057,000
============== =============
</TABLE>
There are no significant temporary differences which give rise to deferred tax
assets or liabilities at December 31, 1998 and 1997.
NOTE F - STOCKHOLDERS' EQUITY
Siebert is subject to the SEC's Uniform Net Capital Rule (Rule 15c3-1), which
requires the maintenance of minimum net capital. Siebert has elected to use the
alternative method, permitted by the rule, which requires that Siebert maintain
minimum net capital, as defined, equal to the greater of $250,000 or 2 percent
of aggregate debit balances arising from customer transactions, as defined. At
December 31, 1998 and 1997, Siebert had net capital of approximately $11,124,000
and $9,052,000, respectively, as compared with net capital requirements of
$250,000. Siebert claims exemption from the reserve requirement under Section
15c3-3(k)(2)(ii).
F-10
<PAGE>
NOTE F - STOCKHOLDERS' EQUITY (CONTINUED)
In an offering completed on March 21, 1997, the Company offered to its
shareholders with "odd lots" the opportunity to "round up" their shares to the
next nearest 100 shares. 6,852 shares were issued with proceeds to the Company
of approximately $16,000. Costs related to the offering approximated $45,000.
The principal shareholder waived her right to receive her portion of dividends
declared in 1997 and 1998.
On April 7, 1998 the Company split its stock 4 for 1. All share and per share
data contained herein have been retroactively adjusted to reflect this stock
split.
On January 15, 1999, the Company completed a rights offering in which
shareholders received one right to purchase one share of the Company's common
stock at $7.50 for each share that they owned; 961,000 rights were exercised
raising approximately $7.2 million.
The 1998 Restricted Stock Award Plan (the "Award Plan"), provides for awards of
not more than 60,000 shares of the Company's common stock, subject to
adjustments for stock splits, stock dividends and other changes in the Company's
capitalization, to key employees, to be issued either immediately after the
award or at a future date. As provided in the Award Plan and subject to
restrictions, shares awarded may not be disposed of by the recipients for a
period of one year from the date of the award. Cash dividends on shares awarded
are held by the Company for the benefit of the recipients and are paid upon
lapse of the restrictions.
400 shares of the Company's common stock were awarded to each of 110 employees
of the Company, as of January 5, 1998. Additional awards of 400 shares were
granted to each of three individuals, as of February 20, 1998. The market value
at the date of the awards was $2.25 and $5.75, respectively. Subsequently, 7,200
shares were forfeited. The Company recorded a non-cash compensation charge of
$91,000 in 1998 relating to the shares awarded under the Award Plan.
NOTE G - OPTIONS
In 1997, the shareholders of the Company approved the 1997 Stock Option Plan
(the "Plan"). The Plan authorizes the grant of options to purchase up to an
aggregate of 2,100,000 shares, subject to adjustment in certain circumstances.
Both non-qualified options and options intended to qualify as "Incentive Stock
Options" under Section 422 of the Internal Revenue Code, as amended, may be
granted under the Plan. A Stock Option Committee of the Board of Directors
administers the Plan. The committee has the authority to determine when options
are granted, the term during which an option may be exercised (provided no
option has a term exceeding 10 years), the exercise price and the exercise
period. The exercise price shall generally be not less than the fair market
value on the date of grant. No option may be granted under the Plan after
December 2007.
F-11
<PAGE>
NOTE G - OPTIONS (CONTINUED)
In March 1997, the Company granted to non-employee directors options to purchase
120,000 shares of the Company's common stock at an exercise price of $2.313 per
share. The options expire five years from the date of grant. In May 1997,
pursuant to the Plan, the Company granted options to certain of its employees to
purchase 799,000 shares of its common stock at an exercise price of $2.313 per
share. In November 1997, pursuant to the Plan, the Company granted options to an
employee to purchase 40,000 shares of the Company's common stock at an exercise
price of $2.219 per share. In February 1998 and November 1998, the Company
granted options to purchase 76,000 and 10,000 shares, respectively, of the
Company's common stock at exercise prices of $2.688 and $6.625 per share,
respectively. All such employee options vest 20% per year for five years and
expire ten years from the date of grant.
A summary of the Company's stock option transactions for the year ended December
31, 1998 and 1997 is presented below:
1998 1997
-------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------- -------- ------- --------
Outstanding - beginning of year 925,200 $ 2.31
Granted 86,000 $ 3.15 959,000 $ 2.31
Forfeited (123,880) $ 2.31 (33,800) $ 2.31
Exercised (16,520) $ 2.31
------- -------
Outstanding - end of year 870,800 $ 2.39 925,200 $ 2.31
======= =======
Exercisable at end of year 254,560 $ 2.31 120,000 $ 2.31
Weighted average fair value of
options granted $1.44 $1.18
The following table summarizes information related to options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
======================================================= ==============================
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
$2.31 885,200 8.68 Years $2.31 120,000 $2.31
$2.22 40,000 9.85 Years $2.22 --
----------- ----------
$2.22 - $2.31 925,200 8.73 Years $2.31 120,000 $2.31
=========== ==========
</TABLE>
F-12
<PAGE>
NOTE G - OPTIONS (CONTINUED)
The following table summarizes information related to options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
====================================================== =================================
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
$2.31 792,800 7.59 Years $2.31 254,560 $2.31
$2.69 68,000 8.88 Years $2.69 -- --
$6.63 9.92 Years $6.63 --
10,000 --
---------- -----------
$2.31 - $6.63 870,800 7.72 Years $2.39 254,560 $2.31
========== =========== =====
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yields ranging from 0% to 3.3%, expected volatility
ranging from 25% to 39%, risk-free interest rates ranging from 4.77% to 6.43%,
and expected lives ranging from 5 to 10 years.
The Company applies APB Opinion 25 and related Interpretations in accounting for
its options. Accordingly, no compensation cost has been recognized for its stock
option grants. The pro forma effect of applying SFAS No. 123 on net income for
the years ended December 31, 1998 and 1997 is not necessarily representative of
the effects on reported net income for future years due to, among other things,
(1) the vesting period of stock options and (2) the fair value of additional
stock options in future years. Had compensation costs for the Company's stock
option grants been determined based on the fair value at the grant dates for
awards, the Company's net income and earnings per share would have reduced to
the pro forma amounts indicated below.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net Income As reported $4,313,000 $ 2,618,000
Pro forma $4,098,000 $ 2,397,000
Net Income Per Share - Basic As reported $ .21 $ .12
Pro forma $ .20 $ .11
Net Income Per Share - Diluted As reported $ .20 $ .12
Pro forma $ .19 $ .11
</TABLE>
At December 31, 1998, 2,079,000 shares of the Company's common stock have been
reserved for future issuance under the Plan, the Award Plan and for options
granted to directors.
F-13
<PAGE>
NOTE H - CLEARING AGREEMENT
In 1998, Siebert signed a new one-year agreement with its clearing broker which
provides, among other things, for reduced ticket charges and execution fees.
Such arrangement provides for retroactive effect at the new rates and resulted
in a refund of $1,000,000.
NOTE I - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND
CONCENTRATIONS OF CREDIT RISK
In the normal course of business, Siebert enters into transactions in various
financial instruments with off-balance sheet risk. This risk includes both
market and credit risk, which may be in excess of the amounts recognized in the
statement of financial condition.
Retail customer transactions are cleared through National Financial Services
Corp. ("NFSC") on a fully disclosed basis. In the event that customers are
unable to fulfill their contractual obligations, NFSC may charge Siebert for any
loss incurred in connection with the purchase or sale of securities at
prevailing market prices to satisfy customers' obligations. Siebert regularly
monitors the activity in its customer accounts for compliance with its margin
requirements.
Siebert is exposed to the risk of loss on unsettled customer transactions in the
event customers and other counterparties are unable to fulfill contractual
obligations. Securities transactions entered into as of December 31, 1998
settled with no adverse effect on Siebert's financial condition.
NOTE J - COMMITMENTS AND CONTINGENT LIABILITIES
The Company rents office space under long-term operating leases expiring in
various periods through 2003. These leases call for base rent plus escalations
for taxes and operating expenses.
Future minimum rental payments for base rent under these operating leases are as
follows:
YEAR ENDING
DECEMBER 31, AMOUNT
------------ --------------
1999 $ 445,000
2000 372,000
2001 327,000
2002 313,000
2003 103,000
--------------
$ 1,560,000
==============
F-14
<PAGE>
NOTE J - COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Rent expense, including escalations for operating costs, amounted to
approximately $527,000 and $424,000 for the years ended December 31, 1998 and
1997, respectively. Rent is being charged to expense over the entire lease term
on a straight-line basis.
Siebert is party to certain claims, suits and complaints arising in the ordinary
course of business. In the opinion of management, all such claims, suits and
complaints are without merit, or involve amounts which would not have a
significant effect on the financial position of the Company.
Siebert sponsors a defined contribution retirement plan under Section 401(k) of
the Internal Revenue Code that covers substantially all employees. Participant
contributions to the plan are voluntary and are subject to certain limitations.
Siebert may also make discretionary contributions to the plan. No contributions
were made by Siebert in 1998 and 1997.
Siebert executed a demand note payable in favor of SBS in the amount of
$1,200,000 collaterized by approximately $1,300,000 of cash equivalents which
are reported as "cash equivalents - restricted". This obligation is not included
in the Company's statement of financial condition.
NOTE K - ACQUISITION
In December 1998, the Company signed a letter of intent to purchase 100% of the
outstanding common stock of a discount brokerage firm, Andrew Peck & Associates,
Inc. for $3.5 million in cash and 563,951 shares of the Company's common stock.
NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the consolidated statements of financial
condition for cash, cash equivalents, receivable from broker, secured demand
notes receivable, accounts payable and accrued liabilities and subordinated
borrowings approximate fair value due to the short term maturities of those
instruments. Securities owned and securities sold, not yet purchased are carried
at market value, in accordance with industry practice for broker-dealers in
securities.
F-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Members
Siebert, Brandford, Shank & Co., L.L.C.
New York, New York
We have audited the statement of financial condition of Siebert, Brandford,
Shank & Co., L.L.C. as of December 31, 1998, and the related statements of
operations, changes in members' capital and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of Siebert, Brandford, Shank & Co.,
L.L.C. as of December 31, 1998, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
Richard A. Eisner & Company, LLP
New York, New York
February 11, 1999
F-16
<PAGE>
SIEBERT, BRANDFORD, SHANK & CO., L.L.C.
SEE NOTES TO FINANCIAL STATEMENTS
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1998
ASSETS
Cash and cash equivalents $ 3,257,835
Accounts receivable 611,477
Securities owned, at market value 904,234
Receivable from affiliate 91,268
Secured demand notes 1,200,000
Furniture, equipment and leasehold improvements, net 79,253
Other assets 90,208
-------------
$ 6,234,275
=============
LIABILITIES AND MEMBERS' CAPITAL
Liabilities:
Payable to broker-dealers $ 794,426
Accounts payable and accrued expenses 1,690,189
-------------
2,484,615
Subordinated debt 1,200,000
Members' capital 2,549,660
-------------
$ 6,234,275
=============
SEE NOTES TO FINANCIAL STATEMENTS
F-17
<PAGE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 (COMMENCED OPERATIONS JULY 1, 1998)
REVENUES:
Investment banking $ 4,550,435
Trading profits 109,861
Interest and other 156,464
-------------
4,816,760
-------------
EXPENSES:
Employee compensation and benefits 2,037,548
Clearing fees 22,475
Communications 89,403
Occupancy 119,304
Professional fees 79,117
Interest 105,937
General and administrative 613,316
-------------
3,067,100
-------------
NET INCOME $ 1,749,660
=============
SEE NOTES TO FINANCIAL STATEMENTS
F-18
<PAGE>
STATEMENT OF CHANGES IN MEMBERS' CAPITAL
YEAR ENDED DECEMBER 31, 1998
BALANCE - JANUARY 1, 1998 $ 800,000
Net income 1,749,660
----------
BALANCE - DECEMBER 31, 1998 $2,549,660
==========
SEE NOTES TO FINANCIAL STATEMENTS
F-19
<PAGE>
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
CASH FLOWS FORM OPERATING ACTIVITIES:
Net income $ 1,749,660
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 47,518
Changes in:
Securities owned, at market value (904,234)
Accounts receivable (611,477)
Receivable from affiliate 39,418
Other assets (73,427)
Accounts payable and accrued expenses 1,690,189
Payable to broker-dealers 794,426
-------------
Net cash provided by operating activities 2,732,073
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (13,534)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from affiliate 4,000,000
Repayments to affiliate (4,000,000)
0
-------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,718,539
Cash and cash equivalents - beginning of year 539,296
-------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 3,257,835
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Taxes paid $ 82,076
Interest paid $ 105,937
SEE NOTES TO FINANCIAL STATEMENTS
F-20
<PAGE>
SIEBERT, BRANDFORD, SHANK & CO., L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] ORGANIZATION AND BASIS OF PRESENTATION:
In October 1996, Napolean Brandford III, Suzanne Shank and Muriel
Siebert & Co., Inc. ("Siebert") began a tax exempt underwriting and
related trading business, which qualifies as a Minority and Women's
Business Enterprise in certain states.
The business was operated as the Siebert, Brandford, Shank Division of
Siebert ("the Division") until July 1, 1998 when regulatory
requirements were met and Siebert, Brandford, Shank & Co., L.L.C.,
("SBS" or "the Company"), which was formed on March 10, 1997, began
operations. Mr. Branford and Ms. Shank collectively own 51% of the
members' interests in SBS and Siebert owns the remaining 49%. Prior to
July 1, 1998 the Division operated under a business arrangement
providing that profits would be shared 51% to Mr. Brandford and Ms.
Shank and 49% to Siebert. Siebert recouped losses of $631,000 incurred
through June 30, 1998 prior to any profit allocation. The original
capital of $800,000 was invested by the members in proportion to their
respective profit sharing interests.
[2] FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET:
Furniture and equipment is stated at cost and depreciation is
calculated using the straight-line method over the lives of the assets,
generally five years. Leasehold improvements are amortized over the
period of the lease.
[3] CASH EQUIVALENTS:
For purposes of reporting cash flows, cash equivalents include money
market funds.
[4] USE OF ESTIMATES:
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 financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
[5] INCOME TAXES:
The Company is not subject to federal income taxes. Instead, the
members are required to include in their income tax returns their
respective share of the Company's income. The Company is subject to tax
in certain states and local jurisdictions.
NOTE B - SUBORDINATED BORROWINGS AND SECURED DEMAND NOTE RECEIVABLE
The subordinated borrowing at December 31, 1998 represents a Secured Demand Note
Collateral Agreement, 10% interest due August 31, 2000. Such borrowing is
payable to Siebert.
Subordinated borrowings are available in computing net capital under the
Securities and Exchange Commission's (the "SEC") Uniform Net Capital Rule. To
the extent that such borrowing is required for the Company's continued
compliance with minimum net capital requirements, it may not be repaid.
F-21
<PAGE>
NOTE B - SUBORDINATED BORROWINGS AND SECURED DEMAND NOTE RECEIVABLE (CONTINUED)
The secured demand note receivable of $1,200,000 is collateralized by cash
equivalents of Siebert of approximately $1,300,000 at December 31, 1998.
NOTE C - FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Furniture, equipment and leasehold improvements consist of the following:
Equipment $ 116,952
Furniture and fixtures 17,138
Leasehold improvements 11,706
-----------
145,796
Less accumulated depreciation and amortization 66,543
$ 79,253
===========
NOTE D - NET CAPITAL
The Company is subject to the Securities and Exchange Commission Uniform Net
Capital Rule 15c3-1, which requires the maintenance of minimum net capital and
requires that the ratio of aggregate indebtedness to net capital, both as
defined, shall not exceed 15 to 1. At December 31, 1998, the Company had net
capital of $3,231,000 which was $3,065,000 in excess of its required net capital
and its ratio of aggregate indebtedness to net capital was .77 to 1. The Company
claims exemption from the reserve requirements under Section 15c-3-3(k)(2)(ii).
NOTE E - COMMITMENTS
The Company rents office space under long-term operating leases expiring through
2000. These leases call for base rent plus escalations for taxes and operating
expenses. Future minimum rental payments under these operating leases are as
follows:
YEAR AMOUNT
---- ----------
1999 $ 76,000
2000 11,000
----------
$ 87,000
==========
Rent expense for 1998 amounted to $105,000.
NOTE F - OTHER
During 1998, the Company was charged $171,000 by Siebert for rent and general
and administrative services.
F-22
<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.
SIEBERT FINANCIAL CORP.
By: /s/ MURIEL F. SIEBERT
------------------------------
Muriel F. Siebert
Chair and President
Date: March 29, 1999
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 and on the dates indicated.
Name Title Date
---- ----- ----
/s/ MURIEL F. SIEBERT March 29, 1999
- -------------------------
Muriel F. Siebert Chair, President and Director
(principal executive officer)
/s/ NICHOLAS P. DERMIGNY March 29,1999
- -------------------------
Nicholas P. Dermigny Executive Vice President,
Chief Operating Officer and
Director
/s/ MITCHELL M. COHEN March 29, 1999
- -------------------------
Mitchell M. Cohen Chief Financial Officer
and Assistant Secretary
(principal financial and
accounting officer)
/s/ PATRICIA L. FRANCY March 25, 1999
- -------------------------
Patricia L. Francy Director
/s/ JANE H. MACON March 25, 1999
- -------------------------
Jane H. Macon Director
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
2.1 Plan and Agreement of Merger between J. Michaels, Inc. ("JMI") and
Muriel Siebert Capital Markets Group, Inc. ("MSCMG"), dated as of
April 24, 1996 ("Merger Agreement") (incorporated by reference to
Siebert Financial Corp.'s Form 10-K for the fiscal year ended
December 31, 1996)
2.2 Amendment No. 1 to Merger Agreement, dated as of June 28, 1996
(incorporated by reference to Siebert Financial Corp.'s Form 10-K
for the fiscal year ended December 31, 1996)
2.3 Amendment No. 2 to Merger Agreement, dated as of September 30, 1996
(incorporated by reference to Siebert Financial Corp.'s Form 10-K
for the fiscal year ended December 31, 1996)
2.4 Amendment No. 3 to Merger Agreement, dated as of November 7, 1996
(incorporated by reference to Siebert Financial Corp.'s Form 10-K
for the fiscal year ended December 31, 1996)
3.1 Certificate of Incorporation of Siebert Financial Corp., formerly
known as J. Michaels, Inc. originally filed on April 9, 1934, as
amended and restated to date (incorporated by reference to Siebert
Financial Corp.'s Form 10-K for the fiscal year ended December 31,
1997)
3.2 By-laws of Siebert Financial Corp. (incorporated by reference to
Siebert Financial Corp.'s Registration Statement on Form S-1 (File
No. 333-49843) filed with the Securities and Exchange Commission on
April 10, 1998)
10.1 Siebert Financial Corp. 1998 Restricted Stock Award Plan
(incorporated by reference to Siebert Financial Corp.'s Form 10-K
for the fiscal year ended December 31, 1997)
10.2 10(a) Siebert Financial Corp. 1997 Stock Option Plan (incorporated
by reference to Siebert Financial Corp.'s Form 10-K for the fiscal
year ended December 31, 1996)
10.4 LLC Operating Agreement, among Siebert, Brandford, Shank & Co., LLC,
Muriel Siebert & Co., Inc., Napoleon Brandford III and Suzanne F.
Shank, dated as of March 10, 1997 (incorporated by reference to
Siebert Financial Corp.'s Form 10-K for the fiscal year ended
December 31, 1996)
10.5 Services Agreement, between Siebert, Brandford, Shank & Co., LLC and
Muriel Siebert & Co., Inc., dated as of March 10, 1997 (incorporated
by reference to Siebert Financial Corp.'s Form 10-K for the fiscal
year ended December 31, 1996)
10.6 Siebert Financial Corp. 1998 Restricted Stock Award Plan
(incorporated by reference to Siebert Financial Corp.'s Form 10-K
for the fiscal year ended December 31, 1997)
10.7 Stock Option Agreement, dated March 11, 1997, between the Company
and Patricia L. Francy (incorporated by reference to Siebert
Financial Corp.'s Registration Statement on Form S-8 (File No.
333-72939) filed with the Securities and Exchange Commission on
February 25, 1999)
<PAGE>
10.8 Stock Option Agreement, dated March 11, 1997, between the Company
and Jane H. Macon (incorporated by reference to Siebert Financial
Corp.'s Registration Statement on Form S-8 (File No. 333-72939)
filed with the Securities and Exchange Commission on February 25,
1999)
10.9 Stock Option Agreement, dated March 11, 1997, between the Company
and Monte E. Wetzler (incorporated by reference to Siebert Financial
Corp.'s Registration Statement on Form S-8 (File No. 333-72939)
filed with the Securities and Exchange Commission on February 25,
1999)
21 Subsidiaries of the registrant (incorporated by reference to Siebert
Financial Corp.'s Registration Statement on Form S-1 (File No.
333-49843) filed with the Securities and Exchange Commission on
April 10, 1998)
23 Consent of Independent Auditors
27 Financial Data Schedule
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in (1) the Registration
Statement on Form S-8, File No. 333-43837, (2) the Registration Statement on
Form S-8, File No. 333-43839 and (3) the Registration Statement on Form S-8,
File No. 333-72939, of our reports dated February 11, 1999 on the consolidated
financial statements of Siebert Financial Corp. and subsidiary ("Siebert") and
Siebert, Brandford, Shank & Co., LLC included in the Annual Report on Form
10-KSB of Siebert for the year ended December 31, 1998.
/s/ RICHARD A. EISNER & COMPANY, LLP
- -----------------------------------
Richard A. Eisner & Company, LLP
New York, New York
March 29, 1999
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