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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996 Commission file number 0-5703
SIEBERT FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
New York 1-1796714
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
885 Third Avenue, Suite 1720
New York, New York 10022
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (212) 644-2400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10- K. [ X ]
As of March 24, 1997, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was approximately $1,227,000 based on the
bid price of the Common Stock on the Nasdaq SmallCap Market on that date.
As of March 24, 1997, there were 5,237,610 shares of Common Stock
outstanding, including 5,105,000 shares held by Muriel F. Siebert, Chair,
President and a Director of the Registrant.
Documents incorporated by reference:
Siebert Financial Corp.'s definitive proxy statement to be filed by the
Registrant pursuant to Regulation 14A is incorporated by reference into items
10, 11, 12 and 13 of Part III of this Form 10-K by reference.
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PART I
Item 1. 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 President and owns 97.5% of the
outstanding Common Stock of the Company.
The Company is the successor by merger to J. Michaels, Inc. ("JMI"), a
company incorporated on April 9, 1934 in the State of New York which had been in
the retail furniture business for more than 100 years. Because of a decline in
the strength of JMI's core retail furniture business in Brooklyn, New York,
management of JMI concluded that the return on JMI's assets generated by its
business was insufficient and decided that it would be in the best interests of
its shareholders to sell JMI's assets and distribute the net proceeds after
payment of all liabilities to the shareholders of JMI. On April 24, 1996, JMI
and Muriel Siebert Capital Markets Group, Inc., a Delaware corporation owned by
Ms. Siebert ("MSCMG"), entered into a plan and agreement of merger (the "Merger
Agreement") providing for the merger (the "Merger") of MSCMG with and into JMI,
on the terms and conditions contained in the Merger Agreement, and, in
connection therewith, after a distribution concurrently with the consummation of
the Merger, to transfer all of JMI's remaining assets to a liquidating trust
pursuant to the Merger Agreement and to sell such assets and distribute the
proceeds thereof to the shareholders of JMI. The Merger was consummated on
November 8, 1996. Shortly thereafter, the first liquidating dividend of $11.50
per share was paid to shareholders of JMI. An additional $2.50 per share was
paid in February 1997 and additional amounts are expected in the future to a
total distribution of approximately $18.00 per share. The Company will have no
continuing involvement with the liquidation of the remaining assets of JMI.
Following the merger, the Company's fiscal year was changed to December 31.
Siebert was incorporated on June 13, 1969 under the laws of the State of
Delaware. The principal executive offices of the Company and Siebert are located
at 885 Third Avenue, 17th Floor, New York, New York 10022.
Business Overview
Siebert provides discount brokerage services and related services to more
than 80,000 investor accounts. 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
full-commission firms and competitive with the leading national discounters.
Through its Capital Markets division, Siebert offers institutional clients
equity execution services on an agency basis and equity, fixed income and
municipal underwriting and investment banking services. Siebert is a
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participant in the secondary markets for Municipal and U.S. Treasury securities.
The Capital Markets division trades listed closed end bond funds and certain
other securities for its own account. The proprietary trading business is
strictly segregated from that of the agency business executed on behalf of
institutional clients.
The firm is unique among discount brokerage firms in that through its
Capital Markets division it offers a wide array of underwriting and investment
banking services including acting as sole manager, co-manager and otherwise
participating in the management underwriting teams of, or acting as financial
advisors for, municipal, corporate debt and equity, government agency and
mortgage/asset backed securities issues.
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 area in the country through its Siebert Brandford Shank Division.
The Retail Discount Brokerage Business
Discount Brokerage and Related Services. The Commission 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 a member of The New York Stock Exchange,
Inc. (the "NYSE") longer than any other discount broker.
Siebert provides discount brokerage and related services to more than
80,000 investor accounts. 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 full-commission firms
and competitive with the national discounters.
Siebert clears securities transactions on a fully-disclosed basis through
National Financial Services Corp. ("NFSC"), a wholly owned subsidiary of
Fidelity Investments, as its clearing agent for all transactions. NFSC, with
over $4 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 between 7:30 a.m. and 7:30 p.m. Eastern Time.
Through its MarketPhone Voice Response service and its Siebert OnLine software
introduced, in the first quarter of 1996, 24 hour access is available to
customers. Siebert's exclusive PerformanceFax P&L analysis service, introduced
in the second quarter of 1996, provides by facsimile profit and loss account
information before the market opens each morning. In January, 1997 SiebertNet
was introduced providing customers with the ability to place orders, get real
time quotes and news and other services directly over the Internet.
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Independent Retail Execution Services. Siebert is independent of the
Over-the- Counter ("OTC") and "Third" market makers and consequently offers what
is believed 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. This allows the customer the opportunity for price improvement when
trading directly on the NYSE. Through a service called NYSE Prime*, Siebert 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. This allows
Siebert to fill its customer orders by choosing the market maker it deems best
in each particular stock quickly and efficiently in all market conditions.
Additionally, the firm offers customers execution services through the
SelectNet* and Instinet* systems. These systems are not generally offered by
other discounters. Siebert believes that its OTC executions afford its customers
the best possible opportunity for consistent price improvement. Siebert does not
execute OTC trades through affiliated market makers.
Siebert executes trades of fixed income securities through its Capital
Markets division. Representatives of Siebert's Capital Markets 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 "Business--Capital
Markets Division."
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 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.
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
no-hassle service guarantee that states, "If you are dissatisfied with a trade
for any reason, that trade is commission free."
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*NYSE Prime is a service mark of the New York Stock Exchange, Inc.; SelectNet is
a trademark of Nasdaq; Instinet is a trademark of Reuters.
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Siebert's products and services include the Siebert Asset Management
account featuring no- fee, no minimum check writing; 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; free safekeeping services; and the Siebert
Syndicate Hotline, Siebert's exclusive municipal bond syndicate notification
program.
Electronic Services. Siebert provides customers with electronic delivery of
services through a variety of means, as discussed below. Siebert believes,
however, that the 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.
Siebert OnLine - the firm's popular PC software, introduced in the first
quarter of 1996, runs on Windows 3.1* and Windows95* through a secure private
connection. It features easy installation and intuitive operations but its
design lends itself to the active trader as well. With the click of a mouse,
investors can check their account status, get real-time quotes and place orders
to trade securities 24 hours a day.
Siebert MarketPhone(R) - allows customers to trade at their convenience
through touch-tone phones and to check balances and executions and receive
real-time quotes, free. 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 within 90 seconds through the firm's Research by
Fax(R) service.
PerformanceFax - introduced in the second quarter of 1996, 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.
SiebertNet - Internet access with features including the efficiency and
manageability of placing stock orders, obtaining 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.
Siebert FundExchange(R) - The FundExchange(R) Mutual Fund service provides
customers with access to approximately 4,500 mutual funds, including 1,000
no-load funds, about 340 of which have no-transaction fees.
Siebert is currently developing and will offer during the next year new
products and services including the following:
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* Windows 3.1 and Windows95 are trademarks of the Microsoft Corporation.
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On-line statement imaging system - Electronic imaging of customer
statements will be displayed directly on the screen of Siebert
representatives for fast accurate reconciliation of customer accounts.
PerformanceFax enhancements - New reports will become available to
customers.
No annual fee VISA(R)* credit card - Will allow customers to make purchases
with a Siebert VISA credit card.
Enhanced MarketPhone(R) telephone brokerage service - Features will include
quotes on mutual funds and Canadian securities; the ability to purchase
mutual funds; a new upgraded menu system; and additional access ports.
Siebert Fax on Demand service - Customers will be able to call toll free
from any touch tone telephone and select from a list of reports that will
be faxed 24 hours a day.
Newsand trade execution alert service via PC, beeper and fax - Customers
will be able to keep abreast of the market whether at home or traveling
using the firm's alert service.
VIP Premiere Statement - The statements will offer a more sophisticated
view of the brokerage account information including a new account valuation
section, an asset allocation pie chart, a new improved activity section,
and a more detailed income summary section.
A Charitable Common Fund account that will allow customers to contribute
appreciated securities and designate the beneficiaries of income and
principal without incurring capital gains taxes on the appreciation.
Retail New Accounts. 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. Additionally, requests to upgrade services such as option and margin
approval are handled by this department.
The Retail 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 assist customers in document
management and compliance with regulatory requirements.
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*VISA is a registered trademark of VISA International.
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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 NFSC, the firm's clearing agent, which also serves
as trustee for such accounts. IRA, SEPP IRA and KEOGH accounts can be invested,
and 401(k) plans will in the near future be able to 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 6,000 publicly traded securities
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,
currently 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 and in the event
of adverse changes in the market value of the 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.
Pursuant to its clearing agreement, Siebert participates in its clearing
agent's income from financing Siebert customers' transactions. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Offices. During the fourth quarter of 1996, Siebert opened retail discount
brokerage offices in Morristown, New Jersey and Palm Beach and Surfside (Bal
Harbour), Florida and entered into an agreement to relocate its office in Los
Angeles to Beverly Hills.
Siebert currently maintains seven retail discount brokerage offices. See
"Item 2 Properties." Customers can visit the 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.
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The New York office remains open Monday through Friday from 7:30 a.m. to
7:30 p.m., Eastern Time, daily, while branch offices remain open from 9 a.m. to
5 p.m., Eastern Time, daily to service customers in person and by telephone.
During the second quarter of 1996, the firm reached an agreement with its
clearing firm whereby the clearing firm would guarantee the availability of up
to 14 trading positions and related telephone and computer equipment for the use
of Siebert personnel in the event Siebert's main trading facility was
unavailable for any reason. Furthermore, the 14 trading positions would be
supported by the clearing agent's internal licensed representatives until
Siebert's representatives arrived. The clearing firm has failed to provide
evidence that they will be able to meet their commitments and the Company is
taking steps to provide alternate arrangements as soon as practical.
Information Systems. Siebert's operations rely heavily on its information
processing and communications systems. Siebert's system for processing a
securities transaction is 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.
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 Siebert's information processing or communication systems for a
significant period of time could limit its ability to process its 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 in facilities provided by NFSC,
its clearing agent, at the World Financial Center.
Capital Markets Division
In 1991, Siebert formalized its commitment to its institutional customer
base by creating the Siebert 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 Division has been involved in issues from
New York to California. In addition, the Division's distribution system is
extensive. The firm has an active retail account base in excess of 80,000
accounts, and an institutional account base which numbers approximately 600
accounts.
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The Company believes that it is the largest WBE in the capital markets
business in the country through Siebert and the largest MWBE in the tax exempt
underwriting area in the country through its Siebert Brandford Shank Division.
The two principal areas of the Capital Market 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 $61.6 billion in municipal debt. Investment Banking revenues from the
underwriting of taxable and tax-exempt debt and fees from financial advisor and
remarketing activities are set forth in the table "Selected Financial Data" in
Part II - Item 6.
In October 1996, Siebert formed the Siebert Brandford Shank Division of
Siebert to add to the former activities of Siebert's tax exempt underwriting
department the activities of 26 municipal investment banking professionals who
were previously employed by the 13th largest tax exempt underwriting firm in the
country. As soon as all licenses and consents are obtained, the Siebert
Brandford Shank Division will be separately incorporated and Napoleon Brandford
and Suzanne F. Shank will own 51% of the equity and be entitled to 51% of the
net profits or bear 51% of any net losses after Siebert's recovery of start-up
expenses while Siebert will have the balance. The group is expected to make
Siebert a more significant factor in the tax exempt underwriting area. This 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, the new Division has opened offices in San Francisco, Seattle and Houston
and is paying rent on an interim basis while negotiating to open or assume the
leases for additional offices in Dallas, Chicago, Detroit and Los Angeles. The
additional overhead and costs incurred in the openings will adversely impact net
income until additional revenues are produced in amounts sufficient to absorb
such overhead and costs. There can be no assurance as to when and if such
revenues will be produced. As a startup Division, the unit has not yet been
profitable.
To date, however, the Division has been awarded roles as Co-Managing
Underwriter of offerings approximating $3.5 billion and as a Senior Managing
Underwriter of offerings of approximately $500 million expected to come to
market between April 1 and December 31, 1997. Awarded clients include the States
of California, Texas and Washington and the Cities of Chicago, Detroit and St.
Louis.
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 in over 105 offerings including corporate debt
issuance totaling over $3.6 billion.
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The principal sources of revenue of the Capital Markets Division are
underwriting profits and management fees derived from underwriting. 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,
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.
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 from time to time positions stocks,
options or futures, it does not execute customer orders against such 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 firm trades an average of 668,000 shares daily for institutional
investors and for its own account.
Institutional Basket Trading Technology. The Capital Markets Division
completed in the second quarter of 1996 the design and commenced operation of
the exclusive Siebert Real-Time List Execution System ("SRLX"). SRLX is designed
exclusively for institutional customers who employ the use of basket trading
strategies in their portfolio management.
SRLX enables the Capital Markets Division to simultaneously manage an array
of baskets for multiple clients while providing real-time analysis. SRLX can be
integrated into an existing local area network. It is built with the latest 32
bit technology to take advantage of today's Pentium-based PC's running Microsoft
Windows95* or Windows NT*. Data integrity is assured through a private digital
T1 line with built-in network redundancy.
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* Pentium is a trademark of the Intel Corporation; Microsoft Windows95 and
WindowsNT are a trademarks of the Microsoft Corporation.
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SRLX is built for institutional customers with features designed to add
significant value to their trading capabilities. SRLX features include: Written
almost entirely in VB native code by in-house staff 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
end-of-day report uploading; customized client reports; active intervention for
large blocks or inactive stocks; and built-in automatic fail-safe and recovery
system.
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.
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 negotiated new issue equity, municipal and government bonds to
charitable organizations. Once the Siebert Brandford Shank division is
profitable, the division will likely follow a similar practice. 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 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." See "Business - Regulation."
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.
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. Siebert
competes with a wide variety of vendors of financial services for the same
customers. Siebert believes that the main competitive advantages are quality of
execution and service, responsiveness, price of services and products offered,
and the breadth of product line.
Among Siebert's principal retail competitors are Charles Schwab, Quick and
Reilly, Fidelity Investments, Waterhouse Securities, Jack White & Co. and
Kennedy Cabot. Siebert charges commissions lower than some other discount
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brokers including Charles Schwab, Quick & Reilly and Fidelity Investments. 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.
Regulation
The securities industry in the United States is subject to extensive
regulation under both Federal and state laws. The Securities and Exchange
Commission (the "Commission") is the Federal agency charged with administration
of the Federal securities laws. Siebert is registered as a broker-dealer with
the Commission, 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 the 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 Commission) 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 Commission 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 Commission,
self-regulatory organizations and state securities 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 employees. Neither the Company nor Siebert has been the subject
of 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. 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 (i.e., protected securities may either be replaced or converted into
an equivalent market value as of the date a SIPC trustee is appointed). Neither
SIPC protection nor the additional protection applies to fluctuations in the
market value of securities.
-12-
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 Commission 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 the recent election, 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 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 MBEs.
See "Business-Advertising, Marketing and Promotion."
Net Capital Requirements; Net Capital
As a registered broker-dealer, Siebert is subject to the Uniform Net
Capital Rule (Rule 15c3-1) promulgated by the Commission (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 net capital may subject a firm to suspension or
expulsion by the NYSE and the NASD, certain punitive actions by the Commission
and other regulatory bodies and, ultimately, may require a firm's liquidation.
"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
(haircuts) 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 Commission prior to and subsequent to withdrawals exceeding
-13-
certain sizes. Such rule prohibits withdrawals that would reduce a
broker-dealer's net capital to an amount less than 25% of its deductions
required by the Net Capital Rule as to its security positions. The Net Capital
Rule also allows the Commission, 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 Regulation 240.15c3-1(a)(1)(ii)
promulgated by the Commission. 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 would be less than 5 percent of
aggregate debits.) At December 31, 1996 and 1995, Siebert had net capital of
$7.8 million and $4.6 million, respectively, and net capital requirements of
$250,000 under Regulation 240.15c3-1(a)(1)(ii). Siebert is not subject to
Commission 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
Commission Rule 17a-11 requirement.
Employees
As of March 18, 1997, Siebert had 121 full time employees, four of whom
were corporate officers. None of the employees are represented by a union, and
Siebert believes that its relations with its employees are good.
Item 2. Properties
Siebert operates its business out of the following nine offices:
Approximate Expiration
Office Area in Date of
Square Current Renewal
Location Feet Lease Terms
-------- ---- ----- -----
885 Third Ave. 7,828 SF 7/15/97 5 year option
Suite 1720
New York, NY 10022
2020 Avenue of the Stars 846 SF N/A Month-to-month
Concourse Level
Suite C216
Los Angeles, CA 90067
220 Sansome Street 3,250 SF 2/28/00 None
15th Floor
San Francisco, CA 94104
(Investment Banking only)
-14-
Approximate Expiration
Office Area in Date of
Square Current Renewal
Location Feet Lease Terms
-------- ---- ----- -----
4400 North Federal Highway 1,038 SF 2/28/02 None
Suite 106D
Boca Raton, FL 33431
400 Fifth Avenue South 1,008 SF 4/22/99 None
Suite 100
Naples, FL 33940
230-238 Royal Palm Way 629 SF 10/31/97 1 year option
Suite 408-410
Palm Beach, FL 33480
9569 Harding Avenue 1,150 SF 9/30/98 None
Surfside, FL 33154
66 South Street 1,341 SF 8/31/06 None
Morristown, NJ 07960
2 Union Square 325 SF 4/30/97 2 one year
601 Union Street options
Seattle, WA 98101
(Investment Banking only)
601 Jefferson 220 SF Month None
Suite 320 to
Houston, TX 77002 month
(Investment Banking only)
In addition to occupying a portion of Siebert's existing offices in New
York, the new Siebert, Brandford, Shank Division has opened offices in San
Francisco, Seattle and Houston and is paying rent on an interim basis while
negotiating to open or assume the leases for additional offices in Dallas,
Chicago, Detroit and Los Angeles.
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
Siebert is involved in various routine lawsuits of a nature which is deemed
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.
-15-
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock commenced trading in 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
November 12, 1996 to December 31, 1996........ $ 12.00 $ 9.00
January 1, 1997 to March 24, 1997............. $ 12.375 $ 9.25
The closing bid price on March 24, 1997 in the Nasdaq SmallCap Market was
$9.25 per share.
As of March 24, 1997, there were approximately 530 holders of record of
Common Stock.
Limited Offering 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 $9.375 per share. The offer, once extended, expired March 21,
1997. 1,713 shares were issued pursuant to the offer.
Dividend Policy
Subject to statutory and regulatory constraints, prevailing financial
conditions and future earnings, the Company may pay cash dividends on its Common
Stock but has not done so to date. 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.
If the Company determines to pay a dividend, Ms. Siebert, as the majority
shareholder of the Company, may from time to time waive her rights to receive
cash dividends to be declared by the Company.
-16-
Item 6. Selected Financial Data
The selected consolidated financial data set forth below for the five years
ended December 31, 1996 has been derived from the Company's audited financial
statements. Such information should be read in conjunction with, and is
qualified in its entirety by, the financial statements and notes thereto
appearing elsewhere in this report.
Year Ended December 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Income statement data:
Revenues:
Commissions ................................... $ 20,105,127 $ 15,645,334 $ 12,128,797 $ 14,349,051 $ 9,874,853
Trading profits ............................... 868,823 2,608,078 3,215,288 3,133,722 1,378,293
Interest and dividends ...................... 656,434 1,389,612 462,618 261,198 234,770
Investment banking ............................ 2,532,795 1,396,967 1,536,030 2,462,309 2,435,734
------------ ------------ ------------ ------------ ------------
Total revenues .............................. 24,163,179 21,039,991 17,342,733 20,206,280 13,923,650
------------ ------------ ------------ ------------ ------------
Expenses:
Salaries, commissions and employee ........... 9,753,847 8,586,116 6,132,899 8,999,567 4,844,544
benefits (1) ................................
Clearing fees, including floor
brokerage ................................... 4,585,398 4,249,050 3,967,558 4,473,740 3,017,085
Advertising and promotion .................... 3,265,692 2,485,426 2,299,030 2,171,858 1,838,707
Communications ................................ 1,359,325 1,119,189 1,001,957 896,986 590,034
Interest ...................................... 290,465 568,326 602,759 323,876 290,185
Rent and occupancy ............................ 403,534 326,089 323,123 323,235 200,976
Other general and administrative ............. 2,339,483 2,461,122 2,458,237 1,932,143 1,930,23
------------ ------------ ------------ ------------ ------------
Total expenses .............................. 21,997,744 19,795,318 16,785,563 19,121,405 12,711,769
------------ ------------ ------------ ------------ ------------
Income before provision for taxes ............... 2,165,435
Provision for income taxes - current ......... 201,000
------------
Net income -- historical ........................ 1,964,435 1,244,673 557,170 1,084,875 1,211,881
Pro forma provision for income taxes (2) ........ 752,000 548,000 245,000 477,000 533,000
------------ ------------ ------------ ------------ ------------
PRO FORMA NET INCOME ......................... 1,212,435 $ 696,673 $ 312,170 $ 607,875 $ 678,881
============ ============ ============ ============
Supplementary pro forma adjustment:
Effect of officer's salary reduction
as though 1997 salary had been in effect 2,975,000
Related income taxes .......................... (1,309,000)
------------
Supplementary pro forma net income .............. $ 2,878,435
============
Per share of common stock:
PRO FORMA NET INCOME .......................... $ .23 $ .13 $ .06 $ .12 $ .13
============ ============ ============ ============ ============
Supplementary pro forma net income .............. $ .55
============
Weighted average common shares deemed outstanding 5,235,897 5,235,897 5,235,897 5,235,897 5,235,897
Balance Sheet data (at period-end):
Total assets ................................. $ 14,372,708 $ 16,291,195 $ 9,372,230 $ 12,161,104 $ 4,784,663
Total liabilities excluding subordinated debt 4,271,143 9,154,065 3,479,773 6,825,817 1,530,795
Subordinated debt to majority shareholder .... 3,000,000 2,000,000 2,000,000 2,000,000 1,000,000
Stockholder's equity ......................... 7,101,565 5,137,130 3,892,457 3,335,287 2,253,868
- ------------
(1) Salaries, commissions and employee benefits includes $2,975,000,
$2,975,000, $1,215,000, $3,958,000 and $1,450,000 for 1996 through 1992 of
S Corporation compensation of Muriel Siebert in excess of the amounts that
would have been paid had her new base salary arrangement of $150,000 been
in effect.
(2) The pro forma provision for income taxes represents income taxes which
would have been provided had Siebert operated as a C Corporation.
-17-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Business Environment
Market conditions during 1996 reflected a continuation of the 1995 bull
market characterized by record volume and record high market levels. Declines in
market volumes or increases in interest rates could limit Siebert's growth or
even lead to a decline in Siebert's customer base which would adversely affect
its results of operations.
Also during 1996, 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 business announcing plans to
become significantly involved. Other firms, traditionally discount execution
firms primarily, have announced their intention to broaden their offerings to
include advice and investment management. Since 1994, some firms have offered
low flat rate 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 reorganizations which Siebert does not
and also direct their execution to affiliated market makers. Increased
competition, broader service offerings or the prevalence of a flat fee
environment could also limit Siebert's growth or even lead to a decline in
Siebert's customer base which would adversely affect its results of operations.
Current Developments
For the year ended December 31, 1996, commission and fee income and
investment banking revenues continued to experience strong and record growth.
Equity trading activities, however, continued to lag the growth in the balance
of the firm.
During the fourth quarter of 1996, Siebert opened retail discount brokerage
offices in Morristown, New Jersey and Palm Beach and Surfside (Bal Harbour),
Florida and entered into an agreement to relocate its office in Los Angeles to
Beverly Hills.
In October 1996, Siebert formed the Siebert Brandford Shank Division of
Siebert to add to the former activities of Siebert's tax exempt underwriting
department the activities of 26 municipal investment banking professionals who
were previously employed by the 13th largest tax exempt underwriting firm in the
country. As soon as all licenses and consents are obtained, the Siebert
Brandford Shank Division will be separately incorporated and Napoleon Brandford
and Suzanne F. Shank will own 51% of the equity and be entitled to 51% of the
net profits while Siebert will own and be entitled to the balance. In addition
to occupying a portion of Siebert's existing offices in New York and Los
Angeles, the new Division has opened offices in San Francisco and Seattle and is
paying rent on an interim basis while negotiating to open or assume the leases
for additional offices in Houston, Dallas, Chicago and Detroit. The additional
-18-
overhead and costs incurred in the openings will adversely impact net income
until additional revenues are produced in amounts sufficient to absorb such
overhead and costs. There can be no assurance as to when and if such revenues
will be produced. As a startup Division, the unit has not yet been profitable.
To date, however, the Division has been awarded roles as Co-Managing Underwriter
of offerings approximating $3.5 billion and as a Senior Managing Underwriter of
offerings of approximately $500 million expected to come to market between April
1 and December 31, 1997.
Results of Operations
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total revenues for 1996 were $24.2 million, an increase of $3.1 million or
15% over 1995. Commission and fee income and investment banking revenues
increased and trading and interest and dividend revenues declined.
Commission and fee income increased $4.5 million or 29% to $20.1 million
due to the continued bull market and increased spending for advertising and
promotion to attract additional clients. In addition, under a new clearing
agreement which was phased in during the second quarter of 1995, Siebert
received additional commission income on client margin and free credit balances
and investments in certain mutual and money market funds and the amounts of
related customer balances and investments increased substantially.
Trading profits declined $1.7 million or 67% to $869,000 due to a
continuing lack of liquidity and substantially reduced volatility in markets in
which the firm trades, thus limiting trading and arbitrage opportunities
compared to the prior year.
Interest and dividends decreased $733,000 or 53% to $656,000 due to
decreases in long trading positions and in trading strategies which generated
greater dividend income in 1995 over the corresponding period in 1996.
Investment banking increased $1.1 million or 81% to $2.5 million due to
increased participation in both equity and tax exempt underwritings over the
prior year period. This resulted from providing additional resources to the
development of both types of business and, from October 1, 1996, the addition of
over 20 municipal investment banking professionals to form the Siebert Brandford
Shank Division engaged in tax exempt underwriting.
Total costs and expenses for 1996 were $22.0 million, an increase of $2.2
million or 11% over 1995. All categories of costs increased except interest
expense and other general and administrative expenses.
Compensation and benefit costs increased $1.2 million or 14% to $9.8
million due to provisions for bonus payments and to increases in staffing to
cover the trading and service needs of the retail commission business, and, in
fourth quarter, the tax exempt underwriting business. Management, staff and
-19-
incentive bonuses increased $350,000 reflecting volume, improved performance and
firm profitability. The balance of the increase relates primarily to an increase
in average head count of 73 for 1995 to 95 for 1996, an increase of 32%. The
staff increase is primarily related to the increase in retail commission
business and, in the fourth quarter, the addition of the municipal investment
banking professionals.
Clearing and brokerage fees increased $336,000 or 7.9% to $4.6 million.
Such costs increased substantially less than commission volume due to the effect
of a new clearing cost structure that became effective in the second quarter of
1995.
Advertising and promotion expense increased $780,000 or 31% to $3.3 million
due to increased branch and service promotion (for example, the opening of the
Naples office in early 1996 and the Surfside and Palm Beach offices in late 1996
and the introduction of new products ( such as "Siebert OnLine") and increased
advertising and promotion to differentiate Siebert from other firms in an
increasingly competitive environment.
Communications expense increased $240,000 or 22% to $1.4 million as the
client base and volume increased and more services were offered directly
on-line.
Interest expense declined $278,000 or 49% to $291,000 primarily due to the
decreased use of equity trading strategies that involve large short positions.
Dividend charges against short positions are included as part of interest
expense.
Rent and occupancy costs increased $77,000 or 24% to $403,000 principally
due to opening a new branch in Naples, Florida in December 1995, pre-opening and
rental costs of three new retail branches in late 1996, and the new location
costs for the Siebert Brandford Shank Division for the fourth quarter of 1996.
Other general and administrative expenses decreased $122,000 or 5% to $2.3
million due principally to reduced legal and consulting fees in the current
year. Included in general and administrative costs for 1996 are approximately
$210,000 in legal, accounting and printing costs related to the JMI merger in
November, 1996.
Siebert's current and pro forma provision for income taxes increased
$405,000 or 74% to $953,000 while pro forma net income for 1996 was $1.2
million, an increase of $516,000 or 74% over 1995, both proportional to a
similar increase in pre-tax income.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total revenues for 1995 were $21.0 million an increase of $3.7 million or
21% over 1994. Commission and fee income and interest and dividend revenues
increased and trading and investment banking revenues declined.
Commission and fee income increased $3.5 million or 29% to $15.6 million
due to the continued bull market and increased spending for advertising to
attract additional clients.
-20-
Trading profits declined $607,000 or 19% to $2.6 million due to a lack of
liquidity and substantially reduced volatility in the firm's markets during the
second half of the year thus limiting the trading and arbitrage opportunities
present in the first half of the year and in the prior period.
Interest and dividends increased $927,000 or 200% to $1.4 million due to
increases in long trading positions and in trading strategies which generated
greater dividend income.
Investment banking decreased $139,000 or 9.1% to $1.4 million due to
reduced underwriting volume generally in municipal markets and a shift from
negotiated underwriting transactions to competitively bid transactions which are
relatively less profitable for participants.
Total costs and expenses for 1995 were $19.8 million, an increase of $3.0
million or 18% over 1994. All categories of costs increased except interest
expense.
Compensation and benefit costs increased $2.5 million or 40% to $8.6
million due to an increase in Subchapter-S compensation to Ms. Siebert of $1.76
million, an increase in contractual incentive bonus compensation of $355,000 and
an increase in the bonus provision for other staff and executives of $365,000.
Clearing and brokerage fees increased $282,000 or 7.1% to $4.2 million.
Such costs increased substantially less than commission volume due to the effect
of a new clearing cost structure that became effective in the second quarter of
1995.
Advertising and promotion expense increased $186,000 or 8.1% to $2.5
million primarily in increased advertising to differentiate Siebert from other
firms in an increasingly competitive environment.
Communications expense increased $117,000 or 12% to $1.1 million due to
increased market volume, increased use of "800" number service resulting from
national television advertising and increased use of Siebert's market phone
service for orders as well as customer inquiries. Also as a result of increased
volume, the cost of quote services increased $58,000 or 14%.
Interest expense declined $34,000 or 5.7% to $568,000 primarily due to the
decreased use of equity trading strategies that involve large short positions.
Dividend charges against short positions are included as part of interest
expense.
Rent and occupancy costs increased $3,000 or 0.9% to $326,000 primarily
from cost escalation provisions in existing leases.
-21-
Siebert's pro forma provision for income taxes increased $303,000 or 124%
to $548,000 and pro forma net income for 1995 was $697,000, an increase of
$385,000 or 123% over 1994, both proportional to a similar increase in pre-tax
income.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Total revenues for 1994 were $17.3 million, a decrease of $2.9 million or
14% compared to 1993. Commissions and fees and investment banking revenues
declined. Trading and interest income increased, but to a much lesser extent.
Commissions and fees were $12.1 million, a decrease of $2.2 million or 16%
compared to 1993. Principal factors were a general decline in overall stock
market volume and activity and increased competition in the discount brokerage
industry, particularly from a class of new flat fee discount brokers.
Trading profits increased $82,000 or 2.6% to $3.2 million due to the
continued success of firm trading strategies suited to relatively liquid and
volatile markets.
Interest and dividends increased $201,000 or 77% to $463,000 due to
increases in long trading positions and in trading strategies which generated
greater dividend income in 1994 compared to 1993.
Investment banking decreased $926,000 or 38% to $1.5 million due primarily
to a reduction of approximately $500,000 in taxable fixed income syndicate
income which had been significant in 1993. This was due to market conditions,
the termination of certain Resolution Trust Company and FannieMae underwriting
programs and the loss of a key employee. The municipal bond area principally
accounted for the remaining decline due to a softening in the municipal bond
market.
Total costs and expenses for 1994 were $16.8 million, a decrease of $2.3
million or 12% compared to 1993. Compensation and benefits and clearing costs
accounted principally for the decrease, with some offsetting increases in other
categories.
Compensation and benefits decreased $2.9 million or 32% to $6.1 million.
Ms. Siebert's Subchapter-S Corp. compensation declined $2.7 million in 1994
compared to 1993 and a reduction in staff and in the executive bonus provision
accounted for the balance, in each case due to reduced firm profitability.
Clearing and brokerage fees decreased $506,000 or 11% to $4.0 million due
to a decrease in the retail commission business. The decrease was less than the
percentage decrease in commissions because the 1994 mix of commissions had a
shift toward listed securities in 1994 which incur floor brokerage costs not
applicable to OTC trades.
Advertising and promotion expense increased $127,000 or 5.9% to $2.3
million. The increased expenditures represented a campaign to minimize the
-22-
effects of reduced market volume by capturing increased market share. Due to
reduced municipal market activity, contributions, included as promotional
expense, decreased approximately $560,000. Expenditures for other advertising
and promotional costs increased approximately $685,000 over the prior year.
Communications expense increased $105,000 or 12% to $1.0 million. Although
commission volume declined, the firm's emphasis on customer service resulted in
more service-oriented representatives providing a wider range of services,
specifically including substantially more quote services.
Interest expense increased $279,000 or 86% to $602,000 due to the trading
strategies involving large short positions which incur dividend charges.
Dividend charges against short positions are included as part of interest
expense.
Rent and occupancy costs remained the same at $323,000.
Other general and administrative expenses increased $526,000 or 27% to $2.5
million, principally due to legal defense fees and expenses with two actions
involving former employees; both cases were settled.
Siebert's pro forma provision for income taxes decreased $232,000 or 49% to
$245,000 and pro forma net income decreased $296,000 or 49% to $312,000, both
proportional to a similar decrease in pre-tax income.
Liquidity and Capital Resources
Siebert's assets are highly liquid, consisting generally of cash, money
market funds and securities freely salable in the open market. Siebert's total
assets at December 31, 1996 were $14.4 million, of which $2.0 million took the
form of a secured demand note. $13.5 million or 94% of total assets were highly
liquid.
Siebert is subject to the net capital requirements of the Commission, the
NYSE and other regulatory authorities. At December 31, 1996, Siebert's net
capital was $ 7.8 million, $7.5 million in excess of its minimum capital
requirement of $250,000.
Risk Management
The principal credit risk to which Siebert 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.
-23-
Managers have some flexibility in allowing 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 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.
Item 8. Financial Statements and Supplementary Data
See index immediately following the signature page.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-24-
Part III
Item 10. Directors and Executive Officers of the Company
(a) Identification of Directors
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.
(B) Identification of Executive Officers
The executive officers of the Company are:
Name Age Position
- ---- --- --------
Muriel F. Siebert 64 Chair and President
Nicholas P. Dermigny 38 Executive Vice President and Chief
Operating Officer
T. K. Flatley 56 Executive Vice President, Chief Financial
and Administrative Officer and Assistant
Secretary
Daniel Iesu 37 Secretary and Controller
Certain information furnished to the Company by each executive officer 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, the National Women's Business Council, the
International Women's Forum and the Boy Scouts of Greater New York.
Nicholas P. Dermigny has been Executive Vice President and Chief Operating
Officer of Siebert since joining the firm in 1989. Prior to 1993, he was
responsible for the retail discount division. Mr. Dermigny became an officer and
director of the Company on November 8, 1996.
T. K. Flatley has been Executive Vice President and Chief Financial and
Administrative Officer of Siebert since April 1996 and of the Company since
November 8, 1996. He became Assistant Secretary of the Company on March 11,
1997. From May 1993 until April 1996, he was engaged independently as a
consultant in the investment banking and brokerage business except for the
period from November 1993 to November 1994 when he was Chief Financial and
-25-
Administrative Officer of Ryan, Beck & Co., Inc., an investment banking and
brokerage firm in New Jersey. From 1990 until 1993, he was President and Chief
Executive Officer of Motivated Security Services, a security services firm based
in New Jersey. Mr. Flatley is a Certified Public Accountant.
Daniel Iesu has been Secretary of Siebert since October 1996 and of the
Company since November 8, 1996. He has been Controller of Siebert since 1989.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.
Item 12. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report.
1. Financial Statements
The financial statements filed as part of this report are
listed in the accompanying Index to Financial Statements.
2. Financial Statement Schedules
Schedules are omitted because they are not applicable or the
required information is shown in the financial statements or
the notes thereto
3. Exhibits
The exhibits required by Item 601 of Regulations S-K filed as
part of, or incorporated by reference in, this report are
listed in the accompanying Exhibit Index.
-26-
(b) Reports on Form 8-K
Current Report on Form 8-K filed with the Commission on
November 15, 1996 reporting pursuant to Item 5 the merger
with JMI.
Current Report on Form 8-K filed with the Commission on
November 21, 1996 reporting pursuant to Item 1 the change
in control of the Registrant as a result of the merger
with JMI.
(c) Exhibits required by Item 601 of Regulation S-K
See the accompanying Exhibit Index
(d) Financial Statement Schedules
See (a) 2. above
-27-
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
March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ Muriel F. Siebert Chair, President and Director March 27, 1997
- ------------------------------ (principal executive officer)
Muriel F. Siebert
/s/ Nicholas P. Dermigny Executive Vice President and March 27, 1997
- ------------------------------ Chief Operating Officer and
Nicholas P. Dermigny Director
/s/ T. K. Flatley Executive Vice President and March 27, 1997
- ------------------------------ Chief Financial and
T. K. Flatley Administrative Officer
(principal financial and
accounting officer)
/s/ Patricia L. Francy Director March 27, 1997
- ------------------------------
Patricia L. Francy
/s/ Jane H. Macon Director March 27, 1997
- ------------------------------
Jane H. Macon
/s/ Monte E. Wetzler Director March 27, 1997
- ------------------------------
Monte E. Wetzler
-28-
INDEX TO FINANCIAL STATEMENTS
Page
----
Siebert Financial Corp. and Subsidiary
Report of Independent Auditors.....................................F-1
Consolidated Balance Sheets at
December 31, 1996 and 1995 .....................................F-2
Consolidated Statements of Income for each of the
years in the three-year period ended December 31, 1996.........F-3
Consolidated Statements of Retained Earnings for each of the
years in the three-year period ended December 31, 1996..........F-4
Consolidated Statements of Cash Flows for each of the
years in the three-year period ended December 31, 1996.........F-5
Notes to Financial Statements......................................F-6
Richard A. Eisner & Company, LLP
- --------------------------------------------------------------------------------
Accountants and Consultants
RAE
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Siebert Financial Corp.
New York, New York
We have audited the accompanying consolidated balance sheets of Siebert
Financial Corp. and its wholly owned subsidiary as of December 31, 1996 and
December 31, 1995, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996. 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, 1996 and
December 31, 1995, and the consolidated results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1996, in conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
February 14, 1997
F-1
SIEBERT FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
A S S E T S
-----------
December 31,
-----------------------------------
1996 1995
----------- -----------
Cash and cash equivalents $ 231,029 $ 164,071
Securities owned, at market value 10,116,248 13,746,931
Receivable from brokers and dealers 1,141,439
Secured demand note receivable from majority shareholder 2,000,000 2,000,000
Property and equipment, net 450,254 238,864
Prepaid expenses and other assets 433,738 141,329
----------- -----------
T O T A L $14,372,708 $16,291,195
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Payable to brokers and dealers $ 5,236,346
Accounts payable and accrued liabilities $ 2,824,000 3,339,229
Securities sold, not yet purchased, at market value 1,447,143 578,490
----------- -----------
T o t a l 4,271,143 9,154,065
----------- -----------
Commitments and contingencies
Liabilities to majority shareholder
subordinated to claims of general creditors 3,000,000 2,000,000
----------- -----------
Shareholders' equity:
Common stock, $.01 par value 49,000,000
shares authorized, 5,235,897 shares
outstanding at December 31, 1996,
5,105,000shares outstanding
at December 31, 1995 52,359 51,050
Additional paid-in capital 6,771,049
Retained earnings 278,157 5,086,080
----------- -----------
Total shareholders' equity 7,101,565 5,137,130
----------- -----------
T O T A L $14,372,708 $16,291,195
=========== ===========
The accompanying notes to financial statements are an integral part hereof.
F-2
SIEBERT FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
---------------------------------------------
1996 1995 1994
------------ ------------ ------------
Revenues:
Commissions $ 20,105,127 $ 15,645,334 $ 12,128,797
Trading profits 868,823 2,608,078 3,215,288
Interest and dividends 656,434 1,389,612 462,618
Investment banking 2,532,795 1,396,967 1,536,030
------------ ------------ ------------
Total revenues 24,163,179 21,039,991 17,342,733
------------ ------------ ------------
Expenses:
Salaries, commissions and employee benefits 9,753,847 8,586,116 6,132,899
Clearing fees, including floor brokerage 4,585,398 4,249,050 3,967,558
Advertising and promotion 3,265,692 2,485,426 2,299,030
Communications 1,359,325 1,119,189 1,001,957
Interest 290,465 568,326 602,759
Rent and occupancy 403,534 326,089 323,123
Other general and administrative 2,339,483 2,461,122 2,458,237
------------ ------------ ------------
Total expenses 21,997,744 19,795,318 16,785,563
------------ ------------ ------------
Income before provision for taxes 2,165,435
Provision for income taxes - current 201,000
------------
NET INCOME - HISTORICAL 1,964,435 1,244,673 557,170
Pro forma provision for income taxes 752,000 548,000 245,000
------------ ------------ ------------
PRO FORMA NET INCOME 1,212,435 $ 696,673 $ 312,170
============ ============
Supplementary pro forma adjustment:
Effect of officer's salary reduction as though
1997 salary had been in effect in 1996 2,975,000
Related income taxes (1,309,000)
------------
Supplementary pro forma net income $ 2,878,435
============
Per share of common stock:
PRO FORMA NET INCOME $ .23 $ .13 $ .06
============ ============ ============
Supplementary pro forma net income $ .55
============
Weighted average shares outstanding 5,235,897 5,235,897 5,235,897
The accompanying notes to financial statements are an integral part hereof
F-3
SIEBERT FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock
-----------------------
Number Additional
of $.01 Par Paid-in Retained
Shares Value Capital Earnings Total
------ ----- ------- -------- -----
Balance - January 1, 1994 5,105,000 $ 51,050 $ - 0 - $ 3,284,237 $ 3,335,287
Net income 557,170 557,170
----------- ----------- -------- ----------- -----------
Balance - December 31, 1994 5,105,000 51,050 - 0 - 3,841,407 3,892,457
Net income 1,244,673 1,244,673
----------- ------------ --------- ----------- -----------
Balance - December 31, 1995 5,105,000 51,050 - 0 - 5,086,080 5,137,130
Net income as S corporation January 1,
1996 - November 8, 1996 1,686,278 1,686,278
Transfer upon change in tax status 6,772,358 (6,772,358) - 0 -
Issuance of shares in connection
with reorganization 130,897 1,309 (1,309) - 0 -
Net income as C corporation
November 9, 1996 -
December 31, 1996 278,157 278,157
----------- ----------- ---------- ----------- -----------
BALANCE - DECEMBER 31, 1996 5,235,897 $ 52,359 $6,771,049 $ 278,157 $ 7,101,565
=========== =========== ========== =========== ===========
The accompanying notes to financial statements are an integral part hereof.
F-4
SIEBERT FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 1,964,435 $ 1,244,673 $ 557,170
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 108,460 67,360 55,668
Changes in operating assets and liabilities:
(Increase)decrease in prepaid expenses and other assets (292,409) (2,097) 137,781
Net decrease (increase) in securities owned, at market value 3,630,683 (8,006,577) 382,928
Net change in receivable from/payable to brokers and dealers (6,377,785) 8,151,165 2,309,964
(Decrease) increase in accounts payable and accrued liabilities (515,229) 1,432,940 (70,391)
Net increase (decrease) in securities sold, not yet
purchased, at market value 868,653 (994,994) (3,275,653)
----------- ----------- -----------
Net cash (used in) provided by operating activities (613,192) 1,892,470 97,467
Cash flows from investing activities:
Purchase of property and equipment (319,850) (95,771) (48,587)
Cash flows from financing activities:
Subordinated loan borrowings from majority shareholder 1,000,000 225,000
Repayment of subordinated loan to majority shareholder (2,000,000)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 66,958 (203,301) 273,880
Cash and cash equivalents - beginning of year 164,071 367,372 93,492
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 231,029 $ 164,071 $ 367,372
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 290,465 $ 568,326 $ 602,759
Income and franchise taxes 234,850 126,342 83,680
Supplemental information on noncash financing activities:
During 1995, the majority shareholder issued a secured demand note to the
Company and the Company issued a subordinated note to the shareholder, both
in the amount of $2,000,000.
During 1994, a secured demand note receivable provided by Ms. Siebert was
offset by subordinated liabilities.
The accompanying notes to financial statements are an integral part hereof
F-5
SIEBERT FINANCIAL CORP. AND SUBSIDIARY
NOTES TO 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 and
trading securities for its own account.
In accordance with a Plan and Agreement of Merger which closed on
November 8, 1996 (the "Merger"), J. Michaels, Inc. ("JMI") issued 5,105,000
shares (post one-for-seven reverse split) to Muriel Siebert in exchange for all
the issued and outstanding shares of Muriel Siebert Capital Markets Group, Inc.,
("MSCMG"), sole shareholder of Siebert. The Agreement provided that JMI
liquidate all its assets, other than shares of Siebert, and distribute the
proceeds to the pre-merger stockholders of JMI who, by virtue of the merger,
collectively retained a 2 1/2% interest in the surviving company which has been
renamed Siebert Financial Corp. The Merger has been accounted for as a
reorganization of Siebert whereby Financial issued 130,897 shares of its common
stock to the pre-merger stockholders of JMI. Accordingly, the financial
statements have been prepared using the historical basis of Siebert's assets and
liabilities.
The financial statements reflect the results of operations, financial
condition and cash flows of Siebert, and, from the date of the Merger,
Financial. All significant intercompany accounts have been eliminated. Financial
and Siebert collectively are referred to herein as the "Company".
(2) Security transactions:
--------------------------
Prior to 1996, security transactions, commissions, revenues and
expenses were recorded on a settlement date basis, generally the third day
following the transaction for securities and the next day for options. Revenues
and related expenses on a trade date basis were not materially different.
Effective January 1, 1996, 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:
-----------------
Effective November 8, 1996 the Company's S corporation tax status was
terminated by virtue of the Merger. The historical financial statements do not
include a provision for income taxes for the period prior to the termination of
the S election. A pro forma provision for income taxes has been reflected which
represents taxes which would have been provided had the Company operated as a C
corporation for the entire year.
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.
(4) Property and equipment:
---------------------------
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.
(5) Cash equivalents:
---------------------
For purposes of reporting cash flows, cash equivalents include money
market funds.
F-6
SIEBERT FINANCIAL CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - Organization and Summary of Significant Accounting Policies:
(continued)
- --------------------------------------------------------------------------------
(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) Reclassifications:
----------------------
Certain reclassifications have been made to the 1994 financial
statements to conform to the 1995 and 1996 presentation.
(9) Supplementary pro forma data:
---------------------------------
Supplementary pro forma net income and supplementary pro forma earning
per share give effect to the adjustment of Ms. Siebert's salary to the amount
set forth in her current salary arrangement and the related tax effect.
(10) Pro forma and supplementary pro forma earnings per common share:
---------------------------------------------------------------------
The Company calculated earnings per share for all periods on the basis
of 5,235,897 common shares deemed outstanding.
(NOTE B) - Liabilities to Majority Shareholder Subordinated to Claims of General
Creditors and Secured Demand Note Receivable Due From Majority
Shareholder:
- --------------------------------------------------------------------------------
The subordinated liabilities consist of the following:
December 31,
----------------------------
1996 1995
---------- ----------
Subordinated note, due December 31, 1998,
interest payable at 4% per annum $2,000,000 $2,000,000
Subordinated note, due January 31, 1999,
interest payable at 8% per annum 500,000
Subordinated note, due October 31, 1999,
interest payable at 8% per annum 500,000
---------- -----------
T o t a l $3,000,000 $2,000,000
========== ==========
The long-term borrowings under subordination agreements will be
automatically renewed for a period of one year if notice of demand for payment
is not given thirteen months prior to maturity.
F-7
SIEBERT FINANCIAL CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - Liabilities to Majority Shareholder Subordinated to Claims of General
Creditors and Secured Demand Note Receivable Due From Majority
Shareholder: (continued)
- --------------------------------------------------------------------------------
The subordinated borrowings are covered by agreements approved by the
New York Stock Exchange and are thus available in computing net capital under
the Securities and Exchange Commission's 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 $123,000, $160,000 and
$160,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
The secured demand note receivable from shareholder of $2,000,000 at
December 31, 1996 and at December 31, 1995 is collateralized by marketable
securities with a market value of $2,363,000 and $2,394,000, respectively.
(NOTE C) - Property and Equipment - Net:
- ----------------------------------------
Property and equipment consist of the following:
December 31,
-------------------------------
1996 1995
--------- ----------
Leasehold improvements $ 70,576 $ 36,305
Furniture and fixtures 61,539 38,612
Equipment 569,471 306,819
--------- ----------
701,586 381,736
Less accumulated deprecia tion and
amortization (251,332) (142,872)
--------- ----------
T o t a l $ 450,254 $ 238,864
========== ==========
Depreciation and amortization expense for the years ended December 31,
1996, 1995 and 1994 amounted to $108,460, $67,360 and $55,668, respectively.
(NOTE D) - Income Taxes:
- ------------------------
The difference between the tax provisions (pro forma for periods prior
to November 8, 1996) and the amount that would be computed by applying the
statutory federal income tax rate to income before taxes is attributable to the
following:
Year Ended
December 31,
-----------------------------------
1996 1995 1994
-------- -------- --------
Income tax provision at 34% $736,000 $423,000 $189,000
State and local taxes,
net of federal tax benefit 217,000 125,000 56,000
------- ------- ------
T o t a l $953,000 $548,000 $245,000
======== ======== ========
There are no significant temporary differences which give rise to
deferred tax assets or liabilities at December 31, 1996.
F-8
SIEBERT FINANCIAL CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE E) - Net Capital:
- -----------------------
Siebert is subject to the Securities and Exchange Commission'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. (The net capital rule of the New
York Stock Exchange also provides that equity capital may not be withdrawn or
cash dividends paid if resulting net capital would be less than 5 percent of
aggregate debits.) At December 31, 1996 and 1995, Siebert had net capital of
$7,754,450 and $4,606,280, respectively, as compared with net capital
requirements of $250,000.
(NOTE F) - 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, 1996 settled with no adverse effect on Siebert's financial
condition.
Siebert's equity in accounts held by NFSC, consisting of securities
owned and securities sold, not yet purchased, collateralize the margin amounts
due to NFSC.
(NOTE G) - Commitments and Contingencies:
- -----------------------------------------
The Company rents office space under long-term operating leases
expiring in various periods through 2006. These leases call for base rent plus
escalations for taxes and operating expenses.
Future minimum rental payments for base rent plus operating expenses
under these operating leases are as follows:
Year Ending
December 31, Amount
------------ ------
1997 $ 435,000
1998 235,000
1999 127,000
2000 66,000
2001 57,000
Thereafter 180,000
----------
$1,100,000
==========
Rent expense, including escalations for operating costs amounted to
$360,000, $289,000 and $309,000 for the years ended December 31, 1996, 1995 and
1994, respectively. Payments are being charged to expense over the entire lease
term on a straight-line basis.
F-9
SIEBERT FINANCIAL CORP. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - Commitments and Contingencies: (continued)
- -----------------------------------------
The Company 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.
The Company 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. The Company may also make discretionary contributions to
the plan. No contributions were made by the Company in 1996, 1995 and 1994.
F-10
EXHIBIT INDEX
Exhibit No. Description of Document
- ----------- -----------------------
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")
2.2 Amendment No. 1 to Merger Agreement, dated as of June 28, 1996
2.3 Amendment No. 2 to Merger Agreement, dated as of September 30, 1996
2.4 Amendment No. 3 to Mergr Agreement, dated as of November 7, 1996
3.1 Certificate of Incorporation of Siebert Financial Corp., formerly
known as J. Michaels, Inc., originally filed on April 9, 1934, as
amended to date (previously filed)
3.2 By-laws of Siebert Financial Corp.
10.1 Siebert Financial Corp. 1997 Stock Option Plan
10.2 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
10.3 Services Agreement, between Siebert, Brandford, Shank & Co., LLC
and Muriel Siebert & Co., Inc., dated as of March 10, 1997
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule (EDGAR filing only)