SIEBERT FINANCIAL CORP — Annual Report 2000

Mar 29, 2000

================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___ to _____ Commission file number 0-5703 Siebert Financial Corp. (Exact name of registrant as specified in its charter) New York 11-1796714 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 885 Third Avenue, New York , New York 10022 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number (212) 644-2400 Securities registered under Section 12(b) of the Exchange Act: Title of each class Name of each exchange on which registered None None ---- ---- Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $.01 per share - -------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X] No Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K (ss. 229.405) 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 ] The number of shares of the Registrant's outstanding Common Stock, as of March 17, 2000, was 22,894,745 shares. The aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant (based on the closing price of the Common Stock as reported by the NASDQ National Market on March 17, 2000 and the assumption for this computation only that all directors and executive officers are affiliates) was $278,301,800. Documents Incorporated by Reference: Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act on or before April 30, 2000, incorporated by reference into Parts II and III. ================================================================================ Special Note Regarding Forward-Looking Statements Except for historical information contained in this Annual Report on Form 10-K, the matters discussed in this report contain certain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that may cause such differences include, but are not limited to: the volume of trading of securities on stock exchanges and in the over-the-counter markets; the method of placing trades by our customers; computer and telephone system failures; the effects of competitors pricing and technology developments, telephone waiting time for servicing of accounts; the effects of industry regulation and changing industry practices, customs; changes in revenues and profit margin due to the cyclical securities markets; the level of spending on advertising and promotion; short or long-term decline in securities prices and trading volumes; and, the effect of losses from customer non-payment of balances due. PART I Item 1. BUSINESS General Siebert Financial Corp. (the "Company") is a holding company that 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 Chairwoman and President and owns approximately 87% of the outstanding common stock, par value $.01 per share (the "Common Stock") of the Company. The Company was ranked first among discount brokerage firms in the July 1999 issue of Smart Money Magazine based in part on Web reliability and customer service and was one of two top ranked, five star on-line brokers in Kiplinger's Personal Finance Magazine's November 1999 issue, based in part upon responsiveness and good executions. In addition, unlike many discount brokerage firms, Siebert offers a wide variety of underwriting and investment banking services. These services offered through its Capital Markets division, include acting as senior manager, co-manager or otherwise participating in the underwriting or sales syndicates of municipal, corporate debt and equity, government agency and mortgage/asset back securities issues. Siebert Financial Corp. became a reporting company through a merger, effective on November 8, 1996, with J. Michaels, Inc. ("JMI"), a company incorporated in the State of New York in 1934, with which it was not previously associated. Following the merger, JMI's fiscal year was changed to December 31 and its name was changed to Siebert Financial Corp. Business Overview Siebert's principal activity is providing Internet and traditional discount brokerage and related services to retail investors. Through its Capital Markets division, Siebert also offers institutional clients equity execution services on an agency basis as well as equity and fixed income underwriting and investment banking services. The Company believes that it is the largest Woman-Owned Business Enterprise ("WBE") in the capital markets business in the country through Siebert and the largest Minority and Women's Business Enterprise ("MWBE") in the tax-exempt underwriting business in the country through its 49% interest in Siebert,Brandford, Shank & Co., LLC ("SBS"), which was formed in Delaware in 1998. -2- The Retail Division Discount Brokerage and Related Services. Siebert became a discount broker on May 1, 1975, a date that would later come to be known as "May Day." Siebert believes that it has been in business and a member of The New York Stock Exchange, Inc. (the "NYSE") longer than any other discount broker. In 1998 Siebert began to offer its customers access to their accounts through SiebertNet, its Internet website. Siebert's focus in its discount brokerage business is to serve retail clients seeking a wide selection of quality investment services, including trading with a broker on the telephone or via the Internet, at commissions that are substantially lower than those of full-commission firms and competitive with the national discount brokerage firms. Siebert clears all securities transactions on a fully disclosed basis through National Financial Services Corp. ("NFSC"), a wholly owned subsidiary of Fidelity Investments. NFSC, with over $9 billion in assets, adds state-of-the-art technology as well as back-office experience to the operations of Siebert supplementing Siebert's in-house systems. Siebert serves investors who make their own investment decisions. Siebert seeks to assist its customers in their investment decisions by offering a number of value added services, including easy access to account information. The firm provides its customers with information via toll-free 800 service direct to its representatives, Monday through Friday between 7:30 a.m. and 7:30 p.m. Eastern Time. Through its SiebertNet, Mobile Broker, inter-active voice recognition and Siebert MarketPhone services, 24-hour access is available to customers. Independent Retail Execution Services. Siebert offers what it believes to be the best possible trade executions for customers. Siebert does not make markets in securities, nor does it position against customer orders. Siebert's listed orders are routed in a manner to afford all customers the opportunity for price improvement on all orders. Through a service called NYSE Prime1, Siebert also has the ability to document to customers all price improvements received on orders executed on the NYSE when orders are filled at better than the National Best Bid/Offer. The firm's OTC orders are executed through a network of NASDAQ market makers with no single market maker executing all trades. Additionally, the firm offers customers execution services through the SelectNet2 and Instinet3 systems for an additional fee. These systems give customers access to all Electronic Communication Networks listed on SelectNet and to Instinet before and after regular market hours. Siebert believes that its OTC executions afford its customers the best possible opportunity for consistent price improvement. Siebert does not have any affiliation with market makers and therefore does not execute OTC trades through affiliated market makers. Representatives 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 or Certificates of Deposit. Retail Customer Service. Siebert believes that superior customer service enhances its ability to compete with larger discount brokerage firms and therefore 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. Customer service personnel are located in each branch office of the firm. - -------------------------- 1 NYSE Prime is a service mark of the New York Stock Exchange, Inc. 2 SelectNet is a trademark of NASDAQ Stock Market, Inc. 3 Instinet is a trademark of Reuters Group PLC. -3- Retirement Accounts. Siebert offers customers a variety of self-directed retirement accounts for which it acts as agent on all transactions. Custodial services are provided through an affiliate of NFSC, the firm's clearing agent, which also serves as trustee for such accounts. Each IRA, SEP IRA, ROTH IRA, 401(k) and KEOGH account can be invested in mutual funds, stocks, bonds and other investments in a consolidated account. Customer Financing. Customers margin accounts are carried through Siebert's clearing agent, which lends customers a portion of the market value of certain securities held in the customer's account. Margin loans are collateralized by these securities. 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 customers' failure to meet the customer's obligations in the event of adverse changes in the market value of the securities positions. Both Siebert and its clearing agent reserve the right to set margin requirements higher than those established by the Federal Reserve Board. Risk Management. Major risks facing the Company fall into two principal categories: systems and credit. Systems, including communications and trading, are critical to the Company's operations. Although the Company maintains redundancy in certain systems, failures could have a material adverse affect on the Company's operations. Customers who fail to pay for their purchases or who fail to maintain the minimum required collateral for amounts borrowed against securities positions represent the principal credit risk facing the Company Information Systems. Siebert's operations rely heavily on information processing and communications systems. The system for processing securities transactions is highly automated. Registered representatives equipped with computer terminals that 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. Through its clearing agent, Siebert's computers are also linked to the major registered United States securities exchanges, the National Securities Clearing Corporation and The Depository Trust Company. Failure of the information processing or communication systems for a significant period of time could limit the ability to process a large volume of transactions accurately and rapidly. This could cause Siebert to be unable to satisfy its obligations to customers and other securities firms, and could result in regulatory violations. External events, such as an earthquake or power failure, loss of external information feeds, such as security price information, as well as internal malfunctions, such as those that could occur during the implementation of system modifications, could render part or all of such systems inoperative. To enhance the reliability of the system and integrity of data, Siebert maintains carefully monitored backup and recovery functions. These include logging of all critical files intra-day, duplication and storage of all critical data outside of its central computer site each evening, and trading facilities for backup and communications in each of its branches. Credit Management. Siebert has established policies with respect to maximum purchase commitments for new customers or customers with inadequate collateral to support a requested purchase. Managers have some flexibility in the allowance of certain transactions. When transactions occur outside normal guidelines, 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 position and minimize any loss. Siebert has not had significant credit losses in the last five years. -4- Capital Markets Division In 1991, Siebert created its Capital Markets division, which serves as a co-manager, underwriting syndicate member, selling group member on a wide spectrum of securities offerings for corporations and Federal agencies. Principal activities of the Capital Markets Division are investment banking and institutional equity execution services. During 1996, Siebert formed the Siebert, Brandford, Shank division of the investment banking group to enhance the activities of Siebert's tax exempt underwriting. The operations of the Siebert, Brandford, Shank division were moved on July 1, 1998 to a newly formed entity, SBS. Two individuals, Mr. Napoleon Brandford and Ms. Suzanne F. Shank, own 51% of the equity and are entitled to 51% of the net profits of SBS and Siebert is entitled to the balance. SBS has made Siebert a more significant factor in the tax exempt underwriting area, and is expected to enhance Siebert's government and institutional relationships as well as the breadth of products that can be made available to retail clients. In addition to occupying a portion of Siebert's existing offices in New York, SBS operates out of offices in San Francisco, Seattle, Houston, Chicago, Detroit, Los Angeles, Washington, DC and Dallas. To date, the Siebert, Brandford, Shank division and SBS have co-managed offerings of approximately $63 billion and senior managed offerings of approximately $2.2 billion. Clients include the States of California, Texas and Washington and the Cities of Chicago, Detroit and St. Louis. 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 these cases, the underwriter assumes a larger part or all of the risk of an underwriting transaction. Under Federal securities laws, other laws and court decisions, an underwriter is exposed to substantial potential liability for material misstatements or omissions of fact in the prospectus used to describe the securities being offered. While municipal securities are exempt from the registration requirements of the Securities Act of 1933, 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. Current Developments. On January 15, 1999, the Company completed a rights offering in which existing stockholders received the right to purchase one share of Common Stock at $7.50 for each share of Common Stock owned of record as of July 29,1998. Approximately 961,000 shares of Common Stock were issued pursuant to the rights offering, generating net proceeds to the Company of approximately $7,000,000, after payment of offering expenses of approximately $270,000. -5- In January 1999, the Company, through its clearing agent, unveiled its new interactive two-way pager service, MobileBroker that allows customers to make equity trades, receive confirmations, get real-time quotes and alerts, access account data, send and receive e-mail and more. In September 1999, Siebert, through its clearing agent, introduced its voice recognition technology allowing customers to use "natural language" to obtain stock quotes, make trades and check balances. Siebert's commission income per customer trade continues to trend down as the number of trades executed on SiebertNet increases. For the year, 1999 SiebertNet trades accounted for approximately 46% of all Siebert retail trades, excluding trades of customers of the Andrew Peck division, because customers of that division do not yet have access to SiebertNet. On May 28, 1999, the Company consummated the acquisition of Andrew Peck Associates, Inc. ("Peck"). Under the terms of the acquisition agreement, Peck was merged with and into Siebert and the separate existence of Peck ceased. All of the common stock of Peck outstanding was converted into 600,000 shares of the Company's common stock. The merger is accounted for as a pooling of interests. Accordingly, the Company's financial statements have been restated to include the results of Peck for all periods presented. On August 11, 1999, the Company's common stock was approved for quotation on the NASDAQ National Market 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. Competition Siebert encounters significant competition from full-commission, online 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. There are currently over 150 online brokerage firms. The general financial success of the securities industry over the past several years has strengthened existing competitors. Siebert believes that such success will continue to attract additional competitors such as banks, insurance companies, providers of online financial and information services and others as they expand their product lines. Many of these competitors are larger, more diversified, have greater capital resources, and offer a wider range of services and financial products than Siebert. Some such firms are offering their services over the facilities of the Internet and have devoted more resources to and have more elaborate web sites than the Company. Siebert competes with a wide variety of vendors of financial services for the same customers. Siebert believes that its main competitive advantages are excellent executions, high quality customer service, responsiveness, cost and products offered and the breadth of product line. Regulation The securities industry in the United States is subject to extensive regulation under both Federal and state laws. The SEC is the Federal agency charged with administration of the Federal securities laws. Siebert is registered as a broker-dealer with the SEC, the NYSE and the National Association of Securities Dealers ("NASD"). Much of the regulation of broker-dealers has been delegated to self-regulatory organizations, principally the NASD and national securities exchanges such as the NYSE which is Siebert's primary regulator with respect to financial and operational compliance. These self-regulatory organizations adopt rules (subject to approval by the SEC) 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 49 states, the District of Columbia and Puerto Rico. -6- The principal purpose of regulations and discipline of broker-dealers is the protection of customers and the securities markets, rather than protection of creditors and stockholders of broker-dealers. The regulations to which broker-dealers are subject cover all aspects of the securities business, including training of personnel, sales methods, trading practices among broker-dealers, uses and safekeeping of customers' funds and securities, capital structure of securities firms, record keeping, fee arrangements, disclosure to clients, and the conduct of directors, officers and employees. Additional legislation, changes in rules promulgated by the SEC and by self-regulatory organizations or changes in the interpretation or enforcement of existing laws and rules may directly affect the method of operation and profitability of broker-dealers and investment advisers. The SEC, self-regulatory organizations and state securities authorities may conduct administrative proceedings which can result in censure, fine, cease and desist orders or suspension or expulsion of a broker-dealer or an investment adviser, its officers or its employees. Neither the Company nor Siebert has been the subject of any such administrative proceedings. As a registered broker-dealer and NASD member organization, Siebert is required by Federal law to belong to the Securities Investor Protection Corporation ("SIPC") which provides, in the event of the liquidation of a broker-dealer, protection for securities held in customer accounts held by the firm of up to $500,000 per customer, subject to a limitation of $100,000 on claims for cash balances. The SIPC is funded through assessments on registered broker-dealers. In addition, Siebert, through its clearing agent, has purchased from private insurers additional account protection up to the net asset value of each account. as defined, for customer securities positions only. Stocks, bonds, mutual funds and money market funds are considered securities and are protected on a share basis for the purposes of SIPC protection and the additional protection. Neither SIPC protection nor the additional protection applies to fluctuations in the market value of securities. Siebert is also authorized by the Municipal Securities Rulemaking Board to effect transactions in municipal securities on behalf of its customers and has obtained certain additional registrations with the SEC and state regulatory agencies necessary to permit it to engage in certain other activities incidental to its brokerage business. Margin lending arranged by Siebert is subject to the margin rules of the Board of Governors of the Federal Reserve System and the NYSE. Under such rules, broker-dealers are limited in the amount they may lend in connection with certain purchases and short sales of securities and are also required to impose certain maintenance requirements on the amount of securities and cash held in margin accounts. In addition, those rules and rules of the Chicago Board Options Exchange govern the amount of margin customers must provide and maintain in writing uncovered options. Certain States and their Agencies offer preferential treatment to Woman and Minority owned firms. These programs are known as quotas or set-asides. Some of the States are reconsidering the preferential programs. Ms. Siebert believes that, irrespective of the legal requirements, as long as there is a "sensitivity to diversity and competitive equality," opportunities will be available for WBEs and MWBEs. Net Capital Requirements As a registered broker-dealer, Siebert is subject to the SEC's Uniform Net Capital Rule (Rule 15c3-1) (the "Net Capital Rule"), which has also been adopted through incorporation by reference in NYSE Rule 325. Siebert is a member firm of the NYSE and the NASD. The Net Capital Rule specifies minimum net capital requirements for all registered broker-dealers and is designed to measure financial integrity and liquidity. Failure to maintain the required regulatory net capital may subject a firm to suspension or expulsion by the NYSE and the NASD, certain punitive actions by the SEC and other regulatory bodies and, ultimately, may require a firm's liquidation. -7- Regulatory net capital is defined as net worth (assets minus liabilities), plus qualifying subordinated borrowings, less certain deductions that result from excluding assets that are not readily convertible into cash and from conservatively valuing certain other assets. These deductions include charges that discount the value of firm security positions to reflect the possibility of adverse changes in market value prior to disposition. The Net Capital Rule requires notice of equity capital withdrawals to be provided to the SEC prior to and subsequent to withdrawals exceeding certain sizes. The Net Capital Rule also allows the SEC, under limited circumstances, to restrict a broker-dealer from withdrawing equity capital for up to 20 business days. The firm falls within the provisions of Rule 240.15c3-1(a)(1)(ii) promulgated by the SEC. Siebert has elected to use the alternative method, permitted by the rule, which requires that Siebert maintain minimum net capital, as defined, equal to the greater of $250,000 or 2 percent of aggregate debit balances arising from customer transactions, as defined. (The net capital rule of the NYSE also provides that equity capital may not be withdrawn or cash dividends paid if resulting net capital would be less than 5 percent of aggregate debits.) At December 31, 1999 and 1998, Siebert had net capital of $15.2 million and $11.1 million, respectively, and net capital requirements of $250,000 under Regulation 240.15c3-1(a)(1)(ii). Siebert is not subject to SEC Rule 15c3-3 and claims exemption from the reserve requirement under Section 15c3-3(k)(2)(ii). The firm maintains net capital in excess of the SEC Rule 17a-11 requirement. Employees As of March 10, 2000, the Company had approximately 138 employees, five of whom were corporate officers. None of the employees is represented by a union, and the Company believes that relations with its employees are good. -8- Item 2. PROPERTIES. Siebert currently maintains seven retail discount brokerage offices and will shortly open its eighth in Fort Lauderdale. 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. Siebert operates its business out of the following fifteen leased offices:

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 litigation that it believes is customary and incidental to its business. In the opinion of management, the ultimate disposition of these actions will not, in the aggregate, have a material adverse effect on its financial position or results of operations. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS The Company held its annual meeting on December 21, 1999. At that meeting, the following matters were voted on and received the votes indicated: (1) Election of Directors For Against Withheld --- ------- -------- Muriel F. Siebert 22,624,612 111,690 1,019 Nicholas P. Dermigny 22,624,612 111,690 1,019 Patricia L. Francy 22,624,612 111,690 1,019 Jane H. Macon 22,624,612 111,690 1,019 Daniel Jacobson 22,624,612 111,690 1,019 (2) Ratification and approval of the selection of Richard A. Eisner & Company, LLP as independent auditor for 1999: For Against --- ------- 22,629,628 110,446 -10- PART II Item 5. PRICE RANGE OF COMMON STOCK The Common Stock trades on the NASDAQ National Market System under the symbol "SIEB". The high and low sales prices of the Common Stock reported by NASDAQ SmallCap Market during the following periods were: High Low First Quarter - 1998........................... $12.06 $2.42 Second Quarter - 1998.......................... $19.00 $7.38 Third Quarter - 1998........................... $13.50 $5.75 Fourth Quarter - 1998.......................... $19.00 $5.75 First Quarter - 1999........................... $70.63 $8.50 Second Quarter - 1999.......................... $58.00 $18.56 Third Quarter - 1999........................... $30.44 $14.50 Fourth Quarter - 1999.......................... $22.84 $13.50 January 1, 2000 - March 10, 2000............... $17.00 $9.00 The closing bid price of the Common Stock on the NASDAQ National System on March 16, 2000 was $ 12.375 per share and there were 181 holders of record of the Common Stock. Dividend Policy The Company paid cash dividends of $.04 to its shareholders on January 18, April 15, July 16, and October 29, 1999; and $.0225, $.0225, $.03 and $.03 on March 16, June 23, September 25 and December 30, 1998, respectively. On March 23, 2000, the Company declared a dividend of $.04 payable to shareholders of record on March 31, 2000. Ms. Siebert, as the majority shareholder of the Company, waived her right to receive the dividends declared by the Company to date. The Board of Directors of the Company considers the declaration of dividends quarterly. Subject to statutory and regulatory constraints, prevailing financial conditions and future earnings, the Company may pay cash dividends on its Common Stock. In considering whether to pay such dividends, the Company's Board of Directors will review the earnings of the Company, its capital requirements, its economic forecasts and such other factors as are deemed relevant. Some portion of the Company's earnings will be retained to provide capital for the operation and expansion of its business. -11- Offerings of Shares In January 1997, the Company offered to "odd lot" shareholders the opportunity to round up to the closest 100 shares any holdings of an odd amount at a price of $9.375 per share. The offer expired March 21, 1997. 1,713 shares were issued pursuant to the offer. On January 15, 1999 the Company completed a rights offering, in which existing shareholders received one right to purchase one share of the Company's common at $7.50 for each share that they owned as of the record date, July 29, 1998. Approximately 961,000 shares were exercised raising approximately $7,000,000, net of expenses of approximately $270,000; the balance expired unexercised. The proceeds will be used to build up and promote the Company's Internet trading service and for general purposes. On May 28, 1999, the Company consummated the acquisition of Andrew Peck Associates, Inc. Under the terms of the acquisition agreement, Peck was merged with and into Siebert and the separate existence of Peck ceased. All of the common stock of Peck outstanding was converted into 600,000 shares of the Company's common stock. Item 6. SELECTED FINANCIAL INFORMATION (In thousands except per share data)

(1) Amounts for 1996 and 1995 give effect to the income taxes that would have been paid if the Company did not elect to be treated as an S Corporation for those years. -12- Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS This discussion should be read in conjunction with the Company's audited Consolidated Financial Statements and the Notes thereto contained elsewhere in this Annual Report. Market conditions during the first four months of 1999 reflected a continuation of the 1996 bull market characterized by record volume, record high market levels and large daily swings in the market averages, while interest rate concerns coupled with normal seasonal summer slowdown led to lower trading volume in the markets overall during the second and third quarters. The fourth quarter saw a return of the bull market in NASDAQ traded stocks and again brought record high volumes, record high market levels in the technology sector, which substantially outperformed "old economy" stocks. Meanwhile, competition continued to intensify among all types of brokerage firms including established discount brokers and new firms entering the on-line brokerage business. Electronic trading continues to account for an increasing amount of trading activity with some firms offering very low or even free flat rate trading execution fees that are difficult for any conventional discount firm to meet. Some of these flat fee or free brokers, however impose asset based charges for services such as mailing, transfers and handling exchanges which the Company does not currently impose, and also direct their executions to captive market makers. Continued competition could limit the Company's growth or even lead to a decline in the Company's customer base, which would adversely affect its results of operations. Industry-wide changes in trading practices, such as the advent of decimal pricing and the increasing use of Electronic Communications Networks, are expected to put continuing pressure on fees earned by discount brokers for the sale of order flow while increasing volatility. The Company, like other securities firms, is directly affected by general economic and market conditions including fluctuations in volume and prices of securities, changes and prospects for changes in interest rates and demand for brokerage and investment banking services, all of which can affect the Company's relative profitability. In periods of reduced market activity, profitability is likely to be adversely affected because certain expenses, including salaries and related costs, portions of communications costs and occupancy expenses, remain relatively fixed. Accordingly, earnings for any period should not be considered representative of any other period. Results of Operations All periods prior to June 30, 1999 have been restated to include the operations of Peck. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Revenues. Total revenues for 1999 were $36.1 million, an increase of $5.6 million or 18.5%, over 1998. Commission and fee income increased $8.4 million, or 34.9%, over the prior year to $32.5 million due to higher trading volume partially offset by lower commissions earned per trade resulting from the increased lower priced electronic trading, reductions on other related services caused by increased competition from ultra low cost flat fee brokers and a reduction of per share order flow fees. The portion of trades executed on SiebertNet continues to increase, amounting to approximately 46% of retail trades executed for the year ending December 31, 1999 compared to 16% for 1998. Investment banking revenues decreased $1.9 million, or 59.6%, from the prior year to $1.3 in 1998, which included investment-banking revenues of SBS for the six months, ended June 30, 1998. SBS generates a majority of its revenues in the tax-exempt underwriting area. Income from equity investee decreased $1.1 million or 91.5% from the prior year to $100,000 due in part to the decreased number of municipal bond offerings as interest rates trended higher. -13- Trading profits declined $249,000, or 19.4%, from the prior year to $1.0 million primarily due to reduced income opportunities in the trading of listed bond funds, the firm's principal trading activity. Additionally, In July 1999, management curtailed proprietary trading activity and invested the Company's capital in lower risk investments, including money market funds. Income from interest and dividends increased $527,000, or 78.7%, from the prior year to $1,197,000 primarily due to higher cash balances as a result of the Company's rights offering. Expenses. Total expenses for 1999 were $28.1 million, an increase of $5.1 million, or 22.3%, from the prior year. Employee compensation and benefit costs increased $258,000, or 2.4%, from the prior year to $11.2 million primarily due to increase in the Company's headcount, offset in part by the treatment of SBS as a separate entity from July, 1998. Clearing and floor brokerage fees increased $1.9 million, or 46.6%, from the prior year to $5.9 million due to increased volume of tickets executed, offset in part by lower per ticket charges. Additionally, the Company received a refund of $1 million in connection with a renegotiated clearing agreement during 1998, the effect of which was to decrease clearing and floor brokerage fees during 1998. Advertising and promotion expense increased $1.4 million, or 69.5%, from the prior year to $3.4 million primarily due to increased spot television advertising and increased media costs. Communications expense increased $665,000, or 36.8%, over the prior year, to $2.5 million primarily due to increased quote usage by customers and news services offered by the Company, coupled with an increase in the volume of the Company's business. Occupancy costs decreased $112,000, or 16.8%, from the prior year to $553,000 principally due to the treatment of SBS as a separate entity from July 1998, partially offset by a lease extension option cancellation fee of approximately $33,000 paid during 1998. Interest expense decreased $172,000, or 52.6%, from the prior year to $155,000, primarily due to decreased activity in the Company's proprietary trading accounts. In July 1999, management curtailed proprietary trading activity and invest the Company's capital in lower risk investments, including money market funds. General and Administrative. General and administrative expenses increased $1.2 million, or 37.7%, from the prior year to $4.5 million primarily due to merger costs in connection with the acquisition of Peck, higher consulting fees and the cost of outsourcing fulfillment of an increased number of new account leads. Taxes. Provision for income taxes increased $191,000, or 6.1%, from the prior year to $3.3 million primarily due to an increase in net income before income tax to $7.9 million in 1999 from $7.5 million in 1998. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Revenues. Total revenues for 1998 were $30.5 million, a decrease of $775,000, or 2.5%, over 1997. Income from equity investee and commission and fee income increased as compared to the prior year partially offset by decreases in investment banking, trading and interest and dividends revenues. Commission and fee income decreased $177,000, or 0.7%, to $24.1 million despite increased trading volume, due to lower commissions earned per trade resulting from the increase of lower priced electronic trading, reductions on other related services caused by increased competition from ultra low cost flat fee brokers and a reduction of order flow fees. -14- Investment banking revenues decreased $1.2 million or 26.6% to $3.3 million as the Company's began reporting its investment in, and the operations of, SBS using the equity method of accounting in July 1998. Prior to that time, the operations of what is now SBS were fully consolidated with those of the Company. SBS generates a majority of its revenue in the tax-exempt underwriting area. Income from equity investee increased $1.2 million as the Company accounted for its investment on SBS on the equity method starting on July 1, 1998. Trading profits declined $509,000, or 28.4% to $1.3 million primarily due to reduced income opportunities in the trading of listed bond funds, the firm's principal trading activity. Income from interest and dividends decreased $77,000, or 10.3%, to $670,000 primarily due to trading strategies, which generated lower dividend income, coupled with generally lower interest rates. Expenses. Total expenses for 1998 were $23.0 million, a decrease of $3.6, million or 13.4%, from 1997. Communications and general and administrative expenses increased while all other categories decreased. Employee compensation and benefit costs decreased $256,000 or, 2.3%, to $10.9 million primarily due to the commencement of SBS as a separate entity, with a commensurate decrease in the number of employees on the Company's payroll. Clearing and floor brokerage fees decreased $2.4 million, or 37.0%, to $4.1 million primarily due to the retroactive effect given to the Company's new clearing agreement with its clearing broker which, among other things, reduced ticket charges, execution fees and a resulted in a refund to the Company of $1.0 million. Advertising and promotion expense decreased $943,000, or 32.1%, to $2.0 million due to a decreased level of promotional advertising. Communications expense increased $161,000, or 9.8%, to $1.8 million primarily due increased quote and news services. General and administrative. Occupancy costs decreased $49,000, or 6.9%, to $665,000 principally due to commencement of operations of SBS as a separate entity partially offset by a lease extension option cancellation fee paid during 1998. Interest expense decreased $91,000, or 21.8%, to $327,000, primarily due to the decreased use of short positions in proprietary trading activity coupled with generally lower interest rates. Other general and administrative expenses remained relatively unchanged at 3.2 million. Provision for income taxes increased $1.1 million, or 52.8%, to $3.1 million, primarily due to an increase in net income before income tax to $7.5 million in 1988, partially offset by a refund of local taxes. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Total revenues for 1997 were $31.3 million, an increase of $1.6 million or 5.4% over 1996. Investment banking revenues, trading and interest and dividend revenues increased as compared to the prior year, however, commission and fee income decreased. -15- Commission and fee income decreased $1.3 million or 4.9% to $24.2 million due to lower commissions earned per trade resulting from the increase of lower priced electronic trading, price reductions on other related services caused by increased competition from ultra low cost flat fee brokers and a reduction of order flow fees. Trading profits increased $854,000 or 90.8% to $1,795,000 primarily due to increased activity in secondary municipal bond trading by the Siebert, Brandford, Shank division and improved trading opportunities in the principal listed bond funds trading activity. Interest and dividends increased $54,000 or 7.8% to $747,000 primarily due to trading strategies, which generated greater dividend income. Investment banking revenues increased $2.0 million or 77.2% to $4.5 million primarily due to a whole year of tax exempt underwriting activity by the Siebert, Brandford, Shank division in 1997. This division operated for only three months of the year in 1996. Total expenses for 1997 were $26.6 million, a decrease of $909,000 or 3.3% over 1996. Both employee compensation and benefits and advertising and promotion decreased. All other categories of costs increased. Employee compensation and benefit costs decreased $1.7 million or 13.4% to $11.2 million primarily due to Muriel Siebert's compensation reduction, offset by a full year's worth of compensation for the Siebert, Brandford, Shank division principals, municipal investment banking staff and commission based municipal trading personnel. Clearing and brokerage fees increased $165,000 or 2.6% to $6.4 million. Such costs increased due to a higher volume of tickets. Advertising and promotion expense decreased $481,000 or 14.1% to $2.9 million due to decreased branch and service promotion; 1996 included several one-time expenses related to branch expansion and on-line trading. Communications expense increased $29,000 or 1.8% to $1.6 million as the client base and volume increased, more services were offered directly on-line and from activities of the investment banking staff. These increases were partially offset by telephone contract price reductions. Occupancy costs increased $246,000 or 52.6% to $714,000 principally due to a full year's worth of rent in 1997 for new retail and investment banking branch offices opened during 1996. Interest expense increased $127,000 or 43.6% to $418,000 primarily due to greater use of margin borrowings and short positions in proprietary trading activity. Other general and administrative expenses increased $734,000 or 29.1% to $3.3 million primarily due to travel and entertainment expenses related to the new municipal investment banking staff and a range of miscellaneous costs associated with increased volume. Current and pro forma provision for income taxes increased $1.1 million or 116% to $2.1 million while net income for 1997 was $2.6 million, an increase of $1.4 million or 116% over 1996, both proportional to a similar increase in pre-tax income. Liquidity and Capital Resources The Company'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, 1999 were $32.3 million. As of December 31, 1999, the Company regarded $28.3 million or 87.6% of total assets as highly liquid. -16- Siebert is subject to the net capital requirements of the SEC, the NYSE and other regulatory authorities. At December 31, 1999, Siebert's regulatory net capital was $15.5 million, $15.2million in excess of its minimum capital requirement of $250,000. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Financial Instruments Held For Trading Purposes: Through Siebert, the Company maintains inventories in Exchange-listed and NASDAQ equity securities on both a long and short basis. The fair value of all securities at December 31, 1999 was approximately $2.7 million in long positions and approximately $50,000 in short positions. The fair value of all securities at December 31, 1998 was approximately $5.4 million in long positions and approximately $567,000 in short positions. Using a hypothetical 10% increase or decrease in prices, the potential loss or gain in fair value, respectively, could be approximately $260,000 and $481,000, respectively, due to the offset of change in fair value in long and short positions. Financial Instruments Held For Purposes Other Than Trading: Working capital is generally temporarily invested in dollar denominated money market funds and overnight certificates of deposits. These investments are not subject to material changes in value due to interest rate movements. Item 8. FINANCIAL STATEMENTS See financial statements and supplementary data required pursuant to this item beginning on page F-1 of this Report on Form 10-K. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND FINANCIAL DISCLOSURE None. -17- PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT This information is incorporated by reference from the company's definitive proxy statements to be filed pursuant to regulation 14A on or prior to April 30, 2000. 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 on or prior to April 30, 2000 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 on or prior to April 30, 2000. Item 13. 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 on or prior to April 30, 2000. Item 14. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The exhibits required by Item 601 of the Regulations S-K filed as part of, or incorporated by reference in, this report are listed in the accompanying Exhibit Index. (b) Reports on Form 8-K None. -18- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT AUDITORS Board of Directors Siebert Financial Corp. New York, New York We have audited the accompanying consolidated statements of financial condition of Siebert Financial Corp. and its wholly owned subsidiary as of December 31, 1999 and December 31, 1998, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999. 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, 1999 and December 31, 1998, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles. Richard A. Eisner & Company, LLP New York, New York February 14, 2000 F-1 SIEBERT FINANCIAL CORP. AND SUBSIDIARY Consolidated Statements of Financial Condition

See notes to consolidated financial statements. F-2 SIEBERT FINANCIAL CORP. AND SUBSIDIARY Consolidated Statements of Income

See notes to consolidated financial statements. F-3 SIEBERT FINANCIAL CORP. AND SUBSIDIARY Consolidated Statements of Changes In Stockholders' Equity

See notes to consolidated financial statements. F-4 SIEBERT FINANCIAL CORP. AND SUBSIDIARY Consolidated Statements of Cash Flows

See notes to consolidated financial statements. F-5 SIEBERT FINANCIAL CORP. AND SUBSIDIARY Notes to Consolidated Financial Statements NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [1] Organization and basis of presentation: Siebert Financial Corp. ("Financial"), through its wholly owned subsidiary, Muriel Siebert & Co., Inc. ("Siebert"), engages in the business of providing discount brokerage services for customers, investment banking services for institutional clients and trading securities for its own account. All significant intercompany accounts have been eliminated. Financial and Siebert collectively are referred to herein as the "Company". The municipal bond investment banking business was conducted by the Siebert Brandford Shank division until July 1, 1998. Since that date it is being conducted by Siebert Brandford Shank & Co., LLC ("SBS"), an investee, which is accounted for by the equity method of accounting (see Note B). On May 28, 1999, the Company consummated a merger with Andrew Peck Associates, Inc. ("Peck"). Under the terms of the agreement, Peck was merged with and into Siebert and the separate existence of Peck ceased. All of the common stock of Peck outstanding was converted into 600,000 shares of the Company's common stock. The merger is accounted for as a pooling of interests. Accordingly, the Company's financial statements have been restated to include the results of Peck for all periods presented. The following information presents certain income statement data of the separate companies for the periods preceding the merger: