SIEBERT FINANCIAL CORP — Interim / Quarterly Report 2000

Aug 14, 2000

================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(D) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2000 -------------- [ ] Transition Report Pursuant to Section 13 or 15(d) of the Exchange Act For the transition period from _ to _ Commission File Number 0-5703 ------- SIEBERT FINANCIAL CORP. - -------------------------------------------------------------------------------- (Exact name of Small Business Issuer 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) (212) 644-2400 - -------------------------------------------------------------------------------- (Issuer's telephone number, including area code) - -------------------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) 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 [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12,13 or 15(d) of the Securities and Exchange of 1934 Act subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of August 9, 2000, there were 22,892,515 shares of Common Stock, par value $.01 per share, outstanding. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] Unless the context otherwise requires, the "Company" or "Siebert" shall mean Siebert Financial Corp. and its wholly owned subsidiaries. The Company's quarterly and annual operating results are affected by a wide variety of factors that could materially and adversely affect actual results, including: changes in general economic and market conditions, fluctuations in volume and prices of securities, changes and prospects for changes in interest rates and demand for brokerage and investment banking services, increases in competition within and without the discount brokerage business through broader services offerings or otherwise, competition from electronic discount brokerage firms offering greater discounts on commissions than the Company, prevalence of a flat fee environment, decline in participation in equity or municipal finance underwritings, decreased ticket volume in the discount brokerage division, limited trading opportunities, increases in expenses, changes in net capital or other regulatory requirements and risks related to the Year 2000. As a result of these and other factors, the Company may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect its business, financial condition, operating results, and stock price. Furthermore, this document and other documents filed by the Company with the Securities and Exchange Commission (the "SEC") contain certain forward looking statements with respect to the business of the Company, including prospective financing arrangements. These forward-looking statements are subject to certain risks and uncertainties, including those mentioned above, which may cause actual results to differ significantly from these forward-looking statements. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date when such statements were made or to reflect the occurrence of unanticipated events. An investment in the Company involves various risks, including those mentioned above and those which are detailed from time to time in the Company's SEC filings. Part I Financial Information Item 1 Financial Statements Siebert Financial Corp. & Subsidiary Consolidated Statements of Financial Condition

See notes to consolidated financial statements. -3- Siebert Financial Corp. & Subsidiary Consolidated Statements of Income (unaudited)

See notes to consolidated financial statements. -4- Siebert Financial Corp. & Subsidiary Consolidated Statements of Cash Flows (unaudited)

See notes to consolidated financial statements. -5- Siebert Financial Corp. & Subsidiary Notes to Consolidated Financial Statements Six Months Ended June 30, 2000 (unaudited) 1. Organization and Basis of Presentation: The consolidated financial statements include the accounts of Siebert Financial Corp. (the "Company") and its wholly owned subsidiary, Muriel Siebert & Co., Inc. ("Siebert"). All material intercompany balances have been eliminated. The statements are unaudited; however, in the opinion of management, all adjustments considered necessary to reflect fairly the Company's financial position and results of operations, consisting of normal recurring adjustments, have been included. The accompanying consolidated financial statements do not include all of the information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles. Accordingly, the statements should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Because of the nature of the Company's business, the results of any interim period are not necessarily indicative of results for a full year. 2. 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% 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.) As of June 30, 2000 and December 31, 1999, Siebert had net capital of approximately $19.2 million and $15.5 million, respectively, as compared with net capital requirements of $250,000. 3. Deferred Taxes: During the quarters ended June 30, 1999, and March 31, 1999, the Company recorded a deferred tax asset of, and increased additional paid-in capital by $836,000 and $2,200,000, respectively, arising from the deductibility of the difference between the exercise price of the options and the market value of the stock on the dates of exercise of the options. During the quarters end June 30, 1999 and March 31, 1999 the Company utilized approximately $1.0 million and $809,000 respectively of the deferred tax asset to offset income taxes payable. 4. Capital Transactions: On May 15, 2000, the board of directors of the Company authorized a buy back of up to 1 million common shares. Shares will be purchased from time to time in the open market and in private transactions. Through June 30, 2000, 18,100 shares have been purchased at prices ranging between $6.875 to $7.97. -6- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto contained elsewhere in this Quarterly Report. Business Environment Market conditions during the first quarter of 2000 reflected a continuation of the 1996 bull market characterized by record volume, record high market levels and large daily swings in the market averages. Interest rate concerns, however, led to lower trading volume in the markets overall during the latter part of April, May and June. Meanwhile, competition has continued to intensify among all types of brokerage firms including discount brokers, as well as from new firms entering the discount brokerage business. Electronic trading continues to account for an increasing amount of trading activity with some firms offering very low flat rate trading execution fees that are difficult for any conventional discount firm to meet. Many of these flat fee brokers, however, impose 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 from ultra low cost flat fee brokers and broader service offerings from other discount brokers could limit the Company's growth or even lead to a decline in the Company's customer base, which would adversely affect its results of operations. Industry-wide changes in trading practices, such as the advent of decimal pricing and the increasing use of Electronic Communication Networks, are expected to cause continuing pressure on fees earned by discount brokers for the sale of order flow. The Company, like other securities firms, is affected directly by general economic and market conditions including fluctuations in trading volume and prices of securities, changes and prospects for changes in interest rates, and demand for brokerage and investment banking services, all of which can affect the Company's results of operations. In periods of reduced market activity, profitability is likely to be adversely affected because certain expenses, including salaries and related costs, portions of communications costs and occupancy expenses, remain relatively fixed. Accordingly, earnings for any period should not be considered representative of earnings to be expected for any other period. Current Developments Siebert's commission per customer trade is trending down as the number of trades executed on SiebertNet increases. For the six months ended June 30, 2000, SiebertNet trades accounted for approximately 60% of all retail trades compared to 40% for the six months ended June 30, 1999. Lower trading volume in the second quarter of 2000 from record high volume experienced in the first quarter of 2000 affected the Company's net income, which was $.08 per share during the quarter ended June 30, 2000 versus $.14 per share during the quarter ended March 31, 2000. On May 15, 2000, the board of directors of the Company authorized a buy back of up to 1 million common shares. Shares will be purchased from time to time in the open market and in private transactions. Through June 30, 2000, 18,100 shares have been purchased at prices ranging between $6.875 to $7.97. Results of Operations Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999 Revenues. Total revenues for the three months ended June 30, 2000 were $10.6 million, an increase of $1.3 million, or 14.5%, over the same period in 1999. Commission and fee income increased $1.8 million, or 22.1%, during the three months ended June 30, 2000 to $9.8 million due to higher trading volume, partially offset by lower commissions earned per trade resulting from the increased use of lower priced electronic trading. The portion of trades executed on the Company's SiebertNet web site continues to increase, representing approximately 60% of trades executed for the quarter ended June 30, 2000 as compared to 44% for the quarter ended June 30, 1999. -7- Investment banking revenues for the three months ended June 30, 2000 were $349,000, a decrease of $22,000, or 5.9%, from the three months ended June 30, 1999. Loss from equity investee for the three months ended June 30, 2000 was $250,000, compared to income of $460,000, or a decrease of 154.3% from the three months ended June 30, 1999. Trading profits for the three months ended June 30, 2000 were $174,000, a decrease of $1,000, or .6% from the three months ended June 30, 1999. Income from interest and dividends for the three months ended June 30, 2000 was $495,000, an increase of $299,000, or 152.6%, from the three months ended June 30, 1999 primarily due to additional funds available for temporary investment. Expenses. Total expenses for the three months ended June 30, 2000 were $7.6 million, an increase of $720,000 or 10.5%, from the three months ended June 30, 1999. Employee compensation and benefit costs for the three months ended June 30, 2000 were $3.0 million, an increase of $56,000, or 1.9%, from the three months ended June 30, 1999 primarily due to additional registered personnel to handle increased trading volume. Clearing and floor brokerage fees for the three months ended June 30, 2000 were $1.8 million, an increase of $388,000, or 28.0% from the three months ended June 30, 1999. The increase was due to the increased volume of trades executed, offset in part by a lower per ticket charge to the Company under a new clearing agreement in 2000. Advertising and promotion expense remained approximately unchanged at $686,000 compared to $690,000, or a decrease of .6% from the three months ended June 30, 1999. Communications expense for the three months ended June 30, 2000 was $779,000, an increase of $128,000, or 19.7%, from the three months ended June 30, 1999 primarily due to an increase in the volume of the Company's general business. Occupancy costs for the three months ended June 30, 2000 was $198,000, an increase of $60,000, or 43.5%, from the three months ended June 30, 1999 primarily due to the execution of two new leases entered into by the Company in connection with the planned move of the Company's operations to Jersey City, New Jersey. Interest expense for the three months ended June 30, 2000 was $3,000, a decrease of $49,000, or 94.2% from the three months ended June 30, 1999 primarily due to the elimination of short positions in proprietary trading activities. General and Administrative. General and administrative expenses for the three months ended June 30, 1999 were $1.2 million, an increase of $141,000, or 13.8% from the three months ended June 30, 1998 primarily due to expansion of Company's customer service capacity. Taxes. Provision for income taxes increased for the three months ended June 30, 2000 to $1.3 million an increase of $238,000, or 23.1% from the three months ended June 30, 1999 due to an increase in income before taxes of $623,000, to $3.0 million or 25.9% for the three months ended June 30, 2000, compared to $2.4 million for the three months ended June 30, 1999. -8- Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999 Revenues. Total revenues for the six months ended June 30, 2000 were $24.2 million, an increase of $6.4 million, or 36.0%, over the same period in 1999. Commission and fee income increased $6.9 million, or 43.9%, over the six months ended June 30, 1999 to $22.5 million due to higher trading volume partially offset by lower commissions earned per trade resulting from the increased use of lower priced electronic trading. The portion of trades executed on the Company's SiebertNet web site continues to increase, representing approximately 60% of trades executed for the six months ended June 30, 2000 as compared to 40% for the six months ended June 30, 1999. Investment banking revenues for the six months ended June 30, 2000 were $818,000, an increase of $169,000, or 26.0% from the six months ended June 30, 1999. Loss from equity investee for the six months ended June 30, 2000 was $341,000, compared to income of $636,000 a decrease of $977,000, or 153.6% from the six months ended June 30, 1999. Trading profits for the six months ended June 30, 2000 were $393,000, a decrease of $24,000, or 5.8%, from the six months ended June 30, 1999. Income from interest and dividends for the six months ended June 30, 2000 was $867,000, an increase of $388,000, or 81.0%, from the six months ended June 30, 1999 primarily due to higher cash balances available for temporary investment at generally higher interest rates than the prior period. Expenses. Total expenses for the six months ended June 30, 2000 were $15.7 million, an increase of $2.1 million, or 15.6%, from the six months ended June 30, 1999. Employee compensation and benefit costs for the six months ended June 30, 2000 were $6.2 million, an increase of $520,000, or 9.1% from the six months ended June 30, 1999 primarily due to additional registered personnel to handle the substantially increased trading volume, particularly in the first quarter of 2000. Clearing and floor brokerage fees for the six months ended June 30, 2000 were $3.8 million, an increase of $945,000, or 33.3%, from the six months ended June 30, 1999. The increase was due to increased volume of trades executed, offset in part by a lower per ticket charge to the Company under a new clearing agreement in 2000. Advertising and promotion expense for the six months ended June 30, 2000 were $1.3 million, a decrease of $154,000, or 10.9% from the six months ended June 30, 1999 due to a decreased level of promotional advertising. Communications expense for the six months ended June 30, 1999 was $1.6 million, an increase of $368,000, or 30.3% from the six months ended June 30, 1999 primarily due to an increase in the general business volume. Occupancy costs for the six months ended June 30, 2000 were $373,000, an increase of $159,000, or 74.3% from the six months ended June 30, 1999 primarily due to the execution of two new leases entered into by the Company in connection with the planned move of the Company's operations to Jersey City, New Jersey. Interest expense for the six months ended June 30, 2000 was $9,000, a decrease of $95,000, or 91.3% from the six months ended June 30, 1999 primarily due to the elimination of short positions in proprietary trading activities. General and Administrative. General and administrative expenses for the six months ended June 30, 2000 were $2.5 million, an increase of $371,000, or 17.8%, from the six months ended June 30, 1999 primarily due to expansion of Company's customer service capacity. -9- Taxes. Provision for income taxes increased for the six months ended June 30, 2000 to $ 3.6 million, an increase of $1.7 million, or 91.9% from the six months ended June 30, 1999 due to an increase in net income before income taxes to $8.5 million in the first six months in 2000 over $4.2 million for the same period in 1999. Liquidity and Capital Resources The Company's assets are highly liquid, consisting generally of cash, money market funds and securities freely saleable in the open market. Siebert's total assets at June 30, 2000 were $38.6 million. As of June 30, 2000, $33.9 million, or 87.8%, of total assets were regarded by the Company as highly liquid. Siebert is subject to the net capital requirements of the SEC, the NYSE and other regulatory authorities. At June 30, 2000, Siebert's regulatory net capital was $19.2 million, $18.9 million in excess of its minimum capital requirement of $250,000. Impact of Inflation General inflation in the economy increases operating expenses of most businesses. The Company has provided compensation increases generally in line with the inflation rate and incurred higher prices for goods and services. While the Company is subject to inflation as described above, management believes that inflation currently does not have a material effect on the Company's operating results, but there can be no assurance that this will continue to be so in the future. Item 3. 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 June 30, 2000 was approximately $4.4 million in long positions. The fair value of all securities at June 30, 1999 was approximately $3.6 million in long positions and approximately $216,000 in short positions. Using a hypothetical 10% increase or decrease in prices, the potential loss or gain in fair value, respectively, is estimated to be approximately $445,000 and $338,000, respectively, due to the offset of change in fair value of 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. -10- Part II. OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in various routine lawsuits of a nature deemed by the Company customary and incidental to its business. In the opinion of management, the ultimate disposition of such actions will not have a material adverse effect on its financial position or results of operations. Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The Company held its annual meeting on June 15, 2000. At that meeting, the following matter was voted on and received the votes indicated: (1) Election of Directors For Against Withheld --- ------- -------- Muriel F. Siebert 22,552,498 0 343,847 Nicholas P. Dermigny 22,552,498 0 343,847 Patricia L. Francy 22,552,498 0 343,847 Jane H. Macon 22,552,498 0 343,847 Daniel Jacobson 22,552,498 0 343,847 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (Edgar Filing Only) (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements 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. Name Title Date ---- ----- ---- /s/Muriel F. Siebert Chair, President and Director August 10, 2000 - ------------------------- (principal executive officer) Muriel F. Siebert /s/Mitchell M. Cohen Chief Financial Officer August 10, 2000 - ------------------------- and Assistant Secretary Mitchell M. Cohen (principal financial and accounting officer)