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SIEB > SEC Filings for SIEB > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for SIEBERT FINANCIAL CORP

Form 10-K for SIEBERT FINANCIAL CORP


31-Mar-2014

Annual Report


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

This discussion should be read in conjunction with our audited Consolidated Financial Statements and the Notes thereto contained elsewhere in this Annual Report.

Our working capital is invested primarily in money market funds, so that liquidity has not been materially affected. The recent financial crisis did have the effect of reducing participation in the securities market by our retail and institutional customers, which had an adverse effect on our revenues. While the stock market improved in 2013 our revenues did not. In 2012 we had one customer account generate commissions that accounted for 12% of the total revenue. The Company's expenses during 2013, 2012 and 2011 include the costs of an arbitration proceeding commenced by a former employee following the termination of his employment, which remains unresolved and are included as professional fees. The Company believes that the action is without merit, but the costs of defense have adversely affected the Company's results of operations and may continue to affect the results of operations until the action is completed. Income of our affiliate, SBS, decreased in 2013 to $193,000 as a result of an decrease in the number of offerings by municipalities and spreads paid to investment banking firms. As a result, the Company's income from SBS decreased to $94,000 in 2013. Competition in the brokerage industry remains intense.

The following table sets forth certain metrics as of December 31, 2013, 2012 and 2011, respectively, which we use in evaluating our business.

                                             For the Twelve Months
                                              ended December 31,
Retail Customer Activity:                2013        2012        2011

Total retail trades:                     347,822     336,412     423,501
Average commission per retail trade:   $   23.46   $   26.59   $   20.71




                                                           As of December 31,
                                                            2013         2012
Retail customer balances:
Retail customer net worth (in billions):                 $       7.3   $    6.5
Retail customer money market fund value (in billions):   $       1.1   $    1.1
Retail customer margin debit balances (in millions):     $     215.7   $  190.9
Retail customer accounts with positions:                      35,591     41,572

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Description:

Total retail trades represents retail trades that generate commissions.

Average commission per retail trade represents the average commission generated for all types of retail customer trades.

Retail customer net worth represents the total value of securities and cash in the retail customer accounts before deducting margin debits.

Retail customer money market fund value represents all retail customers accounts invested in money market funds.

Retail customer margin debit balances represents credit extended to our customers to finance their purchases against current positions.

Retail customer accounts with positions represent retail customers with cash and/or securities in their accounts.

We, like other securities firms, are directly affected by general economic and market conditions including fluctuations in volume and prices of securities, changes and the prospect of changes in interest rates, and demand for brokerage and investment banking services, all of which can affect our profitability. In addition, in periods of reduced financial market activity, profitability is likely to be adversely affected because certain expenses remain relatively fixed, including salaries and related costs, portions of communications costs and occupancy expenses. Accordingly, earnings for any period should not be considered representative of earnings to be expected for any other period.

Competition continues 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 charging very low trading execution fees that are difficult for any conventional discount firm to meet. Some of these brokers, however, impose asset based charges for services such as mailing, transfers and handling exchanges which we do not currently impose, and also direct their orders to market makers where they have a financial interest. Continued competition could limit our growth or even lead to a decline in our customer base, which would adversely affect our results of operations. Industry-wide changes in trading practices, such as the continued use of Electronic Communications Networks, are expected to put continuing pressure on commissions/fees earned by brokers while increasing volatility.

We are a party to an Operating Agreement (the "Operating Agreement"), with Suzanne Shank and Napoleon Brandford III, the two individual principals (the "Principals") of SBSFPC. Pursuant to the terms of the Operating Agreement, the Company and each of the Principals made an initial capital contribution of $400,000 in exchange for a 33.33% initial interest in SBSFPC. SBSFPC engages in derivatives transactions related to the municipal underwriting business. The Operating Agreement provides that profit and loss will be shared 66.66% by the Principals and 33.33% by us. SBSFPC has no derivative positions as of December 31, 2013. The Company and principals are planning to wind down the operations of SBSFPC in 2014.

On January 23, 2008, our Board of Directors authorized a buy back of up to 300,000 shares of our common stock. Under this program, shares are purchased from time to time, at our discretion, in the open market and in private transactions. During 2013 we repurchased 12,266 shares of common stock for an average price of $1.56.

Critical Accounting Policies

We generally follow accounting policies standard in the brokerage industry and believe that our policies appropriately reflect our financial position and results of operations. Our management makes significant estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities included in the financial statements. The estimates relate primarily to revenue and expense items in the normal course of business as to which we receive no confirmations, invoices, or other documentation, at the time the books are closed for a period. We use our best judgment, based on our knowledge of revenue transactions and expenses incurred, to estimate the amount of such revenue and expenses. Our management believes that its estimates are reasonable.

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Results of Operations

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Revenues.Total revenues for 2013 were $16.4 million, a decrease of $4.6 million, or 21.8%, from 2012. Commission and fee income decreased $2.7 million, or 18.4%, from the prior year to $11.9 million primarily due to a decrease in average commission charged per trade as a result of a decrease in retail options trading by one customer, which accounted for approximately 18% of total commission and fees in 2012, as well as an decrease in our institutional trading commissions and our commission recapture operations.

Investment banking revenues decreased $1.5 million, or 38.3%, from the prior year to $2.4 million in 2013 due to our participation in fewer new issues in the equity and debt capital markets.

Trading profits decreased $384,000, or 16.3%, from the prior year to $2.0 million in 2013 primarily due to a fixed income sales- trader being on medical leave.

Income from interest and dividends decreased $14,000, or 18.4%, from the prior year to $62,000 in 2013 primarily due to lower cash balances.

Expenses.Total expenses for 2013 were $22.2 million, an increase of $303,000, or 1.4%, from the prior year.

Employee compensation and benefit costs decreased $783,000, or 7.8%, from the prior year to $9.3 million in 2013. This decrease was due to lower commission and bonus payouts based on production offset by severance incurred to former key employees released in 2013.

Clearing and floor brokerage fees decreased $360,000, or 13.1%, from the prior year to $2.4 million in 2013 primarily due to lower retail trading volumes as well as execution charges for institutional equity customers.

Professional fees increased $2.2 million, or 70.4% from the prior year to $5.3 million in 2013 primarily due to an increase in legal fees relating to a dispute with a former employee.

Advertising and promotion expense decreased $13,000, or 3.1%, from the prior year to $405,000 in 2013 due to an increase in online advertising.

Communications expense decreased $305,000, or 19.1%, from the prior year to $1.3 million in 2013 due to the elimination of costs associated with the discontinuance of our website developed and maintained by a software vendor as of June 2012.

Occupancy costs increased $139,000, or 15.3%, from the prior year to $1.0 million in 2013 due to the our lease in our New York.

Impairment of intangibles of $300,000 in 2013 was the result of the Company writing down the carrying value of its unamortized intangible asset in the fourth quarter of 2013 as management decided to substantially reduce the resources allocated to the WFN operation.

Write off of software development costs of $433,000 in 2012 was due to the Company's discontinuation of its relationship with a software vendor on June 30, 2012, which had developed and maintained our website. As a result, the Company wrote off its remaining unamortized carrying value of development costs of $433,000. Effective July 1, 2012, such services are provided by our clearing broker.

Other general and administrative expenses decreased $129,000, or 5.4%, from the prior year to $2.2 million in 2013 due to decreases in depreciation, computer security updates and registration expense offset by increases in office expenses, SIPC expense, state and local taxes and equipment repairs.

Income from our equity investment in SBS, an entity in which Siebert holds a 49% equity interest, for 2013 was $94,000 compared to income of $774,000 for 2012, a decrease of $680,000, primarily due to SBS participating in less municipal bond offerings as senior- and co-manager. Losses from our equity investment in SBSFPC, an entity in which we hold a 33% equity interest, for 2013 was $159,000 as compared to income of $32,000 from the same period in 2012. This decrease was principally due to SBSFPC terminating swap position and mark to market positions. Results of operations of equity investees are considered to be integral to our operations and material to the results of operations.

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Taxes.The tax provision for the year ended December 31, 2013 and 2012 was $19,000 and $34,000, respectively. The provision for income taxes for 2013 represents federal alternative minimum tax assessment relating to the year 2012. The provision for 2012 represents a state tax assessment of $34,000 based on income relating to years 2007, 2008 and 2009 based on a tax examination completed by NewYork State in 2012. The Company has recorded a valuation allowance to fully offset our deferred tax asset at December 31, 2013 and 2012.

Results of Operations

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Revenues.Total revenues for 2012 were $21.0 million, an increase of $784,000, or 3.9%, from 2011. Commission and fee income increased $316,000, or 2.2%, from the prior year to $14.6 million primarily due to an increase in average commission charged per trade as a result of an increase in retail options trading by one customer, which accounted for approximately 18% of total commission and fees, as well as an increase in our institutional trading commissions and our commission recapture operations offset by a decrease in margin debit rebate as a result of lower daily average debit balances and 12B-1 fees.

Investment banking revenues increased $116,000, or 3.1%, from the prior year to $3.9 million in 2012 due to our participation in more new issues in the equity and debt capital markets.

Trading profits increased $355,000, or 17.7%, from the prior year to $2.4 million in 2012 primarily due to an overall increase in institutional and retail customer trading volume primarily in the debt markets.

Income from interest and dividends decreased $3,000, or 3.8%, from the prior year to $76,000 in 2012 primarily due to lower cash balances.

Expenses.Total expenses for 2012 were $21.9 million, a decrease of $3.7 million, or 14.3%, from the prior year.

Employee compensation and benefit costs increased $52,000, or 0.5%, from the prior year to $10.0 million in 2012. This increase was due to increases in commissions paid based on production offset by the lower cost of health insurance and FICA as a well as compensation as a result in an across the board reduction in headcount.

Clearing and floor brokerage fees decreased $100,000, or 3.5%, from the prior year to $2.7 million in 2012 primarily due to lower retail trading volumes as well as execution charges for institutional equity customers.

Professional fees decreased $2.0 million, or 38.6% from the prior year to $3.1 million in 2012 primarily due to a decrease in legal fees relating to a dispute with a former employee offset by increases in consulting fees relating to our Information Technology department and our commission recapture business.

Advertising and promotion expense increased $16,000, or 4.0%, from the prior year to $418,000 in 2012 due to an increase in online advertising.

Communications expense decreased $543,000, or 25.3%, from the prior year to $1.6 million in 2012 due to a decrease in Bloomberg devices resulting from fewer employees in the Institutional Trading Department and the closing of our Surfside and Naples branches in Florida during the fourth quarter of 2011, as well as the elimination of costs associated with the discontinuance of our website developed and maintained by a software vendor as of June 2012.

Occupancy costs decreased $188,000, or 17.2%, from the prior year to $907,000 in 2012 due to the decrease in rents in our New Jersey office and decrease in our utilities costs as well as the closing of our Surfside and Naples branches in Florida during the fourth quarter of 2011.

Impairment of intangibles of $300,000 in 2012 was the result of the Company writing down the carrying value of its unamortized intangible assets to fair value.

Write off of software development costs of $433,000 was due to the Company's discontinuation of its relationship with a software vendor on June 30, 2012, which had developed and maintained our website. As a result, the Company wrote off its remaining unamortized carrying value of development costs of $433,000. Effective July 1, 2012, such services are provided by our clearing broker.

Other general and administrative expenses decreased $677,000, or 22.2%, from the prior year to $2.4 million in 2012 due to an accrued reserve relating to any additional loss due to settlement of litigation and a decrease in depreciation, computer updates, data storage and SIPC dues, offset by increases in office expense, travel and entertainment, insurance & equipment repairs.

Income from our equity investment in SBS, an entity in which Siebert holds a 49% equity interest, for 2012 was $774,000 compared to income of $8,000 for 2011, an increase of $766,000, primarily due to SBS participating in more municipal bond offerings as senior- and co-manager. Income from our equity investment in SBSFPC, an entity in which we hold a 33% equity interest, for 2012 was $32,000 as compared to income of $21,000 from the same period in 2011. This increase was principally due to a gain recorded by

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SBSFPC on termination of swap positions and marked to market of positions. Results of operations of equity investees is considered to be integral to our operations and material to the results of operations.

Taxes.The tax provision for the year ended December 31, 2012 and 2011 was $34,000 and $23,000, respectively. The provision for income taxes for 2012 represents a state assessment of $34,000 based on income relating to years 2007, 2008 and 2009 based on a tax examination completed by New York State in 2012. The Company has recorded a valuation allowance to fully offset our deferred tax asset at December 31, 2012 and 2011.

Liquidity and Capital Resources

Our assets are highly liquid, consisting generally of cash and money market funds. Our total assets at December 31, 2013 were $28.0 million, of which we regarded $15.4 million, or 55.1%, as highly liquid.

Siebert is subject to the net capital requirements of the SEC, the NYSE and other regulatory authorities. At December 31, 2013, Siebert's regulatory net capital was $13.0 million, which was $12.7 million in excess of its minimum capital requirement of $250,000.

Siebert has entered into a Secured Demand Note Collateral Agreement with SBS under which it is obligated to loan to SBS up to $1.2 million on a subordinated basis collateralized by cash equivalents of approximately $1.5 million as of December 31, 2013. Amounts obligated to be loaned by Siebert under the facility are reflected on our balance sheet as "cash equivalents - restricted". SBS pays Siebert interest on this amount at the rate of 4% per annum. The facility expires on August 31, 2015 at which time SBS is obligated to repay to Siebert any amounts borrowed by SBS thereunder.

Contractual Obligations

     Below is a table that presents our obligations and commitments at December
31, 2013:


                                                           Payment Due By Period
                                                 Less Than                                     More Than
Contractual Obligations              Total         1 Year       1-3 Years      3-5 Years       Five Years
Operating lease obligations       $ 1,887,000    $  710,000    $ 1,177,000    $          0    $          0

Off-Balance Sheet Arrangements

Retail customer transactions are cleared through clearing brokers on a fully disclosed basis. If customers do not fulfill their contractual obligations, the clearing broker may charge Siebert for any loss incurred in connection with the purchase or sale of securities at prevailing market prices to satisfy the customer 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 if customers and other counterparties are unable to fulfill their contractual obligations. There were no material losses for unsettled customer transactions in 2013.

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