SIEB

SIEBERT FINANCIAL CORP. - 10-K Summary (Fiscal Year Ended Dec 31, 2004)

Business Context and Reporting Period

This Annual Report covers the fiscal year ended December 31, 2004. Siebert Financial Corp. is a holding company operating through its wholly-owned subsidiary, Muriel Siebert & Co., Inc. The company is a retail discount broker and investment bank, positioning itself as the largest Woman-Owned Business Enterprise (WBE) in the capital markets. It also holds a 49% interest in Siebert, Brandford, Shank & Co., LLC (SBS), a major tax-exempt underwriter. The company is led by Chairwoman and President Muriel Siebert, who owns approximately 90% of the outstanding common stock.

Key Financial Metrics

Revenue Breakdown (2004): Commissions and fees ($23.8M), Investment banking ($1.4M), Trading profits ($0.8M), Income from equity investee ($1.7M), and Interest/dividends ($0.5M).

Expense Breakdown (2004): Total expenses were $27.1 million. Notable items include employee compensation ($11.1M) and a one-time $1.5 million write-off of an advance to a clearing broker (Pershing LLC).

Material Changes vs. Prior Period

• Revenue Growth: Driven by a 16.3% increase in commission and fee income due to higher trading volume and margin balances. Investment banking revenue rose 25.5% due to increased new issue market activity.
• Expense Increases: Employee compensation rose 27.7% ($2.4M) due to the hiring of a General Counsel and expansion of Capital Markets operations. However, advertising, communications, and occupancy costs decreased.
• Unusual Item: The company recorded a $1.5 million charge against income in Q4 2004 related to an unrecoverable advance to Pershing LLC following the termination of their clearing agreement.
• Stock Repurchases: The company continued its buyback program, purchasing 139,713 shares in 2004. Cumulative repurchases since 2000 reached 901,616 shares.

Guidance, Outlook, Risks, and Contingencies

Legal Proceedings:

• Intuit Lawsuit: Siebert is litigating against Intuit, Inc., seeking $11.1 million in compensatory and $33.3 million in punitive damages regarding a terminated Joint Brokerage Service. In March 2005, the New York Court of Appeals denied Intuit's motion to appeal, confirming Siebert's right to litigate in court rather than arbitration. Intuit has moved to dismiss five of six causes of action.
• Pershing Dispute: Pershing LLC claims entitlement to the $1.5M advance plus damages totaling up to $8.5M. Siebert believes these claims are without merit and has written off the advance.
• NYSE Fine: In March 2005, Siebert consented to a $45,000 fine and censure by the NYSE for technical record-keeping deficiencies. No customer losses occurred.

Risks and Outlook:

• Competition: Intense competition from larger, better-capitalized online brokers offering lower fees and asset-based charges.
• Market Conditions: Profitability is sensitive to trading volume and interest rates. Fixed costs (salaries, occupancy) remain relatively high during low-volume periods.
• Accounting Changes: The company must adopt FAS 123R (Share-Based Payment) in 2005, which is expected to have a material impact on reported earnings by requiring fair value recognition of stock options.

Investor Verification Checklist

• Intuit Litigation Status: Verify the outcome of the motion to dismiss filed by Intuit in early 2005 and the potential for a settlement or judgment.
• Pershing Liability: Confirm if Pershing LLC has initiated legal action to recover the disputed $1.5M advance and additional damages.
• FAS 123R Impact: Review the company's 2005 filings to assess the specific reduction in net income resulting from the new stock-based compensation accounting rules.
• Customer Concentration: Assess the stability of the retail customer base given the competitive pressure from larger discount brokers.
• SBS Performance: Monitor the performance of the 49% owned affiliate (SBS), which contributed $1.7M to income in 2004, as a key revenue driver.