Back to GetFilings.com

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended January 31, 2004

OR

For the transition period from                      to                     

Commission file number 0-23410

CROWN FINANCIAL GROUP, INC.

(formerly M.H. MEYERSON & CO., INC.)

(Exact name of registrant as specified in its charter)

Newport Tower, 525 Washington Blvd., Jersey City, New Jersey 07310

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (201) 459-9500

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K.    ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes    ¨    No  x

At April 29, 2004, 11,503,970 shares of Common Stock, $0.01 par value, of the registrant (the “Common Stock”) were outstanding. The aggregate market value of the Common Stock held by non-affiliates of the registrant was $25,279,997 based on the closing price of $3.84 per share on July 31, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the information set forth in the definitive proxy statement to be filed by the registrant within 120 days of the close of the fiscal year are incorporated by reference in Part III.

Unless the context otherwise requires, the “Company”, “Crown”, “We”, or “our” shall mean Crown Financial Group, Inc., f/k/a M.H. Meyerson & Co., Inc., and its consolidated subsidiaries.

FORWARD-LOOKING STATEMENTS

Certain statements set forth in the Company’s Annual Report on Form 10-K for the year ended January 31, 2004 constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and are subject to the safe harbor created by such section. Certain factors that could cause results to differ materially from those described in the forward looking statements are described in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operation and elsewhere as appropriate. This Annual Report on Form 10-K, including the Consolidated Statements of Financial Condition and the notes thereto, should be read in its entirety for a complete understanding.

AVAILABLE INFORMATION

Our reports, proxy and information statements and other information filed with the SEC are also available at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549 (1-800-SEC-0330), and are also available from the SEC’s website. The SEC’s Internet address is http://www.sec.gov. The Company provides a link to our filings at the SEC’s website on the Company’s website, http://www.crownfin.com.

PART I

Item 1. Business.

OVERVIEW

CROWN FINANCIAL GROUP, INC. (the “Company”), formerly known as M.H. MEYERSON & CO., INC., established in 1960, is a leading market maker currently making markets in approximately 8,500 securities traded on the Nasdaq National Market System, Nasdaq SmallCap, the OTC Bulletin Board, and the Pink Sheets. Market-Making accounted for 85% or more of the Company’s revenues for the fiscal year ended January 31, 2004. The Company is registered with the SEC and is a member of the NASD.

In January 2003, the senior management of the Company concluded a thorough examination of the firms market-making approach and business focus. It was determined that a change in the Company’s business model as well as hiring of key management personnel possessing a thorough understanding of the marketplace and changing market dynamics were in the best interest of the shareholders.

Effective January 14, 2003 the Board of Directors appointed John P. Leighton as Co-Chairman and Chief Executive Officer. Mr. Leighton, formerly head of institutional sales of Knight Equity Markets, L.P. (formerly Knight Securities, L.P.) (“Knight”) with over 26 years experience in the securities industry, assumed the additional role of President. Mr. Leighton subsequently installed a management team with extensive relevant industry and professional experience. In one form or another, this team spent nearly five years together at Knight. The Company is highly confident that this new management team has the vision and experience to execute its business plan, quickly and successfully. In mid-September 2003, a new finance team was also appointed to further the implementation of this new business plan.

On April 22, 2003, Martin H. Meyerson, Co-Chairman and founder of the Company, retired and Mr. Leighton became Chairman. Mr. Meyerson devoted 42 years to the Company.

At the annual meeting of the shareholders held on October 16, 2003, the Company received shareholder approval of its corporate name change from M. H. Meyerson & Co., to Crown Financial Group, Inc. The Company’s new management believes that the new name will assist in the re-branding of the Company as a dynamic, innovative and leading liquidity provider. As a result of the re-branding process, the Company changed its Nasdaq ticker symbol for its publicly traded common stock to CFGI (see Part 2, Item 5 Market for Registrant’s Common Equity and Related Stockholder Matters) from MHMY as of the opening of trading on Monday, October 20, 2003 as well as its Market Participant ID for trade comparison and clearance purposes to CRWN on August 18, 2003.

The Company’s new management team has been executing its business plan and implementing new trading methodologies in order to create a dynamic, innovative and service-oriented liquidity provider. New management finds the time and circumstances propitious for such an endeavor. Over the last several years, the brokerage industry has experienced significant consolidation through merger and acquisition, the collapse of the Internet bubble, a protracted bear market, the implementation of decimalization and the resulting reduction in spreads or minimum price variations (“MPV”). Exacerbating these adverse conditions is an increase in competition for execution services from Electronic Communications Networks (“ECNs”) and regional securities exchanges trading via unlisted trading privileges (“UTP Exchanges”). These factors have reduced significantly the number of securities dealers making markets in

2

Nasdaq and non-Nasdaq OTC securities over the past several years, especially since the decimalization of and reduction in trading increments in the first quarter of 2001.

The presence of ECNs and UTP Exchanges means that the national market for the trading of Nasdaq stocks has become more fragmented. These ECNs and UTP Exchanges are members-only trading systems and, unless they agree otherwise, they cannot be accessed through the facilities of The Nasdaq Stock Market, Inc. Notwithstanding their inaccessibility, their top-of-book is included in the national best bid/offer (“NBBO”), which drives the pricing of order executions. Moreover, without the ability to execute against the quote of these away markets, market makers cannot use those bids and offers to manage the risks attendant to their inventories. In other words, market makers cannot lay off risk to those other buyers and sellers, who may well be driving the pricing for trades, making it much more difficult to manage their inventories and influence pricing of liquidity.

Consolidation in the industry has included the acquisition of many of the largest wholesale market makers by global financial companies. These acquisitions were initiated during the previous bull market. Because market conditions have been so severe, many brokers determined that they were over staffed in the current market environment and were forced to reduce their market making activities and headcounts. A few brokers have ceased market making entirely. These conditions created a significant opportunity for the remaining market makers to obtain greater market share.

Competition and choice in a trading partner drives the marketplace. Brokers that use wholesale market makers like to have more than one relationship. Liquidity is extremely important to brokers to satisfy their customers’ buying and selling instructions in such a way as to achieve best executions for their orders. Dealers provide that liquidity; having several dealers from which to choose from enables brokers to manage the risks that one dealer’s trading system does not accept the brokers’ orders. In addition, routing orders to more than one dealer creates competition among those dealers to win a larger percentage of the brokers’ better order flow. Brokers are searching for other destinations for their order flow. The Company intends to take advantage of the consolidation in the marketplace.

The Company finds its greatest opportunity in the market segments vacated by the retreating brokerage firms, principally, Nasdaq Small Cap, Bulletin Board (“OTCBB”) and Pink Sheet stocks. They are market sectors where the Company has specialized in trading and market making. Management’s business model has been validated in a recent report by AutEx/BlockDATA, a Thomson Financial subsidiary and the industry’s primary overall ranking service for market makers. This industry reporting service publishes daily trading volume and market share statistics reported by market makers. In that report, the Company ranked sixth in Bulletin Board and ninth in Nasdaq SmallCap share volume in these markets for the 2002 calendar year and sixth and fifth, respectively, in calendar year 2003. Many market makers ranked above the Company have either closed or reduced their involvements in these markets over the last year. The Company believes that it is well positioned to fill this void by offering brokers, dealers, and institutional investors another choice of liquidity provider, and in the process garnering market share and pricing power.

The Company has instituted stringent cost controls, and continues to monitor its costs diligently. The Company has shifted away from fixed labor costs for its sales and trading personnel, and towards variable labor costs that are aligned more closely with the profitability of the Company. The Company continues to focus on ways to reduce operating costs even further while seeking additional sources of top line revenue. The Company has been able to achieve this through salary reductions, reduction in headcounts, and through the utilization of state-of-the-art technology. Additionally, many senior managers agreed to forgo part of their salaries until the Company’s operations and financial condition stabilized. Beginning in the fiscal year ended January 31, 2004, management that had forgiven salaries and bonus’, have been receiving salaries, but at levels that are below those contained in employment contracts or otherwise agreed to when those individuals joined the Company. Additionally, the Company’s Compensation Committee is currently evaluating various alternative compensation arrangements for its management and employees that will be aligned more closely with the profitability of the Company.

Success, as represented by profitability for a wholesale market-maker, is to a great extent a function of overall transactional volume and revenue capture per share. As the number of market-making firms decreases, the Company has positioned itself to exploit this opportunity. While margins on a per trade basis remain small, the management is confident that relatively low fixed overhead and innovative trading efficiencies, combined with a highly variable compensation structure, will allow the Company to increase margins and revenue capture.

On October 17, 2003, as part of the closing of the Company’s financial records for the month of September 2003, the new finance team of the Company determined that certain items in the Company’s previously issued unaudited financial statements for the interim periods of the year ended January 31, 2004, were misstated (the “Restatement”). The Company immediately commenced an internal review to determine the scope of the financial statement misstatements and to issue restated financial statements for any prior periods materially impacted by the misstatements. The internal review was conducted by the Company’s new management team under the direct oversight of the Company’s Audit Committee. The Company’s independent auditors, Sanville & Company and Ernst & Young LLP, (which replaced Sanville & Company as the Company’s independent auditors for the fiscal year ended January 31, 2004) also participated in the review. The Company committed significant human and financial resources to ensure the review was completed in a thorough, independent and expeditious manner.

3

As a result of the findings of the review, the Company has restated its financial statements for the years ended January 31, 2003, 2002 and 2001, including the corresponding interim periods, and the quarterly periods ended April 30, 2003 and July 31, 2003. On March 9, 2004, the Company filed with the SEC the Amended Annual Report on Form 10-K/A for the year ended January 31, 2003, the Amended Quarterly Report on Form 10-Q/A for the quarter ended April 30, 2003 and the Amended Quarterly Report on Form 10-Q/A for the quarter ended July 31, 2003. At the same time, the Company also filed the Quarterly Report on Form 10-Q for the quarter ended October 31, 2003, thus completing the Restatement efforts.

DIVISIONS AND OPERATIONS

Broker Dealer Sales

The Broker Dealer Sales Group provides execution services to correspondent broker dealers and is dedicated to ensuring that orders, the majority of which are electronically transmitted, are executed efficiently, effectively; pursuant to client specifications and best execution guidelines. Our broker-dealer clients include global, national and regional broker-dealers and on-line brokers.

Institutional Sales Group

The Company’s Institutional Sales Group is responsible for servicing institutional clients’ order execution and trade allocations. Our institutional sales force is experienced in effectively addressing the trade execution needs of our clients, and is dedicated to growing and maintaining execution-based relationships with institutions and ensuring a high level of execution quality. Our institutional clients primarily include mutual funds, pension plans, plan sponsors, hedge funds, trusts and endowments.

Over-The-Counter Market Making & Listed Trading

The Company’s Over-The-Counter Market Making and Listed Trading Desk services block transactions in stocks listed on Nasdaq, the NYSE and AMEX. We are a leading market maker currently trading in over 8,500 securities listed on Nasdaq National Market System, Nasdaq SmallCap Market, the OTC Bulletin Board and the Pink Sheets. Based on information published by Autex/BlockDATA for calendar year 2003, we were ranked sixth in share volume in the OTC Bulletin Board and fifth in Nasdaq SmallCap Market. As a market maker, we provide trade executions by offering to buy securities from, or sell securities to, institutions and broker-dealers.

The Company has also expanded its trading department to trade in stocks listed on foreign exchanges such as the Euronext, the Australian Stock Exchange, the Tokyo Stock Exchange and the Hong Kong Stock Exchange through the Company’s International Trading Group. We display the prices at which we are willing to bid, meaning buy, or ask, meaning sell, these securities and adjust our bid and ask prices in response to the forces of supply and demand for each security. When acting as principal, we commit our own capital and derive revenues from the difference between the price paid when securities are bought and the price received when those securities are sold. We also provide trade executions on an agency or riskless principal basis, generating commissions or commission equivalents, respectively.

Retail Client Services

The Company has exited the retail segment of its business based on its assessment that these activities do not support our core business. We completed the transfer of the majority of our retail customer accounts to another firm on March 27, 2004.

Investment Banking

Historically, the Company’s investment banking activities have focused on developing small-cap companies. The Company pursues investment banking transactions and services spanning both debt and equity on an agency basis.

4

Fixed Income Securities Trading

The Company’s Fixed Income Trading is engaged in the trading of debt instruments including U.S. Treasury and agency obligations, corporate and municipal debt securities on an agency basis.

BUSINESS PLAN

New management intends to increase its revenue through various initiatives while maintaining discipline on cost controls to generate earnings. As described in the Overview section, the market making industry has been under pressure due to the adverse market conditions through the first half of fiscal 2003, as well as certain market structure changes, in particular the movement in the first quarter of 2001 to decimalization with the one-cent minimum price increment. It is now more important than ever to make markets and conduct institutional sales trading from an efficient platform, i.e., one built on low cost and high technology.

Products

The Company intends to build its revenue base in a variety of ways. Essentially, the Company will provide or has begun to provide various aggressively priced, value-added products that meet the diverse liquidity requirements of our clients such as:

Market Making/Block Trading—The Company engages in the traditional facilitation of transactions through the limited commitment of capital and the application of sophisticated trading methodologies and skills. Market makers do generate revenues in this segment of the market, but because their overhead is much higher than the Company’s, they have difficulties generating earnings. The increased risk and value-added trading capability, including analytical trading services such as volume weighted average price (“VWAP”), would demand the highest fees. The Company believes that it will obtain orders because so many dealers have vacated the space, causing brokers to look for more execution destinations.

Fee Based Trading—The Company transacts business on an agency or riskless principal basis with an attached commission (agency) or markup/markdown (riskless principal). The Company offers full access to its trading skills and tools, including analytical trading services such as best efforts VWAP, to achieve the buy-side trader’s goal of receiving complete transparency on all customer prints. Throughout this whole process the Company will be acting simply on a pass-through basis, without incurring any risk to capital.

Low Cost Client Services—The Company intends to remain a low cost provider of execution services. The Company’s relatively low cost technology platform allows the Company to generate economies of scale, which can be passed along to the Company’s customers through our pricing schedules. This also allows us to attract talented institutional sales traders, broker-dealer sales representatives, and market makers through highly competitive payouts.

Technology—For the self-directed, buy-side client, Crown sponsored access to ECNs provides the asset manager with unequalled access to liquidity in the national market for Nasdaq securities. Sponsored access puts the trading tools into the hands of the buy-side trader who chooses the execution destination for the institutional client. The Company will act as the asset managers’ broker and route the order as directed.

Expansion Strategy

Crown Financial International Limited (“CFIL”), a wholly owned subsidiary of the Company, was established on June 2, 2003, and is currently in the process of applying for a broker-dealer license with the U.K. Financial Services Authority (“FSA”) to begin operations. The Company’s London subsidiary will be an introducing broker and will route order flow from European brokers, dealers, and asset managers to the Company’s Jersey City trading desks. Many securities firms have abandoned this line of business for which management believes a real need exists in Europe. The Company can reach various European asset managers as well as broker-dealers. The Company intends to operate the London office out of a U.K. registered subsidiary that will exist to arrange trades on an agency basis. As of January 31, 2004, there were 5 employees employed on a full-time basis at the London office of CFIL.

Clearing Arrangements

The Company clears its securities transactions on a fully disclosed basis with Spear, Leeds & Kellogg (“SLK”), a subsidiary of Goldman Sachs & Co., for market making and had utilized Fiserv Securities, Inc. (“Fiserv”) for retail, institutional and prime broker clearing. Currently, SLK clears all market-making trades for our trading desk and recently began clearing the institutional accounts. The Company also utilizes SLK’s Redibook Plus as an available service for the trading departments. In addition, the Company entered into a $2,000,000 NASD approved subordinated loan agreement with SLK on June 3, 1997, effective August 1, 1997, originally maturing on August 31, 1999 and extended to August 31, 2003. Management has renegotiated rates with SLK that decrease as transactions increase, thereby helping to control variable costs as business increases. In this connection, SLK agreed to extend the maturity date of our subordinated loan from August 31, 2003 to August 31, 2005.

5

The Company does not hold client funds or securities and does not directly process back office operations. All clearing activities are carried on a fully disclosed basis with our clearing brokers. These clearing services are furnished to the Company and its clients for a fee and include billing, custody of securities, credit review (including for margin accounts) and similar activities. However, if the Company’s customers do not pay or deliver securities for a trade or if they do not properly maintain their credit balances on “margin” accounts, and there is a loss for which the Company cannot collect from our customer, the Company is generally liable for such losses. The Company maintains its back office and compliance divisions to supervise its activities generally and to ensure financial and regulatory compliance with applicable rules.

Technology

The Company’s technology strategy incorporates a blend of vendor applications and proprietary innovation. The Company applies a comparative advantage model in determining what is outsourced, and what is developed internally. In-house technology development delivers automated, analytical market making solutions, execution products custom-tailored to service a wide array of customer trading strategies, liquidity gateway services including smart order routing and trade executions.

The Company continues to develop new execution products to meet the requirements of a broad spectrum of customer trading strategies. The Company’s emerging suite of analytical trading tactics and tools offers the best of all possible execution worlds.

The Company is a leader in providing FIX and TCP/IP-based connectivity solutions to the capital markets community. Crown is a major tenant in the Radianz secure IP Virtual Financial Network (VFN). This network provides meshed B2B connectivity to the financial community. Radianz helps to keep connectivity infrastructure costs low as the need to have dedicated lines to each order flow provider is eliminated.

The Company has recently migrated to Sungard’s latest version of their industry-leading equities order management system, Smart Brass. We extend the benefits of a dedicated service-bureau trading platform to our customers. At the same time, our partnership with Sungard allows us the freedom to offer state-of-the-art proprietary order management and execution services to our customers that augment traditional Brass processing techniques.

We have augmented Sungard’s Powernet, with our own proprietary direct market access technology—providing what we believe unsurpassed smart order routing, designed to suit all types of customer-requested special handling.

The Company recently introduced to clients an Internet browser-based, full-service equities and equity option trading portal named “e*Crown”. Our platform has been designed to provide investment professionals with the tools necessary to compete in the market place. e*Crown provides seamless electronic trading capability from order entry to trade execution and reporting.

VENDORS

The Company uses numerous third party vendors to obtain market data and software, including stock quotations, stock trading charts, news and financial data. The Company has alternate sources for these services and, accordingly, does not consider itself dependent on any one or more of these suppliers. The Company reviews its relationships with vendors regularly and replaces certain vendors as needed to maintain the most cost effective and efficient network available for its traders and representatives.

COMPETITION

The securities industry is very competitive and, with technical innovation, is becoming even more so. Accordingly, the Company seeks to compete based upon our strengths, which include:

6

The Company utilizes what it considers the best and most reliable information technologies to compete and continually enhance the quality of services provided. The Company competes with large and small brokerage firms, which utilize both traditional methods and electronic commerce to transact their business.

The Company encounters intense competition in all aspects of the securities business and competes directly with other securities firms, a significant number of which have substantially greater capital and other resources. Many of these competitors offer a wider range of financial services. The Company’s strategy to bridge this gap is to focus on its core businesses of execution services and create alliances with third party market product vendors thus broadening its product line without the need for significant capital outlay. The Company believes that the principal competitive factors in the securities industry are the quality and ability of professional personnel and relative prices of services and products offered.

Market makers also compete against alternative trading venues, such as electronic communications networks, commonly referred to as ECNs. ECNs provide market participants with the ability to trade securities anonymously, manage inventory and obtain immediate display of their limit orders. ECNs provide a neutral forum in which third parties can display and match their limit orders, but unlike market makers, do not commit capital or provide enhanced liquidity to the marketplace. As a result, ECNs are more attractive to the marketplace for transactions in highly liquid securities, such as those in the Nasdaq 100, than for transactions in less liquid securities. ECNs have the ability to charge access fees to counterparties who access their liquidity. ECNs accounted for approximately 43% of Nasdaq volume in 2003 compared with the estimated 20% of Nasdaq volume they provided in 1999. ECNs also account for a small, but rising, portion of listed share volume.

In addition, over the past three years, competition for order flow in the U.S. equity markets has intensified due to the implementation of the SEC Rules 11Ac1-5 and 11Ac1-6. These rules, applicable to broker-dealers add greater disclosure to execution quality and order-routing practices. Rule 11Ac1-5 requires market centers that trade national market system securities to make available to the public monthly electronic reports that include uniform statistical measures of execution quality on a security-by-security basis. Rule 11Ac1-6 requires broker-dealers that route equity and option orders on behalf of their customers to make publicly available quarterly reports that describe their order routing practices and disclose the venues to which customer orders are routed for execution. These statistics on execution quality vary by order sender based on their mix of business. This rule also requires the disclosure of payment for order flow arrangements as well as internalization practices. The intent of this rule is to encourage routing of order flow to destinations based primarily on the demonstrable quality of executions at those destinations, supported by the order entry firms’ fiduciary requirement to seek to obtain best execution for their customers’ orders.

GOVERNMENT REGULATION

The securities industry in the United States is subject to extensive regulation under both federal and state laws. The Company is registered as a broker-dealer with the SEC and NASD. Much of the regulation of broker-dealers has been delegated to self-regulated organizations, principally the NASD, Nasdaq and national securities exchanges. These self-regulatory organizations adopt rules (subject to approval by the SEC) that govern the industry and conduct regular and periodic examinations of our operations. Securities firms are also subject to regulation by state securities administrators in those states in which they conduct business.

Significant legislation, rule-making and market structure changes have occurred over the last few years that have had an impact on the Company. First, decimalization was introduced in January 2001 in NYSE and AMEX listed securities, and in Nasdaq markets in April 2001. Decimalization, combined with the one-penny minimum price increment, has had a dramatic reduction in average spreads, which in turn has had a profound effect on our profitability. Second, in 2002 Nasdaq launched SuperMontage, a Nasdaq routing and execution system. SuperMontage transformed Nasdaq from a quote-driven market to a full-order-driven market as quotes and orders are treated the same. Under SuperMontage, market makers and ECNs are able to show trading interest at five different price levels, allowing investors to see individual and aggregated interest across all market participants at the National Best Bid or Offer (“NBBO”)

7

and four additional layers above or below the NBBO. Third, the introduction of SuperMontage, which is not used by all market participants, and the increase in trading of Nasdaq-listed securities by other exchanges has created market fragmentation. This lack of linkage between market centers has resulted in an increase in locked and crossed markets, fragmented liquidity pools and different market centers using different sets of regulatory rules and regulations. Fourth, the U.S. Patriot Act of 2001, enacted in response to the terrorist attacks on September 11, 2001, contains anti-money laundering and financial transparency laws and mandates the implementation of various new regulations applicable to broker-dealers and other financial services companies, including standards for verifying client identification at account opening, and obligations to monitor client transactions and report suspicious activities. The increased obligations of financial institutions to identify their customers, watch for and report suspicious transactions, respond to requests for information by regulatory authorities and law enforcement agencies, and to share information with other financial institutions, requires the implementation and maintenance of internal practices, procedures and controls which will increase our costs and may subject us to regulatory inquiries, claims or penalties. Lastly, the Sarbanes-Oxley Act of 2002 has led to sweeping changes in corporate governance. This far reaching legislation has significantly affected public companies by enacting provisions covering corporate governance, board of directors and audit committee structure, management and control structure, new disclosure requirements, oversight of the accounting profession and auditor independence. The SEC also responded by, among other things, requiring chief executive officers and chief financial officers of public companies to certify the accuracy of certain financial reports and other SEC filings.

The regulatory environment in which we operate is subject to constant change. Our business, financial condition and operating results may be adversely affected as a result of new or revised legislation or regulations imposed by the U.S. Congress, the SEC, other U.S. governmental regulatory authorities, or the NASD. Our business, financial condition and operating results also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities.

Additional regulation, changes in existing laws and rules, or changes in interpretations or enforcement of existing laws and rules often directly affect the method of operation and profitability of regulated broker-dealers.

The NASD and Net Capital Requirements

Regulatory bodies, including the NASD, are charged with safeguarding the integrity of the securities and with protecting the interests of investors participating in those markets. Broker-dealers are subject to regulations covering all aspects of the securities business, including sales methods, trade practices among broker-dealers, use and safekeeping of clients’ funds and securities, capital structure, record keeping and the conduct of directors, officers and employees.

The SEC, NASD and various other regulatory agencies have rigid rules, including the maintenance of specific levels of net capital by securities brokers and dealers pursuant to the SEC’s Uniform Net Capital Rule 15c3-1 with which the Company must comply. As part of the Restatement (see Overview above), the Company has restated its net capital, as defined, in accordance with the restated Statements of Financial Condition for the period from January 31, 2002 to January 31, 2004, and has reported the restated amounts to the NASD and the SEC contemporaneously with these restated filings. Based on the amended regulatory filings to the NASD and the SEC, as of January 31, 2003, the Company was required to, but did not maintain minimum net capital, in accordance with SEC rules, of $1,000,000. Our amended regulatory reports filed with the NASD also showed that, for the period from January 31, 2002 to January 31, 2004, the Company had net capital that was less than required by the SEC’s uniform net capital rule in 13 of 25 month-end periods. As a part of the NASD’s ongoing monitoring of our compliance with the SEC’s uniform net capital rule, for a period of time we were furnishing to the NASD our net capital computation on a weekly basis. As of January 31, 2004, the Company had total net capital of $1,805,660, $805,660 in excess of the Company’s minimum net capital requirement of $1,000,000. The Company has reported its past net capital deficiencies to the SEC and NASD.

Additionally, the Company had been under a routine finance and operations review by the NASD staff from February 2003 to August 2003. Before this, the Company had been subject to a special financial examination by the NASD in 2002 covering the periods of April-June 2002 and October-December 2002. On September 17, 2003 and October 22, 2003, respectively, reports were issued by the NASD documenting their findings of the routine finance and operations review in 2003, and the special financial examination in 2002. These reports identified, among other things, certain adjustments to the Company’s financial statements required to correct improper methods utilized by the Company’s former finance and accounting personnel in accruing certain expenses and related liabilities, which was addressed during the Restatement.

On March 30, 2004, the Company filed requests with the SEC and the NASD to extend the filing deadline of its Annual Report for the fiscal year ended January 31, 2004 (the “Annual Report”) required under Exchange Act Rule 17a-5. The Company was granted an extension to file its Annual Report by no later than April 30, 2004. The Company was unable to file the Annual Report by the March 31, 2004 deadline due to the Company’s recent commitment of substantial effort, resources and time to preparing and filing restated financial reports on an amended Annual Report on Form 10-K/A for the year ended January 31, 2003; amended Quarterly Reports on Form 10-Q/A for the quarters ended April 30, 2003 and July 31, 2003; as well as a Quarterly Report on Form 10-Q for the quarter ended October 31, 2003. On March 9, 2004, the Company completed and filed all public reports subject to the Restatement.

8

On April 21, 2004, the Company filed notice to the SEC and NASD in compliance with Rule 17a-11(b)(1) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of the Company’s April 1, 2004 intra-day net capital deficiency, including a detailed accounting of the events that led to the deficiency. This deficiency arose, in part, due to a failure of the Company’s computerized primary risk management and assessment tool. On the morning of April 1, 2004, the Company received a significant increase in program trading volume and the impact on the Company’s trading positions went undetected for a period of time due to a failure of the computer system. When the computer risk and assessment system was restarted and magnitude of the positions became apparent, the Company took immediate action to stop accepting the program trades and to reduce its trading positions in order to assess its capital position and to analyze the sequence of events that led to the system failure. As of the close of business on April 1, 2004, the firm was back in net capital compliance. As a result of the preliminary investigation, which took several weeks to compile, the Company determined that a supervisory failure, in combination with the system failure, were the causal factors of the deficiency. As corrective actions, (1) personnel changes, including suspensions and demotions, were executed and (2) the Company is developing a separate, redundant computerized risk management and assessment system.

The Nasdaq

In its November 26, 2003 notice to the Company, the Nasdaq Listing Qualifications Panel (the “Panel”) determined to delist the Company’s securities on the Nasdaq SmallCap Market effective as of December 1, 2003 (refer to disclosures made in Form 8-K filed with the SEC on November 28, 2003). The Panel’s determination was based, in part, and as a result of the Company’s previously announced discovery of financial misstatements by the Company’s former finance department and the Company’s notice to the marketplace not to rely on the Company’s previously disclosed financial statements until the conclusion of its internal review conducted under the oversight of the Company’s Audit Committee. The overstatement was discovered during the new finance department’s closing of the Company’s financial records for the month of September 2003. Following delisting from the Nasdaq SmallCap Market, the Company’s common stock became quoted in the Pink Sheets, since it was not eligible to trade on the OTC Bulletin Board until the Company was current in all of its periodic filings in compliance with the reporting requirements pursuant to Section 13 of the Exchange Act. The Company appealed the Panel’s decision to the Nasdaq Listing and Hearing Review Council, which subsequently affirmed the delisting determination. The Company’s securities remain quoted in the Pink Sheets and, while there can be no assurance, the Company’s securities may become eligible to quoted on the OTC-Bulletin Board.

The SEC

In November 2003, the Company received an informal inquiry from the SEC in response to our announcement of the discovery of errors in the Company’s financial statements prepared by the former management. The Company initially responded to the SEC inquiry in December 2003, and since then we have had ongoing discussions with the SEC concerning the progress and results of the Company’s investigation. The Company intends to cooperate fully with the SEC’s informal inquiry.

The Department of Labor

The Company is also subject to oversight by the U.S. Department of Labor in connection with our benefit plan. The annual 401(k) benefit plan audits for the years ended December 31, 2002 and 2001 had not been completed by the prior management on a timely basis. These audits are currently being performed and may lead to further examinations by the Department of Labor.

PERSONNEL

As of January 31, 2004, the Company employed a total of 113 full-time persons, whose primary roles are: 63 trading, 15 information systems technology, 8 senior management, 11 back office personnel, 8 legal and compliance, 1 in human resources, 4 finance, 2 investment banking, and 1 fixed income. The Company believes its relations with its employees are good and the Company has no collective bargaining agreements with any labor unions.

The Company’s registered representatives are required to take and pass examinations and fulfill additional required continuing education requirements administered by the NASD and state authorities in order to be qualified to transact business. The Company’s success will depend on its ability to hire and retain additional qualified trading, technical and financial personnel, who are generally in demand.

RISK FACTORS

Set forth below are certain risks and uncertainties relating to the Company’s business. These are not the only risks and uncertainties the Company faces. Additional risks and uncertainties not presently known to the Company or that the Company currently deems

9

immaterial may also impair the Company’s business. If any of the following risks actually occur, the Company’s business, operating results or financial condition could be materially adversely affected.

General risks associated with fluctuations in the securities business

The securities industry has undergone several fundamental changes over the last six years as a result of new regulations at the federal and state level, the emergence of electronic communication networks, the increased prominence of retail investors, consolidation among firms in the securities industry, and the increased use of technology. These changes have resulted in an increase in the volume of equity securities traded in the U.S. equity markets and a decrease in quoted spreads between the bid and the ask prices. The introduction of decimalization and the one-penny minimum price increment in 2001 further reduced quoted spreads with a resulting decrease in our profitability and revenue capture per trade. There can be no assurance that the spreads market makers receive upon execution of trades in equity securities will not continue to decrease in the future. Any further decline in the quoted spreads between the bid and ask prices could have a material adverse effect on the Company’s business, financial condition and operating results.

Harm from regulatory and legal uncertainties

The securities industry in the United States is subject to extensive regulation under both federal and state laws. Market makers are subject to regulations concerning certain aspects of their business, including trade practices, best execution practices, capital structure, record retention, and the conduct of directors, officers and employees. The Company’s operations and profitability may be directly affected by, among other things, additional legislation, changes in rules promulgated by the SEC, NASD, the Federal Reserve, the various stock exchanges, other self-regulatory organizations or governmental bodies, or changes in the interpretation or enforcement of existing laws and rules. Failure to comply with any of these laws, rules or regulations could result in censures, fines, the issuance of cease-and-desist orders or the suspension or disqualification of the Company’s directors, officers or employees. The Company’s ability to comply with applicable laws and rules is largely dependent on its internal system to ensure compliance, as well as its ability to attract and retain qualified compliance personnel. The Company could be subject to disciplinary or other actions in the future due to claimed noncompliance, which could have a material adverse effect on its business, financial condition and results of operations.

Risk of loss associated with market-making and trading activities

The Company conducts its market-making activities predominantly as a principal, which exposes the Company’s capital to significant risks. These activities involve the purchase, sale or a short sale of securities for the Company’s own account and, accordingly, involve risks of price fluctuations and poor liquidity, or rapid changes in the liquidity of markets that may limit or restrict the Company’s ability to either resell securities the Company purchases or to repurchase securities the Company sells in such transactions.

From time to time, the Company may have large position concentrations in securities of a single issuer or issuers engaged in a specific industry, which might result in higher trading losses than would occur if the Company’s positions and activities were less concentrated. The success of the Company’s market-making activities depends upon its ability to attract order flow, the skill of its personnel, general market conditions, the price volatility of specific securities, and the availability of capital. To attract order flow, the Company must be competitive on order execution quality, technology, reputation, and customer service.

In the Company’s role as a market maker, we attempt to derive a profit from the difference between the price at which it buys and sells securities. Competitive forces, however, often require the Company to match the quotes other market maker’s display and to hold varying amounts of securities in inventory. By having to maintain inventory positions, the Company is subject to a high degree of market risk. There can be no assurance that the Company will be able to manage such risk successfully or that the Company will not experience significant losses from such activities. All of the above factors could materially adversely affect the Company’s business, financial condition and operating results.

Harm by adverse economic, political, and market conditions

By its nature, the securities business generally is volatile. It is directly affected by numerous national and international factors that are beyond the Company’s control including, among others, economic, political and market conditions; the availability of short-term and long-term funding and capital; the level and volatility of interest rates; legislative and regulatory changes; currency values and inflation. Any one or more of these factors may contribute to lower levels of activity in the securities markets generally, or increased market volatility, which could result in lower revenues from the Company’s market-making activities. Any reduction in revenues or any loss resulting from the above factors could have a material adverse effect on the Company’s business financial condition and operating results.

Harm from competition to market share and financial performance

The Company derives substantially all of its revenues from market-making activities. The market for these services is rapidly evolving and competitive. The Company expects the competitive environment to continue and intensify in the future. The Company faces direct competition in its equity market-making business primarily from national and regional broker-dealers, alternative trading systems, such as ECNs, and regional exchanges trading stocks via unlisted trading privileges.

10

The Company competes in market making primarily on the basis of execution standards, its relationship with its customers, reputation and technology. A number of the Company’s competitors have greater financial, technical, marketing and other resources than the Company. Some of the Company’s competitors offer a wider range of services and financial products than the Company. These competitors may be able to respond more quickly to new or evolving opportunities, technologies and customer requirements than the Company and may be able to undertake more extensive promotional activities and offer more attractive terms to clients. Moreover, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties or may consolidate to enhance their services and products. In addition, during fiscal year 2004, the Company derived 38% of its trading volume from two customers and there is no assurance that business will persisit at these levels. The Company believes that new competitors may also emerge and they may acquire significant market share. There can be no assurance that the Company will be able to compete effectively with current or future competitors, which could have a material adverse effect on its business, financial condition and results of operations.

Seasonality in securities business

The Company has experienced, and may experience in the future, seasonality in our business. The Company has historically experienced a decrease in revenues in the third quarter of the year, due to lower volumes typically associated with the summer months. The Company believes that this seasonal trend will continue for the foreseeable future and that the Company’s business, financial conditions and operating results may be adversely affected by such trends in the future. As a result, period-to-period comparisons of the revenues and operating results of the Company are not necessarily meaningful and reliance upon such comparisons as indicators of future performance may be generally misplaced.

Harm from systems failures and delays

The Company’s market-making activities are heavily dependent on the integrity and performances of the computer and communications systems supporting them. The Company’s systems and operations are vulnerable to damage or interruption from human error, natural disasters, power loss, computer viruses, intentional acts of vandalism, and similar events. Extraordinary trading volumes or other events could cause the Company’s computer systems to operate at an unacceptably low speed or even fail. Any significant degradation or failure to the Company’s computer systems or any other systems in the trading process could cause clients to suffer delays in trading. Such delays could cause substantial losses for the Company’s clients and could subject the Company to claims from its clients for losses.

Systems failures and delays may occur and could cause, among other things, unanticipated disruptions in service to the Company’s clients, slower system response times resulting in client dissatisfaction, and harm to its reputation. If any of these events were to occur, the Company could suffer a loss of clients or a reduction in the growth of its client base, increased operating expenses, financial losses, or other client claims, and regulatory sanctions or additional regulatory burdens. In addition, the Company currently does not have a live disaster recovery center. If the Company is prevented from using its current trading operations, the Company will not have business continuity. This could have a material adverse effect on the Company’s business, financial condition and operating results.

Harm from capacity constraints of systems

If the Company’s business significantly increases, the Company will need to expand and upgrade its transaction processing systems, network infrastructure and other aspects of its technology. Many of the Company’s systems are designed to accommodate additional growth without redesign or replacement; however, the Company may need to continue to make investments in additional hardware and software to accommodate growth. The Company may not be able to project accurately the rate, timing or cost of any increases in its business, or to expand and upgrade its systems and infrastructure to accommodate any increases in a timely manner. Failure to make necessary expansions and upgrades to the Company’s systems and infrastructure could lead to failures and delays, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

Failure to keep pace with change, technological or otherwise

The markets in which the Company competes are characterized by rapidly changing technology, evolving industry standards, frequent new product and service announcements, introductions and enhancements and changing customer demands. If the Company is not able to keep up with these rapid changes on a timely and cost-effective basis, the Company may be at a competitive disadvantage. In addition, the widespread adoption of new Internet, networking or telecommunications technologies, or other technological changes could require the Company to incur substantial expenditures to modify or adapt its services or infrastructure. Any failure by the Company to anticipate or respond adequately to technological advancements, customer requirements, or changing industry standards, or any delays in the development, introduction or availability of new services, products or enhancements could have a material adverse effect on the Company’s business, financial condition and operating results.

11

Harm from negative publicity

As a result of actions taken by our former finance department necessitating the Restatement, the Company has been and may continue to be the subject of negative publicity focusing on the financial statement errors and subsequent restatement, notwithstanding the fact that the Restatement effort is completed. This negative publicity may have contributed and may continue to contribute to significant declines in the prices of our publicly traded securities.

Our senior management is relatively new to the Company and is required to devote significant attention to matters arising from actions of prior management

During the fiscal year ending January 31, 2004, we replaced our entire senior management and our finance department. Our new finance department began its activities in September 2003. Our new senior management team’s ability to overhaul the finance department has been hindered by their need to spend significant time and effort dealing with our internal review of prior finance department’s actions, including communicating with regulators, auditors and other external advisors, developing effective corporate governance procedures, and designing and implementing effective internal controls. During the Restatement and in order to complete the process, our new management has depended in part on advisors, including certain former directors. In addition on March 25, 2004, the Company’s Chief Executive Officer, John Leighton, was granted an administrative leave and an interim Chief Executive Officer, Charles B. Kennedy, was appointed. We cannot assure you that this major restructuring of our senior management and finance department, and the accompanying distractions, in this environment, will not adversely affect our results of operations.

Harm from regulatory uncertainties and legal proceedings

We have received and continue to receive requests and inquiries from the SEC, NASD, shareholders and others seeking information regarding our financial condition and operations, accounting and related internal controls, and details related to the financial statement errors and the April 1, 2004 intra-day net capital deficiency. We cannot predict if such inquiries ultimately lead to formal investigations and enforcement actions by the SEC or the NASD, or other government agencies. If such investigations materialize, it is possible that we may be required to pay material fines, consent to injunctions on future conduct, and lose the ability to conduct securities business or suffer other penalties, each of which could have a material adverse effect on our business. We cannot assure you that the effects and results of such potential investigations will not be material and adverse to our business, financial condition, results of operations and liquidity. In addition, the Company could be subject to claims, lawsuits, regulatory examinations, and other proceedings. As described under Item 2, Legal Proceedings, the Company is currently contesting liability and/or the amount of damages in several pending matters and the ultimate outcome of these matters could have a material adverse effect on its business financial condition and results of operation.

The Company’s income and benefit plan tax returns and withholding practices are periodically examined by various tax authorities. The Company is also subject to oversight by the U.S. Department of Labor in connection with our benefit plan. The annual 401(k) benefit plan audits had not been completed by the prior management on a timely basis. These audits are currently being performed and may lead to further examinations by the Department of Labor. It is possible that we will be subject to future examinations by various authorities, including the Internal Revenue Service and the Department of Labor. We cannot predict if such examinations will commence, nor can we predict what the results of these potential examinations may be. If such examinations materialize, we cannot assure you that the ultimate resolution of such potential examinations will not have a material adverse effect on our financial condition, results of operations and liquidity.

Declines in the price and liquidity of the Company’s common shares

The market price of the Company’s common shares has declined considerably since the disclosure of the Company’s financial misstatements in October 2003 and the liquidity has also declined considerably after the Company’s publicly traded securities were delisted from the Nasdaq SmallCap Market on December 1, 2003. In addition, our publicly traded securities, and the global stock markets generally, have experienced significant price and volume fluctuations over the past year. We cannot assure you that the price of our publicly traded securities will not decline further or will not continue to experience significant price and volume fluctuations. In addition, we believe that factors such as quarterly fluctuations in financial results, earnings below analysts’ estimates and financial performance and other activities of other publicly traded companies in our industry could cause the price of our publicly traded securities to fluctuate substantially.

Failure to raise additional capital to finance operations

The Company relies on its existing capital, as well as its ability to raise additional capital on an ongoing basis from various sources, including its directors, officers and employees, to finance its operations. We must continue to raise additional capital until such time when the Company generates sufficient cash flows from its continuing operations. There can be no assurances that the Company will be able to raise additional capital sufficient to fund its operations. If the Company is unable to raise sufficient additional capital, the Company’s ability to remain in business will be materially impaired.

Failure to maintain capital requirements

The SEC, the NASD and various other regulatory agencies have stringent rules regarding the maintenance of specific levels of net capital by securities broker-dealers. Net capital is an SEC-defined measure of a broker-dealer’s readily available liquid assets, reduced by its total liabilities other than approved subordinated debt. If the Company fails to maintain the required net capital, the SEC could suspend or revoke the Company’s registration, or the NASD and other regulatory bodies could suspend or expel the Company, which could ultimately lead to its liquidation. The Company’s ability to monitor and assess its capital position at any given time can be drastically impaired by systems failure. Moreover, if the Company falls below certain early warning levels, the NASD could force the Company to constrict its business by reducing the number of markets it makes.

If the net capital rules are changed or expanded, or if there is an unusually large charge against net capital, operations that require the intensive use of capital would be limited. A significant operating loss, damages from litigation or any unusually large charge against net capital could adversely affect the Company’s ability to expand or even maintain its present levels of business, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

12

Of the Company’s $3,000,000 in subordinated loans that existed on January 31, 2003, $2,000,000 was due and payable on August 31, 2003. By agreement dated July 22, 2003, the Company and SLK have agreed to extend the date of maturity from August 31, 2003 to August 31, 2005 of the NASD approved $2,000,000 subordinated loan. The extension of the maturity of the subordinated loan occurred in conjunction with a renegotiation of the clearing services SLK provides to Crown. There is no guarantee that the Company will be able to renew that loan before it matures on August 31, 2005. If the Company is unable to renew or replace that loan, the Company’s ability to remain in business will be materially impaired.

At January 31, 2003, we did not maintain our required minimum net capital, as defined in the SEC’s uniform net capital rule, of $1,000,000. At January 31, 2004, we had net capital, as defined, of $1,805,660, which exceeded our required minimum net capital of $1,000,000. We cannot assure you, however, that we will be able to raise additional capital needed to maintain our required net capital, as defined, and continue our securities business.

During the period from January 31, 2002 to January 31, 2004, the Company’s net capital, as defined and restated, fell below our required minimum net capital of $1,000,000 for 13 of 25 month-end periods. It is possible that we will be required to pay material fines, lose the ability to conduct securities business or suffer other penalties to be imposed by the NASD, each of which could have a material adverse effect on our business.

Item 2. Properties.

The Company currently leases office space in a building known as the Newport Office Tower located at 525 Washington Blvd., Jersey City, New Jersey. The lease is in effect through July 31, 2011 with one 5-year renewal option at the end of the original term. Rent charges on this office for the years ended January 31, 2004, 2003 and 2002 were $882,113, $870,430 and $838,745, respectively.

The Company had subleased approximately 5,800 square feet of the 35th floor space to ViewTrade Holdings, Inc., an entity in which the Company owns approximately a 15% interest (the “Viewtrade Sublease”). This agreement had a nine-month term with automatic 90-day extensions and 90-day non-renewal notification requirements. The Viewtrade Sublease terminated February 29, 2004.

The Company leases an apartment adjacent to its offices for overnight use by out-of-town clients, employees or directors when they are visiting the Company. The lease was signed on February 13, 2004, and is in effect for 12 months through February 28, 2005. As of January 31, 2004, the future minimum rental commitment under this non-cancelable apartment lease is $2,550 per month through February 28, 2005.

The Company established a wholly owned subsidiary, Crown Financial International Limited (“CFIL”) in London, the United Kingdom. CFIL currently leases office space in a building located at 23 Berkeley Square in London, the United Kingdom. The lease was signed on August 19, 2003, and is in effect for 12 months through August 31, 2004. Rent charges on this office are denominated in British pounds and for the period from September 1, 2003 to January 31, 2004 translated to approximately $48,068. As of January 31, 2004, the future minimum rental commitment under this non-cancelable office lease is $8,845 per month through August 31, 2004.

The following table lists all of our properties:

13

Item 3. Legal Proceedings

The nature of the Company’s business subjects it to claims, lawsuits, regulatory examinations, and other proceedings in the ordinary course of business. While the Company is contesting liability and/or the amount of damages in each pending matter, the ultimate outcome of the matters, other proceedings and claims pending against the Company cannot be determined at this time, and the results of these matters cannot be predicted with certainty. There can be no assurance that these matters will not have a material adverse effect on the Company’s results of operations in any future period, depending partly on the results for that period, and a substantial judgment could have a material adverse impact on the Company’s financial condition, results of operations, or cash flows.

As a regulated broker-dealer, the Company is subject to extensive oversight under federal and state laws. Changes in market structure and the need to remain competitive require constant changes to our systems and order handling procedures. The Company continuously makes these changes while endeavoring to comply with extensive complex rules and laws. Compliance, surveillance or trading issues, common in the securities industry, and which are monitored or reported to the self-regulatory organizations (“SRO”), are reviewed in the ordinary course of business by our primary regulators: the SEC and the NASD. As an order flow execution destination, the Company is named periodically, or is asked to respond to a number of regulatory matters brought by the SEC or SROs that arise from its trading activity. In some instances, these matters may rise to an SEC or SRO disciplinary action and/or civil or administrative action.

Except as described herein, the Company is not known to be a party to any litigation or arbitration which would have a material adverse impact on the Company or its operations.

RAINBOW MEDICAL (FLORIDA)

Harry Binder, on behalf of himself and all others similarly situated, Plaintiff, v. Rainbow Medical Inc., Rainbow Pediatrics, Inc., M.H. Meyerson & Co., Inc., Hugo D. Goldstraj, M.D, Marcela C. Goldstraj, M.D., Roberto P. Novo, M.D., Sandra R. Giblin, Martin Leventhal, Gina Bertinelli, Defendants, Circuit Court of the Eleventh Judicial Circuit, Miami Dade, Florida, Case No. 00-24851 CA.

On September 19, 2000, plaintiff commenced a class action lawsuit alleging that the class, consisting of all investors who purchased investment units in Rainbow Medical, Inc. (“Rainbow”) in a $2.5 million private placement offering in June 1997, purchased units which became worthless when, after the offering closed, certain officers and inside directors of Rainbow, specifically defendants Hugo D. Goldstraj, M.D., Marcela C. Goldstraj, M.D., and Roberto P. Novo, M.D., looted Rainbow and stole the proceeds of the offering. The Company was the placement and selling agent for the private placement. Martin Leventhal, C.P.A., a director of the Company became an outside director of Rainbow after the offering closed.

Plaintiff in its Amended Complaint claims against the Company and Leventhal for breach of fiduciary duty, negligent misrepresentation and negligence. Plaintiff alleges that the Company failed to make certain disclosures in the offering memorandum concerning legal proceedings involving Rainbow’s officers, that the Company failed to ensure that Rainbow engaged in certain corporate actions and that Rainbow failed to use the offering proceeds in the manner stated in the offering memorandum. Plaintiff seeks approximately $2.6 million in damages on behalf of the “class” of investors.

On July 19, 2001, plaintiff Harry Binder, as the putative class representative, filed a motion to have the lawsuit certified as a class action. On December 11, 2001, the Trial Court issued an Order denying the motion. Plaintiff appealed the Court’s Order denying class certification. On November 27, 2002, the Third District Court of Appeal, Florida issued a decision affirming the Trial Court’s denial of class certification. Accordingly, the only claims that now remain in the case are plaintiff’s individual claims, which seek damages of $37,500, together with interest and attorney’s fees. The Company intends to defend itself vigorously against any litigation by plaintiff of his individual claims, and has not recorded a provision for any loss that may be incurred as a result of the action.

14

FEDERAL SECURITIES CLAIMS (NEW JERSEY)

In re M.H. Meyerson & Co., Inc. Securities Litigation, United States District Court, District of New Jersey, 02 div. 2724.

On June 6, 2002, the plaintiff (who is also the plaintiff in the Florida lawsuit discussed above) filed a Class Action Complaint against the Company and defendants, Martin Meyerson, Kenneth Koock, Estate of Eugene Whitehouse, Jeffrey Meyerson, Bertram Siegel, Martin Leventhal and Alfred Duncan who are directors of the Company. In their complaint, Plaintiffs allege fraud claims under the federal securities law relating to the Company’s disclosures, and alleged failures to disclose certain information relating to prior litigations involving the Company, the efforts of the Company’s subsidiary, eMeyerson.com, Inc., to develop an electronic trading program through a license agreement with TradinGear.com, Inc., and a litigation arising from eMeyerson’s termination of that agreement, and other matters. Plaintiffs seek damages in excess of $15 million for the alleged class.

Subsequently, a virtually identical class action lawsuit was filed by other plaintiffs against the same defendants in the same court, Choung v. M.H. Meyerson & Co., Inc., et al., U.S. District Court of New Jersey, 02 Civ. 3622. On September 24, 2002, the District Court consolidated the two cases under the caption, “In re M.H. Meyerson & Co. Securities Litigation,” Master File No. 02-CV-2724. The plaintiffs have served an Amended Complaint, which repeats the allegations of the initial pleading.

Upon the Company’s motion, and pursuant to an Order of the U.S. District Court dated September 29, 2003, the consolidated action was dismissed with leave to amend within thirty days. On or about October 30, 2003, plaintiffs filed a Second Amended Consolidated Class Action Complaint (“Second Amended Complaint”). All defendants have recently filed a motion to dismiss the Second Amended Complaint.

The Company believes that the allegations of the Second Amended Complaint are meritless and fail to state legally valid claims. The defendants intend to continue to contest the allegations vigorously, and have not recorded a provision for any loss that may be incurred as a result of the action.

Plaintiffs recently filed a motion for leave to file a Third Amended Complaint which seeks to include facts arising from the Company’s recent restatement of its financial results. The Company is currently drafting a response to the motion.

C.V.I. GROUP ARBITRATION

C.V.I. Group v. M.H. Meyerson & Co., Inc. and Bear Stearns & Co., Inc.

In May 1999, claimants filed a Statement of Claim in arbitration with the National Association of Securities Dealers (“NASD”) alleging that the Company wrongfully transferred 20,000,000 shares of Whitehall Enterprises, Inc. that were deposited with the Company and its then clearing agent, Bear Stearns & Co., Inc. (“Bear Stearns”). Claimants contend that their damages are based upon the market price of the shares at the date of the transfer, $.25 per share. This claim is partially covered by the Company’s Broker/Dealer Errors and Omissions Policy for a net amount of $1,000,000.

15

The Company denied all liability and asserted that the transfer of the shares were authorized and duly executed by each of the claimant entities, EMES, SLR, and Ontario, to Global Financial. Each of EMES, SLR, and Ontario, in its respective Power of Attorney, appointed Global Financial as its agent and attorney-in-fact with full and unlimited power and authority to buy, sell, assign, endorse, and transfer all securities of any nature standing anywhere in the name, respectively, of EMES, SLR, and Ontario. Claimants sent copies of each of the Powers of Attorney to the Company to facilitate the transfer of the shares to Global Financial.

The evidence showed that claimants did not send a revocation of the Powers of Attorney until January 27, 2000—three days after the shares were transferred. Moreover, the Powers of Attorney specifically stated that any revocation is ineffective for any transaction that was initiated before a revocation. This matter was arbitrated in Buffalo, NY on October 15-17, 2001.

On January 8, 2002, the NASD arbitration panel awarded $5,000,000 in compensatory damages against the Company and Bear Stearns. The award was joint and several against both firms. Neither Bear Stearns nor the Company asserted cross claims against each other in the arbitration. Either may attempt, subject to defenses of the other, to assert a cross claim against the other under the clearing agreement or other law for its share of the award. The Company and Bear Stearns have each filed motions to vacate the award in its entirety with the U.S. District Court for the District of New Jersey. Bear Stearns has also requested the Court to vacate the award as to itself, if the Court does not vacate the entire award. These motions together, with the Claimant’s motion to confirm, are expected to be resolved sometime during the second calendar quarter of 2004, but have not been resolved as of the date of the filing of this report.

While both the management of the Company and its legal counsel believe that a vacation or modification of the award is possible, due to the fact that the legal grounds for vacating an award are somewhat narrow, the Company recorded the $5,000,000 adverse award as a liability in its financial statements. Because the award is joint and several, and may be overturned, the Company has not accrued a reserve for interest on the award. The Company has a Securities Broker/Dealer’s Professional Liability Insurance policy with coverage of $1,000,000 for each loss. The insurance company has acknowledged that the adverse arbitration award is covered under the policy. The Company has recorded a $1,000,000 insurance receivable in the consolidated financial statements.

HOOVER ARBITRATION

James D. Hoover, Jr. and Kimberly R. Hoover v. M.H. Meyerson & Co, Inc., Martin H. Meyerson and Ronald Heller, NASD Arbitration No. 03-02234

In March 2003, claimants filed a Statement of Claim in arbitration with the NASD alleging the respondents engaged in excessive and unauthorized trading and entered into unsuitable investments in the claimants’ account. Claimants further alleged that respondent, Heller, solicited investments in several private placements in which respondents had vested interests. Claimants seek damages in the amount of $2.5 million. In May 2003, the Company filed its answer denying the allegation and moved to dismiss the claim.

The Company believes that the allegations in the Statement of Claim are meritless. The Company intends to continue to contest the allegations vigorously.

NEWMAN ARBITRATIONS

Annette Newman, IRA v. M.H. Meyerson & Co, Inc., NASD Arbitration No. 02-07064

Claimant filed arbitration with the NASD alleging a former registered representative of the Company recommended and entered into unsuitable investments for claimant’s account. Claimant also alleged that the registered representative engaged in unauthorized trading in the claimant’s account. Claimant seeks damages in the amount of $113,000. In March 2003, the Company filed its answer denying all allegations.

Martin Newman and Annette Newman v. M.H. Meyerson & Co, Inc., NASD Arbitration No. 03-00129

In January 2003 claimants filed a Statement of Claim in arbitration with the NASD alleging a former registered representative of the Company engaged in excessive trading and made unauthorized investments in the claimants’ account. Claimants also alleged that Company failed to supervise adequately the activities of its representative. Claimants seek damages in the amount of $120,100. On April 3, 2003, the Company filed its answer denying all allegations.

Other matters

&nbs