SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1999
Commission file number 0-14140
First Albany Companies Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 22-2655804
------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 South Pearl St., Albany, NY 12207
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(518) 447-8500
---------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 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 (1) No
---------- --------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
7,057,468 Shares of Common Stock were outstanding as of the close of
- ----------------------------------------------------------------------
business on August 4, 1999.
- ---------------------------
FIRST ALBANY COMPANIES INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Financial
Condition at June 30, 1999 and December 31, 1998.......... 3
Condensed Consolidated Statements of Operations
for the Three Months and Six Months Ended
June 30, 1999 and June 26, 1998........................... 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and June 26, 1998.......... 5
Notes to Condensed Consolidated Financial Statements........... 6-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 14-25
Part II - Other Information
Item 1. Legal Proceedings.......................................... 26
Item 4. Submission of matters to a vote of security holders........ 26
Item 6. Exhibits and Reports on Form 8-K........................... 27-29
FIRST ALBANY COMPANIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30,
1999 December 31,
(In thousands of dollars) (Unaudited) 1998
- ----------------------------------------------------------------------------
Assets
Cash $7,161 $1,424
Securities purchased under agreement to resell 13,457 1,631
Securities borrowed 755,747 470,693
Receivables from:
Brokers, dealers and clearing agencies 4,651 6,434
Customers 227,482 194,401
Others 52,231 12,228
Securities owned 195,926 118,370
Investments 8,251 10,719
Office equipment and leasehold improvements, net 11,347 11,390
Other assets 18,472 15,608
- ----------------------------------------------------------------------------
Total assets $1,294,725 $842,898
============================================================================
Liabilities and Stockholders' Equity
Liabilities
Short-term bank loans $185,314 $104,679
Securities loaned 910,850 565,571
Payables to:
Brokers, dealers and clearing agencies 5,417 4,862
Customers 53,385 48,467
Others 12,099 17,742
Securities sold but not yet purchased 34,138 2,814
Accounts payable 2,205 4,970
Accrued compensation 13,110 23,584
Accrued expenses 8,298 5,863
Notes payable 6,367 4,750
Obligations under capitalized leases 4,841 3,688
- ----------------------------------------------------------------------------
Total liabilities 1,236,024 786,990
- ----------------------------------------------------------------------------
Commitments and Contingencies
Subordinated debt 7,500 7,500
- ----------------------------------------------------------------------------
Stockholders' Equity
Common stock 73 66
Additional paid-in-capital 48,468 40,354
Retained earnings 2,663 8,001
Less treasury stock at cost (3) (13)
- ----------------------------------------------------------------------------
Total stockholders' equity 51,201 48,408
- ----------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,294,725 $842,898
============================================================================
See notes to the condensed consolidated financial statements.
FIRST ALBANY COMPANIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
(In thousands of dollars except June 30, June 26, June 30, June 26,
for per share and outstanding 1999 1998 1999 1998
share amounts)
- ------------------------------------------------------------------------------
Revenues
Commissions $18,233 $14,661 $36,889 $29,368
Principal transactions 17,349 16,104 34,427 37,099
Investment banking 7,325 9,079 14,531 15,203
Investment (losses) gains (871) 352 (4,427) 1,402
Interest 14,730 11,969 26,471 23,182
Fees and other 4,574 3,292 8,507 6,301
- ------------------------------------------------------------------------------
Total revenues 61,340 55,457 116,398 112,555
Interest expense 12,339 9,871 21,674 18,976
- ------------------------------------------------------------------------------
Net revenues 49,001 45,586 94,724 93,579
- ------------------------------------------------------------------------------
Expenses (excluding interest)
Compensation and benefits 34,715 31,726 69,029 66,230
Clearing, settlement and
brokerage costs 1,199 1,034 2,494 1,902
Communications and data processing 3,411 3,482 7,071 6,706
Occupancy and depreciation 3,360 3,312 6,550 6,537
Selling 2,404 1,928 4,511 3,755
Other 2,554 2,216 5,036 4,295
- ------------------------------------------------------------------------------
Total expenses (excluding interest) 47,643 43,698 94,691 89,425
- ------------------------------------------------------------------------------
Income before income taxes 1,358 1,888 33 4,154
- ------------------------------------------------------------------------------
Income tax expense 541 801 13 1,660
- ------------------------------------------------------------------------------
Net income $ 817 $1,087 $ 20 $2,494
==============================================================================
Net income per Common Share:
Basic $0.12 $0.16 $0.00 $0.37
Dilutive $0.10 $0.14 $0.00 $0.33
- ------------------------------------------------------------------------------
Weighted average common
and common equivalent
shares outstanding:
Basic 6,937,258 6,829,172 6,931,233 6,819,376
Dilutive 7,863,142 7,593,119 7,707,636 7,567,379
==============================================================================
Dividend per common share
outstanding $0.05 $0.05 $0.10 $0.10
==============================================================================
See notes to the condensed consolidated financial statements.
FIRST ALBANY COMPANIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30, June 26,
(In thousands of dollars) 1999 1998
- -----------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 20 $2,494
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 2,231 2,236
Deferred compensation 969
Deferred income taxes (2,543) (134)
Undistributed loss of affiliate 1,416 490
Unrealized investment (gain) loss 3,011 (1,837)
Realized (gain) loss on sale of investments (54)
Loss on sales of fixed assets 126
Services provided in exchange for common stock 347 147
(Increase) decrease in operating assets:
Securities purchased under agreement
to resell (11,826) 4,495
Net receivables from customers (28,163) (39,187)
Net receivables from others (41,211)
Securities owned, net (46,232) (57,547)
Other assets (321) 3,579
Increase (decrease) in operating liabilities:
Securities loaned, net 60,225 15,913
Net payables to brokers, dealers, and
clearing agencies 2,338 3,067
Net payables to others (9,668)
Accounts payable and accrued expenses (10,804) (322)
- -----------------------------------------------------------------------------
Net cash used in operating activities (70,417) (76,328)
- -----------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of furniture, equipment,
and leaseholds (425) (89)
Proceeds from sale of investments 66
- -----------------------------------------------------------------------------
Net cash used in investing activities (425) (23)
- -----------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds of short-term bank loans 80,635 80,050
Proceeds of notes payable 4,400
Payments on notes payable (2,783) (1,313)
Payments of obligations under
capitalized leases (689) (447)
Securities sold under agreement to repurchase (891)
Proceeds from issuance of common stock
from treasury 544
Proceeds from issuance of common stock 111
Net decrease from borrowing under
line-of-credit agreements (4,435) (238)
Dividends paid (660) (588)
- -----------------------------------------------------------------------------
Net cash provided by financing activities 76,579 77,117
- -----------------------------------------------------------------------------
Increase in cash 5,737 766
Cash at beginning of the year 1,424 951
- -----------------------------------------------------------------------------
Cash at end of period $ 7,161 $ 1,717
=============================================================================
In 1999, the Company entered into capital leases for office and computer
equipment totaling approximately $1,842,000.
See notes to the condensed consolidated financial statements.
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all normal, recurring adjustments necessary
for a fair presentation of results for such periods. The results for any
interim period are not necessarily indicative of those for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. These consolidated financial statements
should be read in conjunction with the financial statements and notes for
the year ended December 31, 1998.
Certain amounts in the 1998 financial statements have been reclassified to
conform with the 1999 presentation.
In 1999, the Company changed its quarter end from a last Friday of the
quarter to a calendar quarter end. This change was made to be consistent
with the year end, which is on a calendar basis. This change in the period
ended June 30, 1999 had no material effect on the condensed consolidated
Statement of Income.
2. Earnings Per Common Share
Basic earnings per share has been computed based upon the weighted average
number of common shares outstanding. Dilutive earnings per share has been
computed based upon the weighted average common shares outstanding for all
potentially dilutive common stock outstanding during the reporting period.
The weighted average number of common shares and dilutive common equivalent
shares were:
Three Months Ended Six Months Ended
(In thousands of dollars, June 30, June 26, June 30, June 26,
except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------------------------
Net income $ 817 $ 1,087 $ 20 $ 2,494
- ------------------------------------------------------------------------------
Weighted average shares
for basic earnings per share 6,937 6,829 6,931 6,819
Effect of dilutive common
equivalent shares (stock options
and stock issuable under employee
benefit plans) 926 764 777 748
- ------------------------------------------------------------------------------
Weighted average shares and
dilutive common equivalent shares
for dilutive earnings per share 7,863 7,593 7,708 7,567
==============================================================================
Basic earnings per share $ 0.12 $ 0.16 $ 0.00 $ 0.37
Dilutive earnings per share $ 0.10 $ 0.14 $ 0.00 $ 0.33
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Investments
At June 30, 1999 the Company owned approximately 3,666,000 common shares
(34% of the shares outstanding) of Mechanical Technology Incorporated
(MTI). Shares of MTI are traded on the NASDAQ National Market System under
the symbol MKTY. The Company's investment in MTI is recorded under the equity
method and approximated $5.0 million, which included goodwill of approximately
$0.6 million which is being amortized over 10 years. The Company's equity
in MTI's net loss for the three months ended March 26, 1999, recorded on a
one-quarter delay basis, was $0.9 million.
MTI distributed to holders of record of shares of its common stock as of
the close of business on June 4, 1999 (the "Record Date"), non
transferrable subscription rights to purchase additional shares of common
stock at an exercise price of $16.00 per share (the "Rights Offering").
One right was granted for each sixteen shares of common stock held on the
Record Date. The rights expired July 9, 1999. First Albany Companies
Inc., exercised rights for a total of 251,004 shares of MTI common stock
during the month of July 1999.
On April 23, 1999, Mechanical Technology Inc. announced a 3 for 2 stock
split in the form of a stock dividend payable May 17, 1999 to shareholders
of record on April 30, 1999.
The following presents unaudited summarized financial information of MTI
at March 26, 1999 and for the three months then ended March 26, 1999:
(in thousands of dollars)
----------------------------------------
Assets $23,449
Liabilities 10,435
----------------------------------------
Shareholder's equity $13,014
========================================
========================================
Revenues $ 3,293
----------------------------------------
Operating loss (500)
Equity in Joint Venture losses (2,094)
Other Income 34
----------------------------------------
Loss from continuing operations,
net of taxes (2,560)
Net loss $(2,560)
========================================
At June 30, 1999 the aggregate market value of the Company's shares of MTI
stock was $99.0 million. Under the equity method, the market value of MTI's
stock is not included in the Company's financial results. Equity in joint
venture losses for the three months ended March 26, 1999 are attributed to
MTI's investments in Plug Power, L.L.C. The Company's equity in MTI's net
loss, recorded on a one-quarter delay basis, was $1.4 million for the three
months ended June 30, 1999, which will be recorded by the Company in the
quarter ending September 30, 1999.
In February 1999, Plug Power, L.L.C. (a joint venture between MTI and
Edison Development Corp.) issued membership interests to new investors with a
recorded value of $13.75 million. As a result, MTI recorded its proportionate
share of this increase in Plug Power's equity as investment in joint venture
and additional paid-in-capital.
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Accordingly, the Company recorded its proportionate share ($2.0 million) of
this increase in MTI's equity as an increase in investments and additional
paid-in-capital.
At June 30, 1999, the Company owned 209,500 shares of META Group, Inc.
The fair market value of this investment was $3.2 million. During the six
month ended June 30, 1999, the Company has recorded unrealized losses of
$3.0 million with respect to this investment.
4. Receivables from Others
Amounts receivable from others as of:
June 30, December 31,
(In thousands of dollars) 1999 1998
- ----------------------------------------------------------------------------
Adjustment to record securities owned on
a trade date basis, net $38,913 $ 3,773
Others 13,318 8,455
- ----------------------------------------------------------------------------
Total $52,231 $12,228
============================================================================
Proprietary securities transactions are recorded on trade date, as if
they had settled. The related amounts receivable and payable for unsettled
securities transactions are recorded net in Receivables or Payables to
Others on the Statement of Financial Condition.
5. Payables to Others
Amounts payable to others as of:
June 30, December 31,
(In thousands of dollars) 1999 1998
- ----------------------------------------------------------------------------
Borrowing under line-of-credit agreements $10,300 $14,735
Others 1,799 3,007
- ----------------------------------------------------------------------------
Total $12,099 $17,742
============================================================================
Proprietary securities transactions are recorded on trade date, as if
they had settled. The related amounts receivable and payable for unsettled
securities transactions are recorded net in Receivables or Payables to
Others on the Statement of Financial Condition.
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
6. Notes Payable
Notes payable consists of a note for $2,187,500 which is collateralized by
assets and is payable in monthly principal payments of $104,167 plus interest.
The interest rate is 2% over the 30-day London InterBank Offered Rate ("LIBOR")
(5.236% plus 2% on June 30, 1999). This note matures on March 27, 2001.
Notes payable also consists of a note dated March 31, 1999 for $4,180,000
payable in monthly principal payments of $73,333 plus interest. The interest
rate is 1.5% over the 30-day London Interbank Offered Rate ("LIBOR"). A portion
of the proceeds from this note were used to pay off a previous note for
$1,489,583. This note matures on April 1, 2004.
One of the more significant covenants of both notes requires First Albany
Corporation to maintain a minimum net capital (as defined by Rule 15c 3-1
of the Securities and Exchange Commission) equal to three times the required
minimum net capital. The required minimum net capital as of June 30, 1999 was
$4.7 million. The amount of net capital as of June 30, 1999 was $17.2 million.
7. Obligations under Capitalized Leases
The following is a schedule of future minimum lease payments under capital
leases together with the present value of the net minimum lease payments as
of June 30, 1999:
(In thousands of dollars)
------------------------------------------------
1999 $1,023
2000 2,009
2001 1,661
2002 620
2003 62
2004 14
------------------------------------------------
Total Minimum Lease Payments 5,389
Less: Amount Representing Interest 548
------------------------------------------------
Present Value of Minimum Lease Payments $4,841
================================================
8. Subordinated Debt
The Company has a subordinated debt of $2,500,000. This debt bears
interest at 8.75%. Interest is paid monthly with the principal amount due
at maturity on December 31, 2002. The lender has the right to exercise
stock options on 31,130 shares of the Company's stock at $16.06 per share.
This right expires December 31, 2002.
The Company also has an additional subordinated debt of $5,000,000 which
bears interest at 9.25%. Interest is paid monthly with the principal
amount due at maturity on December 31, 2002. The lender has the right to
exercise stock options on 102,103 shares of the Company's stock at $9.80
per share. This right expires December 31, 2002.
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Both loan agreements include restrictive financial covenants. One of the
more significant covenants requires the Company to maintain a minimum net
capital (as defined by Rule 15c3-1 of the Securities and Exchange Commission)
equal to three times the required net capital. The amount of required net
capital as of June 30, 1999 was $4.7 million. The amount of net capital as of
June 30, 1999 was $17.2 million.
9. Commitments and Contingencies
In the normal course of business, the Company has been named a defendant,
or otherwise has possible exposure, in several claims. Certain of these
are class actions which seek unspecified damages which could be substantial.
Although there can be no assurance as to the eventual outcome of litigation in
which the Company has been named as a defendant or otherwise has possible
exposure, the Company has provided for those actions it believes are likely
to result in adverse dispositions. Although further losses are possible, the
opinion of management, based upon the advice of its attorneys and general
counsel, is that such litigation will not, in the aggregate, have a material
adverse effect on the Company's liquidity or financial position, although it
could have a material effect on quarterly or annual operating results in the
period in which it is resolved.
10. Stockholders' Equity
In January 1999, the Board of Directors declared the regular quarterly
cash dividend of $0.05 per share payable on February 24, 1999, to
shareholders of record on February 10, 1999.
In April 1999, the Board of Directors declared the regular quarterly
dividend of $0.05 per share for the first quarter, ended March 31, 1999,
along with a 5% stock dividend. Both are payable on May 25, 1999 to
shareholders of record on May 11, 1999.
In July 1999, the Board of Directors declared the regular quarterly
dividend of $0.05 per share for the second quarter, ended June 30, 1999,
payable on August 24, 1999, to shareholders of record on August 10, 1999.
11. Net Capital Requirements
The Company's broker-dealer subsidiary, First Albany Corporation, is subject
to the Securities and Exchange Commission's Uniform Net Capital Rule which
requires the maintenance of a minimum net capital as calculated and defined
by the Rule. As of June 30, 1999, the broker-dealer subsidiary had aggregate
net capital, as defined, of $17.2 million - exceeding the required net capital
by $12.5 million.
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
12. Derivative Financial Instruments
The Company does not engage in the proprietary trading of derivative
securities with the exception of highly liquid index futures contracts and
options. These index futures contracts and options are used to hedge certain
securities positions in the Company's inventory. Gains and losses are included
as revenues from principal transactions.
The contractual or notional amounts reflected in these financial
instruments reflect the volume and activity and do not reflect the amounts
at risk. The amounts at risk are generally limited to the unrealized
market valuation gains or losses on the instruments and will vary based on
changes in market value. Futures contracts are executed on an exchange,
and cash settlement is made on a daily basis for market movements. Open
equity in the futures contracts are recorded as receivables from clearing
organizations. The settlement of these transactions is not expected to
have a material adverse effect on the financial condition of the Company.
13. Segment Analysis
The Company's reportable operating segments are: Private Client Group,
Institutional Sales and Trading ("Institutional"), and Other. The financial
policies of the Company's segments are the same as those described in the
"Summary of Significant Accounting Policies." The Private Client Group provides
securities brokerage services to individual investors. Revenues are generated
through customer purchase and sale of various securities: equity, taxable and
non-taxable fixed income, mutual funds and various other investment products and
services. The Institutional segment generates revenues from securities
transactions (equities and fixed-income securities) with institutional clients
along with investment banking activities, which includes managing, co-managing
and participating in tax-exempt and corporate securities underwritings. This
segment also includes trading activity in which the Company buys and maintains
inventories of fixed-income products and equities securities (as a "market
maker") for sale to other dealers and to institutional and individual clients.
The Other segment revenues are derived from a variety of sources which include
investment income, net interest revenues relating to securities lending
transactions and revenues from correspondent services.
The Company's Other segment also includes revenue relating to the Company's
investment in Mechanical Technology Incorporated (MTI) which is recorded under
the equity method (see Note 3 - "Investments"). Pre-tax net (loss) income
relating to MTI was $(871,000) and $89,000 for the quarters ended June 1999 and
1998, respectively and $(1,415,000) and $(490,000) for the six months ended
June 1999 and 1998, respectively. The Company records its other investments
at fair market value, which is also included in the Other segment.
Intersegment revenues and expenses are eliminated between segments. Interest
revenues and interest expenses are reviewed primarily on a net basis (Net
Interest Revenues) and are shown as such. The Company evaluates the performance
of its segments and allocates resources to them based upon long-term operating
margin opportunities which are consistent with the growth strategy of the
Company. Included in the Other segment are operations, administrative functions
and other support costs along with an accrual for general discretionary variable
compensation which are not allocated to the various segments. Asset information
by reportable segments is not reported since the Company does not produce such
information internally for the reportable segments. All assets are located
in the United States.
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Three Months Ended Six Months Ended
(In thousands of dollars) June 30, June 26, June 30, June 26,
1999 1998 1999 1998
- -----------------------------------------------------------------------------
Revenues (excluding interest):
Private Client Group $23,762 $21,855 $47,125 $42,685
Institutional 22,719 20,249 44,701 43,119
Other 129 1,384 (1,899) 3,569
- -----------------------------------------------------------------------------
Total $46,610 $43,488 $89,927 $89,373
=============================================================================
Net Interest Revenues:
Private Client Group $ 1,047 $ 947 $ 1,977 $ 1,710
Institutional (216) (383) (335) (753)
Other 1,560 1,534 3,155 3,249
- -----------------------------------------------------------------------------
Total $ 2,391 $ 2,098 $ 4,797 $ 4,206
=============================================================================
Net Revenues:
Private Client Group $24,809 $22,802 $49,102 $44,395
Institutional 22,503 19,866 44,366 42,366
Other 1,689 2,918 1,256 6,818
- -----------------------------------------------------------------------------
Total $49,001 $45,586 $94,724 $93,579
=============================================================================
Pre-Tax Income:
Private Client Group $ 5,803 $ 4,489 $10,854 $ 8,058
Institutional 742 461 1,599 1,477
Other (5,187) (3,062) (12,420) (5,381)
- -----------------------------------------------------------------------------
Total $ 1,358 $ 1,888 $ 33 $ 4,154
=============================================================================
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
14. New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133
is effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999. SFAS 133 requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. In June 1999, the
FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133", which
delayed the effective date. SFAS 133 is now effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. The Company will adopt SFAS
133 in its 2001 fiscal year, as required, and has not determined whether its
implementation will have a material impact on the Company's financial condition,
results of operations or cash flows.
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
1999 vs.
Three Months Ended 1998 Percentage
June 30, June 26, Increase Increase
(In thousands of dollars) 1999 1998 (Decrease) (Decrease)
- -----------------------------------------------------------------------------
Revenues
Commissions $18,233 $14,661 $ 3,572 24%
Principal transactions 17,349 16,104 1,245 8%
Investment banking 7,325 9,079 (1,754) (19%)
Investment (loss) gain (871) 352 (1,223) (347%)
Interest income 14,730 11,969 2,761 23%
Fees and others 4,574 3,292 1,282 39%
- -----------------------------------------------------------------------------
Total revenues 61,340 55,457 5,883 11%
Interest expense 12,339 9,871 2,468 25%
- -----------------------------------------------------------------------------
Net revenues 49,001 45,586 3,415 7%
- -----------------------------------------------------------------------------
Expenses (excluding interest)
Compensation and benefits 34,715 31,726 2,989 9%
Clearing, settlement and
brokerage costs 1,199 1,034 165 16%
Communications and
data processing 3,411 3,482 (71) (2%)
Occupancy and depreciation 3,360 3,312 48 1%
Selling 2,404 1,928 476 25%
Other 2,554 2,216 338 15%
- -----------------------------------------------------------------------------
Total expenses (excluding interest) 47,643 43,698 3,945 9%
- -----------------------------------------------------------------------------
Income before income taxes 1,358 1,888 (530) (28%)
- -----------------------------------------------------------------------------
Income tax expense 541 801 (260) (32%)
- -----------------------------------------------------------------------------
Net Income $ 817 $ 1,087 $ (270) (25%)
=============================================================================
Net interest income
Interest income $14,730 $11,969 $ 2,761 23%
Interest expense 12,339 9,871 2,468 25%
- -----------------------------------------------------------------------------
Net Interest Income $ 2,391 $ 2,098 $ 293 14%
=============================================================================
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and results of
operations during the periods included in the accompanying condensed
consolidated financial statements.
Business Environment
- --------------------
First Albany Corporation (First Albany), a wholly owned subsidiary of First
Albany Companies Inc. (the Company), is a full service investment banking and
brokerage firm. Its primary business includes the underwriting, distribution,
and trading of fixed income and equity securities. The investment banking and
brokerage businesses earn revenues in direct correlation with the general level
of trading activity in the stock and bond markets. This level of activity
cannot be controlled by the Company; however, many of the Company's costs are
fixed. Therefore, the Company's earnings, like those of others in the industry,
reflect the activity in the markets and can fluctuate accordingly.
Results of Operations
- ---------------------
Three Month Periods Ended June 30, 1999 and June 26, 1998
- ---------------------------------------------------------
Net Income
- ----------
Net income for the quarter ended June 30, 1999 was $0.8 million or $0.12
basic earnings per share ($0.10 dilutive earnings per share), compared to
$1.1 million or $0.16 basic earnings per share ($0.14 dilutive earnings per
share) in the comparable 1998 period. First Albany Corporation, the brokerage
operations, had pre-tax profit of $2.5 million on recorded net revenues of
$49.6 million for the quarter ending June 30, 1999, compared to pre-tax
profit of $1.7 million on net revenues of $45 million for the same period
in 1998. The earnings at First Albany Corporation were offset by a pre-tax
loss at the holding company of $1.1 million, resulting primarily from a decline
in the carrying value of First Albany Companies Inc.'s investment portfolio,
which compares to a pre-tax profit of $175 thousand for the same period of 1998.
Commissions
- -----------
Commission revenues for this year's second quarter increased $3.6 million
or 24% compared to the comparable 1998 period, reflecting active trading in
all major markets. Revenues from listed and over-the-counter commissions
increased $3.5 million, while revenues from mutual funds and options increased
$0.1 million.
Principal Transactions
- ----------------------
Principal transactions for this year's second quarter increased $1.2 million
or 8% compared to the comparable 1998 period. This amount was comprised of an
increase in corporate fixed income of $2.8 million, a decrease in equity
securities of $1.1 million and a decrease in municipal bonds of $0.5 million.
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Investment Banking
- ------------------
Investment banking revenues for this year's second quarter decreased $1.8
million or 19% compared to the comparable 1998 period. Revenues from corporate
underwriting decreased $1.3 million while municipal underwriting revenues
decreased $0.5 million.
Investment gains/(losses)
- -------------------------
Investment gains (losses) for this year's second quarter decreased $1.2
million compared to the comparable 1998 period. The decrease was due primarily
to a decline in the book value of the investment portfolio held at First Albany
Companies Inc, the holding company.
Fees and Others
- ---------------
Fees and other revenues for this year's second quarter increased $1.3 million
or 39% compared to the same period of 1998, primarily reflecting increased
revenues from the firm's focus to increase fee-based revenues.
Compensation and Benefits
- -------------------------
Compensation and benefits for this year's second quarter increased $3.0
million or 9% compared to the same period of 1998, due primarily to an increase
in net revenues at First Albany Corporation.
Selling
- -------
Selling expenses for this year's second quarter increased $0.5 million or 25%,
mainly reflecting greater promotional-related activity in the firm's private
client and institutional divisions.
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS COMPARISON OF 1999 VS. 1998
1999 vs.
Six Months Ended 1998 Percentage
June 30, June 26, Increase Increase
(In thousands of dollars) 1999 1998 (Decrease) (Decrease)
- ------------------------------------------------------------------------------
Revenues
Commissions $ 36,889 $ 29,368 $ 7,521 26%
Principal transactions 34,427 37,099 (2,672) (7%)
Investment banking 14,531 15,203 (672) (4%)
Investment (loss) gain (4,427) 1,402 (5,829) (416%)
Interest income 26,471 23,182 3,289 14%
Fees and others 8,507 6,301 2,206 35%
- -------------------------------------------------------------------------------
Total revenues 116,398 112,555 3,843 3%
Interest expense 21,674 18,976 2,698 14%
- ------------------------------------------------------------------------------
Net revenues 94,724 93,579 1,145 1%
- ------------------------------------------------------------------------------
Expenses (excluding interest)
Compensation and benefits 69,029 66,230 2,799 4%
Clearing, settlement and
brokerage cost 2,494 1,902 592 31%
Communications and
data processing 7,071 6,706 365 5%
Occupancy and depreciation 6,550 6,537 13 0%
Selling 4,511 3,755 756 20%
Other 5,036 4,295 741 17%
- ------------------------------------------------------------------------------
Total expenses
(excluding interest) 94,691 89,425 5,266 6%
- ------------------------------------------------------------------------------
Income before income taxes 33 4,154 (4,121) (99%)
- ------------------------------------------------------------------------------
Income tax expense 13 1,660 (1,647) (99%)
- ------------------------------------------------------------------------------
Net income $ 20 $ 2,494 $ (2,474) (99%)
==============================================================================
Net interest income
Interest income $ 26,471 $ 23,182 $ 3,289 14%
Interest expense 21,674 18,976 2,698 14%
- ------------------------------------------------------------------------------
Net interest income $ 4,797 $ 4,206 $ 591 14%
==============================================================================
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Six Months Periods Ended June 30, 1999 and June 26, 1998
- --------------------------------------------------------
Net Income
- ----------
Net income for the six months ended June 30, 1999, was $0.02 million or
$0.00 basic earnings per share ($0.00 dilutive earnings per share), compared
to $2.5 million or $0.37 basic earnings per share ($0.33 dilutive earnings per
share) in the comparable 1998 period.
Commissions
- -----------
Commission revenues increased $7.5 million or 26% in this year's six-month
period reflecting active trading in all major markets. Revenues from listed
and over-the-counter agency commissions increased $7.5 million while revenues
from mutual funds and options remained stable.
Principal Transactions
- ----------------------
Principal transactions decreased $2.7 million or 7% in this year's first
six-months. This was comprised of a decrease in corporate fixed income of
$1.4 million, a decrease in equity securities of $0.8 million, while municipal
bonds remained stable.
Investment Banking
- ------------------
Investment banking revenues decreased $0.7 million or 4% in this year's first
six-months. Revenues from municipal underwriting decreased $1.0 million and
corporate underwriting revenues increased $0.3 million.
Investment gains/(losses)
- -------------------------
Investment gains (losses) decreased $5.8 million in this year's first six
months. The decrease was due primarily to a decline in the book value of
the investment portfolio held at First Albany Companies Inc, the holding
company.
Fees and Others
- ---------------
Fees and other revenues increased $2.2 million or 35% in this year's first
six months resulting from the firm's focus to increase fee-based revenues.
Compensation and Benefits
- -------------------------
Compensation and benefits increased $2.8 million or 4%, which is attributable
to higher revenues at First Albany Corporation.
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Clearance, Settlement and Brokerage Costs
- -----------------------------------------
Clearance, settlement and brokerage costs for this year's first six months
increased $0.6 million or 31% compared to the same period of 1998, due primarily
to increases in listed agency transactions.
Selling
- -------
Selling expenses for this year's first six months increased $0.8 million or
20% mainly reflecting greater promotional-related activity.
Other
- -----
Other expenses for this year's second quarter increased $ 0.7 million or 17%
due mainly to an increase in consulting costs.
Income Taxes
- ------------
Income taxes decreased $1.6 million due to a decrease in pre-tax earnings.
Liquidity and Capital Resources
- -------------------------------
A substantial portion of the Company's assets, similar to other brokerage
and investment banking firms, is liquid, consisting of cash and assets readily
convertible into cash. These assets are financed primarily by the Company's
interest-bearing and non-interest-bearing payables to customers, payables to
brokers and dealers secured by loaned securities, and bank lines-of-credit.
Securities borrowed and securities loaned along with receivables from customers
and payable to customers will fluctuate primarily due to the current level of
business activity in these areas. Securities owned will fluctuate as a result
of the changes in the level of positions held to facilitate customer
transactions and changes in market conditions. Short-term bank loans and
securities loaned, net, are a source of financing for the Company and will
fluctuate accordingly. Receivables from others and payables to others will
fluctuate primarily due to the change in the adjustment to record securities
owned on a trade date basis.
At June 30, 1999, First Albany Corporation, a registered broker-dealer
subsidiary of First Albany Companies Inc., was in compliance with the net
capital requirements of the Securities and Exchange Commission and had capital
in excess of the minimum required.
First Albany Companies Inc. entered into a line of credit facility with a
commercial bank, as of July 6, 1999, which allows for borrowings for general
corporate purposes of up to $15 million. The facility is secured by a portion
of First Albany Companies Inc.'s investment in Mechanical Technology Inc.
Additionally, on July 30, 1999, First Albany Companies Inc. obtained regulatory
approval to issue a subordinated note to First Albany Corporation in the amount
of $7.5 million, which was funded by this new facility. The purpose of the
subordinated note was to increase the net capital of First Albany Corporation.
Management believes that funds provided by operations and a variety of
committed and uncommitted bank lines-of-credit--totaling $275,000,000 of which
approximately $89,686,000 were unused as of June 30, 1999--will provide
sufficient resources to meet present and reasonably foreseeable short-term
financing needs.
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
In January 1999, the Board of Directors declared the regular quarterly
cash dividend of $0.05 per share payable on February 24, 1999, to shareholders
of record on February 10, 1999.
In April 1999 the Board of Directors declared the regular quarterly dividend
of $0.05 per share for the first quarter, ended March 31, 1999, along with a 5%
stock dividend. Both are payable on May 25, 1999 to shareholders of record on
May 11, 1999.
In July 1999, the Board of Directors declared the regular quarterly dividend
of $0.05 per share for the second quarter, ended June 30, 1999, payable on
August 24, 1999, to shareholders of record on August 10, 1999.
The Company believes that funds provided by operations will also provide
sufficient resources for the acquisition of office equipment and leasehold
improvements, current long-term loan repayment requirements, and other long-term
requirements.
Year 2000
- ---------
The Year 2000 Issue (Y2K) concerns the potential impact of historic computer
software code that only utilizes two digits to represent the calendar year
(e.g., "98" for "1998"). Software so developed and not corrected could produce
inaccurate or unpredictable results commencing January 1, 2000, when current
and future dates present a lower two-digit year number than dates in the prior
century. The Company, similar to most securities institutions, is significantly
subject to the potential impact of the Y2K due to the nature of the industry.
Potential impacts to the Company may arise from software, computer hardware,
and other equipment both within the Company's direct control and outside the
Company's ownership, yet with which the Company interfaces either electronically
or operationally. Securities industry regulators have intensively focused upon
Y2K exposures issuing guidance concerning the responsibilities of senior
management and directors. Y2K testing and certification is being addressed as a
key safety and soundness issue in conjunction with regulatory examinations of
securities firms.
In August 1998, the Company filed form BD-Y2K, a mandatory filing with the
Securities & Exchange Commission, New York Stock Exchange and National
Association of Securities Dealers describing its Y2K compliance efforts and its
Y2K readiness status. The Company filed the second of these mandatory filings
in April 1999.
The SEC has highly prioritized Y2K compliance in order to avoid major
disruptions to the operations of securities institutions. Institutions failing
to file these mandatory disclosures may be and in some cases already have been
subject to formal enforcement action, supervisory agreements, cease and desist
orders or civil money penalties.
The Project
- -----------
The Company has initiated a comprehensive project to prepare its internally
and externally dependent computer and peripheral systems for the year 2000,
and has completed changes to critical systems. The Company has taken part in
numerous testing opportunities with other security industry parties, including
testing with Exchanges and Utilities. The Company completed extensive Industry
Wide Testing during the first and second quarters of 1999.
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
These tests were successfully completed by the Company with no Year 2000
errors. In addition, the Company has taken part in other industry testing
including Market Data Testing and Securities Lending Testing.
The Company's Year 2000 plan is multiphase, as follows:
Phase I - Inventory & Assessment: A comprehensive inventory of all hardware,
software, vendor interfaces and service providers has been completed and is
stored in a database that allows for easy access and updating.
Phase II - Planning, Analysis & Design: The detailed Project Plan has been
completed, to allow for easy tracking and updating.
Phase III - Remediation: In some cases, remediation was undertaken either by
the Company or by an outsourced third party in the form of upgrades,
replacements or code fixes. In other cases, the Company monitored its vendors'
progress in making its systems Y2K compliant.
Phase IV - Testing: As programs and hardware were fixed, replaced or upgraded,
they were extensively tested before being placed into production. The Company
will continue to participate in all available securities industry testing.
Phase V - Implementation: All production-ready systems (hardware, software,
and programming) were placed into production and carefully monitored.
Phase VI - Post Implementation: The Company will keep a careful eye out for
any new products put into production after the Y2K plan has been fully executed.
The Company is currently participating in all available external testing with
its service providers. In addition to our own testing, securities industry
service providers, such as the New York Stock Exchange, the Depository Trust
Company and the National Securities Clearance Corporation (NSCC), are
conducting tests of the critical clearance and execution systems that drive
the industry as a whole. This is being done with the oversight of the
Securities and Exchange Commission.
State of Readiness
- ------------------
The Company had defined "mission-critical" applications as those necessary
for the Company to continue with business as usual. Beta Systems, which
represents 90% of the Company's mission-critical applications, provides the
Company with its official books and records, order entry and clearing
capabilities related to securities transaction processing. Beta Systems has
certified to the Company that they are Y2K compliant. Full testing with Beta
Systems, for mission-critical applications, began in the third quarter of 1998
and was completed in the fourth quarter of 1998. The Company also utilized
BETA Systems for participation in Industry Wide Testing. Testing of non
mission-critical applications began during the fourth quarter 1998 and was
successfully completed in the first quarter of 1999.
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
The Company has included facilities management concerns in its overall
Y2K plan. This includes issues with power, HVAC, elevators, fire alarm systems,
and security systems, among others. The Company is confident that these systems
will work normally after January 1, 2000. The Company has delayed several
Information Technology projects so that Y2K issues could be timely and
efficiently dealt with. The delay of these projects has not affected the
Company's financial condition and the results of operations.
The Costs to Address the Company's Y2K Issues
- ---------------------------------------------
The Company has allocated a budget of $1.2 million for the Y2K project. The
Company has spent $1.1 million on its Y2K project through the second quarter
of 1999. This amount was spent on upgrades to its Novell and NT operating
systems, upgrading three voice/data applications, replacing non-compliant
systems and building a Y2K compliant environment. The Company expects to spend
an additional $74,000 in the remaining two quarters of 1999. Most upgrades to
date have been capitalized, however, independent-verification testing of its
internal applications will be expensed as incurred. These costs are being
funded through operating cash flow. All internal remediation has been
accomplished by utilizing existing Company personnel. The Company's Y2K budget
does not reflect the costs of the extensive resource allocation and management
from internal sources. The Novell, NT, voice/data applications and the rollout
of new desktop computer projects were all accelerated to meet the Company's Y2K
project deadlines.
The Risks of the Company's Y2K Issues
- -------------------------------------
The failure to correct a material Y2K problem could result in an interruption
in, or a failure of, certain normal business activities or operations. Such
failures could materially and adversely affect the Company's results of
operations, liquidity and financial condition. Due to the general uncertainty
inherent in the Y2K problem, resulting in part from the uncertainty of the Y2K
readiness of third-party suppliers and customers, the Company is unable to
determine at this time whether the consequences of Y2K failures will have a
material impact on the Company's results of operations, liquidity or financial
condition.
Although all of Company's internal critical systems are now believed to be
compliant, the Company cannot give any assurances that this result was actually
achieved. Specific factors that give rise to this uncertainty include: failure
to identify all susceptible systems, non compliance by third parties whose
systems and operations impact the Company, and other similar uncertainties. A
reasonably possible worst case scenario might include one or more of the
Company's significant systems being non compliant. Such an event could result
in a material disruption to the Company's operations. Specifically, the Company
could experience an interruption in its ability to process trades, safeguard and
manage its invested assets and operating cash accounts, accurately maintain
client information, accurately maintain accounting records, and/or perform
adequate customer service. Should the worst-case scenario occur it could,
depending on its duration, have a material impact on the Company's results of
operations and financial position.
The Company believes that, with implementation and completion of its Y2K
project, the possibility of significant interruptions of normal business
operations should be reduced.
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
The Company's Contingency Plans
- -------------------------------
There are certain industry-service centers that are so fundamental to the
securities business that they cannot be replaced. The Company acknowledges
that while a close watch must be kept on these, they have not been factored
into the Company's contingency strategy. These service centers include, but
are not limited to the following:
National Exchanges (NYSE, AMEX, NASDAQ, CBOT, etc.)
DTC Trading systems
NSCC
The Company has determined that if it cannot independently confirm through
extensive third party testing that Beta Systems is Y2K compliant, it will be
necessary to convert to a service bureau that is compliant. While the Company
believes that Beta Systems will be able to prove their compliance within an
acceptable time frame, the Company has contracted with an established service
bureau to convert the Company in the event that Beta Systems is determined to
be non compliant. The Company will make this decision early in the third
quarter 1999 to allow enough time for the conversion. The Company has
established a written contingency plan for all major systems. The Company
will continue to reassess the need for additional contingency planning based
on progress of Y2K testing by the Company and efforts of third parties.
New Accounting Standards
- ------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133 is
effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999. SFAS 133 requires that all derivative instruments be recorded
on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. In June 1999, the
FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133", which
delayed the effective date. SFAS 133 is now effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. The Company will adopt
SFAS 133 in its 2001 fiscal year, as required, and has not determined whether
its implementation will have a material impact on the Company's financial
condition, results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
MARKET RISK
- -----------
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest rates, bond prices and equity prices, changes in the
implied volatility of interest rate and equity prices and also changes in the
credit ratings of either the issuer or its related country of origin. Market
risk is inherent to both derivative and non-derivative financial instruments,
and accordingly, the scope of the Company's market risk management procedures
extends beyond derivatives to include all market risk sensitive financial
instruments.
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
The Company's exposure to market risk is directly related to its role as a
financial intermediary in customer-related transactions and to its proprietary
trading.
The Company trades municipal bonds and taxable debt obligations, including
U.S. Treasury bills, notes, and bonds; U.S. Government agency notes and bonds;
bank certificates of deposit; mortgage-backed securities, and corporate
obligations. The Company is also an active market-maker in over-the-counter
equity markets and trades certain listed equities as well. In connection with
these activities, the Company may be required to maintain inventories in order
to ensure availability and to facilitate customer transactions. In connection
with some of these activities, the Company attempts to mitigate its exposure to
such market risk by entering into hedging transactions, which may include highly
liquid future contracts, options and U.S. Government securities.
Following is a discussion of the Company's primary market risk exposures as of
June 30, 1999, including a discussion of how those exposures are currently
managed.
Interest Rate and Bond Price Risk
- ---------------------------------
Interest rate risk is a consequence of maintaining inventory positions and
trading in interest-rate-sensitive financial instruments. In connection with
trading activities, the Company exposes itself to interest rate risk, arising
from changes in the level or volatility of interest rates or the shape and slope
of the yield curve. The Company's fixed income activities also expose it to the
risk of loss related to changes in credit spreads. The Company attempts to
hedge its exposure to interest rate risk primarily through the use of U.S.
government securities, highly liquid futures and options designed to reduce
the Company's risk profile.
A sensitivity analysis has been prepared to estimate the Company's exposure
to interest rate risk of its inventory position. The fair market value of these
securities included in the Company's inventory at June 30, 1999 was $158.8
million. Interest rate risk is estimated as the potential loss in fair value
resulting from a hypothetical one-half percent decrease in interest rates. At
June 30, 1999, the potential change in fair value, assuming this hypothetical
decrease, was $5.6 million. The actual risks and results of such adverse
effects may differ substantially.
Equity Price Risk
- -----------------
The Company is exposed to equity price risk as a consequence of making
markets in equity securities. Equity price risk results from changes in the
level or volatility of equity prices, which affect the value of equity
securities or instruments that derive their value from a particular stock.
The Company attempts to reduce the risk of loss inherent in its inventory
of equity securities by monitoring those security positions daily.
Marketable equity securities included in the Company's inventory at June
30, 1999, which were recorded at a fair value of $3.0 million, have exposure
to equity price risk. This risk is estimated as the potential loss in fair
value resulting from a hypothetical 10% adverse change in prices quoted by
stock exchanges and amounts to $0.3 million. The actual risks and results of
such adverse effects may differ substantially. The Company's investment
portfolio, excluding its investment in MTI, at June 30, 1999 had a fair market
value of $3.2 million. (See Note 3). This equity price risk is also estimated
as the potential loss in fair value resulting from a hypothetical 10% adverse
change in prices quoted by stock exchanges and amounts to $0.3 million. Actual
results may differ.
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
CREDIT RISK
- -----------
The Company is engaged in various trading and brokerage activities whose
counterparties primarily include broker-dealers, banks, and other financial
institutions. In the event counterparties do not fulfill their obligations,
the Company may be exposed to risk. The risk of default depends on the credit
worthiness of the counterparty or issuer of the instrument. The Company seeks
to control credit risk by following an established credit approval process,
monitoring credit limits, and requiring collateral where appropriate.
The Company purchases debt securities and may have significant positions in
its inventory subject to market and credit risk. In order to control these
risks, security positions are monitored on at least a daily basis. Should the
Company find it necessary to sell such a security, it may not be able to
realize the full carrying value of the security due to the significance of the
position sold. The Company attempts to reduce its exposure to changes in
securities valuation with the use of highly liquid municipal bond index futures
contracts.
OPERATING RISK
- --------------
Operating risk is the potential for loss arising from limitations in the
Company's financial systems and controls, deficiencies in legal documentation
and the execution of legal and fiduciary responsibilities, deficiencies in
technology and the risk of loss attributable to operational problems. These
risks are less direct than credit and market risk, but managing them is
critical, particularly in a rapidly changing environment with increasing
transaction volumes. In order to reduce or mitigate these risks, the Company
has established and maintains an effective internal control environment which
incorporates various control mechanisms at different levels throughout the
organization and within such departments as Financial and Accounting,
Operations, Legal, Compliance and Internal Audit. These control mechanisms
attempt to ensure that operational policies and procedures are being followed
and that the Company's various businesses are operating with established
corporate policies and limits.
OTHER RISKS
- -----------
Other risks encountered by the Company include political, regulatory and tax
risks. These risks reflect the potential impact that changes in local laws,
regulatory requirements or tax statutes have on the economics and viability of
current or future transactions. In an effort to mitigate these risks, the
Company seeks to continuously review new and pending regulations and
legislation and their potential impact on its business.
Part II-Other Information
Item 1. Legal Proceedings
- -------------------------
In the normal course of business, the Company has been named a defendant,
or otherwise has possible exposure, in several claims. Certain of these are
class actions which seek unspecified damages that could be substantial.
Although there can be no assurance as to the eventual outcome of litigation
in which the Company has been named as a defendant or otherwise has possible
exposure, the Company has provided for those actions most likely to result in
adverse dispositions. Although further losses are possible, the opinion of
management, based upon the advice of its attorneys and general counsel, is
that such litigation will not, in the aggregate, have a material adverse effect
on the Company's liquidity or financial position, although it could have a
material effect on quarterly or annual operating results in the period in
which it is resolved.
Item 4. Submission of matters to a vote of security holders.
- ------------------------------------------------------------
A. Annual meeting was held on May 18, 1999
B. Elected as Directors: (There were no broker non-votes with respect
to the election of Directors).
Votes For Withheld Authority
--------- ------------------
George C. McNamee 6,282,983 56,103
Peter Barton 6,282,983 56,103
Walter M. Fiederowicz 6,282,983 56,103
C. Other matters voted on at Annual Meeting
1. To consider and act upon a proposal to approve the adoption
of the First Albany Companies Inc. 1999 Long-Term Incentive
Plan.
For: 3,613,171
Against: 189,647
Abstain: 5,287
Broker Non-Votes: 2,530,985
2. To ratify the selection of PricewaterhouseCoopers L.L.P as
independent auditors of the Company for the fiscal year
ending December 31, 1999.
For: 6,315,439
Against: 22,834
Abstain: 813
Broker Non-Votes: 0
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
Item No. Item
-------- ----
(10.7a) First Albany Companies Inc. Stock Incentive Option Plan, as
amended effective May 20, 1999 (filed as Registration Statement
333-78877) dated May 20, 1999.
(10.10e) First Albany Companies Inc. Stock Bonus Plan, as amended,
effective April 5, 1999 (filed as Registration Statement
333-75705) dated April 5, 1999.
(10.15a) Amendments to lease between First Albany Companies Inc. and
WFP 53 State Street Co. Limited Partnership (f/k/a Olympia and
York L.P.) for office space at 53 State Street, Boston,
Massachusetts (filed herewith).
(10.18) Modification of sublease agreement between First Albany
Companies Inc. and KeyCorp for office facilities at 30 South
Pearl Street, Albany, New York, dated June 30, 1999 (filed
herewith).
(10.24a) First Albany Companies Inc. Investment Executive Deferred
Compensation Plan, as amended effective April 1, 1999 (filed
as Registration Statement 333-78861) dated May 20, 1999.
(10.25) First Albany Companies Inc. 1999 Long-Term Incentive Plan,
effective March 26, 1999 (filed as Appendix A to Proxy
Statement on Schedule 14A) dated May 20, 1999.
(11) Statement Re: Computation of Per Share Earnings (filed
herewith)
(27) Selected Financial Data Schedule BD (filed herewith)
(b) Reports on Form 8-K
No Form 8K was filed during the quarter ended June 30, 1999.
-------------
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
First Albany Companies Inc.
---------------------------
(Registrant)
Date: August 5, 1999 /s/ ALAN P. GOLDBERG
--------------------
Alan P. Goldberg
President/Co-Chief Executive Officer
Date: August 5, 1999 /s/ TIMOTHY R. WELLES
---------------------
Timothy R. Welles
Chief Financial Officer
(Principal Accounting Officer)