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 September 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
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(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.
7,080,275 Shares of Common Stock were outstanding as of the close of
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business on November 3, 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 September 30, 1999 and
December 31,1998...................... 3
Condensed Consolidated Statements of Operations
for the Three Months and Nine Months Ended
September 30, 1999 and September 25, 1998..... 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended
September 30, 1999 and September 25, 1998.....5-6
Notes to Condensed Consolidated Financial
Statements.................................. 7-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 15-26
Part II - Other Information
Item 1. Legal Proceedings.......................... 27
Item 6. Exhibits and Reports on Form 8-K........ 27-29
FIRST ALBANY COMPANIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
1999 December 31,
(In thousands of dollars) (Unaudited) 1998
- -------------------------------------------------------------------------------
Assets
Cash $1,675 $1,424
Securities purchased under
agreement to resell 38,160 1,631
Securities borrowed 782,564 470,693
Receivables from:
Brokers, dealers and clearing
agencies 9,601 6,434
Customers 243,091 194,401
Others 14,241 12,228
Securities owned 189,168 118,370
Investments 14,256 10,719
Office equipment and leasehold
improvements,net 10,833 11,390
Other assets 21,196 15,608
- -----------------------------------------------------------------------------
Total assets $1,324,785 $842,898
=============================================================================
Liabilities and Stockholders' Equity
Liabilities
Short-term bank loans $150,089 $104,679
Securities sold under agreement
to repurchase 2,471
Securities loaned 917,320 565,571
Payables to:
Brokers, dealers and clearing
agencies 17,355 4,862
Customers 63,214 48,467
Others 18,351 17,742
Securities sold but not yet
purchased 56,843 2,814
Accounts payable 2,428 4,970
Accrued compensation 18,787 23,584
Accrued expenses 8,399 5,863
Notes payable 6,012 4,750
Obligations under capitalized leases 4,788 3,688
- ------------------------------------------------------------------------------
Total liabilities 1,266,057 786,990
==============================================================================
Commitments and Contingencies
Subordinated debt 7,500 7,500
- ------------------------------------------------------------------------------
Stockholders' Equity
Common stock 73 66
Additional paid-in-capital 49,278 40,354
Retained earnings 1,880 8,001
Less treasury stock at cost (3) (13)
- -------------------------------------------------------------------------------
Total stockholders' equity 51,228 48,408
- -------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $1,324,785 $842,898
===============================================================================
See notes to the condensed consolidated financial statements.
FIRST ALBANY COMPANIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
(In thousands of September 30, September 25, September 30, September 25,
dollars except for 1999 1998 1999 1998
per share and
outstanding share
amounts)
- -------------------------------------------------------------------------------
Revenues
Commissions $15,447 $ 15,053 $52,336 $44,421
Principal transaction 15,276 14,367 49,703 51,466
Investment banking 9,117 8,130 23,648 23,333
Investment (losses)
gains (899) 2,250 (5,326) 3,652
Interest 16,988 12,275 43,459 35,457
Fees and other 4,959 3,817 13,466 10,118
- -------------------------------------------------------------------------------
Total revenues 60,888 55,892 177,286 168,447
Interest expense 14,750 10,126 36,424 29,102
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Net revenues 46,138 45,766 140,862 139,345
- ------------------------------------------------------------------------------
Expenses (excluding interest)
Compensation and
benefits 33,619 31,378 102,648 97,608
Clearing, settlement
and brokerage costs 1,197 1,133 3,690 3,035
Communications and
data processing 3,467 3,501 10,538 10,207
Occupancy and
depreciation 3,454 3,401 10,004 9,938
Selling 2,372 2,027 6,884 5,782
Other 2,618 2,367 7,654 6,662
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Total expenses
(excluding interest) 46,727 43,807 141,418 133,232
- -----------------------------------------------------------------------------
(Loss) income before
income taxes (589) 1,959 (556) 6,113
- -----------------------------------------------------------------------------
Income tax (benefit)
expense (159) 811 (146) 2,471
- -----------------------------------------------------------------------------
Net (loss) income $(430) $1,148 $(410) $3,642
=============================================================================
Net (loss) income per Common Share:
Basic $(0.06) $0.16 $(0.06) $0.51
Dilutive $(0.06) $0.15 $(0.06) $0.46
- -----------------------------------------------------------------------------
Weighted average common
and common equivalent
shares outstanding:
Basic 7,294,767 7,183,984 7,283,452 7,168,225
Dilutive 7,294,767 7,859,584 7,283,452 7,917,026
=============================================================================
Dividend per common
share outstanding $0.05 $0.05 $0.15 $0.15
=============================================================================
See notes to the condensed consolidated financial statements.
FIRST ALBANY COMPANIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30, September 25,
(In thousands of dollars) 1999 1998
- -----------------------------------------------------------------------------
Cash flows from operating activities:
Net (loss) income $(410) $3,642
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 3,321 3,335
Deferred compensation 1,023
Deferred income taxes (1,619) 553
Undistributed loss of affiliate 2,812 190
Unrealized investment (gain) loss 2,514 (3,788)
Realized (gain) loss on sale of investments (54)
Loss on sales of fixed assets 128 11
Services provided in exchange for common stock 666 199
(Increase) decrease in operating assets:
Securities purchased under agreement to
resell (36,529) (6,757)
Net receivables from customers (33,943) (25,513)
Net receivables from brokers, dealers
and clearing agencies 1,170
Net receivables from others (48,779)
Securities owned, net (16,769) (20,088)
Other assets (5,625) 6,499
Increase (decrease) in operating liabilities:
Securities sold under agreements to repurchase 2,471
Securities loaned, net 39,878 33,411
Net payables to brokers, dealers,
and clearing agencies 9,326
Net payables to others 1,193
Accounts payable and accrued expenses (4,803) 7,026
- -----------------------------------------------------------------------------
Net cash used in operating activities (36,366) (48,943)
- -----------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of furniture, equipment, and leaseholds (607) (107)
Disbursements for purchase of investments (5,016) (2,444)
Proceeds from sale of investments 66
- -----------------------------------------------------------------------------
Net cash used in investing activities (5,623) (2,485)
FIRST ALBANY COMPANIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
Nine Months Ended
September 30, September 25,
(In thousands of dollars) 1999 1998
- ----------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds of short-term bank loans 45,410 54,090
Proceeds of notes payable 4,400
Payments on notes payable (3,138) (1,969)
Payments of obligations under capitalized
leases (1,114) (650)
Securities sold under agreement to repurchase 2,267
Proceeds from issuance of common stock
from treasury 172 568
Proceeds from issuance of common stock 111
Net decrease from borrowing under
line-of-credit agreements (2,597) (1,845)
Dividends paid (1,004) (900)
- -----------------------------------------------------------------------------
Net cash provided by financing activities 42,240 51,561
- -----------------------------------------------------------------------------
Increase in cash 251 133
Cash at beginning of the year 1,424 951
- -----------------------------------------------------------------------------
Cash at end of period $1,675 $1,084
=============================================================================
In 1999, the Company entered into capital leases for office and computer
equipment totaling approximately $2,214,000.
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 had no material
effect on the condensed consolidated Statement of Operations for
the period ended September 30, 1999.
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 Nine Months Ended
September 30, September 25, September 30, September 25,
(In thousands 1999 1998 1999 1998
except per share amounts)
- -----------------------------------------------------------------------------
Net (loss) income $(430) $1,148 $(410) $3,642
Weighted average shares
for basic earnings
per share 7,295 7,184 7,283 7,168
Effect of dilutive common
equivalent shares (stock
options and stock issuable
under employee benefit plans) 676 749
- -----------------------------------------------------------------------------
Weighted average shares and
dilutive common equivalent
shares for dilutive earnings
per share 7,295 7,860 7,283 7,917
- -----------------------------------------------------------------------------
Basic earnings per share $(0.06) $0.16 $(0.06) $0.51
Dilutive earnings per share $(0.06) $0.15 $(0.06) $0.46
For the quarter and nine months ended September 30, 1999, the Company
excluded approximately 1,146 thousand and 926 thousand common equivalent
shares in its computation of dilutive earnings per share because to do so
would have been anti-dilutive.
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Investments
-----------
First Albany Companies Inc, the holding company holds various
investments in its portfolio. Mechanical Technology Incorporated (MTI) and
META Group, Inc are the two major holdings.
At September 30, 1999 the Company owned approximately 3,917,000 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 $9.5 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 June 25, 1999,
recorded on a one-quarter delay basis, was $1.4 million. The Company's equity
in MTI's net loss for the nine months ended September 30, 1999 was $2.8
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. First Albany Companies Inc., exercised rights for a total of 251,004
shares of MTI common stock during the month of July 1999.
The following presents unaudited summarized financial information of MTI
at June 25, 1999 and for the three months then ended June 25, 1999:
(in thousands of dollars)
-------------------------------------------
Assets $24,568
Liabilities 9,952
-------------------------------------------
Shareholders' equity $14,616
===========================================
===========================================
Revenues $2,606
-------------------------------------------
Operating loss (481)
Equity in Joint Venture losses (3,544)
Other Expense (112)
-------------------------------------------
Loss from continuing operations,
net of taxes (4,137)
Discounted operations income,
net of taxes 41
Net loss $(4,096)
===========================================
At September 30, 1999 the aggregate market value of the Company's shares
of MTI stock was $139.3 million. Under the equity method, the appreciation
in the market value of MTI's stock is not included in the Company's
financial results.
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
During calendar 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 $32.483 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. Accordingly, the Company has
recorded through September 30,1999 its proportionate share ($3.9 million) of
this increase in MTI's equity as an increase in its investments in MTI. The
Company also recorded an increase in additional paid-in-capital of $2.2
million (net of deferred taxes) as a result of this transaction.
At September 30, 1999, the Company owned 209,500 shares of META Group,
Inc. The fair market value of this investment was $3.7 million. During
the nine months ended September 30, 1999, the Company has recorded unrealized
losses of $2.5 million with respect to this investment.
4. Receivables from Others
-----------------------
Amounts receivable from others as of:
September 30, December 31,
(In thousands of dollars) 1999 1998
- -----------------------------------------------------------------------------
Adjustment to record securities owned on
a trade date basis, net $ $ 3,773
Others 14,241 8,455
- -----------------------------------------------------------------------------
Total $14,241 $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:
September 30, December 31,
(In thousands of dollars) 1999 1998
- -----------------------------------------------------------------------------
Borrowing under line-of-credit agreements $12,138 $14,735
Adjustment to record securities owned on
a trade date basis, net 2,998
Others 3,215 3,007
- -----------------------------------------------------------------------------
Total $18,351 $17,742
=============================================================================
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
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.
6. Notes Payable
--------------
Notes payable consists of a note for $1,979,167 which is collateralized by
fixed 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") (5.275% plus 2% on September 30, 1999). This note matures
on March 27, 2001.
Notes payable also consists of a note dated March 31, 1999 for $4,033,333
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 September 30,
1999 was $5.0 million. The amount of net capital as of September 30, 1999
was $21.3 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 September 30, 1999:
(In thousands of dollars)
-----------------------------------------------
1999 $ 545
2000 2,137
2001 1,789
2002 747
2003 68
2004 21
-----------------------------------------------
Total Minimum Lease Payments 5,307
Less: Amount Representing Interest 519
-----------------------------------------------
Present Value of Minimum Lease Payments $4,788
===============================================
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 32,687 shares of the Company's stock at $15.30 per share.
This right expires December 31, 2002.
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
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 107,208 shares of the Company's stock at $9.33 per share.
This right expires December 31, 2002.
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 September 30, 1999 was $5.0 million. The amount of net capital
as of September 30, 1999 was $21.3 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, 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.
In October 1999, the Board of Directors declared the regular quarterly
dividend of $0.05 per share for the third quarter, ended September 30, 1999,
along with a 5% stock dividend, payable on November 23, 1999 to shareholders
of record on November 9, 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
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
capital as calculated and defined by the Rule. As of September 30, 1999,
the broker-dealer subsidiary had aggregate net capital, as defined, of $21.3
million - exceeding the required net capital by $ 16.3 million.
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"), Other and Investments.
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 of tax-exempt and corporate
securities underwritings and financial advisory services. 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, net
interest revenues relating to securities lending transactions and revenues
from correspondent services. The Investment segment includes gains and
losses associated with the investment portfolio held at First Albany
Companies Inc., the holding company.
The Company's Investment segment 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 $(1,397,000) and $300,000 for the quarters ended
September 1999 and 1998, respectively and $(2,812,000) and $(190,000) for
the nine months ended September 1999 and 1998, respectively.
The Company records its other investments at fair market value.
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
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
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 a
long 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.
Three Months Ended Nine Months Ended
(In Thousands September 30, September 25, September 30, September 25,
of dollars) 1999 1998 1999 1998
- -----------------------------------------------------------------------------
Revenues (excluding interest):
Private Client Group $21,646 $21,328 $ 69,694 $ 65,435
Institutional 23,104 19,110 66,890 60,809
Other 49 929 2,569 3,094
Investments (899) 2,250 (5,326) 3,652
- -----------------------------------------------------------------------------
Total $43,900 $43,617 $133,827 $132,990
=============================================================================
Net Interest Revenues:
Private Client Group $ 1,005 $ 868 $ 2,905 $ 2,445
Institutional (258) (334) (516) (954)
Other 1,491 1,615 4,646 4,864
- -----------------------------------------------------------------------------
Total $ 2,238 $2,149 $ 7,035 $ 6,355
=============================================================================
Net Revenues:
Private Client Group $22,651 $22,196 $ 72,599 $ 67,880
Institutional 22,846 18,776 66,374 59,855
Other 1,540 2,544 7,215 7,958
Investments (899) 2,250 (5,326) 3,652
- -----------------------------------------------------------------------------
Total $46,138 $45,766 $140,862 $139,345
=============================================================================
Pre-Tax Income::
Private Client Group $ 4,252 $ 3,857 $ 14,429 $ 11,233
Institutional 844 (343) 2,616 870
Other (4,786) (3,805) (12,275) (9,642)
Investments (899) 2,250 (5,326) 3,652
- -----------------------------------------------------------------------------
Total $ (589) $ 1,959 $ (556) $ 6,113
=============================================================================
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 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
September 30, September 25, Increase Increase
(In thousands of 1999 1998 (Decrease) (Decrease)
Dollars)
- -----------------------------------------------------------------------------
Revenues
Commissions $15,447 $15,053 $ 394 3%
Principal transactions 15,276 14,367 909 6%
Investment banking 9,117 8,130 987 12%
Investment (loss) gain (899) 2,250 (3,149) (140%)
Interest income 16,988 12,275 4,713 38%
Fees and others 4,959 3,817 1,142 30%
- -----------------------------------------------------------------------------
Total revenues 60,888 55,892 4,996 9%
Interest expense 14,750 10,126 4,624 46%
- -----------------------------------------------------------------------------
Net revenues 46,138 45,766 372 1%
- -----------------------------------------------------------------------------
Expenses (excluding interest)
Compensation and benefits 33,619 31,378 2,241 7%
Clearing, settlement and
brokerage costs 1,197 1,133 64 6%
Communications and
data processing 3,467 3,501 (34) (1%)
Occupancy and depreciation 3,454 3,401 53 2%
Selling 2,372 2,027 345 17%
Other 2,618 2,367 251 11%
- -----------------------------------------------------------------------------
Total expenses
(excluding interest) 46,727 43,807 2,920 7%
- -----------------------------------------------------------------------------
(Loss) income before
income taxes (589) 1,959 (2,548) (130%)
- -----------------------------------------------------------------------------
Income tax (benefit) expense (159) 811 (970) (120%)
- -----------------------------------------------------------------------------
Net (loss) income $ (430) $ 1,148 $(1,578) (137%)
=============================================================================
Net interest income
Interest income $16,988 $12,275 $ 4,713 38%
Interest expense 14,750 10,126 4,624 46%
- -----------------------------------------------------------------------------
Net interest income $ 2,238 $ 2,149 $ 89 4%
=============================================================================
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 September 30, 1999 and September 25, 1998
- --------------------------------------------------------------------
Net Income
- ----------
Net (loss) income for the quarter ended September 30, 1999 was ($0.4)
million or $(0.06) basic loss per share ($0.06 dilutive loss per share),
compared to $1.1 million or $0.16 basic earnings per share ($0.15 dilutive
earnings per share) in the comparable 1998 period. First Albany Corporation,
the brokerage operations, had pre-tax profit of $0.6 million on net revenues
of $46.7 million for the quarter ending September 30, 1999, compared to
pre-tax profit of $1.3 million on net revenues of $43.2 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 $1.2 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 $667 thousand for the same
period of 1998.
Principal Transactions
- -----------------------
Principal transactions for this year's third quarter increased $0.9
million or 6% compared to the comparable 1998 period. This amount was
comprised of an increase in municipal bonds of $ 1.5 million, and an
increase in corporate fixed income of $1.1 million and a decrease in equity
securities of $1.7 million.
</page>
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 third quarter increased $1.0
million or 12% compared to the comparable 1998 period. Revenues from
corporate underwriting increased $0.9 million while municipal underwriting
revenues decreased $0.1 million.
Investment gains/(losses)
- -------------------------
Investment gains (losses) for this year's third quarter decreased $3.1
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 third quarter increased $1.1
million or 30% 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 third quarter increased $2.2
million or 7% compared to the same period of 1998, due primarily to an
increase in net revenues at First Albany Corporation.
Income Taxes
- ------------
Income taxes for this year's third quarter decreased $1.0 million due to
a decrease in pre-tax earning.
</page>
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS COMPARISON OF 1999 VS. 1998
1999 vs.
Nine Months Ended 1998 Percentage
September 30, September 25 Increase Increase
(In thousands of 1999 1998 (Decrease) (Decrease)
Dollars)
- -----------------------------------------------------------------------------
Revenues
Commissions $52,336 $44,421 $ 7,915 18%
Principal transactions 49,703 51,466 (1,763) (3%)
Investment banking 23,648 23,333 315 1%
Investment (loss) gain (5,326) 3,652 (8,978) (246%)
Interest income 43,459 35,457 8,002 23%
Fees and others 13,466 10,118 3,348 33%
- -----------------------------------------------------------------------------
Total revenues 177,286 168,447 8,839 5%
Interest expense 36,424 29,102 7,322 25%
- -----------------------------------------------------------------------------
Net revenues 140,862 139,345 1,517 1%
- -----------------------------------------------------------------------------
Expenses (excluding interest)
Compensation and benefits 102,648 97,608 5,040 5%
Clearing, settlement and
brokerage cost 3,690 3,035 655 22%
Communications and
data processing 10,538 10,207 331 3%
Occupancy and depreciation 10,004 9,938 66 1%
Selling 6,884 5,782 1,102 19%
Other 7,654 6,662 992 15%
- -----------------------------------------------------------------------------
Total expenses
(excluding interest) 141,418 133,232 8,186 6%
- -----------------------------------------------------------------------------
(Loss) income before
income taxes (556) 6,113 (6,669) (109%)
- -----------------------------------------------------------------------------
Income tax (benefit) expense (146) 2,471 (2,617) (106%)
- -----------------------------------------------------------------------------
Net (loss) income $ (410) $ 3,642 $(4,052) (111%)
=============================================================================
Net interest income
Interest income $43,459 $35,457 $ 8,002 23%
Interest expense 36,424 29,102 7,322 25%
- -----------------------------------------------------------------------------
Net interest income $ 7,035 $ 6,355 $ 680 11%
=============================================================================
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Nine Months Periods Ended September 30, 1999 and September 25, 1998
- -------------------------------------------------------------------
Net Income
- ----------
Net (loss) income for the nine months ended September 30, 1999, was ($0.4)
million or ($0.06) basic loss per share ($0.06 dilutive loss per share),
compared to $3.6 million or $0.51 basic earnings per share ($0.46 dilutive
earnings per share) in the comparable 1998 period. First Albany Corporation,
the brokerage operations, had pre-tax profit of $5.6 million on net revenues
of 145.5 million for the nine months ending September 30, 1999, compared to
pre-tax profit of $4.7 million on net revenues of $135.2 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 $6.1 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 $1.3 million for the same
period of 1998.
Commissions
- -----------
Commission revenues increased $7.9 million or 18% in this year's nine-month
period reflecting active trading in all major markets. Revenues from listed
and over-the-counter agency commissions increased $8.0 million while revenues
from mutual funds, options and other decreased $0.1 million.
Principal Transactions
- ----------------------
Principal transactions decreased $1.8 million or 3% in this year's first
nine-months period. This was comprised of an increase in municipal bonds
of $1.7 million, a decrease in corporate fixed income of $1.0 million and a
decrease in equity securities of $2.5 million.
Investment gains/(losses)
- -------------------------
Investment gains (losses) decreased $9.0 million in this year's first nine-
month 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 increased $3.3 million or 33% in this year's first
nine-month period resulting from the firm's focus to increase fee-based
revenues.
Compensation and Benefits
- -------------------------
Compensation and benefits increased $5.0 million or 5%, due primarily to
an increase in net revenues at First Albany Corporation.
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Selling
- -------
Selling expenses for this year's first nine-month period increased $1.1
million or 19% mainly reflecting greater promotional-related activity.
Other
- -----
Other expenses for this year's nine-month period increased $ 1.0 million or
15% due mainly to an increase in consulting costs.
Income Taxes
- ------------
Income taxes decreased $2.6 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 September 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 collateralized 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.
Management believes that funds provided by operations and a variety of
committed and uncommitted bank lines-of-credit-totaling $ 290 million of
which approximately $140 million were unused as of September 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, 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.
In October 1999, the Board of Directors declared the regular quarterly
dividend of $0.05 per share for the third quarter, ended September 30, 1999,
along with a 5% stock dividend, payable on November 23, 1999 to shareholders
of record on November 9, 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 and issued guidance
concerning the responsibilities of senior management and directors. Y2K
testing and certification is being addressed as a key safety and soundness is
sue 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 operation of securities institutions.
Institutions failing to file these mandatory disclosures may be, and in some
cases already have been, made subject to formal enforcement action,
supervisory agreements, cease and desist orders or civil money penalties.
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
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.
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 took place 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 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. This phase also included the completion of an extensive
contingency plan.
The Company has and will continue to participate in 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), have conducted tests of the critical clearance and
execution systems that drive the industry as a whole. This has been 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
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
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.
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 close to the entire amount with a minimal amount due
to be spent in the fourth 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. Most upgrades to date have been capitalized, however,
independent-verification testing of its internal applications was expensed
when 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 the 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
Beta Systems
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 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
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
extends beyond derivatives to include all market risk sensitive financial
instruments. 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 September 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 September
30, 1999 was $ 126.8 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 September 30, 1999, the potential change in
fair value, assuming this hypothetical decrease, was $4.7 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
September 30, 1999, which were recorded at a fair value of $ 5.5 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 $ 0.6 million. The actual risks and
results of such adverse effects may differ substantially. The Company's
investment portfolio, excluding its investment in MTI, at September 30, 1999
had a fair market value of $3.7 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 $ 0.4 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 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 as exhibit 10.15a to Form 10Q for quarter
ended June 30, 1999).
(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 as
exhibit 10.18 to Form 10Q for quarter ended June 30, 1999).
(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 September 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: November 5, 1999 /s/ ALAN P. GOLDBERG
------------------------------------
Alan P. Goldberg
President/Co-Chief Executive Officer
Date: November 5, 1999 /s/ TIMOTHY R. WELLES
------------------------------------
Timothy R. Welles
Chief Financial Officer
(Principal Accounting Officer)