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, 2000
------------------------------------
Commission file number 0-14140
First Albany Companies Inc.
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(Exact name of registrant as specified in its charter)
New York 22-2655804
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 South Pearl St., Albany, NY 12207
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(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.
7,485,245 Shares of Common Stock were outstanding as of the close of business on
November 2, 2000
</PAGE>
<PAGE>
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, 2000 and
December 31, 1999............................ 3
Condensed Consolidated Statements of Operations
for the Three Months and Nine Months Ended
September 30, 2000 and September 30, 1999.... 4-5
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended
September 30, 2000 and September 30, 1999.... 6-7
Notes to Condensed Consolidated Financial
Statements................................... 8-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 18-28
Part II - Other Information
Item 1. Legal Proceedings..................... 29
Item 4. Submission of matters to a vote of
security holders...................... 29
Item 6. Exhibits and Reports on Form 8-K...... 29-31
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
=============================================================================
September 30,
2000 December 31,
(In thousands of dollars) (Unaudited) 1999
-----------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 1,201 $ 1,912
Cash and securities segregated 11,100
Securities purchased under agreement to resell 55,888 26,822
Securities borrowed 1,195,097 474,177
Receivables from
Brokers, dealers and clearing agencies 6,034 8,193
Customers 11,027 251,374
Others 29,358 39,815
Securities owned 178,056 158,047
Investments 23,083 15,304
Office equipment and leasehold improvements, net 4,822 10,515
Other assets 26,505 21,975
-----------------------------------------------------------------------------
Total assets $1,542,171 $1,008,134
=============================================================================
Liabilities and Stockholders' Equity
Liabilities
Short-term bank loans $ 106,078 $ 172,534
Securities loaned 1,198,512 596,340
Payables to:
Brokers, dealers and clearing agencies 1,787 9,452
Customers 9,037 59,957
Others 17,890 18,094
Securities sold but not yet purchased 60,537 37,521
Accounts payable 2,503 3,214
Accrued compensation 22,731 30,131
Accrued expenses 25,401 9,849
Income tax payable 17,028 29
Notes payable 3,153 5,480
Obligations under capitalized leases 2,990 4,917
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Total liabilities 1,467,647 947,518
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Commitments and Contingencies
Subordinated debt 6,000 7,500
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Stockholders' Equity
Common stock 86 76
Additional paid-in-capital 79,171 58,314
Deferred compensation 285 1,184
Unamortized value of restricted stock (2,421) (2,353)
Retained earnings/(deficit) 7,315 (2,920)
Less treasury stock at cost (15,912) (1,185)
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Total stockholders' equity 68,524 53,116
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Total liabilities and stockholders' equity $1,542,171 $1,008,134
=============================================================================
</TABLE>
See notes to the condensed consolidated financial statements.
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
================================================================================================
(In thousands of dollars except for Three Months Ended Nine Months Ended
per share and oustanding share amounts September 30, September30, September 30, September 30,
2000 1999 2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Commissions $ 3,590 $ 3,930 $ 12,604 $ 11,348
Principal transactions 14,543 11,036 42,749 34,672
Investment banking 7,761 8,503 21,701 21,839
Investment gains (losses) (1,066) 498 246 (2,513)
Interest income 22,891 15,832 63,170 40,165
Fees and other 860 1,270 3,486 3,874
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Total revenues 48,579 41,069 143,956 109,385
Interest expense 21,145 14,666 57,711 36,177
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Net revenues 27,434 26,403 86,245 73,208
------------------------------------------------------------------------------------------------
Expenses (excluding interest)
Compensation and benefits 21,897 19,824 65,859 57,832
Clearing, settlement and brokerage costs 621 712 2,153 2,119
Communications and data processing 2,168 2,029 6,694 6,192
Occupancy and depreciation 1,399 1,381 4,121 3,933
Selling 1,502 1,299 4,325 3,925
Other 1,068 1,282 3,019 3,322
------------------------------------------------------------------------------------------------
Total expenses (excluding interest) 28,655 26,527 86,171 77,323
------------------------------------------------------------------------------------------------
Operating (loss) income (1,221) (124) 74 (4,115)
Equity in losses of affiliates (1,679) (1,397) (3,640) (2,813)
------------------------------------------------------------------------------------------------
(Loss) income before income taxes (2,900) (1,521) (3,566) (6,928)
Income tax (benefit) expense (926) (550) (1,107) (2,642)
------------------------------------------------------------------------------------------------
(Loss) income from continuing operations (1,974) (971) (2,459) (4,286)
------------------------------------------------------------------------------------------------
(Loss) income from discontinued operations,
net of taxes (2,040) 541 422 3,876
Gain on sale of discontinued operations,
net of taxes 22,799 22,799
------------------------------------------------------------------------------------------------
Net income (loss) $ 18,785 $ (430) $ 20,762 $ (410)
================================================================================================
Basic share data:
Basic earnings:
Continued operations (0.25) (0.12) (0.30) (0.53)
Discontinued operations (0.26) 0.07 0.06 0.48
Gain on sale of discontinued operations 2.87 2.76
------------------------------------------------------------------------------------------------
Net income (loss) per share $ 2.36 $ (0.05) $ 2.52 $ (0.05)
================================================================================================
Diluted earnings:
Continued operations (0.25) (0.12) (0.30) (0.53)
Discontinued operations (0.26) 0.07 0.06 0.48
Gain on sale of discontinued operations 2.87 2.76
------------------------------------------------------------------------------------------------
Net income (loss) per share $ 2.36 $ (0.05) $ 2.52 $ (0.05)
================================================================================================
Weighted average common
and common equivalent
shares outstanding:
Basic 7,955,444 8,042,481 8,252,589 8,030,006
Dilutive 7,955,444 8,042,481 8,252,589 8,030,006
================================================================================================
Dividend per common share outstanding $ 0.05 $ 0.05 $ 0.10 $ 0.10
================================================================================================
</TABLE>
See notes to the condensed consolidated financial statements.
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
Nine Months Ended
September 30, September 30,
(In thousands of dollars) 2000 1999
-------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 20,762 $ (410)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 3,087 3,321
Deferred compensation (899) 1,023
Deferred income taxes 2,443 (1,619)
Gain on sale of discontinued operations (39,309)
Undistributed loss of affiliate 3,640 2,812
Unrealized investment (gain) loss 2,010 2,514
Realized (gain) loss on sale of investments (2,332)
Loss on sales of fixed assets 128
Services provided in exchange for common stock 1,228 666
(Increase) decrease in operating assets:
Cash and securities segregated under federal
regulations (11,100)
Securities purchased under agreement to resell (36,529)
Net receivables from brokers, dealers, and
clearing agencies (5,506) 9,326
Net receivables from customers 189,427 (33,943)
Net receivables from others 11,647 1,193
Securities owned, net 3,007 (16,769)
Other assets (13,157) (5,625)
Increase (decrease) in operating liabilities:
Securities sold under agreement to repurchase (29,066) 2,471
Securities loaned, net (118,748) 39,878
Accounts payable and accrued expenses (4,735) (4,803)
Income taxes payable 16,999
--------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities 29,398 (36,366)
Cash flows from investing activities:
Purchase of furniture, equipment,
and leaseholds, net (71) (607)
Net proceeds from sale of discontinued
operations 57,865
Disbursements for purchase of investments (3,099) (5,016)
Proceeds from sale of investments 2,677
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Net cash used in investing activities 57,372 (5,623)
--------------------------------------------------------------------------------
Cash flows from financing activities:
Net (payment) proceeds of short-term
bank loans (66,456) 45,410
Proceeds of notes payable 4,400
Payments on notes payable (2,327) (3,138)
Payments of obligations under capitalized
leases (2,761) (1,114)
Payments for purchases of common for treasury (15,420) 172
Proceeds from issuance of common stock 2,050 111
Net increase (decrease) from borrowing under
line-of-credit agreements (1,394) (2,597)
Dividends paid (1,173) (1,004)
--------------------------------------------------------------------------------
Net cash (used in) provided by financing
activities (87,481) 42,240
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(Decrease)/Increase in cash (711) 251
Cash at beginning of the year 1,912 1,424
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Cash at end of period $ 1,201 $ 1,675
================================================================================
</TABLE>
In 2000, the Company entered into capital leases for office and computer
equipment totaling approximately $834,000.
In 2000, the Company increased its investment in MTI by $10.7 million and
increased paid-in-capital by $6.3 million and deferred income taxes by $4.4
million (See Note 3).
In 2000, the Company reduced its subordinated liability by $1.5 million in
exchange for the Company's common shares (See Note 10).
See notes to the condensed consolidated financial statements
</PAGE>
<PAGE>
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 condensed consolidated financial
statements should be read in conjunction with the financial statements and
notes for the year ended December 31, 1999.
Certain amounts in the 1999 financial statements have been reclassified to
conform with the 2000 presentation.
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:
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September30,
(In thousands, except per share amounts)2000 1999 2000 1999
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Loss) income from continuing
operations $ (1,974) $ (971) $ (2,459) $ (4,286)
(Loss) income from discontinued
operations, net of taxes (2,040) 541 422 3,876
Gain on sale of discontinued
operations, net of taxes 22,799 22,799
---------------------------------------------------------------------------------------------
Net income (loss) $ 18,785 $ (430) $ 20,762 $ (410)
---------------------------------------------------------------------------------------------
Weighted average shares
for basic earnings per share 7,955 8,043 8,253 8,030
---------------------------------------------------------------------------------------------
Effect of dilutive common
equivalent shares (stock options and stock
issuable under employee benefit plans
---------------------------------------------------------------------------------------------
Weighted average shares and
dilutive common equivalent shares
for dilutive earnings per share 7,955 8,043 8,253 8,030
=============================================================================================
Earnings per share data:
Basic earnings:
---------------------------------------------------------------------------------------------
Continuing operations $ (0.25) $ (0.12) $ (0.30) $ (0.53)
Discontinued operations (0.26) 0.07 0.06 0.48
Gain on sale of discontinued operations 2.87 2.76
---------------------------------------------------------------------------------------------
Net income (loss) per share $ 2.36 $ (0.05) $ 2.52 $ (0.05)
=============================================================================================
</TABLE>
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
<TABLE>
Diluted earnings:
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Continuing operations $ (0.25) $ (0.12) $ (0.30) $ (0.53)
Discontinued operations (0.26) 0.07 0.06 0.48
Gain on sale of discontinued operations 2.87 2.76
---------------------------------------------------------------------------------------------
Net income (loss) per share $ 2.36 $ (0.05) $ 2.52 $ (0.05)
=============================================================================================
</TABLE>
For the quarter and nine months ended September 30, 2000 the Company
excluded approximately 1,073,000 and 1,310,000 common equivalent shares
in its computation of dilutive earnings per share because to do so would
have been anti-dilutive.
For the quarter and nine months ended September 30, 1999, the Company
excluded approximately 1,263,000 and 1,021,000 common equivalent shares
in its computation of dilutive earnings per share because to do so would
have been anti-dilutive.
3. Investments
-----------
First Albany Companies Inc, the Parent Company holds various
investments in its portfolio. Mechanical Technology Incorporated (MTI) and
META Group, Inc are two of its major holdings.
At September 30, 2000 the Company owned approximately 11,753,744 common
shares (33% of the shares outstanding) of 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
$16.8 million. At September 30, 2000 the aggregate market value of the
Company's shares of MTI stock was $127.1 million. Under the equity method,
the market value of MTI's stock is not included in the calculation of the
Company's investment. The Company's equity in MTI's net loss for the three
months ended June 30, 2000 recorded on a one-quarter-delay basis was $1.7
million. Equity in losses of affiliates for the three months ended June
30, 2000 are attributed to MTI's invenstments in Plug Power, Inc.
The following presents unaudited summarized financial information of MTI
at June 30, 2000 and for the three months then ended June 30, 2000:
------------------------------------------
(in thousands of dollars)
==========================================
Assets $85,297
Liabilities 34,923
------------------------------------------
Shareholders' equity $50,374
==========================================
==========================================
Revenues $ 1,143
==========================================
Operating loss $(1,168)
Equity in investee losses (6,579)
Other Expense (987)
------------------------------------------
Loss from continuing operations
before income taxes (8,734)
Income tax benefit 3,693
------------------------------------------
Net loss $(5,041)
===========================================
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Plug Power's shareholders' equity increased $6.0 million during the
calendar quarter ended June 30, 2000, primarily due to cash investments by
individual and corporate investors. Accordingly, the Company has recorded
through September 30, 2000 its proportionate share ($268 thousand) 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 $156
thousand (net of deferred taxes) as a result of this transaction.
Also, MTI's stockholders' equity increased $4.2 million due primarily due
to the issuance of warrants to acquire other investments. Accordingly, the
Company has recorded through September 30, 2000 its proportionate share
($1.4 million) of this increase in MTI's equity as an increase in its
investment in MTI. The Company also recorded an increase in additional
paid-in-capital of $813 thousand (net of deferred taxes) as a result of
this transaction.
At September 30, 2000, the Company owned 134,500 shares of META Group,
Inc. The fair market value of this investment was $1.7 million. During
the three months ended September 30, 2000, the Company has recorded
unrealized losses of $925,000 due to the decline in market value of this
investment.
4. Receivables from Others
-----------------------
Amounts receivable from others as of:
<TABLE>
----------------------------------------------------------------
September 30, December 31,
(In thousands of dollars) 2000 1999
================================================================
<S> <C> <C>
Adjustment to record securities
owned on a trade date basis, net $15,357 $28,552
Others 14,001 11,263
----------------------------------------------------------------
Total $29,358 $39,815
================================================================
</TABLE>
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.
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
5. Securities Owned And Sold But Not Yet Purchased
-----------------------------------------------
Securities owned and sold but not yet purchased consisted of the
following as of:
<TABLE>
=============================================================================
(In thousands of dollars) September 30, December 31,
2000 1999
-----------------------------------------------------------------------------
<S> <C> <C>
Sold, but Sold, but
not yet not yet
Owned Purchased Owned Purchased
-----------------------------------------------------------------------------
Marketable Securities
U.S. Government and federal
agency obligations $ 7,854 $55,060 $ 12,885 $ 26,131
State and municipal bonds 134,101 2,851 111,855 3,080
Corporate obligations 28,669 1,490 19,577 2,249
Corporate stocks 6,207 1,136 12,646 6,061
Not readily marketable securities
securities
Investment securities with
no publicly quoted market 190 187
Investment securities subject
to restrictions 1,035 897
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Total $178,056 $ 60,537 $158,047 $ 37,521
=============================================================================
</TABLE>
Securities not readily marketable include investment securities (a) for
which there is no market on a securities exchange or no independent
publicly quoted market, (b) that cannot be publicly offered or sold unless
registration has been effected under the Securities Act of 1933, or (c)
that cannot be offered or sold because of other arrangements, restrictions
or conditions applicable to the securities or to the Company.
6. Payables to Others
------------------
Amounts payable to others as of:
<TABLE>
------------------------------------------------------------------------------
September 30, December 31,
(In thousands of dollars) 2000 1999
-----------------------------------------------------------------------------
<S> <C> <C>
Borrowing under line-of-credit agreements $ 14,407 $ 15,802
Others 3,483 2,292
-----------------------------------------------------------------------------
Total $ 17,890 $ 18,094
=============================================================================
</TABLE>
7. Income Taxes
------------
Under the asset and liability method, deferred income taxes are recognized
for the tax consequences of "temporary differences" by applying enacted
statutory tax rates applicable for future years to differences between the
financial statement and tax basis of existing assets and liabilities. The
effect of tax rate changes on deferred taxes is recognized in the income
tax provision in the period that includes the enactment date.
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
The temporary differences that give rise to significant portions of
deferred tax assets and liabilities are as follows:
<TABLE>
=========================================================
<S> <C> <C>
(In thousands of dollars) September 30, December 31,
2000 1999
---------------------------------------------------------
Bad debt reserve $ 166 $ 132
Securities held for investment (3,289) (1,812)
Fixed assets 1,862 1,053
Deferred compensation 1,703 2,381
Office lease improvements 3,766
Other 71 82
---------------------------------------------------------
Total deferred tax
assets (liabilities) $ 4,279 $ 1,836
=========================================================
</TABLE>
The Company has not recorded a valuation allowance for deferred tax assets
since it has determined that it is more likely than not that deferred tax
assets will be fully realized through a combination of future taxable income
and income available in carryback years.
8. Notes Payable
-------------
Notes payable consist of a note for $3,153,300 which is 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") (6.4925% plus 1.5% on September
30,2000). This note matures on April 1, 2004.
One of the more significant covenants of the note 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, 2000 was $0.3 million. The amount of net capital as of
September 30, 2000 was $40.1 million.
9. Obligations under Capitalized Leases
------------------------------------
The following is a schedule of future minimum lease payments under capital
leases for office equipment together with the present value of the net
minimum lease payments as of September 30, 2000:
=================================================
(In thousands of dollars)
-------------------------------------------------
2000 $ 458
2001 1,591
2002 902
2003 184
2004 47
2005 6
-------------------------------------------------
Total Minimum Lease Payments 3,188
Less: Amount Representing Interest 198
-------------------------------------------------
Present Value of Minimum Lease Payments $ 2,990
=================================================
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
10. Subordinated Debt
-----------------
The Company has a subordinated debt of $2,000,000. This debt bears
interest at 8.75%. Interest is paid monthly with the principal amount due
at maturity on December 31, 2002.
The Company also has an additional subordinated debt of $4,000,000 that
bears interest at 9.25%. Interest is paid monthly with the principal
amount due at maturity on December 31, 2002.
Both loan agreements include restrictive financial covenants. One of the
more significant covenants requires the Company to maintain minimum net
capital equal to three times the required net capital (as defined by Rule
15c3-1 of the Securities and Exchange Commission). The amount of required
net capital as of September 30, 2000 was $0.3 million. The amount of net
capital as of September 30, 2000 was $40.1 million.
11. 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.
12. Stockholders' Equity
--------------------
In January 2000, the Board of Directors declared the regular quarterly
cash dividend of $0.05 per share payable on February 24, 2000, to
shareholders of record on February 10, 2000.
On March 31, 2000, the Board of Directors declared the regular quarterly
dividend of $0.05 per share for the first quarter, ended March 31, 2000,
along with a 5% stock dividend, payable on May 26, 2000 to shareholders of
record on May 12, 2000.
In July 2000, the Board of Directors declared the regular quarterly cash
dividend of $0.05 per share payable on August 24, 2000, to shareholders of
record on August 10, 2000.
In October 2000, the Board of Directors declared the regular quarterly
dividend of $0.05 per share for the first quarter, ended September 30,
2000, along with a 5% stock dividend, payable on November 28, 2000 to
shareholders of record on November 14, 2000.
In October 2000, the Board of Directors authorized a stock repurchase
program of up to 1.5 million shares of its outstanding common stock. Under
the program, the Company may periodically repurchase shares on the open
market at prevailing market prices or in privately negotiated transactions
from time to time over the next 18 months. Shares purchased under the program
will be held in treasury and used for general corporate purchases.
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
In 2000, the Board of Directors and shareholders approved an amendment to
the Company's Certificate of Incorporation providing for an increase from
10,000,000 to 50,000,000 in the number of authorized shares of Common
Stock.
During the quarter, the Company repurchased 863,416 shares of common
stock. The Company purchased most of these shares from many of its former
financial consultants, who were transferred to First Union Securities, Inc.
The Company consummated the sale of its Private Client Group to First Union
Securities, Inc. on August 4, 2000.
13. Net Capital Requirements
------------------------
The Company's broker-dealer subsidiary, First Albany Corporation (the
"Corporation"), is subject to the Securities and Exchange Commission's
Uniform Net Capital Rule, which requires the maintenance of a minimum net
capital. The Corporation has elected to use the alternative method
permitted by the rule, which requires that the Corporation maintain a
minimum net capital of 2 percent of aggregate debit balances arising from
customer transactions as defined. As of September 30, 2000, the
Corporation had aggregate net capital, as defined, of $40.1 million, which
equaled 16.9% of aggregate debit balances and $39.8 million in excess of
required minimum net capital.
14. 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.
15. Segment Analysis
----------------
The Company's reportable operating segments are: Institutional (including
Investment Banking, Institutional Sales and Trading), Investments, Equity
in Losses of Affiliates and Discontinued Operations. The financial
policies of the Company's segments are the same as those described in the
"Summary of Significant Accounting Policies." 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
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
other dealers and to institutional clients. The Investment segment
includes gains and losses associated with the investment portfolio held at
First Albany Companies Inc., the holding company. Discontinued operations
is comprised of the Company's Private Client Group. 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 Equity in Losses of Affiliates 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) relating to MTI was $(1,679,000) and $(1,397,000) for
the quarters ended September 2000 and 1999, respectively and $(3,640,000)
and $ (2,813,000) for year to date 2000 and 1999 respectively.
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. 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.
<TABLE>
=======================================================================================
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
(In thousands of dollars) September 30, September 30, September 30, September 30,
2000 1999 2000 1999
---------------------------------------------------------------------------------------
Revenues (excluding interest):
Institutional $ 26,754 $ 24,739 $ 80,540 $ 71,733
Investments (1,066) 498 246 (2,513)
---------------------------------------------------------------------------------------
Continued operations 25,688 25,237 80,786 69,220
Discontinued operations 7,047 20,060 61,673 67,420
---------------------------------------------------------------------------------------
Total $ 32,735 $ 45,297 $142,459 $136,640
=======================================================================================
Net Interest Revenues:
Institutional $ 1,746 $ 1,166 $ 5,459 $ 3,988
---------------------------------------------------------------------------------------
Continued operations 1,746 1,166 5,459 3,988
Discontinued operations 422 1,072 2,602 3,047
---------------------------------------------------------------------------------------
Total $ 2,168 $ 2,238 $ 8,061 $ 7,035
=======================================================================================
Net Revenues:
Institutional $ 28,500 $ 25,905 $ 85,999 $ 75,721
Investments (1,066) 498 246 (2,513)
---------------------------------------------------------------------------------------
Continued operations 27,434 26,403 86,245 73,208
Discontinued operations 7,469 21,132 64,275 70,467
---------------------------------------------------------------------------------------
Total $ 34,903 $ 47,535 $150,520 $143,675
=======================================================================================
Pre-Tax Income:
Institutional $ (155) $ (622) $ (172) $ (1,602)
</TABLE>
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
<TABLE>
Three Months Ended Nine Months Ended
(In thousands of dollars) September 30, September 30, September 30, September 30,
2000 1999 2000 1999
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments (1,066) 498 246 (2,513)
Equity in losses of
affiliates (1,679) (1,397) (3,640) (2,813)
---------------------------------------------------------------------------------------
Continued operations (2,900) (1,521) (3,566) (6,928)
Discontinued operations (3,527) 932 721 6,372
Sale of discontinued
operations 39,309 39,309
---------------------------------------------------------------------------------------
Total $ 32,882 $ (589) $ 36,464 $ (556)
=======================================================================================
</TABLE>
16. New Accounting Standards
------------------------
In June 1999, the Financial Accounting Standards Board issued SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities, an amendment
of SFAS 133," which extended the effective date of SFAS 133 to all fiscal
quarters of all fiscal years beginning after June 15, 2000. SFAS 133
requires that all derivative instruments be recorded on the balance sheet
at their fair value. 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.
17. Discontinued Operations
-----------------------
On May 9, 2000, the Company announced that it signed an agreement for the
sale of the assets of its Private Client Group, its retail brokerage branch
network, to First Union Securities, a subsidiary of First Union Corp. The
transaction closed on August 4, 2000. The amount received was
approximately $87 million (adjusted from previously announced $100 million
due to financial consultant attrition production) plus certain assets
purchased for $6 million less certain liabilities assumed for approximately
($6) million and less the assumption of certain long term deferred
compensation plans totaling about ($17) million. In addition, the Company
and First Union Securities agreed to jointly enhance the Financial
Consultant retention program. The Company's contribution to this plan was
approximately ($8) million. Finally, all customer assets and liabilities
associated with this business were transferred to First Union Securities.
Included in the condensed consolidated statement of operations under the
caption "Gain on Sale of Discontinued Operations Net of Taxes", was an
after tax gain from the sale of the Private Client Group of $37.2 million,
and a one-time charge of $14.4 million related to the divestiture of the
Private Client Group related to the Private Client Group. The one-time
charge consisted of a cash charge of $5.5 million and an asset valuation charge
of $8.9 million. The cash charge consisted predominately of compensation
related charges associated with the completion of the divestiture of the Private
Client Group, while the asset valuation charge consisted primarily of the
impairment of future lease space and fixed assets, also related to the
divestiture of the Private Client Group.
In accordance with Accounting Principles Board Opinion No. 30 (APB 30),
"Reporting the Results of Operations - Reporting the Effect of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", the results of the Private Client Group
have been reported separately as a discontinued operation for all periods
presented.
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Components of amounts reflected in condensed consolidated statement of
financial condition and condensed consolidated statement of operations are
presented in the following tables:
<TABLE>
======================================================================================
(In thousands of dollars) Three Months Ended Nine Months Ended
September 30, September 30, September 30, September30,
2000 1999 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 7,469 $ 21,132 $ 64,275 $ 70,467
Expenses 10,996 20,200 63,554 64,095
--------------------------------------------------------------------------------------
(Loss) income before income
taxes (3,527) 932 721 6,372
Income tax (benefit) expense (1,487) 391 299 2,496
--------------------------------------------------------------------------------------
Loss (income) from discontinued
Operations, net taxes $ (2,040) $ 541 $ 422 $ 3,876
======================================================================================
</TABLE>
Included in the balance sheet, for the period ending September 30, 2000
was approximately $12.5 million in accrued expenses relating to discontinued
operations. These accruals consisted primarily of impairment of future lease
space of $8.9 million and other costs relating to the divestiture of the
Private Client Group.
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
2000 vs.
Three Months Ended 1999 Percentage
September 30, September 30, Increase Increase
(In thousands of dollars) 2000 1999 (Decrease) (Decrease)
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Commissions $ 3,590 $ 3,930 $ (340) (9)%
Principal transactions 14,543 11,036 3,507 32%
Investment banking 7,761 8,503 (742) (9)%
Investment gain (loss) (1,066) 498 (1,564) (314)%
Interest income 22,891 15,832 7,059 45%
Fees and others 860 1,270 (410) (32)%
---------------------------------------------------------------------------------------
Total revenues 48,579 41,069 7,510 18%
Interest expense 21,145 14,666 6,479 44%
---------------------------------------------------------------------------------------
Net revenues 27,434 26,403 1,031 4%
---------------------------------------------------------------------------------------
Expenses (excluding interest)
Compensation and benefits 21,897 19,824 2,073 10%
Clearing, settlement and
brokerage costs 621 712 (91) (13)%
Communications and
data processing 2,168 2,029 139 7%
Occupancy and depreciation 1,399 1,381 18 1%
Selling 1,502 1,299 203 16%
Other 1,068 1,282 (214) (17)%
---------------------------------------------------------------------------------------
Total expenses (excluding
interest) 28,655 26,527 2,128 8%
---------------------------------------------------------------------------------------
Operating (loss) income (1,221) (124) (1,097) (885)%
Equity in losses of affiliates (1,679) (1,397) (282) (20)%
---------------------------------------------------------------------------------------
(Loss) income before income taxes (2,900) (1,521) (1,379) (91)%
---------------------------------------------------------------------------------------
Income tax (benefit) expense (926) (550) (376) (68)%
---------------------------------------------------------------------------------------
(Loss) income from continuing
operations (1,974) (971) (1,003) (103)%
---------------------------------------------------------------------------------------
(Loss) income from discontinued
operations, net of taxes (2,040) 541 (2,581) (477)%
Gain on sale of discontinued
operations, net of taxes 22,799 22,799
---------------------------------------------------------------------------------------
Net income (loss) $18,785 $ (430) $19,215 4658%
=======================================================================================
Net interest income
Interest income $22,891 $15,832 $ 7,059 45%
Interest expense 21,145 14,666 6,479 44%
---------------------------------------------------------------------------------------
Net interest income $ 1,746 $ 1,166 $ 580 50%
=======================================================================================
</TABLE>
</PAGE>
<PAGE>
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 generate
revenues in direct correlation with the general level of trading activity
in the stock and bond markets. The Company cannot control this level of
activity; 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.
On May 9, 2000, the Company announced that it signed an agreement for the
sale of the assets of its Private Client Group, its retail brokerage branch
network, to First Union Securities, a subsidiary of First Union Corp. The
transaction closed on August 4, 2000.
The proceeds from this sale will be used to expand the Company's
investment banking, equity & fixed income capital markets, and venture
capital operations, as well as to reduce outstanding bank debt.
Results of Operations
---------------------
Net revenues from continuing operations of $27.4 million for the third
quarter ended September 30, 2000, compared to $26.4 million for the same
period in 1999. Net revenues from continuing operations for the first nine
months of 2000 were $86.2 million, compared to $73.2 million in 1999, an
increase of 18%.
Due to the sale of the assets of the Private Client Group, the Company's
retail brokerage network, to First Union Securities, the operating results
of the Private Client Group are reported as discontinued operations on a
net income basis.
For the third quarter the Company reported consolidated net income of
$18.8 million compared to a net loss of $430 thousand for the same period
of 1999, or $2.36 diluted earnings per share compared to $(0.05) diluted
earnings per share, respectively. For the first nine months of 2000, net
income was $20.8 million, or $2.52 per diluted share, compared to a net
loss of $(0.05) per diluted share, for the same period in 1999. Included
in the consolidated net income for the quarter was an after tax gain from
the sale of the Private Client Group of $37.2 million, a one-time charge of
$14.4 million related to the divestiture of the Private Client Group and a
$2 million loss from discontinued operations related to the Private Client
Group. The one-time charge consisted of a cash charge of $5.5 million and
an asset valuation charge of $8.9 million. The cash charge consisted
predominately of compensation related charges associated with the completion of
the divestiture of the Private Client Group, while the asset valuation charge
consisted primarily of the impairment of future lease space and fixed
assets, also related to the divestiture of the Private Client Group.
First Albany Corporation, the investment bank, reported net revenues from
continuing operations of $28.3 million for the quarter ended September 30,
2000 compared to net revenues of $25.6 million for the same period in 1999,
representing 11% growth. For the quarter, First Albany Corporation
generated pre-tax income of $553 thousand from continuing operations,
compared to a pre-tax loss of $307 thousand for
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
the same period in 1999. For the nine months ending September 30, 2000,
First Albany Corporation reported net revenues of $85.3 million from
continuing operations compared to $75.0 million for the same period in
1999, representing 14% growth. For the first nine months, First Albany
Corporation generated pre-tax earnings of $1.7 million from continuing
operations compared to a pre-tax loss of $767 thousand for the same period
in 1999.
During the quarter, the parent company and affiliates reported a pre-tax
loss of $3.5 million, which compares to a pre-tax loss of $1.2 million for
the same period of 1999. The loss for the quarter is due to the Company
recording its pro rata portion of the June 30, 2000 quarter net loss at
Mechanical Technology Inc. (NASDAQ: MKTY), coupled with a decline in the
market value of other investments owned by the Company. For the first
nine months, the parent and affiliates experienced a pre-tax loss of $5.2
million compared to a pre-tax loss of $6.2 million for the same period of
1999. As of September 30, 2000, the Company had an unrecognized and
unrealized pre-tax gain in its holding of Mechanical Technology Inc. of
approximately $110.3 million.
A portion of First Albany Companies Inc.'s investment portfolio is
accounted for at market value while the remainder is accounted for under
the equity method. The aggregate market value of the Firm's investment
portfolio declined from $182.4 million at June 30, 2000, to $133.3 million
at September 30, 2000, primarily as a result of a decline in the market
value of MKTY. The Firm is required to account for the MKTY investment
under the equity method of accounting because it owns excess of 20%
(approximately 33%) of the shares outstanding, and does not recognize
changes in the market value of this investment in the income statement.
Changes in the value of those portions of the Company's investment
portfolio accounted for at market value may impact the financial results of
future periods either positively or negatively.
Three Month Periods Ended September 30, 2000 and September 30, 1999
-------------------------------------------------------------------
Commissions
-----------
Commission revenues for this year's third quarter decreased $0.3 million
or 9% compared to the comparable 1999 period primarily due to decrease in
listed agency transactions.
Principal Transactions
----------------------
Principal transactions for this year's third quarter increased $3.5
million or 32% compared to the comparable 1999 period. This amount was
comprised of an increase in municipal bonds of $0.1 million, and an
increase in corporate fixed income of $3.3 million, and an increase in
equity securities of $0.1 million.
Investment Banking
------------------
Investment banking revenues for this year's third quarter decreased $0.8
million or 9% compared to the comparable 1999 period. Revenues from
corporate underwriting decreased $0.4 million while municipal underwriting
revenues decreased $0.4 million.
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Investment Gains/(Losses)
-------------------------
Investment gains (losses) for this year's third quarter decreased $1.6
million compared to the comparable 1999 period. The decrease was due
primarily to a decrease in the market value of the investment portfolio
held at First Albany Companies Inc, the Parent Company. (See Note 3)
Net Interest Income
-------------------
Net Interest Income for this year's second quarter increased $0.6
million or 50% compared to the same period of 1999 due primarily to
increase in net revenues from inventory position in fixed income
securities.
Compensation and Benefits
-------------------------
Compensation and benefits expense for this year's third quarter increased
$2.1 million or 10% compared to the same period of 1999, mainly due to an
increase in net revenues, excluding investment gains/(losses).
Equity in losses of affiliates
------------------------------
Equity in losses of affiliates for this year's third quarter decreased
$0.3 million due to a decrease in the book value of Mechanical Technology
Incorporated. (See note 3)
Income Taxes
------------
Income taxes decreased $0.4 million for this year's third quarter due
mainly to decrease in income from continued operations.
Income from Discontinued Operations, Net Of Taxes
--------------------------------------------------
Income from discontinued operations, net of taxes decreased $2.6 million
for this year's third quarter, resulting primarily from the completion of
the sale of the Private Client Group network to First Union Securities on
August 4, 2000.
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
2000 vs.
Nine Months Ended 1999 Percentage
September 30, September 30, Increase Increase
(In thousands of dollars) 2000 1999 (Decrease) (Decrease)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Commissions $ 12,604 $ 11,348 $ 1,256 11%
Principal transactions 42,749 34,672 8,077 23%
Investment banking 21,701 21,839 (138) (1)%
Investment gain (loss) 246 (2,513) 2,759 110%
Interest income 63,170 40,165 23,005 57%
Fees and others 3,486 3,874 (388) (10)%
----------------------------------------------------------------------------------------
Total revenues 143,956 109,385 34,571 32%
Interest expense 57,711 36,177 21,534 60%
----------------------------------------------------------------------------------------
Net revenues 86,245 73,208 13,037 18%
----------------------------------------------------------------------------------------
Expenses (excluding interest)
Compensation and benefits 65,859 57,832 8,027 14%
Clearing, settlement and
brokerage costs 2,153 2,119 34 2%
Communications and
data processing 6,694 6,192 502 8%
Occupancy and depreciation 4,121 3,933 188 5%
Selling 4,325 3,925 400 10%
Other 3,019 3,322 (303) (9)%
----------------------------------------------------------------------------------------
Total expenses (excluding interest) 86,171 77,323 8,848 11%
----------------------------------------------------------------------------------------
Operating income (loss) 74 (4,115) 4,189 102%
Equity in losses of affiliates (3,640) (2,813) (827) (29)%
----------------------------------------------------------------------------------------
(Loss) income before income taxes (3,566) (6,928) 3,362 49%
----------------------------------------------------------------------------------------
Income tax (benefit) expense (1,107) (2,642) 1,535 58%
----------------------------------------------------------------------------------------
(Loss) income from continuing
operations (2,459) (4,286) 1,827 43%
----------------------------------------------------------------------------------------
Income from discontinued operations,
net of taxes 422 3,876 (3,454) (89)%
Gain on sale of discontinued
operations, net of taxes 22,799 22,799
----------------------------------------------------------------------------------------
Net income (loss) $ 20,762 $ (410) $ 21,172 5,164%
========================================================================================
Net interest income
Interest income $ 63,170 $ 40,165 $ 23,005 57%
Interest expense 57,711 36,177 21,534 60%
----------------------------------------------------------------------------------------
Net interest income $ 5,459 $ 3,988 $ 1,471 37%
========================================================================================
</TABLE>
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Nine-Month Period Ended September 30, 2000 and September 30, 1999
-----------------------------------------------------------------
Commissions
-----------
Commission revenues for this year's first nine months increased $1.3
million or 11% compared to the comparable 1999 period primarily due to
increase in listed agency transactions.
Principal Transactions
----------------------
Principal transactions for this year's first nine months increased $8.1
million or 23% compared to the comparable 1999 period. This amount was
comprised of an increase in equity securities of $2.1 million, and an
increase in corporate fixed income of $5.4 million, an increase in
municipal bonds of $3.0 million and a decrease of $2.4 million in our
convertible trading department which was closed in June 2000.
Investment Gains/(Losses)
-------------------------
Investment gains (losses) for this year's first nine months increased $2.8
million compared to the comparable 1999 period. The increase was due
primarily to an increase in the market value of the investment portfolio
held at First Albany Companies Inc, the Parent Company. (See Note 3)
Net Interest Income
-------------------
Net Interest Income for this year's first nine months increased $1.5
million or 37% compared to the same period of 1999 due primarily to
increase in net revenues from inventory position in fixed income
securities.
Compensation and Benefits
-------------------------
Compensation and Benefits for this year's first nine months increased
$8.0 million or 14% compared to the same period of 1999, attributed
primarily to increase in net revenues, excluding investment gains/(losses).
Equity in losses of affiliates
------------------------------
Equity in losses of affiliates for this year's first nine months
decreased $0.8 million due to a decrease in the book value of Mechanical
Technology Incorporated. (See note 3)
Income Taxes
------------
Income taxes increased $1.5 million for this year's first nine months due
mainly to increase in income from continued operations.
Income from Discontinued Operations, Net Of Taxes
-------------------------------------------------
Income from discontinued operations, net of taxes decreased $3.5 million
for this year's first nine months resulting primarily from the completion
of the sale of the Private Client Group network to First Union Securities
on August 4, 2000.
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
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, 2000, 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.
Management believes that funds provided by operations and a variety of
bank lines-of-credit-totaling $285 million of which approximately $189
million were unused as of September 30, 2000-will provide sufficient
resources to meet present and reasonably foreseeable short-term financing
needs.
In January 2000, the Board of Directors declared the regular quarterly
cash dividend of $0.05 per share payable on February 24, 2000, to
shareholders of record on February 10, 2000.
On March 31, 2000 the Board of Directors declared the regular quarterly
dividend of $0.05 per share for the first quarter, ended March 31, 2000,
along with a 5% stock dividend, payable on May 26, 2000 to shareholders of
record on May 12, 2000.
In July 2000, the Board of Directors declared the regular quarterly cash
dividend of $0.05 per share payable on August 24, 2000, to shareholders of
record on August 10, 2000.
In October 2000, the Board of Directors declared the regular quarterly
dividend of $0.05 per share for the first quarter, ended September 30,
2000, along with a 5% stock dividend, payable on November 28, 2000 to
shareholders of record on November 14, 2000.
The Company will use the net proceeds from the sale of its retail branch
network to provide additional liquidity and capital resources as well as to
fund future venture capital investments.
In October 2000, the Board of Directors authorized a stock repurchase
program of up to 1.5 million shares of its outstanding common stock. Under
the program, the Company may periodically repurchase shares on the open
market at prevailing market prices or in privately negotiated transactions
from time to time over the next 18 months. Shares purchased under the
program will be held in treasury and used for general corporate purposes.
During the quarter, the Company repurchased 863,416 shares of common
stock. The Company purchased most of these shares from many of its former
financial consultants, who were transferred to First
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Union Securities, Inc. The Company consummated the sale of its Private
Client Group to First Union Securities, Inc. on August 4, 2000.
The Company believes that funds provided by operations will be sufficient
to fund the acquisition of office equipment, 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
firms in the securities industry, 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.
The Project
-----------
In 1997, the Company initiated a comprehensive project to prepare its
internally and externally dependent computer and peripheral systems for the
Year 2000, and had completed changes to critical systems in 1999. The
Company's Year 2000 plan involved many phases:
Inventory and assessment
Planning, analysis and design
Remediation
Testing
Implementation
Post implementation monitoring
Project Results
---------------
The Company successfully completed its Year 2000 rollover without any
mission-critical information system disruptions. The Company is not aware
of any Year 2000 related problems with third-party vendors of mission-
critical systems or services. However, the Company will continue to
monitor its systems carefully and maintain contingency plans with respect
to its third-party vendor relationships.
The Costs to Address the Company's Y2K Issues
---------------------------------------------
The Company estimates that the total cost of the Company's Year 2000
efforts will not exceed $1.2 million. Most of this amount, being hardware
purchases, was capitalized, however, independent-verification testing of
its internal applications was expensed when incurred. These costs were
funded through operating cash flow. All internal remediation was
accomplished by utilizing existing Company
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
personnel. The Company's Y2K budget did not reflect the costs of the
extensive resource allocation and management from internal sources.
The Risks of the Company's Y2K Issues
-------------------------------------
Although the Year 2000 transition has passed, there can be no assurance
that the Company will not experience any problems related to the Year 2000.
If Year 2000 issues are not adequately monitored, the Company could face,
among other things, business disruption, operational problems, financial losses,
legal liability and similar risks, and the Company's business, results of
operations and financial position could be materially adversely affected.
New Accounting Standards
------------------------
In June 1999, the Financial Accounting Standards Board issued SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities, an amendment
of SFAS 133," which extended the effective date of SFAS 133 to all fiscal
quarters of all fiscal years beginning after June 15, 2000. SFAS 133
requires that all derivative instruments be recorded on the balance sheet
at their fair value. 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. 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, 2000, including a discussion of how those exposures are
currently managed.
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
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, 2000 was $ 106.1 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, 2000, the potential change
in fair value, assuming this hypothetical decrease, was $5.5 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, 2000, which were recorded at a fair value of $5.9 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 $.06 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, 2000 had a fair market value of $6.2
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 $0.6 million.
Actual results may differ.
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.
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
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
Finance 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.
</PAGE>
<PAGE>
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
-------- ----
(10.26) Agreements to Sell First Albany Corporation's Retail Branch
Network and Correspondent Clearing Business dated May 8, 2000
between First Albany Companies Inc., First Albany Corporation and
First Union Securities, Inc. (filed as exhibit 10.26 to form 10Q
for quarter ended March 31, 2000)
(10.27) First Albany Companies Inc. Deferred Compensation Plan for
Key Employees (filed as registration No. 333-37640 (Form S-8)
dated May 23, 2000)
(11) Statement Re: Computation of Per Share Earnings (filed herewith)
(27) Selected Financial Data Schedule BD (filed herewith)
(b) Reports on Form 8-K
-------------------
The following reports on Form 8K were filed during the quarter
ended September 30, 2000:
1. Form 8-K filed August 21, 2000 concerning the sale of the assets
of the Companies' Private Client Group (retail brokerage branch
network) to First Union Securities, Inc., a subsidiary of First
Union Corp.
2. Form 8-K filed September 6, 2000 announcing the completion
of a stock buy-back in which the Registrant purchased
approximately 814,000 shares of its commons stock.
</PAGE>
<PAGE>
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 10, 2000 /S/ ALAN P. GOLDBERG
---------------------------
Alan P. Goldberg
President/Co-Chief Executive Officer
Date: November 10, 2000 /S/ STEVEN JENKINS
---------------------------
Steven Jenkins
Chief Financial Officer
(Principal Accounting Officer)
</PAGE>
