SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2000
-------------------------------
Commission file number 0-14140
First Albany Companies Inc.
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 22-2655804
------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 South Pearl St., Albany, NY 12207
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(518) 447-8500
-------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X (1) No
------- ------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
8,122,147 Shares of Common Stock were outstanding as of the close of business
-----------------------------------------------------------------------------
on August 1, 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 June 30, 2000 and
December 31, 1999.......... ............. 3
Condensed Consolidated Statements of Operations
for the Six Months Ended
June 30, 2000 and June 30, 1999........... 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended
June 30, 2000 and June 30, 1999........... 5-6
Notes to Condensed Consolidated Financial
Statements................................ 7-16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 17-27
Part II - Other Information
Item 1. Legal Proceedings........................ 28
Item 4. Submission of matters to a vote of
security holders 28
Item 6. Exhibits and Reports on Form 8-K......... 29-31
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
=============================================================================
June 30,
2000 December 31,
(In thousands of dollars) (Unaudited) 1999
<S> <C> <C>
-----------------------------------------------------------------------------
Assets
Cash $ 1,661 $ 1,912
Securities purchased under
agreement to resell 45,679 26,822
Securities borrowed 880,283 474,177
Receivables from:
Brokers, dealers and clearing
agencies 5,005 8,193
Customers 28,265 251,374
Others 28,809 39,815
Securities owned 193,642 158,047
Investments 21,981 14,778
Office equipment and leasehold
improvements, net 8,402 10,515
Net assets of discontinued
operations, see note 17 227,483
Other assets 19,658 22,501
-----------------------------------------------------------------------------
Total assets $1,460,868 $1,008,134
=============================================================================
Liabilities and Stockholders' Equity
Liabilities
Short-term bank loans $ 188,559 $ 172,534
Securities loaned 1,059,161 596,340
Payables to:
Brokers, dealers and clearing
agencies 10,754 9,452
Customers 3,851 59,957
Others 21,698 18,094
Securities sold but not yet
purchased 68,599 37,521
Accounts payable 3,579 3,214
Accrued compensation 16,354 30,131
Accrued expenses 12,016 9,849
Income tax payable 1,234 29
Deferred tax liability 120
Notes payable 4,415 5,480
Obligations under capitalized lease 3,382 4,917
-----------------------------------------------------------------------------
Total liabilities 1,393,722 947,518
-----------------------------------------------------------------------------
Commitments and Contingencies
Subordinated debt 6,000 7,500
-----------------------------------------------------------------------------
Stockholders' Equity
Common stock 85 76
Additional paid-in-capital 77,123 58,314
Deferred compensation 1,184
Unamortized value of restricted stock (2,771) (2,353)
Retained deficit (11,058) (2,920)
Less treasury stock at cost (2,233) (1,185)
-----------------------------------------------------------------------------
Total stockholders' equity 61,146 53,116
-----------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,460,868 $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 Three Months Ended Six Months Ended
except for per share and and June 30, June 30, June 30, June 30,
outstanding share amounts) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------
Revenues
Commissions $ 4,243 $ 3,749 $ 9,014 $ 7,418
Principal transactions 12,829 11,935 28,206 23,636
Investment banking 5,879 6,682 13,940 13,336
Investment gains (losses) (851) 0 1,312 (3,011)
Interest income 21,234 13,602 40,279 24,333
Fees and other 1,260 1,489 2,626 2,604
-----------------------------------------------------------------------------
Total revenues 44,594 37,457 95,377 68,316
Interest expense 19,385 12,259 36,566 1,511
-----------------------------------------------------------------------------
Net revenues 25,209 25,198 58,811 46,805
-----------------------------------------------------------------------------
Expenses (excluding interest)
Compensation and benefits 19,555 19,511 43,962 38,008
Clearing, settlement and
brokerage costs 734 660 1,532 1,407
Communications and data processing 2,278 2,012 4,526 4,163
Occupancy and depreciation 1,363 1,367 2,722 2,552
Selling 1,387 1,449 2,823 2,626
Other 727 1,118 1,951 2,040
-----------------------------------------------------------------------------
Total expenses (excluding interest) 26,044 26,117 57,516 50,796
-----------------------------------------------------------------------------
Operating income (loss) (835) (919) 1,295 (3,991)
Equity in losses of affiliates (1,365) (872) (1,962) (1,416)
-----------------------------------------------------------------------------
Income (loss) before income taxes (2,200) (1,791) (667) (5,407)
Income tax expense (benefit) (838) (741) (181) (2,092)
-----------------------------------------------------------------------------
Income from continuing operations (1,362) (1,050) (486) (3,315)
-----------------------------------------------------------------------------
Income from discontinued operations,
net of taxes 275 1,867 2,462 3,335
-----------------------------------------------------------------------------
Net income (loss) $(1,087) $ 817 $ 1,976 $ 20
=============================================================================
Basic share data:
Basic earnings:
Continued operations (0.16) (0.14) (0.06) (0.43)
Discontinued operations 0.03 0.25 0.31 0.43
-----------------------------------------------------------------------------
Net income (0.13) 0.11 0.25 0.00
=============================================================================
Diluted earnings:
Continued operations (0.16) (0.12) (0.05) (0.39)
Discontinued operations 0.03 0.21 0.26 0.39
-----------------------------------------------------------------------------
Net income (0.13) 0.09 0.21 0.00
=============================================================================
Weighted average common
and common equivalent
shares outstanding:
Basic 8,146,338 7,648,327 8,001,106 7,641,684
Dilutie 8,146,338 8,669,114 9,362,933 8,497,669
==============================================================================
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> Six Months Ended
June 30, June 30,
(In thousands of dollars) 2000 1999
<S> <C> <C>
-----------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 1,976 $ 20
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 2,239 2,231
Deferred compensation 806 969
Deferred income taxes (1,791) (2,543)
Undistributed loss of affiliate 1,961 1,416
Unrealized investment (gain) loss 1,085 3,011
Realized (gain) loss on sale of investments (2,332)
Loss on sales of fixed assets 126
Services provided in exchange for common stock 868 347
(Increase) decrease in operating assets:
Cash and securities segregated under federal
regulations (4,750)
Securities purchased under agreement to
resell (18,857) (11,826)
Net receivables from customers (52,860) (28,163)
Net receivables from others 12,697 (41,211)
Securities owned, net (4,517) (46,232)
Other assets (6,606) (321)
Increase (decrease) in operating liabilities:
Securities loaned, net 56,717 60,225
Net payables to brokers, dealers, and
clearing agencies 4,490 2,338
Accounts payable and accrued expenses (7,559) (10,804)
Income taxes payable 1,205
-----------------------------------------------------------------------------
Net cash used in operating activities (15,228) (70,417)
-----------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of furniture, equipment, and
leaseholds (1,504) (425)
Disbursements for purchase of investments (1,535)
Proceeds from sale of investments 2,638
-----------------------------------------------------------------------------
Net cash used in investing activities (401) (425)
</TABLE>
See notes to the condensed consolidated financial statements.
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
<TABLE>
Six Months Ended
June 30, June 30,
(In thousands of dollars) 2000 1999
<S> <C> <C>
-----------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds of short-term bank loans 16,025 80,635
Proceeds of notes payable 4,400
Payments on notes payable (1,065) (2,783)
Payments of obligations under capitalized
leases (1,068) (689)
Payments for purchases of common for treasury (240)
Proceeds from issuance of common stock 574 111
Net increase (decrease) from borrowing under
line-of-credit agreements 1,913 (4,435)
Dividends paid (761) (660)
-----------------------------------------------------------------------------
Net cash provided by financing activities 15,378 76,579
-----------------------------------------------------------------------------
Increase in cash (251) 5,737
Cash at beginning of the year 1,912 1,424
-----------------------------------------------------------------------------
Cash at end of period $ 1,661 $ 7,161
=============================================================================
</TABLE>
In 2000, the Company entered into capital leases for office and computer
equipment totaling approximately $867,000.
In 2000, the Company increased its investment in MTI by $9,044,000 and
increased paid-in-capital by $5,297,000 and deferred income taxes by
$3,747,000 (See Note 3).
In 2000, the Company reduced its subordinated liability by $1,500,000 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 Six Months Ended
(In thousands, except June 30, June 30, June 30, June 30,
per share amounts) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------
Income from continuing operations $(1,362) $(1,050) $ (486) $(3,315)
Income from discontinued operations,
net of taxes 275 1,867 2,462 3,335
-----------------------------------------------------------------------------
Net income (loss) $(1,087) $ 817 $1,976 $ 20
-----------------------------------------------------------------------------
Weighted average shares
for basic earnings per share 8,146 7,648 8,001 7,641
Effect of dilutive common
equivalent shares (stock options
and stock issuable under employee
benefit plans) 1,021 1,362 857
-----------------------------------------------------------------------------
Weighted average shares and
dilutive common equivalent shares
for dilutive earnings per share 8,146 8,669 9,363 8,498
=============================================================================
Earnings per share data:
Basic earnings:
-----------------------------------------------------------------------------
Continuing operations $ (0.16) $ (0.14) $(0.06) $ (0.43)
Discontinued operations 0.03 0.25 0.31 0.43
-----------------------------------------------------------------------------
Net income $ (0.13) $ 0.11 $ 0.25 $ 0.00
=============================================================================
</TABLE>
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
<TABLE>
<S> <C> <C> <C> <C>
Diluted earnings:
-----------------------------------------------------------------------------
Continuing operations $ (0.16) $ (0.12) $(0.05) $(0.39)
Discontinued operations 0.03 0.21 0.26 0.39
-----------------------------------------------------------------------------
Net income $ (0.13) $ 0.09 $ 0.21 $ 0.00
=============================================================================
</TABLE>
For the quarter ended June 30, 2000, the Company excluded approximately
1.3 million common equivalent shares in its computation of dilutive earnings
per share because they were 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 the two major holdings.
At June 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
$16.9 million. At June 30, 2000 the aggregate market value of the Company's
shares of MTI stock was $176.3 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 March 31, 2000 recorded on a one-quarter delay basis, was $1.4 million.
The following presents unaudited summarized financial information of MTI
at March 31, 2000 and for the three months then ended March 31, 2000:
<TABLE>
------------------------------------------
<S> <C>
(in thousands of dollars)
==========================================
Assets $ 81,394
Liabilities 27,231
------------------------------------------
Shareholders' equity $ 54,163
==========================================
==========================================
Revenues $ 1,733
Operating loss (701)
Equity in losses of affiliates (6,328)
Other Expense (493)
Income tax benefit 3,461
Net loss $ (4,061)
===========================================
Equity in losses of affiliates for the three months ended March 31, 2000
are attributed to MTI's investments in Plug Power, Inc. The Company's
equity in MTI's net loss, recorded on a one-quarter delay basis, was a loss
of $1.7 million for the three months ended June 30, 2000, which will be
recorded by the Company in the quarter ending September 30, 2000.
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Plug Power's shareholder's equity increased $1.8 million during the
calendar quarter ended March 31, 2000, primarily due to cash investments by
individual and corporate investors. Accordingly, the Company has recorded
through June 30, 2000 its proportionate share ($87 thousand) of this increase
in MTI's equity as an increase in it's investments in MTI. The Company also
recorded an increase in additional paid-in-capital of $51 thousand (net of
deferred taxes) as a result of this transaction.
At June 30, 2000, the Company owned 134,500 shares of META Group, Inc.
The fair market value of this investment was $2.6 million. During the
three months ended June 30, 2000, the Company has recorded unrealized
losses of $916,000 due to the decline in market value of this investment.
4. Receivables from Others
Amounts receivable from others as of:
</TABLE>
<TABLE>
-----------------------------------------------------------------------------
June 30, December 31,
(In thousands of dollars) 2000 1999
<S> <C> <C>
=============================================================================
Adjustment to record securities
owned on a trade date basis, net $17,226 $28,552
Others 11,583 11,263
-----------------------------------------------------------------------------
Total $28,809 $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.
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) June 30, December 31,
2000 1999
-----------------------------------------------------------------------------
Sold, but Sold, but
not yet not yet
Owned Purchased Owned Purchased
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------
Marketable Securities
U.S. Government and federal
agency obligations $ 11,939 $45,982 $ 12,885 $26,131
State and municipal bonds 141,553 16,557 111,855 3,080
Corporate obligations 32,702 5,327 19,577 2,249
Corporate stocks 6,036 733 12,646 6,061
</TABLE>
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
<TABLE>
<S> <C> <C> <C> <C>
Not readily marketable securities
securities
Investment securities with
no publicly quoted market 190 187
Investment securities subject
to restrictions 1,222 897
-----------------------------------------------------------------------------
Total $193,642 $68,599 $158,047 $37,521
=============================================================================
</TABLE>
</PAGE>
<PAGE>
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>
-----------------------------------------------------------------------------
June 30, December 31,
(In thousands of dollars) 2000 1999
<S> <C> <C>
=============================================================================
Borrowing under line-of-credit
agreements $17,714 $15,802
Others 3,984 2,292
-----------------------------------------------------------------------------
Total $21,698 $ 18,094
=============================================================================
</TABLE>
</PAGE>
<PAGE>
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.
The temporary differences that give rise to significant portions of
deferred tax assets and liabilities are as follows:
<TABLE>
============================================================
(In thousands of dollars) June 30, December 31,
2000 1999
<S> <C> <C>
------------------------------------------------------------
Bad debt reserve $ 142 $ 132
Securities held for investment (4,504) (1,812)
Fixed assets 1,097 1,053
Deferred compensation 3,070 2,381
Other 75 82
------------------------------------------------------------
Total deferred tax (liabilities)
assets $ (120) $ 1,836
============================================================
</TABLE>
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
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 consists of a note for $1,041,667 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") (6.635% plus 2% on June 30, 2000). This note was paid off
on July 3, 2000 in the amount of $1,056,834, including accrued interest.
Notes payable also consists of a note for $3,373,300 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"). This note
matures on April 1, 2004.
One of the more significant covenants of both notes requires First Albany
Corporation to maintain a minimum net capital (as defined by Rule 15c 3-1
of the Securities and Exchange Commission) equal to three times the
required minimum net capital. The required minimum net capital as of June
30, 2000 was $5.9 million. The amount of net capital as of June 30, 2000 was
$27 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 June 30, 2000:
<TABLE>
==============================================================
Continuing Discontinued
(In thousands of dollars) Operations Operations
<S> <C> <C>
--------------------------------------------------------------
2000 $ 949 $ 362
2001 1,596 689
2002 902 387
2003 183 46
2004 46 23
2005 6 3
-------------------------------------------------------------
Total Minimum Lease Payments 3,682 1,510
Less: Amount Representing Interest 300 178
--------------------------------------------------------------
Present Value of Minimum Lease Payments $3,382 $1,332
==============================================================
</TABLE>
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.
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Both loan agreements include restrictive financial covenants. One of the
more significant covenants requires the Company to maintain a minimum net
capital (as defined by Rule 15c3-1 of the Securities and Exchange
Commission) equal to three times the required net capital. The amount of
required net capital as of June 30, 2000 was $5.9 million. The amount of
net capital as of June 30, 2000 was $27 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.
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 June 30, 2000, the Corporation had
aggregate net capital, as defined, of $27 million which equaled 9.1% of
aggregate debit balances and $21.1 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
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
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 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 $(1,365,000) and $(872,000) for the quarters
ended June 2000 and 1999, respectively and $(1,962,000) and $ (1,416,000)
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.
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
<TABLE>
=============================================================================
Three Months Ended Six Months Ended
(In thousands of dollars) June 30, June 30, June 30, June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------
Revenues (excluding interest):
Institutional $24,211 $23,855 $ 53,786 $46,994
Investments (851) 0 1,312 (3,011)
-----------------------------------------------------------------------------
Continued operations $23,360 $23,855 $ 55,098 $43,983
Discontinued operations 22,309 23,627 54,626 47,360
-----------------------------------------------------------------------------
Total $45,669 $47,482 $109,724 $91,343
=============================================================================
Net Interest Revenues:
Institutional $ 1,849 $ 1,343 $ 3,713 $ 2,822
-----------------------------------------------------------------------------
Continued operations $ 1,849 $ 1,343 $ 3,713 $ 2,822
Discontinued operations 1,096 1,048 2,180 1,975
-----------------------------------------------------------------------------
Total $ 2,945 $ 2,391 $ 5,893 $ 4,797
=============================================================================
Net Revenues:
Institutional $26,060 $25,198 $ 57,499 $49,816
Investments (851) 0 1,312 (3,011)
-----------------------------------------------------------------------------
Continued operations $25,209 $25,198 $ 58,811 $46,805
Discontinued operations 23,405 24,675 56,806 49,335
-----------------------------------------------------------------------------
Total $48,614 $49,873 $115,617 $96,140
=============================================================================
Pre-Tax Income:
Institutional $ 16 $ (919) $ (17) $ (980)
Investments (851) 0 1,312 (3,011)
Equity in losses of affiliates (1,365) (872) (1,962) (1,416)
-----------------------------------------------------------------------------
Continued operations $(2,200) $(1,791) $(667) $(5,407)
Discontinued operations 481 3,149 4,248 5,440
-----------------------------------------------------------------------------
Total $(1,719) $ 1,358 $ 3,581 $ 33
=============================================================================
</TABLE>
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
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 is has 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 the previously announced $100
million due to attrition related to financial consultants production) plus
certain assets purchased for $11 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 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 will be transferred to First Union Securities.
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.
Components of amounts reflected in condensed consolidated statement of
financial condition and condensed consolidated statement of operations are
presented in the following tables:
Income Statement Data - Discontinued Operations:
------------------------------------------------
<TABLE>
=========================================================================
(In thousands of dollars) Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------
Net Revenues $23,405 $24,675 $56,806 $49,335
Expenses 22,924 21,526 52,558 43,895
-------------------------------------------------------------------------
Income before income taxes 481 3,149 4,248 5,440
Income Taxes 206 1,282 1,786 2,105
-------------------------------------------------------------------------
Income from discontinued
operations, net taxes $ 275 $ 1,867 $ 2,462 $3,335
=========================================================================
</TABLE>
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
Statement of Financial Condition Data
Discontinued Operations
<TABLE>
================================================
(in thousands of dollars)
<S> <C>
------------------------------------------------
Office equipment and leasehold
improvements net $ 2,266
Other assets 12,363
Obligations under capital leases (1,332)
Deferred compensation (1,990)
Other liabilities (3,687)
-------------------------------------------------
Net business related assets* 7,620
-------------------------------------------------
Receivables from customers 254,524
Payable to customers (34,661)
-------------------------------------------------
Net customer related assets 219,863
-------------------------------------------------
-------------------------------------------------
Total net assets of discontinued $227,483
operations
-------------------------------------------------
</TABLE>
Also, the Company has agreed to buy back approximately 800,000 First
Albany Companies Inc. shares (the "Shares") offered for sale by the
financial consultants employed by the Private Client Group, who have
accepted employment with First Union Securities for approximately $16
million.
* Net business related asset excludes $17 million in future liabilities
under financial consultants deferred compensation.
</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
June 30, June 30, Increase Increase
(In thousands of dollars) 2000 1999 (Decrease) (Decrease)
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------
Revenues
Commissions $ 4,243 $ 3,749 $ 494 13%
Principal transactions 12,829 11,935 894 7%
Investment banking 5,879 6,682 (803) (12%)
Investment gain (loss) (851) 0 (851) 0%
Interest income 21,234 13,602 7,632 56%
Fees and others 1,260 1,489 (229) (15%)
-----------------------------------------------------------------------------
Total revenues 44,594 37,457 7,137 19%
Interest expense 19,385 12,259 7,126 58%
-----------------------------------------------------------------------------
Net revenues 25,209 25,198 11 0%
-----------------------------------------------------------------------------
Expenses (excluding interest)
Compensation and benefits 19,555 19,511 44 0%
Clearing, settlement and
brokerage costs 734 660 74 11%
Communications and
data processing 2,278 2,012 266 13%
Occupancy and depreciation 1,363 1,367 (4) 0%
Selling 1,387 1,449 (62) (4%)
Other 727 1,118 (391) (35%)
-----------------------------------------------------------------------------
Total expenses (excluding
interest) 26,044 26,117 (73) 0%
-----------------------------------------------------------------------------
Operating income (loss) (835 (919) 84 9%
Equity in losses of affiliates (1,365) (872) (493) (57%)
-----------------------------------------------------------------------------
Income (Loss) before income taxes (2,200) (1,791) (409) (23%)
-----------------------------------------------------------------------------
Income tax expense (benefit) (838) (741) (97) (13%)
-----------------------------------------------------------------------------
Income from continuing operations (1,362) (1,050) (312) (30%)
-----------------------------------------------------------------------------
Income from discontinued operations,
net of taxes 275 1,867 (1,592) (85%)
-----------------------------------------------------------------------------
Net income (loss) $(1,087) $ 817 $(1,904) (233%)
=============================================================================
Net interest income
Interest income $21,234 $13,602 $ 7,632 56%
Interest expense 19,385 12,259 7,126 58%
-----------------------------------------------------------------------------
Net interest income $ 1,849 $ 1,343 $ 506 38%
=============================================================================
</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. 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.
On May 9, 2000, the Company announced that it has 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
---------------------
Due to the May 9, 2000 announcement of the pending 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. The transaction
closed on August 4, 2000.
Net revenues from continuing operations of 25.2 million for the second
quarter ended June 30, 2000, compared to 25.2 million for the same period
in 1999.
For the second quarter, the Company reported a consolidated net loss of
$1.1 million compared to net income of $817 thousand for the same period of
1999, or $(0.13) diluted earnings per share compared to $0.09 diluted
earnings per share, respectively. However, for the first six months of
2000, net income improved to $2 million, or $0.21 per diluted share,
compared to $20 thousand, or $0.00 per diluted share, for the same period
in 1999.
First Albany Corporation, the investment bank, had a pre-tax loss of $142
thousand from continuing operations on net revenues of $25.9 million for
the quarter ending June 30, 2000, compared to a pre-tax loss of $688
thousand on net revenues of $24.9 million for the same period in 1999.
Included in the second quarter loss are the results from the proprietary
convertible trading department, which was closed in June 2000, and
experienced a $2.0 million pre-tax loss for the quarter and a six month pre-
tax loss of $2.5 million. Excluding the proprietary convertible trading
department, First Albany Corporation had a pre-tax profit from continuing
operations of $1.9 million for the quarter, and $3.6 million for six-month
period.
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
During the quarter, the parent company and affiliates reported a pre-tax
loss of $2.1 million, which compares to a pre-tax loss of $1.1 million for
the same period of 1999. The loss for the quarter is due to the Company
recording its pro rata portion of the March 31, 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 six
months, the parent and affiliates experienced a pre-tax loss of $1.8 million
compared to a pre-tax loss of $4.9 million for the same period of 1999.
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 $284.2 million at March 31, 2000, to $181.4 million
at June 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 June 30, 2000 and June 30, 1999
---------------------------------------------------------
Commissions
-----------
Commission revenues for this year's second quarter increased $0.5 million
or 13% compared to the comparable 1999 period primarily due to increase in
listed agency transactions.
Principal Transactions
----------------------
Principal transactions for this year's second quarter increased $0.9
million or 7% compared to the comparable 1999 period. This amount was
comprised of an increase in municipal bonds of $2.0 million, and an
increase in corporate fixed income of $0.4 million, an increase in equity
securities of $0.2 million and a decrease of $1.7 million in our convertible
trading department which was closed in June 2000.
Investment Banking
------------------
Investment banking revenues for this year's second quarter decreased $0.8
million or 12% compared to the comparable 1999 period. Revenues from
corporate underwriting increased $0.5 million while municipal underwriting
revenues decreased $1.3 million.
Investment Gains/(Losses)
-------------------------
Investment gains (losses) for this year's second quarter decreased $0.9
million compared to the comparable 1999 period. The decrease was due
primarily to a decrease in the book value of the investment portfolio held
at First Albany Companies Inc, the Parent Company. (See Note 3)
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Net Interest Income
-------------------
Net Interest Income for this year's second quarter increased $0.5
million or 38% compared to the same period of 1999 due primarily to
increase in revenues from inventory position in fixed income securitites.
Other Expense
-------------
Other expenses for this year's second quarter decreased $0.4 million or
35% compared to the same period of 1999, mainly due to decrease in
consulting fees.
Equity in losses of affiliates
------------------------------
Equity in losses of affiliates for this year's second quarter decreased
$0.5 million due to a decrease in the book value of Mechanical Technology
Incorporated. (See note 3)
Income from Discontinued Operations, Net Of Taxes
-------------------------------------------------
Income from discontinued operations, net of taxes decreased $1.6 million
for this year's second quarter, resulting primarily from market conditions
along with resources being directed to the transfer of the Private Client
Group branch network to First Union Securities.
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
=============================================================================
2000 vs.
Six Months Ended 1999 Percentage
June 30, June 30, Increase Increase
(In thousands of dollars) 2000 1999 (Decrease) (Decrease)
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------
Revenues
Commissions $ 9,014 $7,418 $ 1,596 22%
Principal transactions 28,206 23,636 4,570 19%
Investment banking 13,940 13,336 604 5%
Investment gain (loss) 1,312 (3,011) 4,323 (144%)
Interest income 40,279 24,333 15,946 66%
Fees and others 2,626 2,604 22 1%
-----------------------------------------------------------------------------
Total revenues 95,377 68,316 27,061 40%
Interest expense 36,566 21,511 15,055 70%
-----------------------------------------------------------------------------
Net revenues 58,811 46,805 12,006 26%
-----------------------------------------------------------------------------
Expenses (excluding interest)
Compensation and benefits 43,962 38,008 5,954 16%
Clearing, settlement and
brokerage costs 1,532 1,407 125 9%
Communications and
data processing 4,526 4,163 363 9%
Occupancy and depreciation 2,722 2,552 170 7%
Selling 2,823 2,626 197 8%
Other 1,951 2,040 (89) (4%)
-----------------------------------------------------------------------------
Total expenses (excluding
interest) 57,516 50,796 6,720 13%
-----------------------------------------------------------------------------
Operating income (loss) 1,295 (3,991) 5,286 132%
Equity in losses of affiliates (1,962) (1,416) (546) (39%)
-----------------------------------------------------------------------------
Income (Loss) before income taxes (667) (5,407) 4,740 88%
-----------------------------------------------------------------------------
Income tax expense (benefit) (181) (2,092) 1,911 91%
-----------------------------------------------------------------------------
Income from continuing operations (486) (3,315) 2,829 85%
-----------------------------------------------------------------------------
Income from discontinued operations,
net of taxes 2,462 3,335 (873) (26%)
-----------------------------------------------------------------------------
Net income (loss) $ 1,976 $ 20 $ 1,956 9780%
=============================================================================
Net interest income
Interest income $40,279 $24,333 $15,946 66%
Interest expense 36,566 21,511 15,055 70%
-----------------------------------------------------------------------------
Net interest income $ 3,713 $ 2,822 $ 891 32%
=============================================================================
</TABLE>
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Six Month Periods Ended June 30, 2000 and June 30, 1999
-------------------------------------------------------
Commissions
-----------
Commission revenues for this year's first six months quarter increased
$1.6 million or 22% compared to the comparable 1999 period primarily due to
increase in listed agency transactions.
Principal Transactions
----------------------
Principal transactions for this year's first six months increased $4.6
million or 19% compared to the comparable 1999 period. This amount was
comprised of an increase in equity securities of $1.7 million, and an
increase in corporate fixed income of $0.9 million, an increase in
municipal bonds of $4.0 million and a decrease of $2.0 million in our
convertible trading department which was closed in June 2000.
Investment Banking
------------------
Investment banking revenues for this year's first six months increased
$0.6 million or 5% compared to the comparable 1999 period. Revenues from
corporate underwriting increased $2.7 million while municipal underwriting
revenues decreased $2.1 million.
Investment Gains/(Losses)
-------------------------
Investment gains (losses) for this year's first six months increased $4.3
million compared to the comparable 1999 period. The increase was due
primarily to an increase in the book 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 $0.9
million or 32% compared to the same period of 1999 due primarily to
increase in revenues from inventory position in fixed income securitites.
Compensation and Benefits
-------------------------
Compensation and Benefits for this year's first six months increased $6.0
million or 16% compared to the same period of 1999, attributed primarily to
increase in net revenues.
Equity in losses of affiliates
------------------------------
Equity in losses of affiliates for this year's first six months decreased
$0.5 million due to a decrease in the book value of Mechanical Technology
Incorporated. (See note 3)
Income Taxes
------------
Income taxes increased $1.9 million for this year's first six months due
mainly to increase in income from continued operations.
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Income from Discontinued Operations, Net Of Taxes
-------------------------------------------------
Income from discontinued operations, net of taxes decreased $0.9 million
for this year's first six months resulting primarily from market conditions
along with resources being directed to the transfer of the Private Client
Group branch network to First Union Securities.
Liquidity and Capital Resources
-------------------------------
A substantial portion of the Company's assets, similar to other brokerage
and investment banking firms, is liquid, consisting of cash and assets
readily convertible into cash. These assets are financed primarily by the
Company's interest-bearing and non-interest-bearing payables to customers,
payables to brokers and dealers secured by loaned securities, and bank
lines-of-credit. Securities borrowed and securities loaned along with
receivables from customers and payable to customers will fluctuate
primarily due to the current level of business activity in these areas.
Securities owned will fluctuate as a result of the changes in the level of
positions held to facilitate customer transactions and changes in market
conditions. Short-term bank loans and securities loaned, net, are a source
of financing for the Company and will fluctuate accordingly. Receivables
from others and payables to others will fluctuate primarily due to the
change in the adjustment to record securities owned on a trade date basis.
At June 30, 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 $295 million of which approximately $106
million were unused as of June 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.
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.
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.
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
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 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
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
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 June 30, 2000, 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.
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
A sensitivity analysis has been prepared to estimate the Company's
exposure to interest rate risk of its inventory position. The fair market
value of these securities included in the Company's inventory at June 30,
2000 was $119 million. Interest rate risk is estimated as the potential
loss in fair value resulting from a hypothetical one-half percent decrease in
interest rates. At June 30, 2000, the potential change in fair value,
assuming this hypothetical decrease, was $3.1 million. The actual risks and
results of such adverse effects may differ substantially.
Equity Price Risk
The Company is exposed to equity price risk as a consequence of making
markets in equity securities. Equity price risk results from changes in
the level or volatility of equity prices, which affect the value of equity
securities or instruments that derive their value from a particular stock.
The Company attempts to reduce the risk of loss inherent in its inventory
of equity securities by monitoring those security positions daily.
Marketable equity securities included in the Company's inventory at June
30, 2000, which were recorded at a fair value of $6.4 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 $.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 June
30, 2000 had a fair market value of $5.1 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 $.5 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.
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,
</PAGE>
<PAGE>
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
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 4. Submission of matters to a vote of security holders.
------ ----------------------------------------------------
A. Annual meeting was held on May 23, 2000
B. Elected as Directors: (There were no broker non-votes with
respect to the election of Directors).
Votes For Withheld Authority
--------- -------------------
Hugh A. Johnson 6,998,130 81,054
Daniel V. McNamee III 6,963,003 116,181
Charles L. Schwager 6,973,044 106,140
C. Other matters voted on at Annual Meeting
1. To consider and act upon a proposal to approve the adoption of
the First Albany Companies Inc. 2000 Employee Stock
Employee Stock Purchase Plan.
For: 2,891,750
Against: 129,749
Abstain: 16,849
Broker Non-Votes: 4,040,836
2. To approve an amendment to the Company's Certificate of
Incorporation increasing from 10,000,000 to 50,000,000 the
number of authorized shares of Common Stock.
For: 6,870,385
Against: 176,067
Abstain: 32,732
Broker Non-Votes: 0
3. To ratify the selection of PricewaterhouseCoopers L.L.P. as
independent auditors of the Company for the fiscal year
ending December 31, 2000.
For: 6,953,803
Against: 123,384
Abstain: 1,997
Broker Non-Votes: 0
</PAGE>
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------
(a) Exhibits
Item No. Item
(10.26) Agreement 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
-------------------
No Form 8K was filed during the quarter ended March 31, 2000.
</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: August 10, 2000 /s/ALAN P. GOLDBERG
------------------------------------
Alan P. Goldberg
President/Co-Chief Executive Officer
Date: August 10, 2000 /s/STEVEN JENKINS
-------------------------------------
Chief Financial Officer
(Principal Accounting Officer)
</PAGE>
<PAGE>
