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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999 Commission file number 014140
F I R S T A L B A N Y C O M P A N I E S I N C .
(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 S. Pearl Street, Albany, New York 12207
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (518) 447-8500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
none none
- -------------------- -------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common stock par value $.01 per share
- -------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this
Form 10-K. [ ]
As of March 14, 2000, 7,616,026 shares, par value $.01 per share, were
outstanding. The aggregate market value of the shares of common stock of
the Registrant held by non-affiliates (based upon the closing price of
Registrant's shares as reported on the NASDAQ system on March 14, 2000,
which was $38.00) was approximately $169,536,848.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement to be filed with
the Securities and Exchange Commission are incorporated by reference into
Part III.
Part I
Item 1. Business
- ------ --------
First Albany Companies Inc. (the Company), through its wholly owned
subsidiary First Albany Corporation (First Albany), conducts a full service
investment banking and brokerage business. These activities include
securities brokerage for individual and institutional customers, and market-
making and trading of corporate, government, and municipal securities. In
addition, First Albany underwrites and distributes municipal and corporate
securities, provides securities clearance activities for other brokerage
firms, and offers financial advisory services to its customers. Another of
the Company's subsidiaries is First Albany Asset Management Corporation
("FAAM"). FAAM serves as investment manager to individual and institutional
customers. FAAM directs the investment of customer and mutual fund assets by
making investment decisions, placing purchase and sales orders, and providing
research, statistical analysis, and continuous supervision of the portfolios.
First Albany Enterprise Funding, Inc. ("FAEF") is another subsidiary of the
Company formed in 1998 as a private equity investment company whose business
is to provide venture capital and merchant banking services to firms in the
high technology sector.
Brokerage services to private client and institutional customers are provided
through First Albany's salesforce of financial consultants and institutional
salespeople. First Albany believes that its financial consultants and
institutional salespeople are a key factor to the success of its business.
Over the last five years, the number of full-time financial consultants and
institutional salespeople has grown from approximately 265 to 306 as of
December 31, 1999, many of whom joined First Albany after previous
associations with national brokerage firms.
First Albany has organized its business to focus on and serve the needs and
financial/capital requirements of institutions, individuals, corporations,
and municipalities. As investment bankers, First Albany is positioned to
advise, manage, and conduct a variety of activities as requested including
underwritings, initial and secondary offerings, advisory services, mergers
and acquisitions, and private placements. As a brokerage firm, First
Albany offers customers a full array of investment opportunities.
First Albany operates a total of 33 Private Client and Institutional
(including Investment Banking) offices in 12 states. First Albany's
executive office and largest sales office are both located in Albany, New
York.
The Company (formed in 1985) and First Albany (formed in 1953) are New York
corporations. First Albany is a member of the New York Stock Exchange,
Inc. ("NYSE"), the American Stock Exchange, Inc. ("ASE"), and the Boston
Stock Exchange, Inc. ("BSE") and is registered as a broker-dealer with the
Securities and Exchange Commission ("SEC"). First Albany is also a member
of the National Association of Securities Dealers, Inc. ("NASD") and the
Securities Investor Protection Corporation ("SIPC"), which insures customer
funds and securities deposited with a broker-dealer up to $500,000 per
customer, with a limitation of $100,000 on claims for cash balances. First
Albany has obtained additional coverage of $24,500,000 per account from
National Union, a wholly owned subsidiary of American International Group
(AIG), America's largest commercial insurer. Both companies are rated A+15
(highest rating) by A.M. Best.
Sources of Revenues
- -------------------
A breakdown of the amount and percentage of revenues from each principal
source for the periods indicated follows:
For the Years Ended
- -------------------------------------------------------------------------------
December 31, December 31, December 31,
1999 1998 1997
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Amount Percent Amount Percent Amount Percent
- -------------------------------------------------------------------------------
(In thousands of dollars)
Securities commissions:
Listed $28,867 11.6% $25,723 11.4% $22,523 11.6%
Over-the-counter 20,032 8.1% 13,654 6.0% 11,327 5.9%
Options 3,201 1.3% 3,256 1.4% 2,843 1.5%
Mutual funds 18,336 7.4% 18,378 8.1% 15,805 8.2%
Other 193 0.1% (1) 0.0% 489 0.3%
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Sub-total 70,629 28.5% 61,010 26.9% 52,987 27.5%
Principal transactions 71,973 28.9% 70,157 31.0% 61,179 31.7%
Investment banking 31,861 12.8% 30,544 13.5% 19,636 10.1%
Investment (losses)
gains (5,378) (2.1)% 1,903 0.8% 2,056 1.0%
Clearing revenues 1,351 0.5% 1,055 0.5% 1,090 0.6%
Fees and other 16,711 6.7% 13,200 5.8% 10,550 5.5%
- -------------------------------------------------------------------------------
Total operating
revenues 187,147 75.3% 177,869 78.5% 147,498 76.4%
- -------------------------------------------------------------------------------
Interest income 61,551 24.7% 48,697 21.5% 45,474 23.6%
- -------------------------------------------------------------------------------
Total revenues $248,698 100.0% $226,566 100.0% $192,972 100.0%
===============================================================================
Securities Commissions
- ----------------------
In executing customers' orders to buy or sell listed securities and
securities in which it does not make a market, First Albany generally acts
as an agent and charges a commission.
Principal Transactions
- ----------------------
First Albany buys and maintains inventories of municipal debt (tax-exempt
and taxable), corporate debt, convertible securities and equity securities
as a "market maker" for sale of those securities to other dealers and to
customers. As of December 31, 1999, First Albany made a market in 193
common stocks quoted on National Association of Securities Dealers Automated
Quotation ("NASDAQ"). First Albany also trades tax-exempt, and beginning in
1999, taxable 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. Principal transactions have been a significant source of
revenue and should continue to be so in the future.
First Albany also has an institutional municipal risk trading operation, in
which certain inventory positions are hedged by highly liquid future
contracts. Most of the inventory positions are carried for the purpose of
generating sales by the retail and institutional salesforce. First
Albany's trading activities require the commitment of capital and may place
First Albany's capital at risk. All inventory positions are marked to the
market at a minimum on a monthly basis.
The following table sets forth the highest, lowest, and average month-end
inventories (including the net of securities owned and securities sold, but
not yet purchased) for calendar 1999 by securities category where First
Albany acted as principal.
Highest Lowest Average
(In thousands of dollars) Inventory Inventory Inventory
- ------------------------------------------------------------------------
State and municipal bonds $136,335 $67,081 $104,688
Corporate obligations 40,586 10,333 23,760
Corporate stocks 6,585 (399) 3,596
U.S. Government and federal
agencies obligations 9,933 (26,783) (7,508)
- -------------------------------------------------------------------------
Underwriting and Investment Banking
- -----------------------------------
First Albany manages, co-manages, and participates in municipal and
corporate securities distributions. For the periods indicated, the table
below highlights the number and dollar amount of corporate and municipal
securities offerings managed or co-managed by First Albany and the number
and amount of First Albany's underwriting participations in syndicates,
including those managed or co-managed by First Albany:
Corporate Stock and Bond Offerings
----------------------------------
Managed or Co-Managed Syndicate Participations
- -------------------------------------------------------------------------------
Year Number of Amount of Number of Amount of
Ended Issues Offering Participations Participation
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(In thousands of dollars)
December 1999 19 $1,648,114 173 $302,440
December 1998 10 636,660 108 166,582
December 1997 12 322,137 110 126,250
Municipal Bond Offerings
------------------------
Managed or Co-Managed Syndicate Participations
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Year Number of Dollar Number of Dollar
Ended Issues Amount Participations Amount
- -------------------------------------------------------------------------------
(In thousands of dollars)
December 1999 289 $27,686,276 331 $3,626,019
December 1998 344 39,681,183 380 4,672,904
December 1997 243 26,480,340 293 4,398,478
Participation in an underwriting syndicate or selling group involves both
economic and regulatory risks. An underwriter or selling group member may
incur losses if it is forced to resell the securities it is committed to
purchase at less than the agreed-upon purchase price. However, many
underwritings are done on a best efforts basis.
Interest
- --------
First Albany derives interest income primarily from the financing of
customer margin loans, securities lending activities, and securities owned.
Customers' securities transactions are effected on either a cash or margin
basis. In margin transactions, First Albany extends credit, which is
collateralized by securities and cash in the customer's account, to the
customer.
During the past several years, cash balances in customers' accounts have
been a source of funds to finance customers' margin account debit balances.
SEC regulations restrict the use of customers' funds by broker-dealers by
providing generally that free credit balances and funds derived from pledging
and lending customers' securities are to be used only to finance customers'
margin account debit balances, and, to the extent not so used, the funds must
be deposited in a special reserve bank account for the exclusive benefit of
customers. The regulations also require broker-dealers, within designated
periods of time, to obtain physical possession or control of, and to
segregate, customers' fully paid and excess margin securities.
In the ordinary course of both its trading and brokerage activities, First
Albany borrows securities to cover short sales and to complete transactions
in which customers or other brokers have failed to deliver securities by
the required settlement date. First Albany also lends securities to other
brokers and dealers for similar purposes.
When borrowing securities, First Albany is required to deposit cash or
other collateral, or to post a letter of credit with the lender and receive
a rebate (based on the amount of cash deposited) calculated to yield a
negotiated rate of return. When lending securities, First Albany receives
cash and generally pays a rebate (based on the amount of cash received) to
the other party to the transaction. Securities borrow and loan transactions
are executed pursuant to written agreements with counter-parties which
provide that the securities borrowed or loaned be marked to market on a daily
basis and that excess collateral be refunded or that additional collateral be
furnished in the event of changes in the market value of the securities.
Collateral adjustments are usually made on a daily basis through the
facilities of various clearinghouses.
Operations, Clearing, and Systems
- ---------------------------------
First Albany's operations include: execution of orders; processing of
transactions; receipt, identification, and delivery of funds and
securities; custody of customers' securities; internal financial control;
and compliance with regulatory and legal requirements.
The volume of transactions handled by the operations staff fluctuates
substantially. The monthly number of purchase and sale transactions
processed for the periods indicated were as follows:
Number of Monthly
Transactions
Year Ended High Low Average
---------- --------------------------------
December 1999 161,208 81,899 113,817
December 1998 122,150 73,369 93,375
December 1997 101,571 52,773 69,609
First Albany has established internal controls and safeguards to help
prevent securities theft, including use of depositories and periodic
securities counts. As required by the NYSE and certain other authorities,
First Albany carries fidelity bonds covering loss or theft of securities as
well as embezzlement and forgery.
First Albany clears its own securities transactions and posts its books and
records daily. Periodic reviews of controls are conducted, and
administrative and operations personnel meet frequently with management to
review operating conditions. Operations, compliance, internal audit, and
legal personnel monitor compliance with applicable laws, rules, and
regulations.
In addition to processing its own customer transactions, First Albany
processes, for a fee, the transactions of other brokerage firms whose
customer accounts are carried on a fully disclosed basis with all security
positions, margin accounts receivable, and credit balances reflected on the
books and records of First Albany.
Financial Services
- ------------------
The Financial Services Department advises customers on a variety of
interrelated financial matters including mutual fund research, insurance
analysis, education and retirement planning, survivor income needs, estate
tax analysis, and corporate retirement plan consultations.
For a fee, the Financial and Estate Planning Group will prepare detailed
analysis with specific recommendations aimed at accumulating wealth and
attaining financial goals. First Albany also offers a range of retirement
plans, including IRAs, SEP Plans, profit sharing, 401(k), and pension
programs.
The Financial Services Department offers its expertise on products such as
mutual funds, unit investment trusts, fixed and variable annuities, and
life, disability and long term care insurance programs.
Fee-based investment programs are also administered by the Department
through the FACTS programs. Through FACTS, First Albany Capital Tracking
Systems, investors can work on an asset based fee basis rather than pay by
way of commissions.
Research
- --------
First Albany maintains a professional staff of equity analysts. Research
is focused on several industry sectors, including technology, financial
services, energy and alternative energy. First Albany employs 13 senior
analysts who support First Albany's institutional equities and corporate
finance activities.
First Albany's scope of research in the technology sector is enhanced by
maintaining a strategic alliance with the META Group, Inc. ("META"). META,
an independent market assessment company, provides research and analysis of
developments and trends in information technology ("IT"), including computer
hardware, software, communications and related information technology
industries to both IT users and IT vendors. The alliance with META enables
First Albany to provide its investors with insights drawn from META's
analysis of technology trends, user experience, and vendor pricing and
negotiating tactics.
Research services include review and analysis of the economy; general market
conditions; technology trends, industries and specific companies via both
fundamental and technical analyses; recommendations of specific action with
regard to industries and specific companies; preparation of research reports
which are provided to private client and institutional customers; and
responses to inquiries from customers.
Private Client Business
- -----------------------
Revenues from First Albany's private client brokerage activities are
generated through customer purchases and sales of stocks, bonds, mutual
funds, and other investment products. For the years ended December 31,
1999, 1998 and 1997, these revenues accounted for approximately 50%, 49%,
and 53% of operating revenues, respectively.
Institutional Business
- ----------------------
Revenues generated from securities transactions with major institutions for
the years ended December 31, 1999, 1998 and 1997, accounted for approximately
47%, 44%, and 39% of operating revenues, respectively. Institutional
revenues are derived from sales of tax-exempt securities, taxable debt
obligations, and equity securities.
Employees
- ---------
At December 31, 1999, the Company had 870 full-time employees, of which 220
were Private Client financial consultants, 108 were institutional salespeople
and institutional traders, 204 were in branch sales support, 178 were in
other revenue producing positions, 48 were in operations, and 112 were in
other support and administrative functions.
New financial consultants, salespeople, and traders are required to take
examinations given by the NASD and approved by the NYSE and all principal
exchanges as well as state securities authorities in order to be registered.
There is intense competition among securities firms for financial
consultants, salespeople, and traders with proven production records.
The Company considers its employee relations to be good and believes that its
compensation and employee benefits are competitive with those offered by
other securities firms. None of the Company's employees are covered by a
collective bargaining agreement.
Competition
- -----------
First Albany is engaged in a highly competitive business. Its competition
includes, with respect to one or more aspects of its business, all of the
member organizations of the NYSE and other registered securities exchanges,
all members of the NASD, members of the various commodity exchanges, and
commercial banks and thrift institutions. Many of these organizations are
national firms and have substantially greater financial and human resources
than First Albany. Discount brokerage firms seeking to expand their share of
the private client market, including firms affiliated with commercial banks
and thrift institutions, are devoting substantial funds to advertising and
direct solicitation of customers. In many instances, First Albany is
competing directly with such organizations. In addition, there is
competition for investment funds from the real estate, insurance, banking,
and savings and loan industries. The Company believes that the principal
factors affecting competition for the securities industry are the quality and
ability of professional personnel and relative prices of services and
products offered.
Regulation
- ----------
The securities industry in the United States is subject to extensive
regulation under federal and state laws. The SEC is the federal agency
charged with administration of the federal securities laws. Much of the
regulation of broker-dealers, however, has been delegated to self-regulatory
organizations, principally the NASD and the national securities exchanges.
These self-regulatory organizations adopt rules (subject to approval by the
SEC) which govern the industry and conduct periodic examinations of member
broker-dealers. Securities firms are also subject to regulation by state
securities commissions in the states in which they are registered. First
Albany is currently registered as a broker-dealer in 50 states, the District
of Columbia and Puerto Rico.
The regulations to which broker-dealers are subject cover all aspects of the
securities business, including sales methods, trade practices among broker-
dealers, capital structure of securities firms, recordkeeping, and conduct of
directors, officers, and employees. Additional legislation, changes in rules
promulgated by the SEC and by self-regulatory organizations, or changes in
the interpretation or enforcement of existing laws and rules often directly
affect the method of operation and profitability of broker-dealers. The SEC,
self-regulatory organizations, and state security regulators may conduct
administrative proceedings which can result in censure, fine, suspension, or
expulsion of a broker-dealer, its officers, or employees. The principal
purpose of regulation and discipline of broker-dealers is the protection of
customers and the securities markets rather than protection of creditors and
stockholders of broker-dealers.
Net Capital Requirements
- ------------------------
As a broker-dealer and member of the NYSE, First Albany is subject to the
Uniform Net Capital Rule promulgated by the SEC. The rule is designed to
measure the general financial condition and liquidity of a broker-dealer, and
it imposes a minimum amount of net capital requirement deemed necessary to
meet the broker-dealer's continuing commitments to its customers.
A broker-dealer is required to maintain certain net capital standards.
Compliance with the Net Capital Rule may limit those operations which require
the use of its capital for purposes, such as maintaining the inventory
required for a firm trading in securities, underwriting securities, and
financing customer margin account balances. Net capital and aggregate debit
balances change from day to day and, at December 31, 1999, First Albany's net
capital was $23,242,000 which was 8.4% of its aggregate debit balances (2%
minimum requirement) and $17,705,000 in excess of required minimum net capital.
Item 2. Properties
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As of February 2000, the Company had a total of 33 Private Client Group and
Institutional Sales and Trading ("Institutional") offices in 12 states, all
of which are leased or rented. The Company's executive offices are located
at 30 South Pearl Street, Albany, New York. The order entry, trading,
research, information technology ("IT"), operations, and accounting
activities are centralized in the Albany office. The offices at 30 South
Pearl Street are operated under a lease which currently expires in the year
2004. All other offices are subject to lease or rental agreements that
expire at various times through March 2008. These leases, in the opinion of
management, are sufficient to meet the needs of the Company. A list of
locations are as follows:
Albany, NY Fairfield, CT Oneonta, NY
30 South Pearl St. Private Client Group Private Client Group
Private Client Group
& Institutional
IT, Research, Garden City, NY Pittsfield, MA
Back Office Private Client Group Private Client Group
80 State St. Hartford, CT Rancho Sante Fe, CA
Private Client Group Private Client Group Institutional
& Institutional
Binghamton (Vestal), NY Johnstown, NY Richmond (Glen Allen), VA
Private Client Group Private Client Group Institutional
Bonita Springs, FL Los Angeles, CA San Francisco, CA
Institutional Institutional Institutional
Boston, MA Manchester, NH San Francisco
Private Client Group Private Client Group (Burlingame), CA
& Institutional Institutional
IT, Research
Minneapolis, MN Scranton, PA
Buffalo, NY Institutional Institutional
Private Client Group
Morristown, NJ Sewickley, PA
Burlington Institutional Institutional
(Colchester), VT
Private Client Group Nashua, NH Stamford, CT
Private Client Group Research
Chadds Ford, PA
Institutional New York, NY Syracuse, NY
One Penn Plaza Private Client Group
Chicago, IL Private Client Group
Private Client Group & Institutional
& Institutional IT, Research, Back Wellesley, MA
Office 40 Grove St.
Elmira, NY Institutional
Private Client Group Norwich, NY 330 Washington St.
Private Client Group Private Client Group
Item 3. 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
claims 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 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.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ----------------------------------------------------
None.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- ------ ------------------------------------------------------------------
Matters
- -------
The Company's common stock trades on the NASDAQ Stock Market under the
symbol "FACT". As of March 3, 2000 there were approximately 1,459 holders
of record of the Company's common stock. The following table sets forth the
high and low bid quotations for the common stock as adjusted for subsequent
stock dividends, along with cash dividends during each quarter for the fiscal
years ended:
December 31, 1999 Quarters Ended
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Stock Price Range Mar. 31 June 30 Sept. 30 Dec. 31
- -------------------------------------------------------------------------------
High $ 13 5/8 $ 17 1/8 $ 20 $ 19 3/4
Low $ 9 1/8 $ 11 1/2 $ 15 1/8 $ 12 1/2
Cash Dividend per Share $ 0.05 $ 0.05 $ 0.05 $ 0.05
December 31, 1998 Quarters Ended
- ------------------------------------------------------------------------------
Stock Price Range Mar. 27 June 26 Sept. 25 Dec. 31
- ------------------------------------------------------------------------------
High $ 13 5/8 $ 13 $ 12 5/8 $ 11 1/4
Low $ 10 5/8 $ 11 1/2 $ 8 7/8 $ 7 1/2
Cash Dividend per Share $ 0.05 $ 0.05 $ 0.05 $ 0.05
December 31, 1997 Quarters Ended
- ------------------------------------------------------------------------------
Stock Price Range Mar. 28 June 27 Sept. 26 Dec. 31
- ------------------------------------------------------------------------------
High $ 8 1/2 $ 11 7/8 $ 12 3/4 $ 13 1/2
Low $ 7 1/2 $ 7 5/8 $ 10 $ 10 3/8
Cash Dividend per Share $ 0.05 $ 0.05 $ 0.05 $ 0.05
The Board of Directors has from time to time authorized the Company to
repurchase shares of its common stock either in the open market or otherwise.
As of December 31, 1999, the total number of treasury shares, including
shares of the employee stock trust, was 143,551 (see Note 11). When
appropriate, the Company will consider making additional purchases.
During calendar 1999, the Company declared and paid four quarterly cash
dividends totaling $.20 per share of common stock, and declared and issued
two 5% common stock dividends.
In January 2000, subsequent to the period reflected in this report, the
Company declared the regular quarterly cash dividend of $0.05 per share
payable on February 24, 2000 to shareholders of record on February 10, 2000.
First Albany Companies Inc.
FINANCIAL SUMMARY
(In thousands of dollars except per share amounts)
Item 6. Selected Financial Data
- ------ -----------------------
The following selected financial data have been derived from the Consolidated
Financial Statements of the Company.
|------------For the Years Ended-------------------------|
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Sept. 29,
For the years ended* 1999 1998 1997 1996 1995 1995
[S] [C] [C] [C] [C] [C] [C]
- -------------------------------------------------------------------------------
Operating Results
Revenues:
Commissions $ 70,629 $61,010 $52,987 $42,711 $34,941 $31,889
Principal
transactions 71,973 70,157 61,179 60,539 44,183 43,198
Investment banking 31,861 30,544 19,636 19,558 16,311 14,625
Investment (losses) (5,378) 1,903 2,056 2,899 638
gains
Fees and other 18,062 14,255 11,640 10,244 7,530 7,214
- ------------------------------------------------------------------------------
Operating revenues 187,147 177,869 147,498 135,951 103,603 96,926
Interest income 61,551 48,697 45,474 32,240 28,075 26,173
- ------------------------------------------------------------------------------
Total revenues 248,698 226,566 192,972 168,191 131,678 123,099
Interest expense 51,931 39,946 38,615 26,030 21,985 19,904
- ------------------------------------------------------------------------------
Net Revenues 196,767 186,620 154,357 142,161 109,693 103,195
- ------------------------------------------------------------------------------
Expenses (excluding interest):
Compensation and 143,776 130,169 105,080 95,691 74,596 71,064
benefits
Clearing, settlement and
brokaerage costs 4,970 4,347 3,358 2,868 2,378 2,258
Communications and
data processing 14,151 13,852 12,872 10,897 8,244 7,794
Occupancy and
depreciation 13,376 13,420 13,203 8,527 6,909 6,660
Selling 9,527 7,863 8,027 7,246 5,231 4,817
Other 10,194 9,837 8,915 7,840 5,912 5,382
- -------------------------------------------------------------------------------
Total expenses 195,994 179,488 151,455 133,069 103,270 97,975
(excl. interest)
- ------------------------------------------------------------------------------
Income before income
taxes 773 7,132 2,902 9,092 6,423 5,220
Income tax expense 360 2,794 1,251 3,592 2,363 1,870
- ------------------------------------------------------------------------------
Income before
extraordinary gain 413 4,338 1,651 5,500 4,060 3,350
Extraordinary gain,
net of $225 taxes 305
- ------------------------------------------------------------------------------
Net income $ 413 $ 4,338 $ 1,956 $ 5,500 $ 4,060 $ 3,350
===============================================================================
Per Common Share:**
Earnings-basic $ 0.06 $ 0.60 $ 0.28 $ 0.83 $ 0.61 $ 0.50
Cash dividend 0.20 0.20 0.20 0.20 0.20 0.20
Book value 6.99 6.67 6.29 6.21 5.61 5.42
- -------------------------------------------------------------------------------
Financial Condition:
Total assets $1,008,134 $842,898 $831,921 $675,785 $510,081 $543,255
Notes payable 5,480 4,750 7,271 4,583 1,641 1,791
Obligations under
capitalized leases 4,917 3,688 3,088 1,426
Subordinated debt 7,500 7,500 7,500 5,000
Stockholders' equity 53,116 48,408 44,548 42,274 37,558 36,192
- -----------------------------------------------------------------------------
*In July 1996, the Company changed its fiscal year end to a calendar year
end. As a result, the selected financial data provides information for the
12-month periods ending December 31, 1999, 1998, 1997, 1996, 1995 and
September 29, 1995.
**All per share figures have been restated for all common stock dividends
paid.
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------ ----------------------------------------------------------------
Results of Operations.
- ----------------------
BUSINESS ENVIRONMENT
- --------------------
First Albany Corporation (First Albany), a wholly-owned subsidiary of
First Albany Companies Inc. (the Company), is a full-service investment
banking and brokerage firm. Its primary business includes the underwriting,
distribution, and trading of fixed income and equity securities. The
investment banking and brokerage businesses earn revenues in direct
correlation with the general level of trading activity in the stock and bond
markets. This level of activity cannot be controlled by the Company;
however, many of the Company's costs are fixed. Therefore, the Company's
earnings, like those of others in the industry, reflect the activity in the
markets and can fluctuate accordingly.
This is a highly-competitive business. The competition includes not only
full-service national firms and discount houses, but also mutual funds that
sell directly to the customer as well as banks and insurance companies that
offer a variety of investment products.
1999 was the fifth year the stock market registered remarkable double-
digit returns. Stock prices, as measured by the S&P 500, returned 21% and
the Dow Industrial Average rose from 9,181 to 11,497. However, many well
diversified investors did not experience these returns. In reality, 64% of
all stocks on the NYSE declined an average of 28% and 50% of NASDAQ stocks
lost an average of 32% in 1999. The market was driven by the technology
sector which posted a significant gain of 78.2%. Meanwhile, the U.S. bond
market experienced its second worst year in two decades in response to
ongoing concerns for inflation. Bonds, as measured by the Lehman Brothers
Government/Corporate Index, posted a return of -2.2%.
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
RESULTS OF OPERATIONS
===============================================================================
1999 vs.
Twelve Months Ended 1998 Percentage
December 31, December 31, Increase Increase
(In thousands of dollars) 1999 1998 (Decrease) (Decrease)
- -------------------------------------------------------------------------------
Revenues:
Commissions $ 70,629 $61,010 $9,619 16%
Principal transactions 71,973 70,157 1,816 3%
Investment banking 31,861 30,544 1,317 4%
Investment (losses) gains (5,378) 1,903 (7,281) (383%)
Fees and other 18,062 14,255 3,807 27%
- -------------------------------------------------------------------------------
Operating revenues 187,147 177,869 9,278 5%
Interest income 61,551 48,697 12,854 26%
- -------------------------------------------------------------------------------
Total revenues 248,698 226,566 22,132 10%
Interest expense 51,931 39,946 11,985 30%
- -------------------------------------------------------------------------------
Net revenues 196,767 186,620 10,147 5%
- -------------------------------------------------------------------------------
Expenses (excluding interest):
Compensation and benefits 143,776 130,169 13,607 10%
Clearing, settlement and
brokerage cost 4,970 4,347 623 14%
Communications and
data processing 14,151 13,852 299 2%
Occupancy and depreciation 13,376 13,420 (44) 0%
Selling 9,527 7,863 1,664 21%
Other 10,194 9,837 357 4%
- ------------------------------------------------------------------------------
Total expenses
(excluding interest) 195,994 179,488 16,506 9%
- -------------------------------------------------------------------------------
Income before income taxes 773 7,132 (6,359) (89%)
Income tax expense 360 2,794 (2,434) (87%)
- -------------------------------------------------------------------------------
Net income $ 413 $ 4,338 $(3,925) (90%)
===============================================================================
Net interest income:
Interest income $61,551 $48,697 $12,854 26%
Interest expense 51,931 39,946 11,985 30%
- -------------------------------------------------------------------------------
Net interest income $ 9,620 $ 8,751 $ 869 10%
===============================================================================
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
Calendar Year 1999 Compared with Calendar Year 1998
Net Income
- ----------
For the year ended December 31, 1999, the Company reported record net
revenues of $196.8 million, compared to $186.6 million in 1998, resulting
in a net income of $413 thousand ($0.06 basic earnings per share and $0.05
dilutive earnings per share) and $4.3 million ($0.60 basic earnings per
share and $0.55 dilutive earnings per share), respectively.
For the year ended December 31, 1999, First Albany Corporation had pre-
tax profit of $8.1 million on net revenues of $201.2 million compared to pre-
tax profit of $6.6 million on net revenues of $184.0 million for the same
period in 1998. During the year, the earnings at First Albany Corporation
were offset by a pre-tax loss at First Albany Companies Inc., (the "Parent
Company"), of $7.2 million, which compares to a pre-tax profit of $0.5
million for the same period of 1998. The losses at the Parent Company are
primarily the result of a decline in book value of First Albany Companies
Inc.'s investment portfolio.
A portion of the Parent Company's investment portfolio is accounted
for at market value while the remainder is accounted for under the equity
method. While the book value of the Parent Company's investment portfolio
decreased $7.3 million (see Note 6), the aggregate market value of the
investment portfolio increased by $70 million, from $26.1 million at December
31, 1998, to $96.1 million at December 31, 1999, which was driven by an
increase in the market value of Mechanical Technology Inc. (NASDAQ: MKTY).
The Parent Company accounts for Mechanical Technology Inc. under the equity
method of accounting as a result of owning in excess of 20% (approximately 33%)
of the shares outstanding, and therefore does not recognize changes in the
market value of this investment in the income statement. Furthermore,
changes in the value of the Company's investment portfolio could positively
or negatively impact the financial results of future periods.
Commissions
- -----------
Commission revenues increased $9.6 million or 16% in calendar 1999
reflecting active trading in all major markets. Revenues from listed stocks
and over-the-counter agency stock commissions increased $9.5 million or 24%
while revenues from mutual funds, options and other increased $0.1 million.
Principal Transactions
- ----------------------
Principal transactions increased $1.8 million or 3% in calendar 1999.
This was composed of an increase in municipal securities of $4.0 million, a
decrease in corporate fixed income of $0.4 million and a decrease in equity
securities of $1.8 million.
Investment Banking
- ------------------
Investment banking increased $1.3 million or 4% in calendar 1999 compared
to the comparable period in 1998. Revenues from corporate underwritings
increased $3.1 million while municipal underwriting revenues decreased $1.8
million.
Investment (losses) gains
- -------------------------
Investment (losses) gains decreased $7.3 million in calendar 1999. This
decrease was due primarily to a decline in the book value of the investment
portfolio held at First Albany Companies Inc., the Parent Company.
Fees and Other
- --------------
Fees and other revenues increased $3.8 million or 27% in calendar 1999
resulting partially from the Company's focus to increase fee-based revenue.
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
Compensation and Benefits
- -------------------------
Compensation and benefits increased $13.6 million or 10% in calendar 1999
compared to the same period of 1998, attributed primarily to a 9% increase in
net revenues at First Albany Corporation.
Selling Expense
- ---------------
Selling expense increased $1.7 million or 21% in calendar 1999 mainly
reflecting greater promotional-related activity.
Income Taxes
- ------------
Income taxes decreased $2.4 million in calendar 1999 due primarily to a
decrease in pre-tax earnings.
Equity Investments
- ------------------
At December 31, 1999, the Company owned approximately 3,917,000 common
shares (33% of the shares outstanding) of Mechanical Technology Incorporated
(MTI). The Company's investment in MTI is recorded under the equity method
and approximated $9.8 million, which included goodwill of approximately
$494,000, which is being amortized over 10 years. For the years ended
December 31, 1999 and 1998, the Company's equity in MTI's net (loss) income,
recorded on a one-quarter delay basis, was ($3.6 million) and ($1.5 million),
respectively. For the three-month period ended December 31, 1999, MTI
reported an unaudited loss of approximately $1.8 million. The Company's
equity in MTI's net loss, was a loss of $596,000, and will be recorded in the
quarter ending March 31, 2000.
During 1999, Plug Power, Inc. (formerly a joint venture between MTI and
Edison Development Corp.) issued membership interests, prior to Plug Power's
initial public offering, to new investors with a recorded value of $50.6
million. As a result, MTI recorded its proportionate share of this increase
in Plug Power's equity as investment in Plug Power and additional paid-in-
capital. Accordingly, the Company has recorded through December 31, 1999 its
proportionate share ($5.0 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 $2.9 million (net of deferred taxes) as a
result of this transaction.
During MTI's first fiscal quarter 2000, Plug Power, Inc. issued common stock
in an initial public offering. Plug Power's shareholders' equity increased
$178.8 million primarily due to cash investments by individuals and corporate
investors, including MTI, and the public offering. As a result, MTI recorded
its proportionate share of this increase in Plug Power's equity as an
increase it its investment in Plug Power and additional paid-in-capital, net
of deferred taxes. Accordingly, the Company will record in the March 31,
2000 quarter its proportionate share (approximately $8.9 million) of this
increase in MTI's equity as an increase in its investment in MTI. The
Company will also record in the March 31, 2000 quarter an increase in
additional paid-in-capital of approximately $5.2 million (net of deferred
taxes) as a result of this transaction.
MTI distributed to holders of record of shares of its common stock as of the
close of business on June 4, 1999 (the "Record Date"), non transferable
subscription rights to purchase additional shares of common stock at an
exercise price of $16.00 per share (the "Rights Offering"). One right was
granted for each sixteen shares of common stock held on the Record Date. The
rights expired July 9, 1999. First Albany Companies Inc. exercised rights
for a total of 251,004 shares of MTI common stock during the month of July,
1999.
At December 31, 1999, the aggregate market value of the Company's shares in
MTI was $91,072,000. Under the equity method, the market value of MTI's
stock is not included in the calculation of the Company's investment.
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
===============================================================================
1998 vs.
Twelve Months Ended 1997 Percentage
December 31, December 31, Increase Increase
(In thousands of dollars) 1998 1997 (Decrease) (Decrease)
- -------------------------------------------------------------------------------
Revenues:
Commissions $61,010 $52,987 $ 8,023 15%
Principal transactions 70,157 61,179 8,978 15%
Investment banking 30,544 19,636 10,908 56%
Investment gains 1,903 2,056 (153) (7%)
Fees and other 14,255 11,640 2,615 22%
- -------------------------------------------------------------------------------
Operating revenues 177,869 147,498 30,371 21%
Interest income 48,697 45,474 3,223 7%
- -------------------------------------------------------------------------------
Total revenues 226,566 192,972 33,594 17%
Interest expense 39,946 38,615 1,331 3%
- -------------------------------------------------------------------------------
Net revenues 186,620 154,357 32,263 21%
Expenses (excluding interest):
Compensation and benefits 130,169 105,080 25,089 24%
Clearing, settlement and
brokerage cost 4,347 3,358 989 29%
Communications and
data processing 13,852 12,872 980 8%
Occupancy and depreciation 13,420 13,203 217 2%
Selling 7,863 8,027 (164) (2%)
Other 9,837 8,915 922 10%
- -------------------------------------------------------------------------------
Total expenses
(excluding interest) 179,488 151,455 28,033 19%
- -------------------------------------------------------------------------------
Income before income taxes 7,132 2,902 4,230 146%
Income tax expense 2,794 1,251 1,543 123%
- -------------------------------------------------------------------------------
Income before extraordinary
items 4,338 1,651 2,687 163%
Extraordinary gain,
net of $225 taxes 305 (305) (100%)
- -------------------------------------------------------------------------------
Net income $ 4,338 $ 1,956 $ 2,382 122%
===============================================================================
Net interest income:
Interest income $48,697 $45,474 $ 3,223 7%
Interest expense 39,946 38,615 1,331 3%
- -------------------------------------------------------------------------------
Net interest income $ 8,751 $ 6,859 $ 1,892 28%
===============================================================================
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
Calendar Year 1998 Compared with Calendar Year 1997
Net Income
- ----------
Net income for the calendar year ended December 31, 1998 was $4.3 million
or $0.60 basic earnings per share compared to $2.0 million or $0.28 basic
earnings per share a year ago. This year's net revenue gains reflect an
increase in each of the Company's divisions. Net revenues in the Company's
Institutional Division were up 33% compared to the same period last year
(taxable fixed income had an increase of over 60%, equities increased 30%
while municipals increased 14%), while the Private Client Group's net
revenues increased 13%.
Commissions
- -----------
Commission revenues increased $8.0 million or 15% in calendar 1998
reflecting active trading in all major markets. Revenues from listed stocks
and over-the-counter agency stock commissions increased $5.5 million or 15%
with mutual fund commission revenues increasing $2.5 million or 16%.
Principal Transactions
- ----------------------
Principal transactions increased $9.0 million or 15% in calendar 1998.
This was composed of an increase in taxable fixed income of $10.6 million
partially due to increased opportunity in international markets, an increase
in investment income of $0.9 million, and a decrease in municipal bonds of
$2.5 million, with equity securities remaining stable.
Investment Banking
- ------------------
Investment banking increased $10.9 million or 56% in calendar 1998,
primarily due to favorable market conditions during this period. Revenues
from selling concessions increased $5.1 million (equities increased $0.5
million, municipals increased $3.1 million and taxable fixed income increased
$1.5 million), underwriting fees increased $1.1 million (equities increased
$0.5 million and municipals increased $0.6 million), and investment banking
fees increased $4.7 million (equities increased $2.6 million and municipals
increased $2.1 million).
Fees and Other
- --------------
Fees and other revenues increased $2.6 million or 22% in calendar 1998
resulting partially from the Company's focus to increase fee based revenue.
Net Interest Income
- -------------------
Net interest income increased $1.9 million or 28% in calendar 1998, due
primarily to higher levels of margin borrowings by the Company's clients.
Compensation and Benefits
- -------------------------
Compensation and benefits increased $25.1 million or 24% in calendar 1998
due primarily to higher levels of revenues and profitability. Sales-related
compensation increased $23.2 million, salaries increased $1.9 million, and
benefits remained stable.
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
Clearance, Settlement and Brokerage Costs
- -----------------------------------------
Clearance, settlement and brokerage costs increased $1.0 million or 29% in
calendar 1998 due primarily to increases in listed agency transactions and
customer options activity.
Communications and Data Processing
- ----------------------------------
Communications and data processing increased $1.0 million or 8% in
calendar 1998. Communications expense increased $0.5 million due mainly to
the firm's upgrade in market data services and the growth of its business
related activity. Data processing expense increased $0.5 million due mainly
to a greater number of transactions.
Income Taxes
- ------------
Income taxes increased $1.5 million in calendar 1998 due primarily to an
increase in pre-tax earnings.
Equity Investments
- ------------------
At December 31, 1998, the Company owned approximately 2,444,000 common
shares (34% of the shares outstanding) of Mechanical Technology Incorporated
(MTI). The Company's investment in MTI is recorded under the equity method
and approximated $4,487,000, which included goodwill of approximately
$700,000, which is being amortized over 10 years. For the years ended
December 31, 1998, and 1997, the Company's equity in MTI's net (loss)income,
recorded on a one-quarter delay basis, was ($1,488,000) and $1,168,000,
respectively. For the three month period ended December 31, 1998, MTI
reported an unaudited loss of approximately $1.6 million. The Company's
equity in MTI's net loss, was a loss of $544,000, and will be recorded in the
quarter ending March 31, 1999.
In June 1997, Plug Power L.L.C., a joint venture between MTI and Edison
Development Corp. ("EDC"), a subsidiary of DTE Energy Corporation, was
formed. MTI and EDC have each stated they intend to contribute $5 million to
Plug Power to fund continuing operations for the period August 1, 1998
through March 31, 1999. Under applicable accounting standards, MTI
recognized its proportionate share of loss in Plug Power to the extent of
such investment. This resulted in a $3.8 million loss in MTI's fourth
quarter. The Company recognized its proportionate share (34%) of MTI's
losses and reduced its pre-tax income by $1.3 million during its fourth quarter.
MTI distributed to holders of record of shares of its common stock as of
the close of business on August 12, 1998 (the "Record Date"), non
transferrable subscription rights to purchase additional shares of common
stock at an exercise price of $6.00 per share (the "Rights Offering"). One
right was granted for each five shares of common stock held on the Record
Date. The rights expired September 24, 1998. First Albany Companies Inc.
exercised rights for a total of 407,340 shares of MTI common stock during the
month of September 1998.
At December 31, 1998, the aggregate market value of the Company's shares in
MTI was $19,705,000. Under the equity method, the market value of MTI's
stock is not included in the calculation of the Company's investment.
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
===============================================================================
1997 vs.
Twelve Months Ended 1996 Percentage
December 31, December 31, Increase Increase
(In thousands of dollars) 1997 1996 (Decrease) (Decrease)
- -------------------------------------------------------------------------------
Revenues:
Commissions $52,987 $42,711 $10,276 24%
Principal transactions 61,179 60,539 640 1%
Investment banking 19,636 19,558 78 0%
Investment gains 2,056 2,899 (843) (29%)
Fees and other 11,640 10,244 1,396 14%
- -------------------------------------------------------------------------------
Operating revenues 147,498 135,951 11,547 9%
Interest income 45,474 32,240 13,234 41%
- -------------------------------------------------------------------------------
Total revenues 192,972 168,191 24,781 15%
Interest expense 38,615 26,030 12,585 48%
- -------------------------------------------------------------------------------
Net revenues 154,357 142,161 12,196 9%
- -------------------------------------------------------------------------------
Expenses (excluding interest):
Compensation and benefits 105,080 95,691 9,389 10%
Clearing, settlement and
brokerage cost 3,358 2,868 490 17%
Communications and
data processing 12,872 10,897 1,975 18%
Occupancy and depreciation 13,203 8,527 4,676 55%
Selling 8,027 7,246 781 11%
Other 8,915 7,840 1,075 14%
- -------------------------------------------------------------------------------
Total expenses
(excluding interest) 151,455 133,069 18,386 14%
- -------------------------------------------------------------------------------
Income before income taxes 2,902 9,092 (6,190) (68%)
Income tax expense 1,251 3,592 (2,341) (65%)
- -------------------------------------------------------------------------------
Income before extraordinary
items 1,651 5,500 (3,849) (70%)
Extraordinary gain, net of
$225 taxes 305 305
- -------------------------------------------------------------------------------
Net income $ 1,956 $ 5,500 $(3,544) (64%)
===============================================================================
Net interest income:
Interest income $45,474 $32,240 $13,234 41%
Interest expense 38,615 26,030 12,585 48%
- -------------------------------------------------------------------------------
Net interest income $ 6,859 $ 6,210 $ 649 10%
===============================================================================
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
Calendar Year 1997 Compared with Calendar Year 1996
Net Income
- ----------
Net income for the calendar year ended December 31, 1997, was $2.0 million
or $0.28 basic earnings per share compared to $5.5 million or $0.83 basic
earnings per share a year ago. This year's increase in net revenues of $12.2
million primarily reflects increases in the Company's Private Client Group.
Although earnings continued to improve throughout 1997, earnings remain
negatively impacted by our investment in people and technology. In the
fourth quarter of calendar 1997, we began to see progress from our cost-
reduction efforts with a 5% decrease in non compensation-related expenses
over the previous quarter.
Commissions
- -----------
Commission revenues increased $10.3 million or 24% in calendar 1997
reflecting active trading in all major markets. Revenues from listed stocks
and over-the-counter agency stock commissions increased $5.6 million or 20%,
with mutual fund commission revenues increasing $3.6 million or 29% and
options commissions increasing $1.0 million or 50%.
Principal Transactions
- ----------------------
Principal transactions remained stable in calendar 1997. Taxable fixed
income increased $2.4 million, municipal bonds increased $2.1 million,
equities decreased $3.8 million, and investment income decreased $0.9 million.
Investment Banking
- ------------------
Investment banking revenues remained stable in calendar 1997. Revenues
from investment banking fees increased $2.3 million (municipal finance fees
increased $1.6 million while corporate finance fees increased $0.7 million).
Selling concessions were down $1.8 million (municipals were the same as the
prior year, equities decreased $1.4 million and taxable fixed income
decreased $0.4 million), and underwriting fees decreased $0.4 million
(municipals increased $0.5 million and equities decreased $0.9 million).
Investment gains
- ----------------
Investment gains decreased $0.8 million or 29% in calendar 1997. This
decrease was due primarily to a decline in the book value of the investment
portfolio held at First Albany Companies Inc., the Parent Company.
Fees and Other
- --------------
Fees and other revenues increased $1.4 million or 14% in calendar 1997
primarily reflecting increased service charge income and financial service
revenues.
Compensation and Benefits
- -------------------------
Compensation and benefits increased $9.4 million or 10% in calendar 1997
due partly to the increase in revenues. Sales-related compensation increased
$3.2 million, salaries increased $3.5 million, and benefits increased $2.7
million partly due to an increase in medical insurance costs.
Communications and Data Processing
- ----------------------------------
Communications and data processing increased $2.0 million or 18% in
calendar 1997. Communications expense increased $1.5 million due mainly to
the Company's upgrade in technology and increased headcount. Data processing
expense increased $0.5 million due in most part to a greater number of
transactions.
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
Occupancy and Depreciation
- --------------------------
Occupancy and depreciation expense increased $4.7 million or 55% in
calendar 1997 primarily as a result of the upgrade of our private client
branch technology and the expansion of our private client and institutional
offices in New York City.
Other
- -----
Other expense increased $1.1 million or 14% in calendar 1997 due to an
increase in consulting fees and investments in enhanced client communications.
Extraordinary Gain, net of taxes
- --------------------------------
The Company realized an extraordinary gain of $0.3 million, net of taxes.
This extraordinary gain was the result of the Company's investment in
Mechanical Technology Incorporated ("MTI"). The Company's investment in MTI
is recorded under the equity method. The Company recorded its share of MTI's
extraordinary gains as an extraordinary gain on the Company's books. During
the first quarter of MTI's 1997 fiscal year, MTI realized an extraordinary
gain due to the extinguishment of debt.
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
LIQUIDITY AND CAPITAL RESOURCES
A substantial portion of the Company's assets, similar to other brokerage and
investment banking firms, are 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 payables 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 fiscal year-end 1999, First Albany Corporation, a registered broker-
dealer subsidiary of First Albany Companies Inc., was in compliance with the
net capital requirements of the Securities and Exchange Commission and had
capital in excess of the minimum required.
Management believes that funds provided by operations and a variety of
bank lines-of-credit-totaling $345 million of which approximately $172
million was unused as of December 31, 1999,-will provide sufficient resources
to meet present and reasonably, foreseeable short-term financial needs.
During 1999, the Company declared and paid four quarterly cash dividends
totaling $0.20 per share of common stock, as well as declared and issued two
5% common stock dividends.
In January 2000, subsequent to the period reflected in this report, the
Company declared the regular quarterly cash dividend of $0.05 per share
payable on February 24, 2000, to shareholders of record on February 10, 2000.
Management believes that funds provided by operations will be sufficient to
fund the acquisition of office equipment, leasehold improvements, 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
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
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 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 7a. 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 and equity prices, changes in the implied
volatility of interest rates 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
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
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. 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 December 31, 1999, including a discussion of how those exposures are
currently managed.
Interest Rate 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 December
31, 1999 was $112.9 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 year end, the potential change in fair
value, assuming this hypothetical decrease, was $4.8 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 constantly
throughout each day.
Marketable equity securities included in the Company's inventory at
December 31, 1999, which were recorded at a fair value of $7.7 million, have
exposure to equity price risk. This risk is estimated as the potential loss
in fair value resulting from a hypothetical 10% adverse change in prices
quoted by stock exchanges and amounts to $0.8 million. The actual risks and
results of such adverse effects may differ substantially. The Company's
investment portfolio at December 31, 1999, excluding MTI (See Note 6), had a
fair market value of $5 million. 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 $0.5 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
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
basis. Should the Company find it necessary to sell such a security, it
may not be able to realize the full carrying value of the security due to
the significance of the position sold. The Company attempts to reduce its
exposure to changes in securities valuation with the use of highly liquid
municipal bond index futures contracts.
OPERATING RISK
Operating risk is the potential for loss arising from limitations in the
Company's financial systems and controls, deficiencies in legal documentation
and the execution of legal and fiduciary responsibilities, deficiencies in
technology and the risk of loss attributable to operational problems. These
risks are less direct than credit and market risk, but managing them is
critical, particularly in a rapidly changing environment with increasing
transaction volumes. In order to reduce or mitigate these risks, the Company
has established and maintains an effective internal control environment that
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 within 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 continually review new and pending regulations
and legislation and their potential impact on its business.
Item 8. Financial Statements and Supplementary Data.
- ------ --------------------------------------------
Index to Financial Statements and Supplementary Data
----------------------------------------------------
Page
REPORT OF INDEPENDENT ACCOUNTANTS 26
FINANCIAL STATEMENTS:
Consolidated Statements of Income For the
Years Ended December 31, 1999, 1998 and 1997 27
Consolidated Statements of Financial Condition
as of December 31, 1999 and 1998 28
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31,
1999, 1998 and 1997 29
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1999, 1998 and 1997 30-31
Notes to Consolidated Financial Statements 32-47
SUPPLEMENTARY DATA:
Selected Quarterly Financial Data (Unaudited) 48
Report of Independent Accountants
To the Board of Directors and
Stockholders of First Albany Companies Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 50 present fairly, in all material
respects, the financial position of First Albany Companies Inc. at December
31, 1999 and 1998, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States. In
addition, in our opinion, the financial statement schedule listed in the
index appearing under Item 14(a)(2) on page 50 presents fairly, in all
material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our
audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS L.L.P.
March 3, 2000
First Albany Companies Inc.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars, except per share amounts)
December 31, December 31, December 31,
For the years ended 1999 1998 1997
- -------------------------------------------------------------------------------
Revenues:
Commissions $70,629 $61,010 $52,987
Principal transactions 71,973 70,157 61,179
Investment banking 31,861 30,544 19,636
Investment (losses) gains (5,378) 1,903 2,056
Interest 61,551 48,697 45,474
Fees and other 18,062 14,255 11,640
- -------------------------------------------------------------------------------
Total revenues 248,698 226,566 192,972
Interest expense 51,931 39,946 38,615
- -------------------------------------------------------------------------------
Net revenues 196,767 186,620 154,357
- -------------------------------------------------------------------------------
Expenses (excluding interest):
Compensation and benefits 143,776 130,169 105,080
Clearing, settlement and
brokerage costs 4,970 4,347 3,358
Communications and data
processing 14,151 13,852 12,872
Occupancy and depreciation 13,376 13,420 13,203
Selling 9,527 7,863 8,027
Other 10,194 9,837 8,915
- -------------------------------------------------------------------------------
Total expenses (excluding interest) 195,994 179,488 151,455
- -------------------------------------------------------------------------------
Income before income taxes 773 7,132 2,902
Income tax expense 360 2,794 1,251
- -------------------------------------------------------------------------------
Income before extraordinary items 413 4,338 1,651
Extraordinary gain, net of $225 taxes 305
- -------------------------------------------------------------------------------
Net income $ 413 $ 4,338 $ 1,956
===============================================================================
Basic earnings per share:
Income before extraordinary items $ 0.06 $ 0.60 $ 0.23
Extraordinary gain 0.00 0.00 0.05
- -------------------------------------------------------------------------------
Net income $ 0.06 $ 0.60 $ 0.28
===============================================================================
Dilutive earnings per share:
Income before extraordinary items $ 0.05 $ 0.55 $ 0.22
Extraordinary gain 0.00 0.00 0.04
- -------------------------------------------------------------------------------
Net income $ 0.05 $ 0.55 $ 0.26
===============================================================================
*All per share figures have been restated to reflect all stock dividends paid.
The accompanying notes are an integral
part of the consolidated financial statements.
First Albany Companies Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands of dollars)
December 31, December 31,
As of 1999 1998
- -------------------------------------------------------------------------------
Assets
Cash $ 1,912 $ 1,424
Securities purchased under agreement to resell 26,822 1,631
Securities borrowed 474,177 470,693
Receivables from:
Brokers, dealers and clearing agencies 8,193 6,434
Customers 251,374 194,401
Others 39,815 11,367
Securities owned 158,047 118,370
Investments 14,778 10,719
Office equipment and leasehold
improvements, net 10,515 11,390
Other assets 22,501 16,469
- -------------------------------------------------------------------------------
Total Assets $1,008,134 $842,898
===============================================================================
Liabilities and Stockholders' Equity
Liabilities
Short-term bank loans $ 172,534 $104,679
Securities loaned 596,340 565,571
Payables to:
Brokers, dealers and clearing agencies 9,452 4,862
Customers 59,957 48,467
Others 19,613 17,742
Securities sold but not yet purchased 37,521 2,814
Accounts payable 3,214 4,970
Accrued compensation 30,131 23,584
Accrued expenses 8,359 5,863
Notes payable 5,480 4,750
Obligations under capitalized leases 4,917 3,688
- -------------------------------------------------------------------------------
Total Liabilities 947,518 786,990
- -------------------------------------------------------------------------------
Commitments and Contingencies
Subordinated debt 7,500 7,500
- -------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock; $1.00 par value;
authorized 500,000 shares; none issued
Common stock; $.01 par value; authorized
10,000,000 shares; issued 7,639,638
and 6,584,464 respectively 76 66
Additional paid-in capital 58,314 41,195
Unearned compensation (2,353) (841)
Deferred compensation 1,184
Retained (deficit)/earnings (2,920) 8,001
Treasury stock at cost (1,185) (13)
- -------------------------------------------------------------------------------
Total Stockholders' Equity 53,116 48,408
- -------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $1,008,134 $842,898
===============================================================================
The accompanying notes are an integral
part of the consolidated financial statements.
First Albany Companies Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
(In thousands of dollars except for number of shares)
Common Stock Additional
Issue Paid-In Unearned Deferred Retained Treasury Stock
Shares Amount Capital Compensation Compensation Earnings Shares Amount
- ------------------------------------------------------------------------------------------------------
Balance
December 31,
1996 5,390,594 $ 54 $26,135 ($ 544) $ $18,556 (311,809) ($1,927)
Issuance of
restricted stock 475 (509) (39) 51,411 287
Amortization of
unearned compensation 295
Stock dividends
declared 552,787 5 7,172 (7,177) (21,765)
Cash dividends paid (1,072)
Options exercised (154) 172,884 1,035
Net Income 1,956
- -------------------------------------------------------------------------------------------------------
Balance
December 31,
1997 5,943,381 59 33,782 (758) 12,070 (109,279) (605)
Issuance of
restricted stock (572) (634) 132 33,059 178
Amortization of
unearned compensation 551
Stock dividends
declared 609,176 6 7,500 (7,506) (4,689)
Cash dividends paid (1,165)
Options
exercised 31,907 1 243 132 67,136 354
Treasury stock sold 102 10,965 60
Non-employee options 140
Net income 4,338
- -------------------------------------------------------------------------------------------------------
Balance
December 31,
1998 6,584,464 66 41,195 (841) 8,001 (2,808) (13)
Issuance of restricted
stock 23,571 2,394 (2,309) 100,150 12
Amortization of
unearned compensation 797
Stock dividends
declared 699,131 7 9,961 (9,968) (9,850)
Cash dividends paid (1,366)
Options exercised 32,472 608 68,957 1
Stock issued to
treasury 300,000 3 (300,000) (3)
Non-employee options 73
Employee stock trust
(Note 11) 1,184 1,184 (1,182)
MTI investment (Note6) 2,899
Net income 413
- -------------------------------------------------------------------------------------------------------
Balance
December 31,
1999 7,639,638 $ 76 $58,314 ($2,353) $1,184 ($ 2,920) (143,551) ($1,185)
=======================================================================================================
The accompanying notes are an integral
part of the consolidated financial statements.
First Albany Companies Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Dec. 31, Dec. 31, Dec. 31,
For the years ended 1999 1998 1997
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 413 $ 4,338 $ 1,956
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Depreciation and amortization 4,425 4,429 4,562
Deferred compensation 1,184
Deferred income taxes (3,835) (901) 2,251
Undistributed earnings of affiliate 3,629 1,488 (1,168)
Unrealized investment losses (gains) 2,252 (2,916) (117)
Realized gains on sale of investments (475) (770)
Loss on sale of fixed assets 131 60
Services provided in exchange for
common stock 959 637 509
(Increase) decrease in operating assets:
Securities purchased under agreement to
resell (25,191) 3,668 (2,430)
Net receivables from customers (45,483) (12,139) (53,839)
Net receivables from others (27,644) (27,008) (10,850)
Securities owned, net (4,970) (2,880) 33,403
Other assets (4,316) 3,119 (17,589)
Increase (decrease) in operating liabilities:
Securities loaned, net 27,285 15,817 73,388
Net payables to brokers, dealers,
and clearing agencies 2,831 (106) (2,760)
Accounts payable and accrued expenses 7,287 11,120 4,098
- -------------------------------------------------------------------------------
Net cash (used in) provided by
operating activities (61,043) (1,749) 30,644
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of furniture, equipment,
and leaseholds (788) (226) (2,682)
Purchases of investments (5,016) (2,444) (15)
Proceeds from sale of investments 570 1,045
- -------------------------------------------------------------------------------
Net cash used in investing activities (5,804) (2,100) (1,652)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds (payments) of short-term bank
loans, net 67,855 4,977 (35,010)
Proceeds from subordinated debt 2,500
Proceeds of notes payable 4,400 5,000
Payments of notes payable (3,670) (2,521) (2,312)
Payments of obligations under capitalized
leases (1,570) (912) (425)
Securities sold under agreement to repurchase (891) 891
Payments for purchases of common stock 147
Proceeds from issuance of common stock
from treasury 472 892 881
Net increase (decrease) from borrowing
under line-of-credit agreements 1,067 3,942 (2,499)
Dividends paid (1,366) (1,165) (1,072)
- -------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 67,335 4,322 (32,046)
- -------------------------------------------------------------------------------
The accompanying notes are an integral
part of the consolidated financial statements.
First Albany Companies Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(continued)
Dec. 31, Dec. 31, Dec. 31,
For the years ended 1999 1998 1997
- -------------------------------------------------------------------------------
Increase (decrease) in cash 488 473 (3,054)
Cash at beginning of the period 1,424 951 4,005
- -------------------------------------------------------------------------------
Cash at the end of the period $ 1,912 $ 1,424 $ 951
===============================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES
Income tax payments $ 5,357 $ 956 $ 681
Interest payments $50,109 $39,837 $39,808
In 1999, 1998 and 1997, the Company entered into capital leases for office
and computer equipment totaling approximately $2,798,000, $1,513,000 and
$2,087,000, respectively.
Additionally during 1999 the Company increased its investment in MTI by
$5,019,000 and increased paid-in-capital by $2,899,000 and deferred income
taxes by $2,120,000. (See Note 6)
The accompanying notes are an integral
part of the consolidated financial statements.
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Significant Accounting Policies
Organization and Nature of Business
- -----------------------------------
The consolidated financial statements include the accounts of First Albany
Companies Inc. and its wholly-owned subsidiaries (the "Company"). First
Albany Corporation (the "Corporation") is the Company's principal subsidiary
and a registered broker-dealer. The Corporation is registered with the
Securities and Exchange Commission ("SEC") and is a member of various
exchanges and the National Association of Securities Dealers, Inc. The
Corporation's primary business includes securities brokerage for individual
and institutional customers and market-making and trading of corporate,
government, and municipal securities. In addition, the Corporation
underwrites and distributes municipal and corporate securities, provides
securities clearance activities for other brokerage firms, and offers
financial advisory services to its customers. Another of the Company's
subsidiaries is First Albany Asset Management Corporation ("FAAM"). Under
management agreements, FAAM serves as investment manager to individual and
institutional customers. FAAM directs the investment of customer assets by
making investment decisions, placing purchase and sales orders, and providing
research, statistical analysis, and continuous supervision of the portfolios.
First Albany Enterprise Funding, Inc. ("FAEF") is also a subsidiary of the
Company formed in 1998 as a private equity investment company whose business
is to provide venture capital and merchant banking services to firms in the
high technology sector. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Securities Transactions
- -----------------------
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 from or Payables to
others on the Statement of Financial Condition. Profit and loss arising from
all securities transactions entered for the account and risk of the Company
are recorded on trade date. Customers' securities transactions are reported
on a settlement date basis (normally the third business day following the
transaction) with related commission income and expenses reported on a trade-
date basis.
As a broker-dealer, the Corporation values marketable securities at
market value and securities not readily marketable at fair value as
determined by management. The resulting unrealized gains and losses are
included as revenues from principal transactions. First Albany Companies
Inc. also purchases securities for investment purposes and, as a non broker-
dealer, classifies them as trading securities and values them at market
value, unless they are restricted from being sold, in which case they are
valued at cost.
Investment Banking
- ------------------
Investment banking revenues include gains, losses and fees, net of syndicate
expenses, arising from securities offerings in which the Company acts as an
underwriter or agent. Investment banking revenues also include fees earned
from providing merger, acquisition and financial advisory services.
Investment banking management fees are recorded on offering date, sales
concessions on trade date and underwriting fees at the time the underwriting
is completed and the income is reasonably determinable.
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Resale and Repurchase Agreements
- --------------------------------
Transactions involving purchases of securities under agreements to resell
or sales of securities under agreements to repurchase are treated as
collateralized financing transactions and are recorded at their contracted
resale or repurchase amounts plus accrued interest. It is the policy of the
Company to obtain possession or control of collateral with a market value
equal to or in excess of the principal amount loaned under resale agreements.
Collateral is valued daily, and the Company may require counterparties to
deposit additional collateral or return collateral pledged, when appropriate.
At December 31, 1999 and December 31, 1998, the Company had entered into
resale agreements in the amounts of $26,822,000 and $1,631,000, respectively.
At December 31, 1999, and December 31, 1998, the Company had not entered into
repurchase agreements with counterparties.
Securities-Lending Activities
- -----------------------------
Securities borrowed and securities loaned transactions are recorded at
the amount of cash collateral advanced or received. Securities borrowed
transactions require the Company to deposit cash or other collateral with the
lender. With respect to securities loaned, the Company receives collateral
in the form of cash or other collateral in an amount generally in excess of
the market value of securities loaned. The Company monitors the market value
of securities borrowed and loaned on a daily basis, with additional
collateral obtained or refunded as necessary.
Collateral
- ----------
The Company continues to report assets it has pledged as collateral in
secured borrowing and other arrangements when the secured party cannot sell
or repledge the assets or the Company can substitute collateral or otherwise
redeem it on short notice. The Company generally does not report assets
received as collateral in secured lending and other arrangements because the
debtor typically has the right to redeem the collateral on short notice.
Income Taxes
- ------------
The amount of current taxes payable is recognized as of the date of the
financial statements utilizing currently enacted tax laws and rates.
Deferred income taxes are recognized for the future tax consequences, which
are attributed to differences between the financial statement and tax basis
of existing assets and liabilities.
Statement of Cash Flows
- -----------------------
For purposes of the statement of cash flows, the Company has defined cash
equivalents as highly liquid investments, with original maturities of less
than 90 days that are not segregated under federal regulations or held for
sale in the ordinary course of business.
Office Equipment and Leasehold Improvements
- -------------------------------------------
Office equipment and leasehold improvements are stated at cost less
accumulated depreciation of $23,439,000 at December 31, 1999 and $19,916,000
at December 31, 1998. Depreciation is provided on a straight-line basis over
the shorter of the estimated useful life of the asset (3 to 5 years) or the
term of the lease.
Securities Issued for Services
- ------------------------------
The Company accounts for stock and options issued for services by reference
to the fair market value of the Company's stock on the date of stock issuance
or option grant. Compensation expense is recorded for the fair market value
of the stock issued, or in the case of options, for the difference between
the stock's fair
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
market value on the date of the grant and the option exercise price. In
the event that recipients are required to render future services to obtain
full rights in the securities received, the compensation expense so
recorded is deferred and amortized as a charge to income over the period
that such rights vest to the recipient.
Reclassification
- ----------------
Certain 1998 and 1997 amounts have been reclassified to conform to the 1999
presentation.
Earnings per Common Share
- -------------------------
Basic earnings per share is computed based upon weighted-average shares
outstanding. Dilutive earnings per share is computed consistently with basic
while giving effect to all dilutive potential common shares that were
outstanding during the period.
December 31, December 31, December 31,
1999 1998 1997
- --------------------------------------------------------------------
Net Income $ 413 $4,338 $1,956
- --------------------------------------------------------------------
Weighted average shares
for basic EPS 7,300 7,177 6,966
Effect of dilutive common
equivalent shares 949 704 679
- --------------------------------------------------------------------
Weighted average shares
and dilutive common
equivalent shares for
dilutive EPS 8,249 7,881 7,645
- --------------------------------------------------------------------
Basic EPS $ 0.06 $ 0.60 $ 0.28
Dilutive EPS $ 0.05 $ 0.55 $ 0.26
====================================================================
All per share figures have been restated for all stock dividends declared.
NOTE 2. Receivables From and Payables To Brokers, Dealers, and Clearing Agencies
Amounts receivable from and payable to brokers, dealers, and clearing
agencies, other than correspondents, consists of the following:
=========================================================
(In thousands of dollars) December 31, December 31,
1999 1998
---------------------------------------------------------
Securities failed to deliver $8,193 $6,434
---------------------------------------------------------
Total receivables $8,193 $6,434
=========================================================
Securities failed to receive $9,449 $4,862
Payable to clearing organizations 3
---------------------------------------------------------
Total payables $9,452 $4,862
=========================================================
NOTE 3. Receivables From and Payables To Customers
Receivables from and payables to customers include amounts due on cash
and margin transactions. Securities owned by customers are held as
collateral for receivables. Such collateral is not reflected in the
financial statements. Total unsecured and partly secured customer receivables
were $288,000 and $333,000
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
as of December 31, 1999 and December 31, 1998, respectively. An allowance
for doubtful accounts was recorded for $288,000 and $305,000 as of December
31, 1999 and December 31, 1998 respectively.
NOTE 4. Receivables from Others
Amounts receivables from others as of:
=======================================================================
(In thousands of dollars) December 31, December 31,
1999 1998
- -----------------------------------------------------------------------
Adjustment to record securities
on a trade date basis, net $28,552 $ 3,773
Others 11,263 7,594
- -----------------------------------------------------------------------
Total $39,815 $11,367
=======================================================================
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 from or Payables to
others on the Statement of Financial Condition.
NOTE 5. Securities Owned And Sold But Not Yet Purchased
Securities owned and sold but not yet purchased consisted of the
following as of:
=======================================================--=================
(In thousands of dollars) December 31, December 31,
1999 1998
- --------------------------------------------------------------------------
Sold, but Sold, but
not yet not yet
Owned Purchased Owned Purchased
- ----------------------------------------------------------------------------
Marketable Securities
U.S. Government and federal
agency obligations $ 12,885 $26,131 $6,321 $1,626
State and municipal bonds 111,855 3,080 85,836 54
Corporate obligations 19,577 2,249 21,434 10
Corporate stocks 12,646 6,061 3,898 1,124
Not readily marketable
securities
Investment securities with
no publicly quoted market 187 187
Investment securities subject
to restrictions 897 694
- ----------------------------------------------------------------------------
Total $158,047 $37,521 $118,370 $2,814
============================================================================
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.
NOTE 6. 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.
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
At December 31, 1999, the Company owned approximately 3,917,000 common
shares (33% of the shares outstanding) of MTI. The Company's investment in
MTI is recorded under the equity method and approximated $9,798,000, which
included goodwill of approximately $494,000, which is being amortized over 10
years.
For the years ended December 31, 1999, 1998 and 1997, the Company's equity
in MTI's net (loss)income, recorded on a one-quarter delay basis, was
($3,629,000), ($1,488,000) and $1,168,000, respectively.
The following presents summarized financial information of MTI for the year
ended September 30, 1999:
================================================
Assets $ 31,780,000
Liabilities 3,994,000
------------------------------------------------
Shareholders' equity $ 27,786,000
================================================
================================================
Net Sales $ 12,885,000
------------------------------------------------
Operating loss (1,408,000)
Loss from continuing operations (10,729,000)
Income from discontinued operations 41,000
Net loss $(10,688,000)
================================================
At December 31, 1999, the aggregate market value of the Company's shares
in MTI was $91,072,000. Under the equity method, the market value of MTI's
stock is not included in the calculation of the Company's investment.
During 1999, Plug Power, Inc. (formerly a joint venture between MTI and
Edison Development Corp.) issued membership interests, prior to Plug Power's
initial public offering, to new investors with a recorded value of $50.6
million. As a result, MTI recorded its proportionate share of this increase
in Plug Power's equity as investment in Plug Power and additional paid-in-
capital. Accordingly, the Company has recorded through December 31, 1999 its
proportionate share ($5.0 million) of this increase in MTI's equity as an
increase in its investments in MTI. The Company also recorded an increase in
additional paid-in-capital of $2.9 million (net of deferred taxes) as a
result of this transaction.
For the three month period ended December 31, 1999, MTI reported an
unaudited loss of approximately $1.8 million. The Company's equity in MTI's
net loss, was a loss of $596,000, and will be recorded in the quarter ending
March 31, 2000. During MTI's first fiscal quarter 2000, Plug Power, Inc.
issued common stock in an initial public offering. Plug Power's shareholders
equity increased $178.8 million primarily due to cash investments by
individuals and corporate investors, including MTI, and the public offering.
As a result, MTI recorded its proportionate share of this increase in Plug
Power's equity as investment in Plug Power and additional paid-in-capital,
net of deferred taxes. Accordingly, the Company will record in the March 31,
2000 quarter its proportionate share (approximately $8.9 million) of this
increase in MTI's equity as an increase in its investments in MTI. The
Company will also record in the March 31, 2000 quarter an increase in
additional paid-in-capital of approximately $5.2 million (net of deferred
taxes) as a result of this transaction.
MTI distributed to holders of record of shares of its common stock as of the
close of business on June 4, 1999 (the "Record Date"), non transferable
subscription rights to purchase additional shares of common stock at an
exercise price of $16.00 per share (the "Rights Offering"). One right was
granted for each sixteen shares of common stock held on the Record Date. The
rights expired July 9, 1999. First Albany Companies Inc. exercised rights
for a total of 251,004 shares of MTI common stock during the month of July,
1999.
At December 31, 1999, the Company owned 209,500 shares of META Group, Inc.
The fair market value of this investment was $3,981,000. During the year
ended December 31, 1999, the Company has recorded
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
net unrealized losses of $2,252,000 with respect to this investment.
During the year ended December 31, 1998, the Company recorded a realized
gain of $475,000 and net unrealized gains of $2,917,000 with respect to this
investment. During the year ended December 31, 1997, the Company recorded a
realized gain of $770,000 and net unrealized gains of $117,000 with respect
to this investment.
NOTE 7. Bank Loans
Short-term bank loans are made under a variety of bank lines of credit-
totaling $345 million of which approximately $172 million was unused as of
December 31, 1999,- which are limited to financing securities eligible for
collateralization. This includes Company owned securities and certain
customer-owned securities purchased on margin, subject to certain regulatory
formulas. These loans bear interest at fluctuating rates based primarily on
the Federal Funds interest rate. The weighted average interest rates on
these loans were 5.5%, 5.3%, and 6.1%, at December 31, 1999, 1998, and 1997,
respectively.
Short-term bank loans were collateralized by Company-owned securities of
$191,608,000 and customers' margin account securities of $59,169,000 at
December 31, 1999.
A note for $1,666,667 is collateralized by fixed assets and is payable in
monthly principal payments of $104,167 plus interest. The interest rate is
2% over the 30-day London InterBank Offered Rate ("LIBOR") (5.73 plus 2% on
December 31, 1999). One of the more significant covenants requires First
Albany Corporation to maintain a minimum net capital (as defined by Rule
15c3-1 of the Securities and Exchange Commission) equal to three times the
required minimum net capital. The required minimum net capital as of
December 31, 1999, was $5,537,000. The amount of net capital as of December
31, 1999, was $23,242,000. This note matures on March 27, 2001.
A note for $3,813,333 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"). A portion of the proceeds from this note was used
to pay off a previous note for $1,489,583. This note matures on April 1, 2004.
Future annual principal loan repayment requirements as of December 31, 1999,
are as follows:
==========================
(In thousands of dollars)
==========================
2000 $ 2,130
2001 1,297
2002 880
2003 880
2004 293
-------------------------
Total $ 5,480
=========================
NOTE 8. 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 December 31, 1999:
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
==============================================
(In thousands of dollars)
----------------------------------------------
2000 $2,329
2001 1,981
2002 986
2003 91
2004 55
----------------------------------------------
Total minimum lease payments 5,442
Less: amount representing interest 525
----------------------------------------------
Present value of minimum lease payments $4,917
==============================================
NOTE 9. Payables To Others
Amounts payable to others as of:
============================================================================
(In thousands of dollars) December 31, December 31,
1999 1998
- -----------------------------------------------------------------------------
Borrowing under line-of-credit agreements $15,802 $ 14,735
Others 3,811 3,007
- -----------------------------------------------------------------------------
Total $19,613 $17,742
=============================================================================
NOTE 10. Subordinated Debt
During 1997, the Company increased its subordinated debt by $2,500,000.
This debt bears interest at 8.75%. Interest is paid monthly with the
principal amount due at maturity on December 31, 2002. The lender has the
right to exercise stock options on 32,687 shares of the Company's stock at
$15.30 per share. This right expires December 31, 2002. The Company also
has an additional subordinated debt of $5,000,000 that bears interest at
9.25%. Interest is paid monthly with the principal amount due at maturity on
December 31, 2002. The lender has the right to exercise stock options on
107,208 shares of the Company's stock at $9.33 per share. This right expires
December 31, 2002.
Both loan agreements include restrictive financial covenants. One of the
more significant covenants requires the Company to maintain a minimum net
capital (as defined by Rule 15c3-1 of the Securities and Exchange Commission)
equal to three times the required net capital. The amount of required net
capital as of December 31, 1999 was $5,537,000. The amount of net capital as
of December 31, 1999 was $23,242,000.
NOTE 11. Stockholders' Equity
Dividends:
During 1999, the Company declared and paid four quarterly cash dividends
totaling $0.20 per share of common stock, and also declared and issued two
5% common stock dividends.
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.
Rights Plan:
On March 27, 1998, the Board of Directors adopted a Shareholder Rights
Plan. The rights were distributed as a dividend of one right for each share
of First Albany Companies Inc. common stock outstanding, with a record date
of March 30, 1998. The Shareholder Rights Plan is intended to deter coercive
takeover tactics and strengthen the Company's ability to deal with an
unsolicited takeover proposal.
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The rights will expire on March 30, 2008. Each right will entitle the
holder to buy one one-hundredth of a newly issued share of preferred stock
at an exercise price of $56.00. The rights will become exercisable at such
time as any person or group acquires more than 15% of the outstanding shares
of common stock of the Company (subject to certain exceptions) or within 10
days following the commencement of a tender offer that will result in any
person or group owning such percentage of the outstanding voting shares.
Upon any person or group acquiring 15% of the outstanding shares of voting
stock, each right will entitle its holders to buy shares of First Albany
Companies Inc. common stock (or of the stock of the acquiring company if it
is the surviving entity in a business combination) having a market value
equal to twice the exercise price of each right. The rights will be
redeemable at any time prior to their becoming exercisable.
Treasury Stock:
During June 1999, the Company increased its treasury stock holdings by
300,000 shares via issuance of new shares. These additional shares are
intended to be used in meeting the Company's obligations for various
incentive and deferred compensation plans.
Deferred Compensation and Employee Stock Trust:
The Company has adopted or may hereafter adopt various nonqualified
deferred compensation plans (the "Plan") for the benefit of a select group of
highly compensated employees who contribute significantly to the continued
growth and development and future business success of the Company. Plan
participants may elect under the Plan to have the value of their Plan
Accounts track the performance of one or more investment benchmarks available
under the Plan, including First Albany Companies Common Stock Investment
Benchmark, which tracks the performance of First Albany Companies Inc.
common stock ("Company Stock"). During 1999, the Company established a rabbi
trust ("Trust"). With respect to the First Albany Companies Common Stock
Investment Benchmark, the Company contributes Company Stock to the Trust to
meet its related liability under the Plan.
Assets of the Trust have been consolidated with those of the Company. The
value of the Company's stock at the time contributed to the Trust has been
classified in stockholders' equity and generally accounted for in a manner
similar to treasury stock.
The deferred compensation arrangement requires the related liability to be
settled by delivery of a fixed number of shares of Company Stock.
Accordingly, the related liability is classified in equity under deferred
compensation and changes in the fair market value of the amount owed to the
participant in the Plan is not recognized.
NOTE 12. 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.
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The components of income taxes are:
=======================================================================
(In thousands of dollars) December 31, December 31, December 31,
1999 1998 1997
-----------------------------------------------------------------------
Federal
Current $ 2,419 $1,897 $ (956)
Deferred (2,722) (680) 1,642
State and local
Current 1,779 1,798 181
Deferred (1,116) (221) 609
-----------------------------------------------------------------------
Total income taxes $ 360 $2,794 $1,476
=======================================================================
The reasons for the difference between the expected income tax expense using
the federal statutory rate and the income tax expense are as follows:
============================================================================
(In thousands of dollars) December 31, December 31, December 31,
1999 1998 1997
- ----------------------------------------------------------------------------
Income taxes
at federal statutory rate $263 $2,425 $1,167
State and local income taxes, net of
federal income taxes 561 1,118 439
Meals and entertainment 241 171 169
Tax-exempt interest income, net (757) (970) (405)
Non deductible expenses 52 50 106
- -----------------------------------------------------------------------------
Total income taxes $360 $2,794 $1,476
=============================================================================
The temporary differences that give rise to significant portions of deferred
tax assets and liabilities are as follows:
==================================================================
(In thousands of dollars) December 31, December 31,
1999 1998
------------------------------------------------------------------
Bad debt reserve $ 132 $ 127
Securities held for investment (1,812) (1,842)
Fixed assets 1,053 623
Deferred compensation 2,381 1,381
Other 82 (168)
------------------------------------------------------------------
Total deferred tax assets (liabilities) $ 1,836 $ 121
==================================================================
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.
NOTE 13. Employee Benefit Plans
The Company maintains a deferred profit sharing plan (Internal Revenue Code
Section 401(k) Plan) that permits eligible employees to defer a percentage of
their compensation. Company contributions to eligible participants may be
made at the discretion of the Board of Directors. During the years ended
December 31, 1999, 1998 and 1997, the Company contributed $224,000, $297,000
and $107,000 respectively. The Company also maintains an Employee Stock
Bonus Plan (Internal Revenue Code Section 401(a)) which permits eligible
employees to contribute up to 8% of their compensation on an after-tax basis.
The Company makes matching contributions equal to a percentage of each
employee's contributions. Company contributions vest in accordance with the
Plan and are tax deferred until withdrawal.
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Employee and Company contributions are invested solely in the common stock
of the Company. During the years ended December 31, 1999, 1998 and 1997,
the Company contributed $961,000, $864,000 and $788,000 respectively.
The Company plans to terminate the Stock Bonus Plan effective December 31,
1999. The Company is currently preparing an application seeking a
documentation letter from the Internal Revenue Service confirming that the
prior tax qualifications of the Stock Bonus Plan will not be affected by its
termination. Management believes that the IRS will rule favorably on this
termination.
NOTE 14. Incentive Plans
In 1982, the Company established a Stock Incentive Plan (the "1982 Plan")
that, as amended by stockholders in 1987, authorized issuance of options to
officers and key employees of the Company to purchase up to 800,000 shares
of common stock. In 1989, stockholders approved adoption of the First Albany
Companies Inc. 1989 Stock Incentive Plan (the "1989 Plan"), which authorized
the award of options to purchase common stock, common stock appreciation rights
or the sale of restricted stock. As of December 31, 1999 and 1998, the 1989
Plan was authorized to issue 2,366,240 and 2,199,673 shares of the Company's
common stock, respectively. The 1982 Plan was terminated in 1989 and the
1989 Plan expired on December 31, 1999. Options previously granted under the
1982 and 1989 Plan remain valid in accordance with the terms of the grant of
uch options; however, the grant of new options under the 1982 and 1989 Plan
ended. Effective March 26, 1999, the Company established the 1999 Long-Term
Incentive Plan (the "1999 Plan"). The 1999 Plan authorizes the award of
options to purchase common stock, common stock appreciation rights or the
sale of restricted common stock. The 1999 Plan authorizes 882,000 shares
(adjusted for stock-dividends) of the Company's common stock for issuance to
employees of the Company and its subsidiaries and expires December 31, 2009.
Options granted under the 1989 and 1999 Plans have been granted at not less
than the fair market value at the grant date, vest over a maximum of six
years, and expire ten years after the grant date.
During 1999, 1998 and 1997, 135,521, 39,591, and 51,888 restricted shares,
respectively, have been awarded under the Plans at a weighted average grant
date fair price of $16.92, $12.77 and $11.75, respectively. The fair market
value of the awards will be amortized over the period in which the
restrictions are outstanding.
There have been no stock appreciation rights granted under the Plans.
Option transactions for the three year period ended December 31, 1999,
under the Plans were as follows:
Shares Weighted Average
Subject Exercise
to Option Price
- ----------------------------------------------------------------
Balance at December 31, 1996 861,823 $ 6.06
Options granted 682,128 10.02
Options exercised (172,884) 5.09
Options terminated (50,616) 8.40
- ----------------------------------------------------------------
Balance at December 31, 1997 1,320,451 7.43
Options granted 427,843 11.09
Options exercised (99,043) 7.35
Options terminated (52,356) 8.56
- ----------------------------------------------------------------
Balance at December 31, 1998 1,596,895 7.65
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Options granted 460,139 10.59
Options exercised (104,351) 5.84
Options terminated (121,919) 8.98
- -----------------------------------------------------------------
Balance at December 31, 1999 1,830,764 $ 7.69
=================================================================
There were 645,044 shares available for grants of options at December 31, 1999.
The following table summarizes information about stock options outstanding
under the Plans at December 31, 1999:
|-----------Outstanding------------||-------Exercisable-------|
Exercise Average Average
Price Average Life Exercise Exercise
Range Shares (years) Price Shares Price
- -------------------------------------------------------------------------------
$ 2.55 - $ 3.25 372,519 1.47 $ 2.81 372,519 $ 2.81
$ 4.88 - $ 6.93 285,041 3.93 5.38 232,686 5.03
$ 7.61 - $10.77 825,339 7.58 8.64 324,113 9.25
$11.72 - $12.70 307,965 9.05 12.00 110,250 11.93
$16.67 - $17.74 39,900 9.52 16.98 23,100 16.67
- -------------------------------------------------------------------------------
1,830,764 $ 7.69 1,062,668 $ 6.51
===============================================================================
At December 31, 1999, 1,062,668 options with an average exercise price of
$6.51 were exercisable; at December 31, 1998, 774,848 options with an average
exercise price of $5.95 were exercisable; and at December 31, 1997, 602,333
options with an average exercise price of $5.19 were exercisable.
The Company has elected to follow Accounting Principals Board No. 25
"Accounting for Stock Issued to Employees" ("APB 25") in accounting for the
stock option plans. Under APB 25, no compensation cost has been recognized
in 1999, 1998, and 1997. Had compensation cost and fair value been
determined pursuant to Financial Accounting Standard No. 123 (FAS 123)
"Accounting for Stock-Based compensation," net income would have decreased
from $413,000 to a loss of $354,000 in calendar year 1999, $4,338,000 to
$3,283,000 in calendar year 1998, and $1,956,000 to $1,557,000 in calendar
year 1997. Basic earnings per share would decrease from $0.06 to ($0.05)
in 1999, $0.60 to $0.46 in 1998, and $0.28 to $0.22 in 1997. Dilutive
earnings per share would decrease from $.05 to ($0.05) in 1999, $0.55 to
$0.42 in 1998, and $0.26 to $0.20 in year 1997. The initial impact of FASB
123 on pro forma earnings per share may not be representative of the effect
on income in future years because options vest over several years and
additional option grants may be made each year.
The weighted average fair value of options granted under FAS 123 was
$5.62 in 1999, $8.12 in 1998, and $5.53 in 1997. The fair value of options
granted is estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted average assumptions used for
grants: dividend yield of 1.3% for 1999 and 1.5% for both 1998 and 1997;
expected volatility of 37.7%, 66.4%, and 59.4% for 1999, 1998 and 1997,
respectively; risk-free interest rates of 5.0% to 5.8%, 5.0%, and 5.5%, for
1999, 1998 and 1997, respectively; and expected lives of 6.0, 6.0, and 5.0
years for 1999, 1998 and 1997, respectively.
The Company has various other incentive programs which are offered to
eligible employees. These programs consist of cash incentives and deferred
bonuses. Amounts awarded vest over periods ranging from three to ten years.
Costs are amortized over the vesting period and aggregated $5,408,000 in
1999, $5,859,000 in 1998, and $3,641,000 in 1997.
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15. Commitments and Contingencies
The Company's headquarters, sales offices, and certain office and
communication equipment are leased under noncancelable operating leases,
which expire at various times through 2008. Future minimum annual rentals
payable are as follows:
================================
(In thousands of dollars)
--------------------------------
2000 $ 7,582
2001 6,885
2002 6,695
2003 5,922
2004 4,677
Thereafter 10,910
--------------------------------
Total $42,671
================================
Annual rental expense including utilities for the years ended December 31,
1999, 1998 and 1997, approximated $6,573,000, $6,366,000 and $6,247,000,
respectively.
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.
The Company is contingently liable under bank stand-by letter of credit
agreements, executed in connection with security clearing activities,
totaling $3,200,000 at December 31, 1999. The Company also has guaranteed
a note payable for $590,000 which is collateralized by assets where the fair
value approximates $700,000.
NOTE 16. Proprietary Accounts of Introducing Brokers
The Securities and Exchange Commission issued a "No Action" letter dated
November 3, 1998 with respect to the net capital treatment of assets in
proprietary accounts of introducing brokers. In accordance with this letter,
the Company has agreed to compute a reserve requirement for the proprietary
accounts of introducing brokers as of December 31, 1999. As ofDecember 31,
1999, the Company had no deposit requirement.
NOTE 17. Net Capital Requirements
The Corporation is subject to the SEC's Uniform Net Capital Rule (Rule
15c3-1), which requires the maintenance of 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
equal to 2 percent of aggregate debit balances arising from customer
transactions, as defined. At December 31, 1999, the Corporation had net
capital of $23,242,000 which equaled 8.4% of aggregate debit balances and
$17,705,000 in excess of required minimum net capital.
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 18. Financial Instruments with Off-Balance-Sheet Risk
In the normal course of business, the Company's customer and correspondent
clearing activities involve the execution, settlement, and financing of
various customer securities transactions. These activities may expose the
Company to off-balance-sheet risk in the event the customer or other broker
is unable to fulfill its contracted obligations, and the Company has to
purchase or sell the financial instrument underlying the contract at a
loss.
The Company's customer securities activities are transacted on either a
cash or margin basis. In margin transactions, the Company extends credit
to its customers, subject to various regulatory and internal margin
requirements, collateralized by cash and securities in the customer's
accounts. In connection with these activities, the Company executes and
clears customer transactions involving the sale of securities not yet
purchased, substantially all of which are transacted on a margin basis
subject to individual exchange regulations. Such transactions may expose the
Company to significant off-balance-sheet risk in the event margin
requirements are not sufficient to fully cover losses that customers may
incur. In the event the customer fails to satisfy its obligations, the
Company may be required to purchase or sell financial instruments at
prevailing market prices to fulfill the customer's obligations. The Company
seeks to control the risks associated with its customer activities by
requiring customers to maintain margin collateral in compliance with various
regulatory and internal guidelines. The Company monitors required margin
levels daily and, pursuant to such guidelines, requires the customer to
deposit additional collateral or to reduce positions, when necessary.
The Company's customer financing and securities settlement activities
require the Company to pledge customer securities as collateral in support
of various secured financing sources such as bank loans and securities
loaned. In the event the counterparty is unable to meet its contractual
obligation to return customer securities pledged as collateral, the Company
may be exposed to the risk of acquiring the securities at prevailing market
prices in order to satisfy its customer obligations. The Company controls
this risk by monitoring the market value of securities pledged on a daily
basis and by requiring adjustments of collateral levels in the event of
excess market exposure. In addition, the Company establishes credit limits
for such activities and monitors compliance on a daily basis.
In addition, the Company has sold securities that it does not currently
own and is obligated to purchase such securities at a future date. The
Company has recorded these obligations in the financial statements at the
December 31, 1999 market values of the related securities and will incur a
loss if the market value of the securities increases subsequent to December
31, 1999.
The Company acts as a manager and co-manager in underwriting security
transactions. In this capacity, there is risk if the potential customer
does not fulfill the obligation to purchase the securities. This risk is
mitigated by the fact that the Company deals primarily with institutional
investors. In most cases, no one institutional customer subscribes to the
majority of the securities being sold, thereby spreading the risk for this
type of loss among many established customers. The Company also maintains
credit limits for these activities and monitors compliance with applicable
limits and industry regulations on a daily basis.
NOTE 19. Concentrations of 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.
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 reduces its exposure to
changes in securities valuation with the use of municipal bond index futures
contracts. (See Note 21.)
NOTE 20. Fair Value of Financial Instruments
The financial instruments of the Company are reported on the statement of
financial condition at market or fair value or at carrying amounts that
approximate fair value, due to the short-term nature of the financial
instruments, with the exception of its investment in MTI (Note 6) and its
subordinated debt. The fair value of subordinated debt at December 31, 1999,
approximates its carrying value based on current rates available.
NOTE 21. 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
securities positions in the Company's inventory. Gains and losses on these
financial instruments are included as revenues from principal transactions.
Trading profits and losses relating to these financial instruments were as
follows:
============================================================================
(In thousands of dollars) Year Ended Year Ended Year Ended
Dec. 31, 1999 Dec. 31, 1998 Dec. 31,1997
- ----------------------------------------------------------------------------
Trading profits state
and municipal bonds $(1,110) $ 4,730 $ 6,840
Index futures hedging 655 (2,172) (2,061)
- ----------------------------------------------------------------------------
Net revenues $ (455) $ 2,558 $ 4,779
============================================================================
As of December 31, 1999, the contractual or notional amounts related to
these financial instruments were as follows:
============================================================================
(In thousands of dollars) Average Notional or Year End Notional or
Contract Market Value Contract Market Value
- -----------------------------------------------------------------------------
Index futures contracts ($6,974) ($6,165)
- -----------------------------------------------------------------------------
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of December 31, 1998, the contractual or notional amounts related to
these financial instruments were as follows:
=============================================================================
(In thousands of dollars) Average Notional or Year End Notional or
Contract Market Value Contract Market Value
- -----------------------------------------------------------------------------
Index futures contracts ($18,253) ($8,347)
- -----------------------------------------------------------------------------
As of December 31, 1997, the contractual or notional amounts related to
these financial instruments were as follows:
=============================================================================
(In thousands of dollars) Average Notional or Year End Notional or
Contract Market Value Contract Market Value
- -----------------------------------------------------------------------------
Index futures contracts ($12,401) ($14,994)
- -----------------------------------------------------------------------------
The contractual or notional amounts related to 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 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.
NOTE 22. Segment Analysis
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 is effective for
fiscal years beginning after December 15, 1997. SFAS 131 establishes
standards for reporting financial and descriptive information about an
enterprise's operating segments in its annual financial statements and
selected segment information in interim financial reports.
The Company's reportable operating segments are: Private Client Group,
Institutional Sales and Trading ("Institutional"), Other, and Investments.
The Private Client Group provides securities brokerage services to individual
investors. Revenues are generated through customer purchases and sales of
equity securities, taxable and non-taxable fixed income securities, along
with mutual funds and various other investment products and services. The
Institutional segment generates revenues from securities transactions
(equities and fixed-income securities) with major institutions along with
investment banking activities, which includes the managing, co-managing and
participating in tax-exempt and corporate securities underwritings (excluding
sales credits relating to such underwritings which are included in the
Private Client Group). This segment also includes trading activity in which
the Company buys and maintains inventories of fixed-income products and
equity securities (as a "market maker") for sale to other dealers and to
customers. The Other segment revenues are derived from a variety of sources
which include net interest revenues relating to securities lending
transactions and revenues from correspondent services.
The Company's Investments segment includes revenue relating to the Company's
investment in Mechanical Technology Incorporated (MTI) which is recorded
under the equity method (see Note 6 - "Investments").
Pre-tax net (loss)income relating to MTI was ($3,629,000), ($1,488,000) and
$1,168,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
The financial policies of the Company's segments are the same as those
described in the "Summary of Significant Accounting Policies." 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
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
shown as such. The Company evaluates the performance of its segments and
allocates resources to them based upon operating margins. Included in the
Other segment are operations, administrative functions and other support
costs. 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.
Information concerning operations in these segments is as follows:
- -------------------------------------------------------------------------
For years ended December 31, December 31, December 31,
(in thousands of dollars) 1999 1998 1997
==========================================================================
Revenues (excluding interest):
Private Client Group $ 95,377 $ 88,070 $ 79,875
Institutional 92,914 83,830 61,487
Other 4,234 4,066 4,080
Investments (5,378) 1,903 2,056
- --------------------------------------------------------------------------
Total $ 187,147 $ 177,869 $ 147,498
==========================================================================
Net Interest Income:
Private Client Group $ 3,869 $ 3,288 $ 1,228
Institutional (724) (1,286) (886)
Other 6,475 6,749 6,517
- --------------------------------------------------------------------------
Total $ 9,620 $ 8,751 $ 6,859
==========================================================================
Net Revenues:
Private Client Group $ 99,246 $ 91,358 $ 81,103
Institutional 92,190 82,544 60,601
Other 10,709 10,815 10,597
Investments (5,378) 1,903 2,056
- --------------------------------------------------------------------------
Total $ 196,767 $ 186,620 $ 154,357
==========================================================================
Pre-Tax Income:
Private Client Group $ 20,339 $ 13,700 $ 16,766
Institutional 2,793 3,105 2,871
Other (16,981) (11,576) (18,791)
Investments (5,378) 1,903 2,056
- --------------------------------------------------------------------------
Total $ 773 $ 7,132 $ 2,902
==========================================================================
NOTE 23. 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.
FIRST ALBANY COMPANIES INC.
SUPPLEMENTARY DATA
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
(In thousands of dollars, except per share data)
Quarters Ended
-------------------------------------------------------------------------
1999 - Calendar Year Mar. 31 June 30 Sep. 30 Dec. 31
-------------------------------------------------------------------------
Total revenues $ 55,058 $ 61,340 $ 60,888 $ 71,412
Interest expense (9,335) (12,339) (14,750) (15,507)
-------------------------------------------------------------------------
Net revenues 45,723 49,001 46,138 55,905
Total expenses
(excluding interest) (47,048) (47,643) (46,727) (54,576)
-------------------------------------------------------------------------
Income before income taxes (1,325) 1,358 (589) 1,329
Income tax expense 528 (541) 159 (506)
-------------------------------------------------------------------------
Net income $ (797) $ 817 $ (430) $ 823
=========================================================================
Net income per common
and common equivalent share:
Basic $ (0.11) $ 0.11 $ (0.06) $ 0.11
Dilutive $ (0.11) $ 0.10 $ (0.06) $ 0.10
Quarters Ended
-------------------------------------------------------------------------
1998 - Calendar Year Mar. 27 June 26 Sep. 25 Dec. 31
-------------------------------------------------------------------------
Total revenues $ 57,098 $ 55,457 $ 55,892 $ 58,119
Interest expense (9,105) (9,871) (10,126) (10,844)
-------------------------------------------------------------------------
Net revenues 47,993 45,586 45,766 47,275
Total expenses
(excluding interest) (45,727) (43,698) (43,807) (46,256)
-------------------------------------------------------------------------
Income before income taxes 2,266 1,888 1,959 1,019
Income tax expense (859) (801) (811) (323)
-------------------------------------------------------------------------
Net income $ 1,407 $ 1,087 $ 1,148 $ 696
=========================================================================
Net income per common
and common equivalent share:
Basic $ 0.20 $ 0.15 $ 0.16 $ 0.10
Dilutive $ 0.18 $ 0.13 $ 0.15 $ 0.09
All per share figures have been restated for common stock dividends paid.
The sum of the quarter earnings per share amount does not always equal the
full fiscal year's amount due to the effect of averaging the number of shares
of common stock and common stock equivalents throughout the year.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------ ----------------------------------------------------------------
Financial Disclosure.
- ---------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
- ------- ---------------------------------------------------
Except as set forth below, the information required by this item will be
contained under the caption "Election of Directors" in the Company's
definitive proxy statement for the Annual Meeting of Stockholders to be held
on or about May 23, 2000. Such information is incorporated herein by reference.
Item 11. Executive Compensation.
- ------- -----------------------
The information required by this item will be contained under the caption
"Compensation of Executive Officers" in the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on or about May
23, 2000. Such information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------- ---------------------------------------------------------------
The information required by this item will be contained under the caption
"Stock Ownership of Principal Owners and Management" in the Company's
definitive proxy statement for the Annual Meeting of Stockholders to be held
on or about May 23, 2000. Such information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
- ------- -----------------------------------------------
The information required by this item will be contained under the caption
"Certain Relationships and Related Transactions" in the Company's definitive
proxy statement for the Annual Meeting of Stockholders to be held on or about
May 23, 2000. Such information is incorporated herein by reference.
Part IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
- ------- ---------------------------------------------------------------
(a)(1) The following financial statements are included in Part II, Item 8:
Report of Independent Accountants
Financial Statements:
Consolidated Statements of Income For the Years
Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Financial Condition
as of December 31, 1999 and 1998
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(a)(2) The following financial statement schedule for the periods 1999, 1998
and 1997 are submitted herewith:
Schedule II-Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or
the required information is shown in the financial statements or notes thereto.
(a)(3) Exhibits included herein:
Exhibit
Number Description
- ------- ------------
3.1 Certificate of Incorporation of First Albany Companies Inc. (filed as
Exhibit No. 3.1 to Registration Statement No. 33-1353).
3.1a Amendment to Certificate of Incorporation of First Albany Companies
Inc. (as filed as Exhibit No. (3) (i) to Form 10-Q for the quarter ended
June 26, 1998).
3.2 By laws of First Albany Companies Inc. (filed as Exhibit No. 3.2 to
Registration Statement No. 33-1353).
3.2a By laws of First Albany Companies Inc., as amended (as filed as Exhibit
No. 3.2a to Form 10-Kfor the fiscal year ended September 24, 1993).
3.2b By laws of First Albany Companies Inc., as amended (as filed as Exhibit
No. 3.2b to Form 10-K for the calendar year ended December 31, 1996).
3.2c By laws of First Albany Companies Inc., as amended (as filed as Exhibit
No. 3.2c to Form 10-K for the calendar year ended December 31, 1997).
3.2d By laws of First Albany Companies Inc., as amended (as filed as Exhibit
(3) (ii) to Form 10-Q for the quarter ended June 26, 1998).
4. Specimen Certificate of Common Stock, par value $.01 per share (filed
as Exhibit No. 4 to Registration Statement No. 33-1353).
10.6 Deferred Profit Sharing Plan of First Albany Corporation effective
October 1, 1982, as amended by shareholder vote dated January 19, 1987
(filed as Exhibit 10.6 to Form 10-K for the fiscal year ended September
30, 1986).
10.7 Incentive Stock Option Plan of First Albany Corporation effective
October 1, 1982, as amended by shareholder vote, dated January 19, 1987
(filed as Exhibit 10.7 to Form 10-K for the fiscal year ended September
30, 1987.
10.10 First Albany Companies Inc. Stock Bonus Plan effective July 8, 1987
(filed as Registration Statement No. 33-15220(Form B) dated July 8,
1987).
10.10a First Albany Companies Inc. Stock Bonus Plan, as amended, effective
June 25, 1990(filed as Registration Statement No. 33-35166(Form S-8)
dated June 25, 1990).
10.10b First Albany Companies Inc. Stock Bonus Plan, as amended, effective
February 4, 1994(filed as Registration Statement 33-52153(Form S-8)
dated February 4, 1994).
10.10c First Albany Companies Inc. Stock Bonus Plan, as amended, effective
June 2, 1995(filed as Registration Statement 33-59855(Form S-8) dated
June 2, 1995).
10.10d First Albany Companies Inc. Stock Bonus Plan, as amended, effective
June 2, 1995(filed as Registration Statement 333-18645(Form S-8) dated
December 23, 1996).
10.10e First Albany Companies Inc. Stock Bonus Plan, as amended, effective
April 5, 1999 (filed as Registration Statement 333-75705) dated April
5, 1999.
(a)(3) Exhibits included herein: (continued)
Exhibit
Number Description
- ------- -----------
10.12 First Albany Companies Inc. 1989 Stock Incentive Plan effective
February 27, 1989, as approved by shareholder vote dated February 27,
1989 (filed as Exhibit 10.12 to Form 10-K for the fiscal year ended
September 30, 1989).
10.12a First Albany Companies Inc. Stock Incenctive Plan, as amended effective
May 20, 1999 (filed as Registration Statement 333-78877 dated May 20,
1999).
10.15 Lease dated June 12, 1992, between First Albany Companies Inc. and
Olympia and York Limited Partnership for office space at 53 State Street,
Boston, Massachusetts(filed as Exhibit 10.15 to Form 10-K for the fiscal
year ended September 25, 1992).
10.15a Amendments to lease between First Albany Companies Inc. and WFP 53
State Street Co. Limited Partnership (f/k/a Olympia and York L.P.) for
office space at 53 State Street, Boston, Massachusetts (filed as exhibit
10.15a to Form 10Q for quarter ended June 30, 1999).
10.16 The First Albany Companies Inc. Restricted Stock Plan as adopted by
the Company on April 27, 1992(filed as Exhibit 10.16 to Form 10-K for the
fiscal year ended September 25, 1992).
10.18 Sublease dated October 13, 1995, between First Albany Companies Inc.
and KeyCorp for office facilities at 30 South Pearl Street, Albany,
New York. (Filed as Exhibit 10.18 to Form 10K for fiscal year ended
September 29, 1995).
10.19 Term Loan Agreement dated March 29, 1996, between First Albany
Companies Inc. and OnBank Trust & Co. (Filed as Exhibit 10.19 to Form
10K for calendar year ended December 31,1996).
10.20 Subordinated Loan Agreement dated September 16, 1996, between First
Albany Companies Inc. and Sharon M. Duker. (Filed as Exhibit 10.20 to
Form 10K for calendar year ended December 31, 1996).
10.20a Subordinated Loan Agreement between First Albany Companies Inc. and
Sharon M. Duker as amended effective December 23, 1997 (filed as
Exhibit 10.20a to Form 10-K for calendar year ended December 31, 1997).
10.21 Master Equipment Lease Agreement dated September 25, 1996, between
First Albany Companies Inc. and KeyCorp Leasing Ltd. (Filed as Exhibit
10.21 to Form 10K for calendar year ended December 31, 1996).
10.22 Lease dated March 21, 1996, between First Albany Companies Inc. and
Mid-City Associates for office space at One Penn Plaza, New York, New
York. (Filed as Exhibit 10.22 to Form 10K for calendar year ended
December 31, 1996).
10.22a Amendment to Lease dated December 1, 1999 between First Albany
Companies Inc. and One Penn Plaza, LLC (formerly owned by Mid-City
Associates) for office space at One Penn Plaza, New York, New York.
10.23 Subordinated Loan Agreement dated December 23, 1997 between First
Albany Companies Inc. and Sharon M. Duker (filed as Exhibit 10.23 to
Form 10K for calendar year ended December 31, 1997).
10.24 First Albany Companies Inc. Executive Officers Deferred Compensation
Plan and First Albany Companies Inc. Investment Executive Deferred
Compensation Plan effective January 7, 1998 (filed as Registration
Statement No. 333-43825 (Form S-8) dated January 7, 1998).
10.25 First Albany Companies Inc. 1999 Long-Term Incentive Plan, effective
March 26, 1999 (filed as Appendix A to Proxy Statement on Schedule 14A
dated May 20, 1999).
11 Computation of per share earnings.
21 List of Subsidiaries of First Albany Companies Inc.
(a)(3) Exhibits included herein: (continued)
Exhibit
Number Description
- ------ -----------
23 Consent of PricewaterhouseCoopers L.L.P.
27 Financial Data Schedule BD
(b) Reports on Form 8-K: No reports on Form 8-K have been filed by
the Registrant during the last quarter of the period covered by
this report.
(c) Exhibits: The exhibits to this report are listed in section
(a)(3) of Item 14 above.
(d) Financial Statement Schedules: The financial statement schedule
filed with this report is listed in section (a)(2) of Item 14
above.
(d) Separate Financial Statements of Fifty Percent or Less Owned Persons.
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
Item 8
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants. . . . . . . . . . . F-2
Consolidated Financial Statements:
Balance Sheets as of September 30, 1999 and 1998 . . . . . F-3 & F-4
Statements of Operations for the Years Ended
September 30, 1999, 1998 and 1997 . . . . . . . . . . F-5
Statements of Shareholders' Equity for the Years Ended
September 30, 1999, 1998 and 1997 . . . . . . . . . . F-6
Statements of Cash Flows for the Years Ended
September 30, 1999, 1998 and 1997 . . . . . . . . . . F-7 - F-8
Notes to Consolidated Financial Statements . . . . . . . F-9 - F-35
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Separate financial statements of the registrant alone are omitted because
the registrant is primarily an operating company and all subsidiaries
included in the consolidated financial statements being filed, in the
aggregate, do not have minority equity interest and/or indebtedness to
any person other than the registrant or its consolidated subsidiaries in
amounts which together exceed 5% of the total assets as shown by the most
recent year-end consolidated balance sheet.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Mechanical Technology Incorporated
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and retained earnings and
of cash flows present fairly, in all material respects, the financial
position of Mechanical Technology Incorporated and Subsidiaries at September
30, 1999 and 1998, and the results of their operations and their cash flows
for each of the three years in the period ended September 30, 1999, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/PricewaterhouseCoopers L.L.P.
Albany, New York
November 12, 1999
F-2
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1999 and 1998
(Dollars in thousands)
1999 1998
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,870 $ 5,567
Investments in marketable securities 7,876 -
Accounts receivable, less allowance of
$113 (1999) and $99 (1998) 3,852 4,959
Other receivables - related parties 105 87
Inventories 3,752 3,748
Taxes receivable 10 8
Note receivable - current 329 327
Prepaid expenses and other current assets 265 472
Net assets of a discontinued operation - 8
______ ______
Total Current Assets 22,059 15,176
Property, Plant and Equipment, net 827 4,467
Note receivable - noncurrent 184 264
Investment in Plug Power 8,710 1,221
_______ ________
Total Assets $ 31,780 $ 21,128
======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
September 30, 1999 and 1998
(Dollars in thousands)
1999 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Income taxes payable $ - $ 5
Accounts payable 614 2,064
Accrued liabilities 2,243 3,328
Contribution payable-Plug Power - 4,000
Net liabilities of discontinued operations 540 -
_______ _______
Total Current Liabilities 3,397 9,397
LONG-TERM LIABILITIES
Deferred income taxes and other credits 597 607
_______ _______
Total Liabilities $ 3,994 $ 10,004
_______ _______
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share,
authorized 15,000,000; issued
11,649,959 (1999) and 10,773,968(1998) 11,649 10,775
Paid-in capital 42,755 16,274
Deficit (26,573) (15,885)
_______ _______
27,831 11,164
Accumulated Other Comprehensive Loss:
Unrealized loss on available for sale
securities, net (5) -
Foreign currency translation adjustment (11) (11)
_______ _______
Accumulated Other Comprehensive Loss (16) (11)
Common stock in treasury, at cost,
6,750 shares (1999) and
4,500 shares (1998) (29) (29)
_______ _______
Total Shareholders' Equity 27,786 11,124
Total Liabilities and Shareholder's Equity $ 31,780 $ 21,128
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 1999, 1998 and 1997
(Dollars in thousands, except per share)
Restated
1999 1998 1997
Net sales $ 12,885 $ 21,028 $ 24,102
Cost of sales 8,239 12,386 14,474
_______ _______ _______
Gross profit 4,646 8,642 9,628
Selling, general and administrative
expenses 4,949 5,812 7,015
Product development and research costs 1,105 831 1,020
_______ _______ _______
Operating (loss) income (1,408) 1,999 1,593
Interest expense (106) (102) (323)
Gain on sale of division/subsidiary - - 2,012
Equity in losses of Plug Power (9,363) (3,806) (330)
Other income(expense), net 185 (97) (251)
_______ _______ _______
(Loss)income from continuing operations
before extraordinary item and income
taxes (10,692) (2,006) 2,701
Income tax expense 37 25 143
_______ _______ _______
(Loss)income from continuing operations
before extraordinary item (10,729) (2,031) 2,558
Extraordinary item- gain on extinguishment
of debt, net of taxes ($106) - - 2,507
_______ _______ _______
(Loss)income from continuing operations (10,729) (2,031) 5,065
Income(loss)from discontinued operations 41 (2,285) (545)
_______ _______ _______
Net(loss)income $(10,688) $ (4,316) $ 4,520
======= ======= =======
Earnings (loss) per share (Basic and Diluted):
(Loss)income before extraordinary item $ (.94) $ (.21) $ .28
Extraordinary item - - .27
(Loss)from discontinued operations - (.24) (.06)
_______ _______ _______
Net(loss)income $ (.94) $ (.45) $ .49
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended September 30, 1999, 1998 and 1997
(Dollars in thousands)
Restated
1999 1998 1997
COMMON STOCK
Balance, October 1
(1997 balance as previously reported) $ 10,775 $ 8,864 $ 4,902
Three-for-two common stock split effected
in the form of a 50% stock dividend
effective April 30, 1999 - - 2,451
Issuance of shares - options 56 117 -
Issuance of shares 818 1,794 1,511
_______ _______ _______
Balance, September 30 $ 11,649 $ 10,775 $ 8,864
======= ======= =======
PAID-IN-CAPITAL
Balance, October 1
(1997 balance as previously reported) $ 16,274 $ 10,968 $ 13,423
Three-for-two common stock split effected
in the form of a 50% stock dividend
effective April 30, 1999 - - (2,451)
Issuance of shares - options 168 108 -
Issuance of shares 11,826 5,198 (4)
Plug Power investment 14,487 - -
_______ _______ _______
Balance, September 30 $ 42,755 $ 16,274 $ 10,968
======= ======= =======
DEFICIT
Balance, October 1 $(15,885) $(11,569) $(16,089)
Net(loss)income (10,688) (4,316) 4,520
_______ _______ _______
Balance, September 30 $(26,573) $(15,885) $(11,569)
======= ======= =======
UNREALIZED LOSS ON AVAILABLE FOR SALE
SECURITIES, NET
Balance, October 1 $ - $ - $ -
Unrealized loss on available for
for sale securities, net (5) - -
_______ _______ _______
Balance, September 30 $ (5) $ - $ -
======= ======= =======
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance, October 1 $ (11) $ (19) $ (19)
Adjustments - 8 -
_______ _______ _______
Balance, September 30 $ (11) $ (11) $ (19)
======= ======= =======
TREASURY STOCK
Balance, October 1 $ (29) $ (29) $ (29)
Restricted stock grants - - -
_______ _______ _______
Balance, September 30 $ (29) $ (29) $ (29)
======= ======= =======
RESTRICTED STOCK GRANTS
Balance, October 1 $ - $ (2) $ (24)
Grants issued/vested, net - 2 22
_______ _______ _______
Balance, September 30 $ - $ - $ (2)
======= ======= =======
SHAREHOLDERS' EQUITY
September 30 $ 27,786 $ 11,124 $ 8,213
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended September 30, 1999, 1998 and 1997
(Dollars in thousands)
Restated
1999 1998 1997
OPERATING ACTIVITIES
(Loss)income from continuing operations $ (10,729) $(2,031) $ 5,065
Adjustments to reconcile net (loss) income to net cash
provided (used) by continuing operations:
Depreciation and amortization 581 323 243
Gain on extinguishment of debt, net of taxes - - (2,507)
Gain on sale of subsidiaries - - (2,012)
Unrealized loss on marketable securities (5) - -
Equity in losses of Plug Power 9,363 3,806 330
Accounts receivable reserve 14 5 21
Loss on sale of fixed assets 28 9 -
Deferred income taxes and other credits (10) 13 (170)
Other - - 31
Stock option compensation 55 - -
Changes in operating assets and liabilities net
of effects from discontinued operations:
Accounts receivable 1,093 (1,069) (44)
Accounts receivable - related parties (18) - -
Inventories (4) (362) 228
Prepaid expenses and other current assets (174) (346) (18)
Accounts payable (1,450) 788 (87)
Income taxes (7) (76) (49)
Accrued liabilities (1,085) (519) 58
________ _______ _______
Net cash (used) provided by continuing operations (2,348) 541 1,089
________ _______ _______
Discontinued Operations:
Income/(loss)from discontinued operations 41 (2,285) (574)
Adjustments to reconcile income to net cash
provided (used) by discontinued operations:
Changes in net assets/liabilities
of discontinued operations 548 3,178 31
Net assets transferred from discontinued operations - (878) -
________ _______ _______
Net cash provided (used) by discontinued operations 589 15 (543)
________ _______ _______
Net cash (used) provided by operations (1,759) 556 546
________ _______ _______
INVESTING ACTIVITIES
Purchases of property, plant & equipment (2,738) (3,166) (377)
Investment in marketable securities (7,876) - -
Proceeds from sale of subsidiaries - - 2,600
Principal payments from note receivable 78 59 -
Investment in Plug Power (6,000) - -
Note receivable Plug Power - (500) -
________ _______ _______
Net cash (used)provided by investing activities (16,536) (3,607) 2,223
________ _______ _______
FINANCING ACTIVITIES
Borrowings under IDA financing, less restricted
cash 5,858 - -
Proceeds from options exercised 153 225 -
Proceeds from rights offering 12,820 7,178 -
Costs of rights offering (158) (186) -
Debt issue costs (75) (28) -
Net (payments) under line-of-credit and note
agreement - - (100)
Principal payments on long-term debt - - (1,310)
________ _______ _______
Net cash provided(used)by financing activities 18,598 7,189 (1,410)
________ _______ _______
Effect of exchange rate changes on cash flows - 8 -
Increase in cash and cash equivalents 303 4,146 1,359
Cash and cash equivalents - beginning of year 5,567 1,421 62
________ _______ _______
Cash and cash equivalents - end of year $ 5,870 $ 5,567 $ 1,421
======== ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For The Years Ended September 30, 1999, 1998 and 1997
(Dollars in thousands)
Restated
1999 1998 1997
Supplemental Disclosures
NONCASH INVESTING ACTIVITIES
Contribution of net assets to Plug Power:
Accounts receivable $ - $ 500 $ -
Note receivable - 500 -
Inventories - - 1
Property, plant and equipment, net - - 452
Accounts payable - - (46)
Accrued liabilities - - (50)
Contribution payable - Plug Power - 4,000 -
______ ______ ________
$ - $ 5,000 $ 357
______ ______ ________
Proceeds from sale of subsidiary
Notes receivable $ - $ - $ 650
______ ______ ________
Net noncash provided by investing activities $ - $ 5,000 $ 1,007
______ ______ ________
NONCASH FINANCING ACTIVITIES
Conversion of Note Payable to Common Stock:
Note Payable extinguishment $ - $ - $(3,000)
Common stock issued - - 1,500
Accrued interest - Note Payable - - (1,213)
Additional paid-in capital - Other Investors 14,487 - -
Campus contribution to Plug Power:
Debt (6,000) - -
Fixed assets 5,861 - -
Prepaid expenses 364 - -
Restricted cash 142 - -
______ ______ ________
Net noncash provided (used) by
financing activities $14,854 $ - $(2,713)
______ ______ ________
Net noncash provided (used) by
investing and financing activities $14,854 $ 5,000 $(1,706)
====== ====== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and accounts
have been eliminated. The Company has a 40.65% interest in Plug Power,
L.L.C. ("Plug Power"). The consolidated financial statements include the
Company's investments in Plug Power (including obligations to invest), plus
its share of losses. The investment is included in the financial line
"Investment in Plug Power".
Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Financial Instruments
The fair value of the Company's financial instruments including cash and cash
equivalents, investments, line-of-credit, note payable and long-term debt,
approximates carrying value. Fair values were estimated based on quoted
market prices, where available, or on current rates offered to the Company
for debt with similar terms and maturities.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property, Plant, and Equipment
Property, plant and equipment are stated at cost and depreciated using
primarily the straight-line method over their estimated useful lives:
Buildings and improvements 20 to 40 years
Leasehold improvements 10 years
Machinery and equipment 2 to 10 years
Office furniture and fixtures 3 to 10 years
Significant additions or improvements extending assets' useful lives are
capitalized; normal maintenance and repair costs are expensed as incurred.
The costs of fully depreciated assets remaining in use are included in the
respective asset and accumulated depreciation accounts.
F-9
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Accounting Policies (continued)
When items are sold or retired, related gains or losses are included in net
income.
Income Taxes
The Company accounts for taxes in accordance with Financial Accounting
Standard No. 109, "Accounting for Income Taxes," which requires the use of
the asset and liability method of accounting for 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 financial statement
and tax bases of existing assets and liabilities. Under FAS No. 109, 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 provision for
taxes is reduced by investment and other tax credits in the years such credits
become available.
Revenue Recognition
Sales of products are recognized when products are shipped to customers.
Sales of products under long-term contracts are recognized under the
percentage-of-completion method. Percentage-of-completion is based on the
ratio of incurred costs to current estimated total costs at completion.
Total contract losses are charged to operations during the period such losses
are estimable.
Foreign Currency Translation
Assets and liabilities of the foreign subsidiary are translated at year-end
rates of exchange, and revenues and expenses are translated at the average
rates of exchange for the year. Gains or losses resulting from the
translation of the foreign subsidiary's balance sheet are accumulated in a
separate component of shareholders' equity.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid short-term
investments with maturities of less than three months.
Investments in Marketable Securities
Management determines the appropriate classification of its investments in
marketable securities at the time of purchase and reevaluates such
determinations at each balance sheet date. Marketable securities for which
the Company does not have the intent or ability to hold to maturity are
classified as available for sale along with any
F-10
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Accounting Policies (continued)
investments in mutual funds. Securities available for sale are carried
at fair value, with the unrealized gains and losses, net of income taxes,
reported as a separate component of Shareholders' Equity. The Company has
had no investments that qualify as trading or held to maturity.
The amortized cost of debt securities is adjusted for accretion of discounts
to maturity. Such accretion as well as interest are included in interest
income. Realized gains and losses are included in Other income (expense),
net in the Consolidated Statements of Operations. The cost of securities sold
is based on the specific identification method.
The Company's investments in marketable securities are diversified among high
- -credit quality securities in accordance with the Company's investment policy.
Earnings (Loss) Per Share
Effective October 1, 1997, the Company adopted Financial Accounting Standard
No. 128, "Earnings per Share." In accordance with this Standard, net income
(loss) per share is computed using the weighted average number of common
shares outstanding during each year. Diluted net income(loss) per share
includes the effects of all potentially dilutive securities. Earnings per
share amounts for all periods presented have been computed in accordance with
this Standard.
Advertising
The costs of advertising are expensed as incurred. Advertising expense was
approximately $102, $83 and $92 thousand in 1999, 1998, and 1997, respectively.
Asset Impairment
The Company adopted SFAS No. 121, "Accounting For The Impairment of Long-
Lived Assets and for Long-Lived Assets To Be Disposed Of." This statement
requires companies to record impairments to long-lived assets, certain
identifiable intangibles, and related goodwill when events or changing
circumstances indicate a probability that the carrying amount of an asset may
not be fully recovered. Impairment losses are recognized when expected
future cash flows are less than the asset's carrying value.
Reclassification and Restatement
Certain 1998 and 1997 amounts have been reclassified to conform to the 1999
presentation. The financial statements for 1997 have also been restated to
reflect the discontinuance of the Company's Technology Division (See Note 16).
F-11
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Investments in Marketable Securities
The following is a summary of the investments in marketable securities
classified as current assets:
(Dollars in thousands) 1999 1998
Available for sale securities:
Corporate debt securities
Fair Value $ 7,876 $ -
====== =====
Amortized Cost $ 7,881 $ -
====== =====
Unrealized Loss $ (5) $ -
====== =====
The difference between the amortized cost of available for sale securities
and their fair market value results in unrealized gains and losses, which are
recorded as a separate component of stockholders' equity. Gross realized
gains and losses on sales of available for sale securities were immaterial in
1999, 1998 and 1997.
The estimated fair value of available for sale securities by contractual
maturity is as follows:
(Dollars in thousands) 1999
Due in one year or less $ 4,916
Due after one year through three years -
Due after three years 2,960
______
$ 7,876
======
Expected maturities may differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations without
prepayment penalties.
(3) Inventories
Inventories consist of the following:
(Dollars in thousands) 1999 1998
Finished goods $ 73 $ 112
Work in process 916 791
Raw materials, components and
Assemblies 2,763 2,845
______ ______
$ 3,752 $ 3,748
====== ======
F-12
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) Property, Plant and Equipment
Property, plant and equipment consists of the following:
(Dollars in thousands) 1999 1998
Land and improvements $ - $ 125
Buildings and improvements 26 6,111
Leasehold improvements 470 517
Machinery and equipment 3,686 4,285
Office furniture and fixtures 621 866
_____ ______
4,803 11,904
Less accumulated depreciation 3,976 7,437
_____ ______
$ 827 $4,467
===== ======
At the beginning of 1998, assets with a net book value of $878 thousand
consisting primarily of land, building and management information systems
were transferred from discontinued operations to continuing operations.
Construction in progress, included in buildings and improvements, was
approximately $1,371 thousand in 1998.
At the end of 1999, the Company was committed to approximately $387 thousand
of future expenditures for new furniture, equipment and fixtures.
Depreciation expense was $489, $317 and $216 thousand for 1999, 1998 and
1997, respectively. Repairs and maintenance expense was $166, $177 and $175
thousand for 1999, 1998 and 1997, respectively.
Prior to the sale of all land and buildings to Plug Power in 1999, the cost
and accumulated depreciation of buildings and improvements leased to Plug
Power was:
(Dollars in thousands) 1998 1997
Cost $ 1,547 $ 21
Accumulated depreciation (660) (17)
______ _____
$ 887 $ 4
====== =====
F-13
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Notes Receivable
Notes receivable consists of the following:
(Dollars in thousands) 1999 1998
Notes receivable with an interest
rate of 10%, interest and principal
due September 30, 1998 (A) $ 250 $ 250
Notes receivable with an interest
rate 10%, due in monthly installments
through September 30, 2002 263 341
______ _____
513 591
Less: Current portion (329) (327)
______ _____
$ 184 $ 264
====== =====
(A) The principal amount of this note may be reduced in accordance with
the terms of the note in the event of a sale of the fixed assets. The
purchaser has requested that the principal amount of the note be reduced
to reflect the resale value of certain assets of L.A.B. The Company is
enforcing its rights with respect to the note and is currently litigating
for the collection of this note.
(6) Investment in Plug Power, L.L.C.
On June 27, 1997, the Company and Edison Development Corp. ("EDC"), a
subsidiary of DTE Energy Co. formed a joint venture, Plug Power, L.L.C.
("Plug Power"), to further develop the Company's Proton Exchange Membrane
("PEM") Fuel Cell technology. In exchange for its contribution of contracts
and intellectual property and certain other net assets that had comprised the
fuel cell research and development business activity of the Technology
segment (which assets had a net book value of $357 thousand), the Company
received a 50% interest in Plug Power. EDC made an initial cash contribution
of $4.75 million in exchange for the remaining 50% interest in Plug Power.
The Company's investment in Plug Power is included in the balance sheet
caption "Investment in Plug Power"; the assets contributed by the Company to
Plug Power in fiscal 1997 had previously been included in the assets of the
Company's Technology segment. See the supplemental disclosure regarding
Contribution of Net Assets to Plug Power in the Consolidated Statements of
Cash Flows for additional information regarding the assets contributed by the
Company to Plug Power. The Company recorded the carrying value of the net
assets contributed as its initial investment in Plug Power in recognition of
the nature of the venture's undertaking.
F-14
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Investment in Plug Power, L.L.C. (continued)
On April 15, 1998, EDC contributed $2.25 million in cash to Plug Power.
The Company contributed a below-market lease for office and manufacturing
facilities in Latham, New York valued at $2 million and purchased a one-
year option to match the remaining $250 thousand of EDC's contribution.
In May 1998, EDC contributed an additional $2 million to Plug Power and
the Company purchased another one-year option to match the contribution.
The Company paid approximately $191 thousand for the options, which were
scheduled to mature April 24, 1999 ($250 thousand) and June 15, 1999 ($2
million).
As of March 25, 1999, the Company and Plug Power exchanged the foregoing
options and certain "research credits" (described below) for 2.25 million
Plug Power membership interests. The Company earned the research credits by
assisting Plug Power in securing the award of certain government grants and
research contracts during the period June 1997 through April 1999.
In August, 1998, the Company committed to contribute an additional $5 million
dollars (in cash, accounts receivable and research credits) to Plug Power
between August 5, 1998 and March 31, 1999 and recorded a liability
representing this obligation. During the period from September 1998 to
February 1999, the Company fully funded this commitment by contributing $4
million cash and converting $.5 million of accounts receivable and $.5
million of notes receivable.
During April 1999, the Company and EDC amended and restated the Plug Power
Mandatory Capital Contribution Agreement. The agreement, which was effective
as of January 26, 1999, stated that, in the event Plug Power determined that
it required funds at any time through December 31, 2000, Plug Power had the
right to call upon the Company and EDC to each make capital contributions as
follows:
* The Company and EDC would each fund capital calls of up to $7.5
million in 1999 and $15 million in 2000 ("Capital Commitment").
* In exchange for such capital contributions to Plug Power, the
Company and EDC would receive class A membership interests
("Shares") from Plug Power at $7.50 per share.
* The Company and EDC would share the Capital Commitment equally.
* Plug Power's Board of Managers would determine when there is
need for such capital contributions.
* The Company and EDC would have sixty (60) days from the date of
such authorization to tender their payment to Plug Power.
The agreement was scheduled to terminate on December 31, 2000 or the
date of an initial public offering of shares by Plug Power at a per
F-15
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Investment in Plug Power, L.L.C. (continued)
share price of greater than $7.50 per share ("Termination Date").
In exchange for the Capital Commitment, Plug Power agreed to permit the
Company and EDC to make capital contributions to the extent of their
Capital Commitment on the Termination Date, whether or not such funds
have been called, in exchange for shares at the fixed price of $7.50 per
share.
In June 1999, the Company and Plug Power entered into an agreement for
the sale of the MTI campus and adjacent residence, including all land
and buildings, to Plug Power in exchange for 704,315 Class A membership
interests and the assumption of approximately $6 million in debt by Plug
Power. The sale of the MTI facility and the transfer of the $6 million
IDR bonds to Plug Power were effective as of July 1, 1999 with no gain
or loss recognized.
In August 1999, the Company committed to purchase 3 million shares of Plug
Power if the public offering price of Plug Power's stock was greater than
$7.50 per share. The Mandatory Capital Contribution Agreement between the
Company and Plug Power, dated as of January 26, 1999 was amended and restated
to reflect this commitment.
On September 30, 1999, the Company purchased 266,667 shares of Plug Power at
$7.50 per share. This purchase reduced the Company's commitment to purchase
Plug Power shares at the time of its public offering from 3,000,000 shares to
2,733,333 shares at a price of $7.50 per share.
The Company's total contributions to Plug Power (including contributions
of cash, assets, research credits, below market lease and real estate)
for the period commencing on June 27, 1997, and ending September 30,
1999 total $20.7 million.
During calendar 1999, Plug Power's equity increased approximately $50.628
million primarily due to investments by investors. Of this amount, $30.368
million was received in cash, $9.010 million in property and services and
$11.250 million represents membership interests issued in connection with the
formation of GE Fuel Cell Systems LLC. As a result, the Company recorded its
proportionate share of the increase in Plug Power's equity ($14.854 million)
as investment in Plug Power and additional paid-in capital.
The Company has recorded its proportionate share of Plug Power's losses
to the extent of its recorded investment in Plug Power. The carrying
value of the Company's investment is $8.71 million as of September 30,
1999 for a 40.65% interest in Plug Power.
F-16
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Investment in Plug Power, L.L.C. (continued)
The Company will recognize its proportionate shares of losses in the
future to the extent of its carrying value and additional future
investments.
On November 1, 1999, the Company purchased 2,733,333 shares of Plug
Power at $7.50 per share. This purchase completed the Company's
commitment to purchase Plug Power shares at the time of its public
offering. Plug Power's public offering was completed at $15 per share.
The Company's total contributions to Plug Power as of November 1, 1999
total $41.2 million. Immediately after the Plug Power IPO, the Company
owned 13,704,315 shares or 31.9% of Plug Power.
At September 30, 1999 and 1998, the difference between the carrying value
of the Company's investment in Plug Power and its interest in the
underlying equity consists of the following:
(Dollars in thousands) 1999 1998
Calculated ownership (40.65% in 1999 and
50% in 1998) $12,704 $ 2,431
Unrecognized negative goodwill (3,994) (2,085)
Value of below market lease contribution - (2,000)
Calculated 50% of equity value under option - (1,125)
Contribution liability - 4,000
______ ______
Carrying value of Investment in Plug Power $ 8,710 $ 1,221
====== ======
Summarized below is financial information for Plug Power. Plug Power's
fiscal year ends December 31.
9 Months
Ended Year Ended
Sept 30, Dec 31, Dec 31,
(Dollars in thousands) 1999 1998 1997
Current assets $12,024 $ 5,293 $3,917
Noncurrent assets 31,522 2,800 929
Current liabilities 6,291 2,601 1,250
Noncurrent liabilities 6,002 - -
Stockholders' equity 31,253 5,493 3,597
Gross revenue 6,702 6,541 1,194
Gross profit (3,148) (2,323) (33)
Net loss (24,867) (9,616) (5,903)
F-17
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Income Taxes
Deferred tax assets and liabilities are determined based on the temporary
differences between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates.
Income tax expense (benefit) for the years ended September 30, consists
of the following:
(Dollars in thousands) 1999 1998 1997
Continuing operations
Federal $ 1 $ 15 $ 62
State 36 10 81
Deferred - - -
_______ _______ _______
37 25 143
_______ _______ _______
Discontinued operations
Federal - - (17)
State - - (12)
Deferred - - -
_______ _______ _______
- - (29)
_______ _______ _______
Extraordinary Item
Federal - - 28
State - - 78
Deferred - - -
_______ _______ _______
- - 106
_______ _______ _______
$ 37 $ 25 $ 220
======= ======= =======
The significant components of deferred income tax expense (benefit) for
the years ended September 30, are as follows:
(Dollars in thousands) 1999 1998 1997
Continuing operations
Deferred tax (benefit) expense $ (1,833) $ (667) $ (356)
Net operating loss carryforward (3,259) 105 1,223
Valuation allowance 5,092 562 (867)
_______ ________ _______
- - -
_______ ________ _______
Discontinued operations
Deferred tax expense(benefit) 114 (508) 60
Net operating loss carryforward (97) (265) (251)
Valuation allowance (17) 773 191
_______ ________ _______
- - -
_______ ________ _______
$ - $ - $ -
======= ======== =======
F-18
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Income Taxes (continued)
1999 1998 1997
Extraordinary item
Deferred tax (benefit) expense - - (28)
Net operating loss carryforward - - 862
Valuation allowance - - (834)
_______ _______ _______
- - -
_______ _______ _______
$ - $ - $ -
======= ======= =======
The Company's effective income tax rate from continuing operations
differed from the Federal statutory rate as follows:
1999 1998 1997
Federal statutory tax rate (34%) (34%) 34%
State taxes, net of
federal tax effect - - 2%
Change in valuation allowances 34% 28% (32%)
Alternative minimum tax - - 2%
Other, net - 7% (1%)
_______ _______ _______
-% 1% 5%
======= ======= =======
The deferred tax assets and liabilities as of September 30, consist of
the following tax effects relating to temporary differences and
carryforwards:
(Dollars in thousands)
1999 1998
Current deferred tax assets:
Loss provisions for discontinued
operations $ 300 $ 337
Bad debt reserve 112 96
Inventory valuation 173 161
Inventory capitalization 39 20
Vacation pay 63 66
Warranty and other sale obligations 86 25
Other reserves and accruals 116 151
_______ _______
889 856
Valuation allowance (889) (856)
_______ _______
Net current deferred tax assets $ - $ -
======= =======
F-19
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) Income Taxes (continued)
1999 1998
Noncurrent deferred tax assets (liabilities):
Net operating loss $ 5,687 $ 1,951
Property, plant and equipment 122 (9)
Investment in Plug Power (3,322) 954
Other 224 187
Alternative minimum tax credit 150 150
_______ _______
2,861 3,233
Valuation allowance (2,861) (3,233)
Other credits (597) (607)
_______ _______
Noncurrent net deferred tax
liabilities and other credits $ (597) $ (607)
======= =======
The valuation allowance at year ended September 30, 1999 is $3.750 million
and at September 30, 1998 was $4.089 million. During the year ended September
30, 1999, the valuation allowance decreased by $339 thousand.
At September 30, 1999, the Company has unused Federal net operating loss
carryforwards of approximately $14.219 million. The Federal net operating
loss carryforwards if unused will begin to expire during the year ended
September 30, 2009. The use of $5.339 million of these carryforwards is
limited on an annual basis, pursuant to the Internal Revenue Code, due to
certain changes in ownership and equity transactions. For the year ended
September 30, 1999, the Company has available alternative minimum tax
credit carryforward of approximately $150 thousand.
The Company made cash payments, net of refunds, for income taxes of $15, $42
and $361 thousand for 1999, 1998 and 1997, respectively.
(8) Accrued Liabilities
Accrued liabilities consist of the following:
(Dollars in thousands) 1999 1998
Salaries, wages and related expenses $ 553 $ 999
Acquisition and disposition costs 431 410
Legal and professional fees 169 305
Warranty and other sale obligations 398 607
Accrued severance - 143
Deferred income 264 267
Commissions 182 213
Interest expense 7 8
Other 239 376
______ ______
$ 2,243 $ 3,328
====== ======
F-20
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Debt
The Company has a working capital line of credit available in the amount
of $4 million with interest payable monthly at a rate of prime (8.25% and
8.5% at September 30, 1999 and 1998, respectively) or LIBOR plus 2.5%
(7.9% and 7.875% at September 30, 1999 and 1998, respectively). This
obligation is collateralized by the assets of the Company, exclusive of
its investment in Plug Power. The Company also has a $1 million equipment
loan/lease line of credit at an interest rate of LIBOR plus 2.75% (8.15% and
8.125% at September 30, 1999 and 1998, respectively). This obligation is
collateralized by the equipment purchased under the line of credit. The
lines of credit expire on January 31, 2000. No amounts were outstanding
under these lines at September 30, 1999 and 1998.
On December 17, 1998, the Industrial Development Agency for the Town of
Colonie issued $6 million in Industrial Development Revenue ("IDR") Bonds
on behalf of the Company to assist in the construction of a new building
for Advanced Products and the Company's corporate staff and renovation of
existing buildings leased to Plug Power. The IDR Bond proceeds were
deposited with a trustee for the bondholders and the Company drew bond
proceeds to cover qualified project costs. First Albany Companies Inc.
("FAC"), which owns 34% of the Company's stock, underwrote the sale of
the IDR Bonds. FAC received no fees for underwriting the IDR Bonds but
will be reimbursed for its out-of-pocket costs.
KeyBank issued a letter of credit (the credit agreement) for approximately $6
million in connection with the $6 million IDR Bonds. The KeyBank credit
agreements require the Company to meet certain covenants, including a fixed
charge coverage and leverage ratio. Further, if certain performance
standards are achieved, the interest rates on the debt may be reduced.
The credit agreement also requires the Company to grant a first lien on
all consolidated assets of the Company, exclusive of its investment in
Plug Power, a first mortgage on all land and buildings owned by the
Company and a first lien on any equipment purchased by the Company.
The IDR Bond Obligation, letter of credit and unexpended bond proceeds
were transferred to Plug Power in connection with the sale of the MTI
facility and adjacent residence effective July 1, 1999.
F-21
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Debt (continued)
On November 1, 1999, the Company entered into a $22.5 million Credit
Agreement with KeyBank, N.A. ("the $22.5 million Credit Agreement"), the
Company has pledged 13,704,315 shares of Plug Power Common Stock as
collateral for its $22.5 million loan from KeyBank, N.A. ("Loan"). The
proceeds of this loan were used to fund the Company's remaining $20.5
million balance of its Mandatory Capital Commitment to contribute $22.5
million to Plug Power. Although the Credit Agreement does not require the
Company to sell shares of Plug Power Common Stock, the Company may sell
shares of Plug Power Common Stock to pay interest or principal on the Loan.
Pursuant to the $22.5 million Credit Agreement, the Company is obligated to
make interest only payments for the first 18 months following the closing of
the Loan, and to repay the principal in 6 equal quarterly installments of
$3.750 million each, commencing on June 30, 2001. In addition, a one time
commitment fee totaling $247,500 is payable for the Loan, $75,000 of which
was paid as of September 30, 1999. Interest is payable monthly at a rate of
Prime (8.25% on November 1, 1999) or if certain performance standards are
achieved, the interest rates on the $22.5 million Credit Agreement may be
reduced.
The $22.5 million Credit Agreement requires the Company to meet certain
covenants, including maintenance of a collateral account which at all times
has a minimum market value of $600 thousand and a balance on November 1, 1999
of $2.65 million, and maintenance of a collateral coverage ratio. The
existing covenants under the original letter of credit were eliminated
pursuant to the $22.5 million Credit Agreement.
The weighted average interest rate for the Note Payable, IDR Bonds and Line
of Credit during 1999 was 5.11%, 9.02% during 1998 and 10.75% during 1997.
Cash payments for interest were $164, $97 and $201 thousand for 1999, 1998
and 1997, respectively.
(10) Shareholders' Equity
On July 12, 1999, the Company completed the sale of 801,223 shares of common
stock to current shareholders through a rights offering. The offering raised
approximately $12.820 million before offering costs of approximately $158
thousand for net proceeds of approximately $12.671 million. The Company will
use some or all of the proceeds of the offering for investment into Plug
Power. In addition, some proceeds may be used for acquisitions for the
Company's core businesses, efforts to increase market share, working capital,
general corporate purposes and other capital expenditures.
F-22
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Shareholders' Equity (continued)
On April 23, 1999, the Company declared a 3 for 2 stock split in the form
of a stock dividend. Holders of the Company's $1.00 par value common stock
received one additional share of $1.00 par value common stock for every two
shares of common stock owned as of April 30, 1999. The financial statements
for all prior periods have been retroactively adjusted to reflect this stock
split for both common stock issued and options outstanding.
On September 30, 1998, the Company completed the sale of 1,196,399 shares
of common stock to current shareholders through a rights offering. The
offering raised approximately $7.178 million before offering costs of
approximately $186 thousand for net proceeds of approximately $6.992 million.
The Company has used some or all of the proceeds of the offering for
investment in Plug Power. In addition, some proceeds may be used for
acquisitions for the Company's core businesses, efforts to increase market
share, working capital, general corporate purposes and other capital
expenditures.
Changes in common shares for 1999, 1998 and 1997 are as follows:
1999 1998 1997
Common Shares
Balance, October 1
(1997 balance as previously
reported) 10,773,968 8,862,992 4,902,201
Three-for-two common stock split
effected in the form of a 50%
stock dividend effective
April 30, 1999 - - 2,451,101
Issuance of shares for
stock option exercises 74,768 116,377 -
Issuance of shares for stock sale 801,223 1,794,599 1,500,000
Issuance of shares - consultant - - 9,690
__________ __________ _________
Balance, September 30 11,649,959 10,773,968 8,862,992
========== ========== =========
Treasury Shares
Balance, October 1 4,500 4,500 4,500
Acquisition of shares 2,250 - -
__________ __________ _________
Balance, September 30 6,750 4,500 4,500
========== ========== =========
F-23
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) Earnings per Share
The amounts used in computing earnings per share and the effect on income
and the weighted average number of shares of potentially dilutive
securities are as follows:
(Dollars in Thousands) 1999 1998 1997
(Loss) income before extraordinary
item and available to common
stockholders $ (10,729) $ (2,031) $ 2,558
Weighted average number of shares:
Weighted average number of
shares used in net (loss)/income
per share, including the bonus
element effects for the rights
offering 11,330,530 9,576,672 9,134,308
Effect of dilutive securities:
Stock options - - 14,868
___________________________________________________________________________
Weighted average number of
shares used in diluted net
(loss)/income per share 11,330,530 9,576,672 9,149,176
___________________________________________________________________________
During fiscal 1999, options to purchase 741,613 shares of common stock
at prices ranging between $1.63 and $22.50 per share were outstanding but
were not included in the computation of Earnings per Share-assuming
dilution because the Company incurred a loss from continuing operations
and inclusion would be anti-dilutive. The options expire between December
20, 2006 and June 16, 2009.
During fiscal 1998, options to purchase 607,372 shares of common stock at
prices ranging from $1.63 to $4 per share were outstanding but were not
included in the computation of Earnings per Share-assuming dilution because
the Company incurred a loss from continuing operations and inclusion would be
anti-dilutive. The options expire between December 20, 2006 and August 31,
2008.
(12) Stock Option Plan
During March 1999, the shareholders approved the 1999 Employee Stock
Incentive Plan ("1999 Plan"). The 1999 Plan provides that an initial
aggregate number of 1 million shares of common stock may be awarded or
issued. The number of shares available under the 1999 Plan may be adjusted
for stock splits and during 1999 the number of shares available under the
plan increased to 1,500,000 shares. Under the 1999 Plan, the Board of
Directors is authorized to award stock options to officers, employees and
others.
F-24
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Stock Option Plan (continued)
During December 1996, the shareholders approved a stock incentive plan
("1996 Plan"). The 1996 Plan provides that an initial aggregate number of
500,000 shares of common stock may be awarded or issued. The number of
shares available under the 1996 Plan may be increased by 10% of any increase
in the number of outstanding shares of common stock for reasons other than
shares issued under this 1996 Plan. During 1999 and 1998, the number of
shares available under the 1996 Plan increased to 1,159,582 and 719,640
shares respectively. Under the 1996 Plan, the Board of Directors is
authorized to award stock options, stock appreciation rights, restricted
stock, and other stock-based incentives to officers, employees and others.
Options are generally exercisable in from one to five cumulative annual
amounts beginning 12 months after the date of grant. Certain options
granted may be exercisable immediately. Option exercise prices are not
less than the market value of the shares on the date of grant. Unexercised
options generally terminate ten years after grant.
During 1999, the Company awarded 15,000 options to a consultant. The
fair value of these options ($55 thousand) was charged to expense.
For the purpose of applying Financial Accounting Standard No. 123 ("FAS
123"), "Accounting for Stock-Based Compensation", the fair value of each
option granted is estimated on the grant date using the Black-Scholes Single
Option model. The dividend yield was 0% for 1999, 1998, and 1997,
respectively. The expected volatility was 78% in 1999, 102% in 1998 and 78%
in 1997. The expected life of the options is 5 years. The risk free interest
rate ranges from 4.37% to 5.81% in 1999, 5.52% to 5.85% in 1998 and 6.12% to
6.67% in 1997. The Company applies Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," in accounting for stock
options. Accordingly, no compensation cost has been recognized in 1999, 1998
or 1997. Had compensation cost and fair value been determined pursuant to
FAS 123, net loss would increase from $(10,688) to $(11,988) thousand in 1999
and from $(4,316) to $(4,773) thousand in 1998 and net income would decrease
from $4,520 to $4,351 thousand in 1997. Basic and diluted loss per share
would increase from $(0.94) to $(1.06) in 1999 and from $(0.45) to $(0.50) in
1998 and basic and diluted earnings per share would decrease from $0.49 to
$0.48 in 1997. The weighted average fair value of options granted during 1999,
1998 and 1997 for purposes of FAS 123, is $5.80, $4.70 and $1.96 per share,
respectively.
F-25
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Stock Option Plan (continued)
Activity with respect to the 1996 Plan is as follows:
1999 1998 1997
Shares under option
at October 1 607,372 623,400 -
Options granted 232,550 297,750 634,650
Options exercised (78,949) (116,378) -
Options canceled (19,360) (197,400) (11,250)
________ _________ ________
Shares under option
at September 30 741,613 607,372 623,400
======== ========= ========
Options exercisable
at September 30 419,438 271,373 115,200
Shares available for
granting of options 222,642 355,710 276,600
The weighted average exercise price is as follows:
1999 1998 1997
Shares under option
at October 1 $ 2.89 $ 1.94 $ -
Options granted 8.62 3.83 1.94
Options exercised 2.26 1.91 -
Options canceled 3.36 1.74 1.63
Shares under option at
September 30 4.89 2.89 1.94
Options exercisable at
September 30 5.59 2.64 1.95
The following is a summary of the status of options outstanding at
September 30, 1999:
Outstanding Options Exercisable Options
___________________________________ ________________________________
Weighted
Average Weighted Weighted
Exercise Remaining Average Average
Price Contractual Exercise Exercise
Range Number Life Price Number Price
$1.63-$2.29 257,438 7.7 $2.12 151,313 $2.09
$3.17-$4.67 244,875 8.7 $3.98 113,625 $3.98
$5.00-$5.33 129,300 9.2 $5.28 49,500 $5.30
$12.50 105,000 9.5 $12.50 105,000 $12.50
$22.50 5,000 9.7 $22.50 -
_______ _______
741,613 419,438
======= =======
F-26
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) Retirement Plan
The Company maintains a voluntary savings and retirement plan (Internal
Revenue Code Section 401(k) Plan) covering substantially all employees.
The Company plan allows eligible employees to contribute a percentage of
their compensation; the Company makes additional contributions in amounts
as determined by management and the Board of Directors. The investment
of employee contributions to the plan is self-directed. The cost of the
plan was $168, $152 and $179 thousand for 1999, 1998 and 1997, respectively.
(14) Commitments and Contingencies
On September 9, 1998, Barbara Lawrence, the Lawrence Group, Inc.
("Lawrence"), and certain other Lawrence-related entities ("Plaintiffs")
filed suit in the United States Bankruptcy Court for the Northern District of
New York against First Albany Corporation, a wholly owned subsidiary of First
Albany Companies Inc., Dale Church, Edward Dohring, Alan Goldberg, George
McNamee, Beno Sternlicht, Marty Mastroianni (former President and Chief
Operating Officer of the Company) and 33 other individuals ("Defendants") who
purchased a total of 820,909 shares of MTI stock from the Plaintiffs. The
complaint alleged that Defendants purchased MTI stock from the Plaintiffs in
violation of sections 10b, 20, 20A and rule 10b-5 of the Securities Exchange
Act of 1934. In December 1998, the complaint was amended to add MTI as a
defendant and assert a Claim for common law fraud against all the Defendants
including the Company. The case concerns the Defendants' 1998 purchase of
MTI shares from the Plaintiffs at the price of $2.25 per share. Ownership of
the shares was disputed and several of the Plaintiffs were in bankruptcy at
the time of the sale. First Albany Corporation acted as Placement Agent for
the Defendants in the negotiation and sale of the shares and in proceedings
before the Bankruptcy Court for the Northern District of New York, which
approved the sale in September 1997. Plaintiffs claim that the Defendants
failed to disclose material inside information concerning Plug Power, LLC to
the Plaintiffs and therefore the $2.25 per share purchase price was unfair.
Plaintiffs are seeking damages of $5 million plus punitive damages and costs.
In April 1999, Defendants filed a motion to dismiss the amended complaint,
which was denied. In June 1999, the parties agreed to stay discovery and
amend Defendants time to answer the amended complaint until September 17,
1999. In October 1999, Defendants answered the amended Complaint.
During October 1998, a legal action brought by a group of investors against
the Company related to a stock purchase agreement and side letter agreements
for the sale of the stock of the Company's wholly owned subsidiary, Ling
Electronics, Inc. ("Ling"), was determined in favor of the Company.
F-27
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Commitments and Contingencies (continued)
In February 1995, Ling made a voluntary disclosure to the United States
Department of Commerce regarding unlicensed exports of certain products
shipped in the first four months of fiscal 1995. Ling has fully cooperated
with the Office of Export Enforcement, which has not taken any action to
date. Possible administrative sanctions include: no action; awarning letter;
denial of export privileges; and/or imposition of civil penalties. Foreign
sales represent a significant portion of Ling's total revenue. The final
outcome of this matter is not presently determinable and, therefore no
provision for any liability that may result has been recorded in the
Company's financial statements.
The Company and its subsidiaries lease certain manufacturing, warehouse
and office facilities. The leases generally provide for the Company to
pay increases over a base year level for taxes, maintenance, insurance
and other costs of the leased properties. The leases contain renewal
provisions.
Future minimum rental payments required under noncancelable operating
leases are (dollars in thousands): $269 in 2000; $305 in 2001; $304 in
2002; $300 in 2003; and $300 in 2004. Rent expense under all leases was
$482, $403 and $446 thousand for 1999, 1998 and 1997, respectively.
Rental income under all sub-leases was $164, $66 and $19 thousand in 1999,
1998 and 1997, respectively.
(15) Related Party Transactions
At September 30, 1999 First Albany Companies Inc. ("FAC") owned approximately
34% of the Company's Common Stock (See Note 19).
During fiscal 1999, 1998 and 1997, First Albany Corporation, a wholly owned
subsidiary of FAC, provided financial advisory services in connection with
the sale of the Technology Division in 1999 and 1998 and the L.A.B. Division
in 1997, for which First Albany Corporation was paid fees of $15, $10 and $75
thousand, respectively.
Amounts receivable from an officer totaled approximately $38 thousand and
is included in the balance sheet caption "Other receivables-related parties"
at September 30, 1999.
On June 27, 1997, the Company entered into a management services agreement
with Plug Power to provide certain services and facilities for a period of
one year. This agreement expired on June 27, 1998. The Company continued to
provide services, which were billed on a cost reimbursement basis. During
1998, the Company entered into leases for manufacturing, laboratory and
office space which expired on July 1, 1999 pursuant to the sale of the MTI
facility to Plug Power in exchange for 704,315 Plug Power Class A membership
interests and the assumption of $6 million in debt by Plug Power.
F-28
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) Related Party Transactions (continued)
Billings under these agreements amounted to $448, $661 and $65 thousand
for 1999, 1998 and 1997, respectively. Amounts receivable from Plug Power
under these agreements is included in the balance sheet caption "Other
receivables-related parties".
On September 30, 1999, the Company made an additional cash contribution of
approximately $2 million to Plug Power in exchange for 266,667 Plug Power
Class A membership interests.
On July 1, 1999, the Company contributed the MTI campus to Plug Power in
exchange for 704,315 Plug Power Class A membership interests. During the
remainder of 1999, the Company paid $59 thousand to Plug Power in connection
with a lease of office and manufacturing space. This lease will terminate on
November 24, 1999.
On August 5, 1998, the Company made a short-term loan to Plug Power of $500
thousand, which was subsequently contributed to capital on September 23,
1998. The Company also converted $500 thousand of its accounts receivable
from Plug Power to capital on September 23, 1998. At September 30, 1998, the
remaining obligation to provide additional funds to Plug Power was $4
million. During fiscal 1999, the Company fully funded this commitment by
contributing $4 million cash.
(16) Discontinued Operations
The sale of the Company's Technology Division, the sole component of the
Technology segment, to NYFM, Incorporated (a wholly owned subsidiary of
Foster-Miller, Inc., a Waltham, Massachusetts-based technology company)
on March 31, 1998 completed management's planned sale of non-core businesses.
Accordingly, the Company no longer includes Technology among its reportable
business segments and now operates in only one segment, Test & Measurement.
The Technology Division is reported as a discontinued operation as of
December 26, 1998, and the consolidated financial statements have been
restated to report separately the net assets and operating results of the
business. In exchange for the Technology Division's assets, NYFM,
Incorporated (a) agreed to pay the Company a percentage of gross sales in
excess of $2.5 million for a period of five years; (b) assumed approximately
$40 thousand of liabilities; and (c) established a credit for warranty work of
approximately $35 thousand.
F-29
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) Discontinued Operations (continued)
Discontinued operations consist of the following:
(Dollars in thousands) 1999 1998 1997
Sales $ - $ 532 $ 7,878
======= ====== ======
Income(loss)from discontinued
operations before income tax 41 (516) (574)
Income tax (benefit) - - (29)
_______ ______ ______
Net income(loss)from discontinued
operations $ 41 $ (516) $ (545)
======= ====== ======
Loss on disposal of Division $ - $(1,769) $ -
Income tax (benefit) - - -
_______ ______ ______
Loss on disposal of Division $ - $(1,769) $ -
======= ====== ======
The assets and liabilities of the Company's discontinued operations are
as follows at September 30:
(Dollars in thousands) 1999 1998
Assets (primarily accounts receivable) $ 220 $ 1,136
Liabilities (primarily accrued expenses) 760 1,128
_______ ______
Net (Liabilities)Assets $ (540) $ 8
======= ======
Assets with a net book value of $878 thousand consisting primarily of
land, building and management information systems were transferred to
continuing operations on October 1, 1997.
(17) Sale of Division/Subsidiary
L.A.B. Division
On September 30, 1997, the Company sold all of the assets of its L.A.B.
Division to Noonan Machine Company of Franklin Park, IL. The Company
received $2.60 million in cash and two notes, totaling $650 thousand,
from Noonan Machine Company. The purchaser has requested that the principal
amount of the note be reduced to reflect the resale value of certain assets
of L.A.B. The Company is enforcing its rights with respect to the note. The
net proceeds from the sale were used to pay down all outstanding debt and
build working capital.
The sale resulted in a $2.0 million gain, which was recorded in the fourth
quarter of fiscal year 1997. In addition, $250 thousand of the proceeds
associated with one of the notes was recorded as deferred revenue due to
contingencies associated with the realization of this note. This note is
still outstanding as of September 30, 1999.
F-30
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Geographic and Segment Information
The Company sells its products on a worldwide basis with its principal
markets listed in the table below where information on export sales is
summarized by geographic area for the Company as a whole:
(Dollars in thousands)
1999 1998 1997
Geographic Area
United States $ 9,576 $ 17,022 $ 17,290
Europe 1,180 1,072 1,223
Japan 787 1,534 1,243
Pacific Rim 760 834 1,901
China 278 302 1,900
Canada 153 228 178
Rest of World 151 36 367
______ _______ _______
Total Sales $12,885 $ 21,028 $ 24,102
====== ======= =======
In 1999, no customers accounted for more than 10% of sales and in 1998,
one customer accounted for 11.5% of sales.
The Company operates in two business segments, Alternative Energy Technology
and Test and Measurement. The Alternative Energy Technology segment incubates
alternative energy technology. The Test and Measurement segment develops,
manufactures, markets and services sensing instruments, computer-based
balancing systems for aircraft engines, vibration test systems and power
conversion products.
The accounting policies of the Alternative Energy Technology and Test and
Measurement segments are the same as those described in the summary of
significant accounting policies. The Company evaluates performance based
on profit or loss from operations before income taxes, accounting changes,
non-recurring items and interest income and expense. Inter-segment sales are
not significant.
Summarized financial information concerning the Company's reportable segments
is shown in the following table. The "Other" column includes corporate
related items and items like income taxes or unusual items, which are not
allocated to reportable segments. In addition, segments noncash items
include any depreciation and amortization in reported profit or loss. For
the Alternative Energy Technology segment, the information is based on an
annual period from October 1 to September 30 derived from Plug Power's
unaudited financial statements.
F-31
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Geographic and Segment Information (continued)
(Dollars in thousands)
Alternative
Energy Reconciling
Consolidated
Technology Test and Items
Totals
1999 (unaudited) Measurement Other (unaudited) (unaudited)
Revenues $ 8,247 $ 12,885 $ - $ (8,247) $ 12,885
Segment profit/
(loss) (27,391) (1,404) 79 8,028 (10,688)
Equity in Plug
Power loss - - - (9,363) (9,363)
Total assets 43,547 8,185 14,885 (34,837) 31,780
Investment in
Plug Power - - - 8,710 8,710
Capital
expenditures 9,247 183 2,555 (9,247) 2,738
Depreciation and
amortization 1,165 202 379 (1,165) 581
1998
Revenues $ 5,948 $ 21,028 $ - $ (5,948) $ 21,028
Segment profit/
(loss) (8,243) 2,155 (2,665) 4,437 (4,316)
Equity in Plug
Power loss - - - (3,806) (3,806)
Total assets 8,093 9,424 10,483 (6,872) 21,128
Investment in
Plug Power - - - 1,221 1,221
Capital
expenditures 1,889 202 2,964 (1,889) 3,166
Depreciation and
amortization 418 205 118 (418) 323
1997
Revenues $ 242 $ 24,102 $ - $ (242) $ 24,102
Segment profit/
(loss) (4,752) 2,411 2,439 4,422 4,520
Equity in Plug
Power loss - - - (330) (330)
Total assets 4,979 8,696 5,280 (4,952) 14,003
Investment in
Plug Power - - - 27 27
Capital
expenditures 133 375 2 (133) 377
Depreciation and
amortization 93 206 37 (93) 243
F-32
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Geographic and Segment Information (continued)
The following table presents the details of "Other" segment profit
(loss).
(Dollars in thousands) 1999 1998 1997
Corporate and Other
Expenses/(Income):
Depreciation and
amortization $ 379 $ 118 $ 37
Interest expense 106 102 323
Interest income (335) (65) -
Income tax expense 37 25 143
Other (income)expense, net (225) 200 1,032
(Income)loss from
discontinued operations (41) 2,285 545
Gain on sale of division - - (2,012)
Gain on extinguishment
of debt, net of tax - - (2,507)
_____ _______ _______
Total (income) expense $ (79) $ 2,665 $ (2,439)
The reconciling items are the amounts of revenues earned and expenses
incurred for corporate operations, which is not included in the segment
information.
(19) Extraordinary Item - Extinguishment of Debt
During fiscal 1996, FAC purchased 909,091 shares of the Company's Common
Stock from the New York State Superintendent of Insurance as the court-
ordered liquidator of United Community Insurance Company ("UCIC"). In
connection with this purchase, FAC also acquired certain rights to an
obligation ("Term Loan") due from the same finance company ("FCCC") to
whom the Company was obligated under a Note Payable, due December 31, 1996.
FCCC was in default of its Term Loan to UCIC. FAC, as the owner of the rights
to the Term Loan, filed suit-seeking payment. Collateral for the FCCC Term
Loan included the Company's Note Payable to FCCC. FAC exercised its rights
to the collateral securing the Term Loan, including the right to obtain
payment on the Note Payable directly from the Company. The Company and FAC
entered into an agreement dated as of December 27, 1996 under which the
Company issued to FAC 1.0 million shares of Common Stock in full
satisfaction of the Note Payable and accrued interest.
F-33
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(19) Extraordinary Item - Extinguishment of Debt (continued)
If FCCC were to seek collection of the Note Payable plus accrued interest
from the Company, the Company, based on the opinion of counsel, believes that
the outcome of any such action pursued by FCCC against the Company would not
have a material adverse impact on the Company's financial position or results
of operation.
(20) Comprehensive (Loss) Income
Total comprehensive (loss) income for the years ended September 30
consists of:
(Dollars in Thousands) 1999 1998 1997
Net (loss)income $(10,688) $ (4,316) $ 4,520
Other comprehensive income(loss),
before tax:
Foreign currency translation
adjustments - 8 -
Unrealized loss on available
for sale securities (5) - -
Income tax related to items of
other comprehensive
income(loss) - - -
_______ _______ ______
Total comprehensive (loss)income $(10,693) $ (4,308) $ 4,520
======= ======= ======
(21) Subsequent Events
On October 21, 1999, the Company created a strategic alliance with
SatCon Technology Corporation (SatCon). SatCon acquired Ling Electronics,
Inc. and Ling Electronics, Ltd. from the Company and the Company will invest
approximately $7 million in SatCon. In consideration for the acquisition of
Ling Electronics and the Company's investment, the Company will receive
1,800,000 shares of SatCon's common stock and warrants to purchase an
additional 100,000 shares of SatCon's common stock. The Company immediately
funded $2.57 million of its investment in SatCon and will make the remaining
investment by the end of January 2000. SatCon will also receive warrants to
purchase 100,000 shares of the Company's common stock.
The Company immediately issued SatCon 36,000 stock purchase warrants. The
warrants are immediately exercisable at $37.66 per share and expire on
October 21, 2003. The estimated fair value of these warrants at the date
issued was $14.81 per share using a Black Scholes option pricing model and
assumptions similar to those used for valuing the Company's stock options.
The Company immediately received 36,000 stock purchase warrants from SatCon.
The warrants are immediately exercisable at $8.83 per share and expire on
October 21, 2003.
F-34
MECHANICAL TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(21) Subsequent Events (continued)
In addition, David Eisenhaure, President and Chief Executive Officer of
SatCon Technology Corporation, will become a member of the Board of Directors
of the Company and Alan Goldberg, a director of the Company and co-Chief
Executive Officer of First Albany Companies Inc. will become a member of
SatCon Technology Corporation's Board of Directors. SatCon Technology
Corporation has also agreed to appoint an additional member to its Board of.
Directors based on recommendations by the Company.
SatCon Technology Corporation manufactures and sells power and energy
management products for telecommunications, silicon wafer manufacturing,
factory automation, aircraft, satellites and automotive applications.
SatCon has four operating divisions: Film Microelectronics, Inc. designs and
manufactures microelectronic circuits and interconnect products. Magmotor
manufactures motors and magnetic suspension systems. Beacon Power
manufactures flywheel energy storage devices and the Technology Center is
responsible for new technology and product development.
F-35
FIRST ALBANY COMPANIES INC
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
PERIODS ENDED DECEMBER 31, 1999, DECEMBER 31, 1998
AND DECEMBER 31, 1997.
COL. A COL.B COL.C COL.D COL.E
- ----------------------------------------------------------------------------
Additions
Balance a Charged to Balance
Beginning Costs and at End of
Description of Period Expenses Deductions Period
- ----------------------------------------------------------------------------
Allowance for doubtful
accoutns--deducted
from receivables from
customers:
Calendar Year 1999 $ 305,000 $ 10,000 $ 0 $ 315,000
Calendar Year 1998 $ 340,000 $ 133,000 $ 168,000 $ 305,000
Calendar Year 1997 $ 304,000 $ 120,000 $ 84,000 $ 340,000
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRST ALBANY COMPANIES INC
By: /s/ GEORGE C. MCNAMEE
George C. McNamee,
Chairman and Co-Chief Executive Officer
Date: March 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signature Title Date
/s/ GEORGE C. MCNAMEE
- ---------------------- Chairman and Co-Chief Executive Officer March 28, 2000
George C. McNamee
/s/ ALAN P. GOLDBERG
- ---------------------- President and Co-Chief Executive Officer March 28, 2000
Alan P. Goldberg
/s/ STEVEN R. JENKINS
- ---------------------- Chief Financial Officer March 28, 2000
Steven R. Jenkins (Principal Accounting Officer)
/s/ HUGH A. JOHNSON JR.
- ---------------------- Senior Vice President and Director March 28, 2000
Hugh A. Johnson, Jr.
- ------------------------- Director
Peter Barton
/s/ J. ANTHONY BOECKH
- -------------------------- Director March 28, 2000
J. Anthony Boeckh
/s/ WALTER M. FIEDEROWICZ
- -------------------------- Director March 28, 2000
Walter M. Fiederowicz
/s/ DANIEL V. MCNAMEE III
- -------------------------- Director March 28, 2000
Daniel V. McNamee III
/s/ CHARLES L. SCHWAGER
- --------------------------- Director March 28, 2000
Charles L. Schwager
/s/ BENAREE P. WILEY
- ---------------------------- Director March 28, 2000
Benaree P. Wiley