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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, 1997 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
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(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
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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 13, 1998, 5,886,806 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 13, 1998,
which was $14.50) was approximately $41,613,564.
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 business with brokerage activity predominantly in New York and New
England. 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.
Brokerage services to retail and institutional customers are provided through
First Albany's salesforce of Investment Executives and Institutional
Salespeople. First Albany believes that its Investment Executives and
Institutional Salespeople are a key factor to the success of its business. Over
the last five years, the number of full-time Investment Executives and
Institutional Salespeople has grown from approximately 234 to 337, 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 under-
writings, 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 27 Retail, Institutional, and Investment
Banking offices in 10 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,* September 29,*
1997 1996 1995 1995
(three-months)
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Amount Percent Amount Percent Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------
(In thousands of dollars)
Securities commissions:
Listed $ 22,523 1.6% $ 20,507 12.2% $ 5,128 13.7% $ 17,852 14.5%
Over-the-counter 11,327 5.9 7,749 4.6 1,402 3.7 4,395 3.6
Options 2,843 1.5 1,894 1.1 382 1.0 1,240 1.0
Mutual funds 15,805 8.2 12,258 7.3 2,712 7.3 8,228 6.7
Other 489 0.3 303 0.2 15 0.1 174 0.1
- ---------------------------------------------------------------------------------------------
Sub-total 52,987 27.5 42,711 25.4 9,639 25.8 31,889 25.9
Principal transactions 63,235 32.7 63,438 37.7 12,322 32.9 43,198 35.1
Investment banking 19,636 10.1 19,558 11.6 5,435 14.5 14,625 11.9
Clearing revenues 1,090 0.6 1,100 0.7 267 0.7 1,059 0.8
Fees and other 10,550 5.5 9,144 5.4 1,603 4.3 6,155 5.0
- ---------------------------------------------------------------------------------------------
Total operating
revenues 147,498 76.4 135,951 80.8 29,266 78.2 96,926 78.7
- ---------------------------------------------------------------------------------------------
Interest income 45,474 23.6 32,240 19.2 8,138 21.8 26,173 21.3
- ---------------------------------------------------------------------------------------------
Total revenues $192,972 100.0% $168,191 100.0% $ 37,404 100.0% $123,099 100.0%
=============================================================================================
*In July 1996, the Company changed its fiscal year end to a calendar year end.
Accordingly, results from operations for the period ending December 31, 1996
reflect a twelve-month period ("calendar year") while results for the
transitional period ending December 31, 1995 reflect a three-month period.
Securities Commissions
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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
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First Albany buys and maintains inventories of municipal debt, corporate debt,
and equity securities as a "market maker" for sale of those securities to other
dealers and to customers. A staff of 56 traders, underwriters, and assistants
manage First Albany's inventory of securities. First Albany Investment
Executives work directly with these traders. As of December 31, 1997, First
Albany made a market in 222 common stocks quoted on National Association of
Securities Dealers Automated Quotation ("NASDAQ") and other less actively traded
securities. First Albany also 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. Principal transactions have been a
significant source of revenue and should continue to be so in the future.
Continuation of these activities depends on the availability of sufficient
capital and the services of highly skilled traders, Investment Executives, and
Institutional Salespeople.
In fiscal 1995, First Albany added 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.
Profits and losses are dependent upon the skill of traders, price movement,
trading activity, and the size of inventories.
In executing customers' orders to buy or sell in the over-the-counter market in
a security in which it makes a market, First Albany may sell to or purchase from
its customers at a price which is substantially equal to the current inter-
dealer market price, plus or minus a markup or markdown. Alternatively, First
Albany may act as an agent, executing a customer's purchase or sale order with
another broker-dealer, who acts as a market maker, at the best inter-dealer
market price available and charging a commission.
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 1997 by securities category where First Albany acted
as principal.
Highest Lowest Average
(In thousands of dollars) Inventory Inventory Inventory
- --------------------------------------------------------------------------------
State and municipal bonds $163,106 $ 54,447 $ 95,850
Corporate obligations 21,346 3,313 9,580
Corporate stocks 3,312 813 1,905
U.S. Government and federal
agencies obligations 12,814 (3,332) 4,478
Underwriting and Investment Banking
- -----------------------------------
First Albany manages, co-manages, and participates in tax-exempt and corporate
securities distributions. For the periods indicated, the table below highlights
the number and dollar amount of corporate and tax-exempt 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
- --------------------------------------------------------------------------------
(In thousands of dollars)
December 1997 12 $322,137 110 $126,250
December 1996 9 348,292 177 218,452
December 1995
(three-months) 2 86,828 74 73,303
September 1995 13 514,583 203 227,170
September 1994 13 483,814 334 349,723
September 1993 3 158,300 344 366,314
Tax-Exempt 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 1997 243 $26,480,340 293 $ 4,398,478
December 1996 267 19,291,904 302 3,226,226
December 1995
(three-months) 47 6,322,205 59 522,292
September 1995 113 12,235,469 222 1,362,845
September 1994 123 14,744,502 332 1,598,182
September 1993 171 18,379,821 349 1,741,206
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. In addition, under the
federal securities laws, other statutes, and court decisions with respect to
underwriters' liabilities and limitations on indemnification of underwriters by
issuers, an underwriter is subject to substantial potential liability for
material misstatements or omissions in prospectuses and other communications
with respect to underwritten offerings. Further, underwriting or selling
commitments constitute a charge against net capital and First Albany's
underwriting or selling commitments may be limited by the requirements that it
must at all times be in compliance with the net capital rule. See "Net Capital
Requirements".
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. In accordance with Federal Reserve Bank regulations, NYSE
regulations, and internal policy, First Albany earns interest income as a result
of charging customers at a rate of up to 2 3/4% over the brokers' call rate.
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 1997 101,571 52,773 69,609
December 1996 75,140 49,631 56,956
December 1995 (three months) 60,880 45,543 50,880
September 1995 56,251 35,440 42,181
September 1994 44,917 30,685 36,412
September 1993 40,326 28,784 33,630
First Albany has established internal controls and safeguards against 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, 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
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Customized financial services are available to customers of First Albany.
The Financial Services Department advises customers on a variety of interrelated
financial matters, including investment portfolio review, tax management,
insurance analysis, education and retirement planning, survivor income needs,
and estate tax analysis. For a fee, financial planners will prepare a 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. Fixed and variable annuities are
available as well as life, disability, and nursing home insurance programs,
limited partnership interests in real estate, oil and gas drilling, and similar
ventures.
Research
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First Albany maintains a professional staff of equity analysts. Research is
focused on five industry sectors: technology, financial services, energy,
utilities, and basic industry. First Albany employs 12 analysts and 12 research
assistants who support First Albany's institutional and corporate finance
activities.
In fiscal 1995, First Albany enlarged the scope of its research in the
technology sector by entering into 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 retail and institutional customers; and responses to
inquiries from customers. In addition, First
Albany purchases outside research services including economic reports, charts,
data bases, company analyses, and technical analyses.
Retail Business
- ---------------
Revenues from First Albany's retail brokerage activities are generated through
customer purchases and sales of stocks, bonds, mutual funds, and other
investment products. For the calendar years ended December 31, 1997,
December 31, 1996, the three month period ended December 31, 1995 and fiscal
year 1995, these revenues accounted for approximately 52%, 45%, 49%, and 53%, of
operating revenues, respectively.
Institutional Business
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Revenues generated from securities transactions with major institutions for the
calendar years ended December 31, 1997, December 31, 1996, the three month
period ended December 31, 1995 and fiscal year 1995, accounted for approximately
32%, 34%, 36%, and 31%, of operating revenues, respectively. Institutional
revenues are derived from sales of tax-exempt securities, taxable debt
obligations, and equities and are generated by 83 Institutional Salespeople.
Municipal Bond Business
- -----------------------
The tax-exempt department consists of 105 professionals and offers a broad range
of services, including primary market underwriting, secondary market trading,
institutional sales, sales liaison with branches, portfolio analysis, credit
analysis, investment banking services, and financial advisory services.
Sales revenues from all secondary market tax-exempt products were $14.9 million
for the calendar year ended December 31, 1997; $15.0 million for the calendar
year ended December 31, 1996; $3.2 million for the three-month period ended
December 31, 1995; and $12.9 million in fiscal 1995.
Employees
- ---------
At December 31, 1997, the Company had 843 full-time employees, of which 252 were
Retail Investment Executives, 127 were Institutional Salespeople and
Institutional Traders, 155 were in branch sales support, 141 were in other
revenue producing positions, 60 were in operations, and 108 were in other
support and administrative functions.
New Investment Executives 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 Investment Executives with proven sales 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
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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 retail 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
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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 and the District of Columbia.
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 may be required to reduce its business and to restrict
withdrawal of subordinated capital if its net capital is less than 4% of
aggregate debit balances; it may be prohibited from expanding its business and
declaring cash dividends if its net capital is less than 5% of aggregate debit
balances; and it will be subject to closer supervision by the NYSE if its net
capital is less than 6% of aggregate debit balances. 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, 1997, First Albany's net capital was $18,605,000 which was 9.5%
of its aggregate debit balances (2% minimum requirement) and $14,670,000 in
excess of required minimum net capital.
Item 2. Properties
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As of February 1998, the Company had a total of 27 Retail, Institutional, and
Investment Banking offices in 10 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, investment banking, research, data processing,
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 2002. 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 Garden City, NY Norwich, NY
30 South Pearl St. Retail Sales Retail Sales
Retail & Institutional
Sales, Investment Banking,
DP, Research, Back Office Hartford, CT Oneonta, NY
Retail & Institutional Retail Sales
Sales
80 State St. Johnstown, NY Philadelphia, PA
Retail Sales Retail Sales Institutional Sales
Bonita Springs, FL Los Angeles, CA Pittsfield, MA
Institutional Sales Investment Banking Retail Sales
Boston, MA Manchester, NH San Francisco
Retail & Institutional Sales Retail Sales (Burlingame), CA
Investment Banking, DP, Research Investment Banking
Buffalo, NY Morristown, NJ Syracuse, NY
Retail Sales Institutional Sales Retail Sales
Colchester(Burlington), VT Nashua, NH Vestal
Retail Sales Retail Sales (Binghamton), NY
Retail Sales
Chicago, IL New York, NY Wellesley, MA
Retail Sales One Penn Plaza 40 Grove St.
Retail & Institutional Institutional Sales
Sales, Investment Banking,
Elmira, NY DP, Research, Back Office
Retail Sales 330 Washington St.
Retail Sales
Fairfield, CT 17 State St.
Retail Sales Retail Sales
Operations
Item 3. Legal Proceedings
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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 13, 1998 there were approximately 1,446 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, 1997 Quarters Ended
- --------------------------------------------------------------------------------
Stock Price Range Mar. 28 June 27 Sept.26 Dec. 31
- --------------------------------------------------------------------------------
High $10 3/8 $14 1/2 $15 1/2 $16 3/8
Low $ 9 1/8 $ 9 1/4 $12 1/8 $12 5/8
Cash Dividend per Share $ 0.05 $ 0.05 $ 0.05 $ 0.05
December 31, 1996 Quarters Ended
- --------------------------------------------------------------------------------
Stock Price Range Mar. 29 June 28 Sept.27 Dec. 31
- --------------------------------------------------------------------------------
High $ 9 1/4 $ 9 1/2 $ 9 1/2 $ 9 3/4
Low $ 8 1/8 $ 8 1/8 $ 8 1/8 $ 7 7/8
Cash Dividend per Share $ 0.05 $ 0.05 $ 0.05 $ 0.05
December 31, 1995 Three-month period
- --------------------------------------------------------------------------------
Stock Price Range Dec. 31
- --------------------------------------------------------------------------------
High $ 8 5/8
Low $ 6 3/8
Cash Dividend per Share $ 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, 1997, the total number of treasury shares was 109,279. When
appropriate, the Company will consider making additional purchases.
During calendar 1997, 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 1998, subsequent to the period reflected in this report, the Company
declared the regular quarterly cash dividend of $0.05 per share payyable on
February 26, 1998 to shareholders of record on February 12, 1998.
Item 6. Selected Financial Data
- --------------------------------
The following selected financial data have been derived from the Consolidated
Financial Statements of the Company.
First Albany Companies Inc.
FINANCIAL SUMMARY
(In thousands of dollars except per share amounts)
------------------------For the Years Ended----------------------------
Dec. 31, Dec. 31, Dec. 31, Sept. 29, Sept.30, Sept. 24,
For the years ended 1997 1996 1995 1995 1994 1993
- --------------------------------------------------------------------------------------------------
Operating Results
Revenues:
Commissions $ 52,987 $ 42,711 $ 34,941 $ 31,889 $ 29,553 $ 28,884
Principal transactions 63,235 63,438 44,821 43,198 36,167 34,857
Investment banking 19,636 19,558 16,311 14,625 19,164 23,265
Fees and other 11,640 10,244 7,530 7,214 6,578 5,901
- --------------------------------------------------------------------------------------------------
Operating revenues 147,498 135,951 103,603 96,926 91,462 92,907
Interest income 45,474 32,240 28,075 26,173 16,222 9,483
- --------------------------------------------------------------------------------------------------
Total revenues 192,972 168,191 131,678 123,099 107,684 102,390
Interest expense 38,615 26,030 21,985 19,904 10,467 5,257
- --------------------------------------------------------------------------------------------------
Net revenues 154,357 142,161 109,693 103,195 97,217 97,133
- --------------------------------------------------------------------------------------------------
Expenses (excluding interest):
Compensation and
benefits 105,080 95,691 74,596 71,064 65,513 64,388
Clearing, settlement
and brokerage costs 3,358 2,868 2,378 2,258 1,894 1,981
Communications and data
processing 12,872 10,897 8,244 7,794 7,198 6,209
Occupancy and
depreciation 13,203 8,527 6,909 6,660 5,710 5,395
Selling 8,027 7,246 5,231 4,817 4,779 4,152
Other 8,915 7,840 5,912 5,382 4,755 6,242
- --------------------------------------------------------------------------------------------------
Total expenses (excl.
interest) 151,455 133,069 103,270 97,975 89,849 88,367
- --------------------------------------------------------------------------------------------------
Income before income taxes 2,902 9,092 6,423 5,220 7,368 8,766
Income tax expense 1,251 3,592 2,363 1,870 2,876 3,375
- ---------------------------------------------------------------------------------------------------
Income before extraordinary
gain 1,651 5,500 4,060 3,350 4,492 5,391
Extraordinary gain,
net of $255 taxes 305
- ---------------------------------------------------------------------------------------------------
Net income $ 1,956 $ 5,500 $ 4,060 $ 3,350 $ 4,492 $ 5,391
===================================================================================================
Per Common Share: *
Earnings-basic $ 0.34 $ 1.00 $ 0.74 $ 0.61 $ 0.83 $ 0.99
Cash dividend 0.20 0.20 0.20 0.20 0.20 0.20
Book value 7.64 7.55 6.82 6.59 6.16 5.50
- ---------------------------------------------------------------------------------------------------
Financial Condition:
Total assets $831,921 $675,785 $510,081 $543,255 $482,749 $514,794
Notes payable 7,271 4,583 1,641 1,791 94 456
Obligations under
capitalized leases 3,088 1,426
Subordinated debt 7,500 5,000 2,250
Stockholders' equity 44,548 42,274 37,558 36,192 33,230 30,088
- ---------------------------------------------------------------------------------------------------
*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.
In July 1996, the Company changed its fiscal year end to a calendar year end.
Accordingly, results from operations for the period ending December 31, 1996
reflect a twelve-month period ("calendar year") while results for the
transitional period ending December 31, 1995 reflect a three-month period.
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.
1997 was an unusually good year for the equity markets in general. The yield
on long-term U.S. Treasury bonds decreased from 6.64% to 5.92% while the Dow
Jones Industrial Average rose from 6448 to 7908. As a result, stock prices
registered a total return of 33.3% as measured by the S&P 500, and bonds
registered a return of 9.8% as measured by the Lehman Brothers
Government/Corporate Index. The stock market return was unusual. The
compound annual returns with all the dividends and interest reinvested between
1925 and 1997 for government bonds was 5.2% and for equities was 11%.
Although First Albany remains optimistic about the outlook for equity prices in
1998, a pullback in prices could occur. If such a pullback should occur, it
would have a damaging effect on the secondary markets. Revenues from security
trading, commission revenues, and underwriting fees and profits of First Albany
Corporation would most likely suffer.
RESULTS OF OPERATIONS
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 63,235 63,438 (203) 0%
Investment banking 19,636 19,558 78 0%
Fees and other 11,640 10,244 1,396 14%
- -------------------------------------------------------------------------------------
Operating revenue 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 $255 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
$0.34 basic earnings per share compared to $5.5 million or $1.00 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 municipal and retail divisions.
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. We expect to continue our cost reduction efforts throughout
1998.
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 increased $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, equities decreased $0.9 million).
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. In late 1997, the Company
changed its medical insurance plan, which will reduce its costs in 1998.
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 firm'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 retail branch technology and
the expansion of our retail 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.)
================================================================================
1996 vs.
Twelve Months Ended 1995 Percentage
December 31, December 31, Increase Increase
(In thousands of dollars) 1996 1995 (Decrease) (Decrease)
- --------------------------------------------------------------------------------
Revenues:
Commissions $ 42,711 $ 34,941 $ 7,770 22%
Principal transactions 63,438 44,821 18,617 42%
Investment banking 19,558 16,311 3,247 20%
Fees and other 10,244 7,530 2,714 36%
- --------------------------------------------------------------------------------
Operating revenues 135,951 103,603 32,348 31%
Interest income 32,240 28,075 4,165 15%
- --------------------------------------------------------------------------------
Total Revenues 168,191 131,678 36,513 28%
Interest expense 26,030 21,985 4,045 18%
- --------------------------------------------------------------------------------
Net revenues 142,161 109,693 32,468 30%
- --------------------------------------------------------------------------------
Expenses (excluding interest):
Compensation and benefits 95,691 74,596 21,095 28%
Clearing, settlement and
brokerage cost 2,868 2,378 490 21%
Communications and
data processing 10,897 8,244 2,653 32%
Occupancy and depreciation 8,527 6,909 1,618 23%
Selling 7,246 5,231 2,015 39%
Other 7,840 5,912 1,928 33%
- --------------------------------------------------------------------------------
Total expenses (excluding
interest) 133,069 103,270 29,799 29%
- --------------------------------------------------------------------------------
Income before income taxes 9,092 6,423 2,669 42%
Income tax expense 3,592 2,363 1,229 52%
- --------------------------------------------------------------------------------
Net income $ 5,500 $ 4,060 $ 1,440 35%
================================================================================
Net interest income:
Interest income $ 32,240 $ 28,075 $ 4,165 15%
Interest expense 26,030 21,985 4,045 18%
- --------------------------------------------------------------------------------
Net interest income $ 6,210 $ 6,090 $ 120 2%
================================================================================
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
Calendar Year 1996 Compared with Calendar Year 1995
Net Income
- ----------
Net income for the calendar year ended December 31, 1996 was $5.5 million or
$1.00 basic earnings per share compared to $4.1 million or $0.74 basic earnings
per share a year ago. The 1996 revenue gain reflects significant increases in
both the Company's institutional and retail divisions. Net revenues increased
over 60% for our equity capital markets division and over 50% for our fixed
income capital markets division, while revenues in the retail division increased
nearly 25%. In the second half of 1996, continued strong revenues were offset
in part by our investment in people and systems.
Commissions
- -----------
Commission revenues increased $7.8 million or 22% in calendar 1996 reflecting
active trading in all major markets. Revenues from listed stocks and over-the-
counter agency stock commissions increased $4.5 million or 19% with mutual fund
commission revenues increasing $3.1 million or 33%.
Principal Transactions
- ----------------------
Principal transactions increased $18.6 million or 42% in calendar 1996. This
growth was comprised of an increase in equity securities of $10.3 million, an
increase in municipal bonds of $0.7 million, an increase in taxable fixed income
of $5.9 million and an increase in investment income of $1.7 million, primarily
from META Group, Inc.
Investment Banking
- ------------------
Investment banking revenues increased $3.2 million or 20% in calendar 1996.
Revenues from selling concessions were up $0.7 million (municipals increased
$1.6 million, equities decreased $0.8 million and taxable fixed income decreased
$0.1 million), underwriting fees increased $0.5 million (primarily equities),
and investment banking fees increased $2.0 million (municipal finance fees
increased $1.5 million while corporate finance fees increased $0.5 million).
Fees and Other
- --------------
Fees and other revenues increased $2.7 million or 36% in calendar 1996
primarily reflecting increased service charge income and financial service
revenues.
Compensation and Benefits
- -------------------------
Compensation and benefits increased $21.1 million or 28% in calendar 1996 due
primarily to the increase in revenues. Sales-related compensation increased
$17.8 million, salaries increased $2.7 million, and benefits increased $0.6
million.
Communications and Data Processing
- ----------------------------------
Communications and data processing increased $2.7 million or 32% in calendar
1996. Communications expense increased $2.2 million due mainly to the
Company's continued commitment to upgrading technology, its increase in
personnel and the growth of its business related activity. 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 $1.6 million or 23% in calendar
1996 primarily as a result of our continuing investment in new automated
systems.
Selling
- -------
Selling expense increased $2.0 million or 39% in calendar 1996 mainly
reflecting greater promotional- related expenses resulting from increased retail
and institutional activity.
Other
- -----
Other expense increased $1.9 million or 33% in calendar 1996 due to an
increase in consulting costs and expenses related to an upgrade in our customer
statement.
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
===================================================================================
1995 vs.
Three Months Ended 1994 Percentage
December 31, December 31, Increase Increase
(In thousands of dollars) 1995 1994 (Decrease) (Decrease)
- -----------------------------------------------------------------------------------
Revenues:
Commissions $ 9,639 $ 6,587 $ 3,052 46%
Principal transactions 12,322 10,699 1,623 15%
Investment banking 5,435 3,749 1,686 45%
Fees and other 1,870 1,553 317 20%
- -----------------------------------------------------------------------------------
Operating revenues 29,266 22,588 6,678 30%
Interest income 8,138 6,237 1,901 30%
- -----------------------------------------------------------------------------------
Total Revenues 37,404 28,825 8,579 30%
Interest expense 6,631 4,551 2,080 46%
- -----------------------------------------------------------------------------------
Net revenues 30,773 24,274 6,499 27%
- -----------------------------------------------------------------------------------
Expenses (excluding interest):
Compensation and benefits 20,433 16,900 3,533 21%
Clearing, settlement and
brokerage cost 613 493 120 24%
Communications and
data processing 2,264 1,814 450 25%
Occupancy and depreciation 1,842 1,593 249 16%
Selling 1,563 1,149 414 36%
Other 1,576 1,046 530 51%
- -----------------------------------------------------------------------------------
Total expenses (excluding
interest) 28,291 22,995 5,296 23%
- -----------------------------------------------------------------------------------
Income before income taxes 2,482 1,279 1,203 94%
Income tax expense 929 436 493 113%
- -----------------------------------------------------------------------------------
Net income $ 1,553 $ 843 $ 710 84%
===================================================================================
Net interest income:
Interest income $ 8,138 $ 6,237 $ 1,901 30%
Interest expense 6,631 4,551 2,080 46%
- -----------------------------------------------------------------------------------
Net interest income $ 1,507 $ 1,686 $ (179) (11)%
===================================================================================
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
Three Month Period Ended December 31, 1995 and December 31, 1994
Net Income
- -----------
Net income for the quarter ended December 31, 1995, was $1.6 million or $0.28
basic earnings per share compared to $0.8 million or $0.16 basic earnings per
share a year ago. Most of the Company's business units showed significant
revenue gains in the three month period ending December 31, 1995 compared to the
three month period ending December 31, 1994. Revenues in both the equity
capital markets and municipal divisions increased over 50%, while revenues in
the retail division were up almost 20%.
Commissions
- -----------
Commission revenues increased $3.1 million or 46% in the three month period
ending December 31, 1995 reflecting active trading in all major markets.
Revenues from listed and over-the-counter agency stock commissions increased
$2.0 million or 44% with mutual fund commission revenues increasing $1.0 million
or 57%.
Principal Transactions
- ----------------------
Principal transactions increased $1.6 million or 15% in the three month period
ending December 31, 1995. This growth was comprised of an increase in equity
securities of $0.9 million, an increase in municipal bonds of $0.3 million and
an increase in taxable fixed income of $0.4 million.
Investment Banking
- ------------------
Investment banking revenues increased $1.7 million or 45% in the three month
period ending December 31, 1995. Revenues from selling concessions were up $1.0
million (equities increased $0.4 million, municipals increased $0.4 million and
taxable fixed income increased $0.2 million), underwriting fees increased $0.6
million (primarily municipal bonds), and investment banking fees increased $0.1
million (municipal finance fees increased $0.3 million while corporate finance
fees decreased $0.2 million).
Fees and Other
- --------------
Fees and other revenues increased $0.3 million or 20% reflecting increased
service charge income and financial service revenues.
Compensation and Benefits
- -------------------------
Compensation and benefits increased $3.5 million or 21% due primarily to the
increase in revenues. Sales-related compensation increased $2.4 million,
salaries increased $0.9 million, and benefits increased $0.2 million.
Communications and Data Processing
- ----------------------------------
Communications and data processing increased $0.5 million or 25% in the three
month period ending December 31, 1995. Communications expense increased $0.4
million due mainly to the Company's buildup in institutional equity sales and
research. Data processing expense increased $0.1 million due primarily to a
greater number of transactions.
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
Selling
- -------
Selling expense increased $0.4 million or 36% mainly reflecting higher
promotional related costs resulting from institutional sales activity.
Other
- -----
Other expenses increased $0.5 million or 51% in the three month period
ending December 31, 1995, partially due to an increase in consulting costs.
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, is liquid, consisting of cash and assets readily
convertible into cash. These assets are financed primarily by the Company's
interest-bearing and non-interest-bearing payables to customers, payables to
brokers and dealers secured by loaned securities, and bank lines-of-credit.
Securities borrowed and securities loaned along with receivables from customers
and payable to customers will fluctuate primarily due to the current level of
business activity in these areas. Securities owned will fluctuate as a result
of the changes in the level of positions held to facilitate customer
transactions and changes in market conditions. Short-term bank loans decreased
due partly to a decrease in securities owned. Securities loaned, net, increased
primarily due to an increase in net customer receivables. 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 1997, 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 $190,000,000 of which approximately $90,298,000 were
unused as of December 31, 1997-will provide sufficient resources to meet present
and reasonably foreseeable short-term financial needs.
During 1997, 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 1998, subsequent to the period reflected in this report, the
Company declared the regular quarterly cash dividend of $0.05 per share payable
on February 26, 1998, to shareholders of record on February 12, 1998.
Management believes that funds provided by operations will be sufficient to
fund the acquisition of office equipment, leasehold improvements, and other
long-term requirements.
New Accounting Standards
- ------------------------
Financial Accounting Standards Board No. 125 - "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." This
statement, which would be effected for all transfers after December 31, 1997,
addresses several matters that have a significant impact of the Broker/Dealer
industry. It addresses how and when to record transferred assets, transfers of
partial interest, servicing of financial assets, securitizations, transfers of
sales-type and direct financing lease receivables, securities lending
transactions, repurchase agreements including "dollar rolls," "wash sales," loan
syndications and participations, risk participations in banker's acceptances,
factoring arrangements, transfer of receivables with recourse, and
extinguishment of liabilities, collateral, repurchase agreements and how to
amortize servicing assets and liablities. Management has reviewed this
statement and has determined that it has no material effect on the presentation
of the consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" ("SFAS 130") and "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"), respectively (collectively, the
Statements"). The Statements are effective for fiscal years beginning after
December 15, 1997. SFAS 130 establishes standards for reporting of
comprehensive income and its components in annual financial statements. 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
FIRST ALBANY COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
interim financial reports. Reclassification or restatement of comparative
financial statements or financial information for earlier periods is required
upon adoption of SFAS 130 and SFAS 131, respectively, Application of the
Statements' requirements is not expected to have a material impact on the
Company's consolidated financial position, results of operations or earnings per
share data as currently reported.
Year 2000
- ---------
The Company relies on both internal systems and systems of other parties in
regard to its business, accounting and operational software. As the millennium
approaches, the Company is working toward becoming year 2000 compliant. Many of
our internal systems are already year 2000 compliant. The Company currently has
plans that if successful will have all internal systems year 2000 compliant
during 1998.
The Company has contacted its outside vendor software providers regarding the
year 2000 and has developed specific plans to address this issue. These vendors
are in the process of implementing these plans with an expected completion date
of late 1998. If any vendor is not successful, the Company will evaluate
selecting alternative vendors at that time.
The incremental costs of this project are estimated to be approximately
$700,000. Most of these costs are attributable to software/hardware upgrades.
The Company presently believes that with modifications to existing software or
conversion to new software, year 2000 problems can be effectively avoided.
However, if such modifications and conversions are not made, or are not
completed timely, year 2000 problems could have a material impact on the
operations of the Company.
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements and Supplementary Data
----------------------------------------------------
Page
----
REPORT OF INDEPENDENT ACCOUNTANTS 25
FINANCIAL STATEMENTS:
Consolidated Statements of Income For the Calendar
Years Ended December 31, 1997, and December 31, 1996;
the three-month Transition Period ended December 31,
1995; and the Fiscal Year Ended September 29, 1995 26
Consolidated Statements of Financial Condition
as of December 31, 1997, December 31, 1996
and December 31, 1995 (unaudited) 27
Consolidated Statements of Changes in Stockholders'
Equity for the Calendar Years Ended December 31,
1997 and December 31, 1996; the three-month
Transition Period ended December 31, 1995, and
the Fiscal Year Ended September 29, 1995 28
Consolidated Statements of Cash Flows for the
Calendar Years Ended December 31, 1997 and
December 31, 1996; the Three-month Transition
Period ended December 31, 1995; and the Fiscal
Year Ended September 29, 1995, 29-30
Notes to Consolidated Financial Statements 31-45
SUPPLEMENTARY DATA:
Selected Quarterly Financial Data (Unaudited) 46
Report of Independent Accountants
Board of Directors and Stockholders
First Albany Companies Inc.
We have audited the consolidated statements of financial condition of First
Albany Companies Inc. as of December 31, 1997 and 1996 and the related
statements of income, changes in stockholder's equity and cash flows for the
years ended December 31, 1997 and 1996, the three months ended December 31, 1995
and the year ended September 29, 1995 and the financial statement listed in Item
14(a) of this Form 10-K. 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 in accordance with generally accepted auditing
standards. Those standards 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.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Albany
Companies Inc. as of December 31, 1997 and 1996, and the consolidated results
of their operations and their cash flows for the years ended December 31, 1997
and 1996, the three months ended December 31, 1995, and for the year ended
September 29, 1995 in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Albany, New York
March 23, 1998
First Albany Companies Inc.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars, except per share amounts)
Three-Month
Transition Period
December 31, December 31, December 31, September 29,
For the years ended 1997 1996 1995 1995
- ----------------------------------------------------------------------------------------
Revenues:
Commissions $ 52,987 $ 42,711 $ 9,639 $ 31,889
Principal transactions 63,235 63,438 12,322 43,198
Investment banking 19,636 19,558 5,435 14,625
Interest 45,474 32,240 8,138 26,173
Fees and other 11,640 10,244 1,870 7,214
- ----------------------------------------------------------------------------------------
Total revenues 192,972 168,191 37,404 123,099
Interest expense 38,615 26,030 6,631 19,904
- ----------------------------------------------------------------------------------------
Net revenues 154,357 142,161 30,773 103,195
- ----------------------------------------------------------------------------------------
Expenses (excluding interest):
Compensation and benefits 105,080 95,691 20,433 71,064
Clearing, settlement and
brokerage costs 3,358 2,868 613 2,258
Communications and data
processing 12,872 10,897 2,264 7,794
Occupancy and depreciation 13,203 8,527 1,842 6,660
Selling 8,027 7,246 1,563 4,817
Other 8,915 7,840 1,576 5,382
- ----------------------------------------------------------------------------------------
Total expenses (excluding
interest) 151,455 133,069 28,291 97,975
- ----------------------------------------------------------------------------------------
Income before income taxes 2,902 9,092 2,482 5,220
Income tax expense 1,251 3,592 929 1,870
- ----------------------------------------------------------------------------------------
Income before extraordinary
items 1,651 5,500 1,553 3,350
Extraordinary gain,
net of $255 taxes 305
- ----------------------------------------------------------------------------------------
Net income $ 1,956 $ 5,500 $ 1,553 $ 3,350
========================================================================================
Basic Earnings Per Share:
Income before extraordinary
gain $ 0.29 $ 1.00 $ 0.28 $ 0.61
Extraordinary gain 0.05 0.00 0.00 0.00
- ----------------------------------------------------------------------------------------
Net Income $ 0.34 $ 1.00 $ 0.28 $ 0.61
========================================================================================
Dilutive Earnings Per Share:
Income before extraordinary
gain $ 0.26 $ 0.93 $ 0.26 $ 0.59
Extraordinary gain 0.05 0.00 0.00 0.00
- ----------------------------------------------------------------------------------------
Net Income $ 0.31 $ 0.93 $ 0.26 $ 0.59
========================================================================================
*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, December 31,
1997 1996 1995
(unaudited)
- -------------------------------------------------------------------------------------
Assets
Cash $ 951 $ 4,005 $ 5,450
Cash segregated under federal regulations 1,300
Securities purchased under agreement
to resell 5,299 2,869
Securities borrowed 468,786 344,904 283,785
Receivables from:
Brokers, dealers and clearing agencies 4,421 1,856 7,231
Customers 182,976 128,130 99,759
Others 7,760 8,181 17,492
Securities owned 121,116 156,154 80,586
Investments 7,026 6,157 1,470
Office equipment and leasehold
improvements, net 12,947 12,584 6,075
Other assets 20,639 10,945 6,933
- -------------------------------------------------------------------------------------
Total Assets $831,921 $675,785 $510,081
=====================================================================================
Liabilities and Stockholders' Equity
Liabilities
Short-term bank loans $ 99,702 $134,712 $112,292
Securities sold under agreement
to repurchase 891
Securities loaned 547,847 350,577 283,146
Payables to:
Brokers, dealers and clearing agencies 2,955 3,150 3,281
Customers 49,181 48,174 48,274
Others 37,201 56,615 5,000
Securities sold but not yet purchased 8,440 10,075 4,407
Accounts payable 4,196 1,928 2,457
Accrued compensation 13,025 11,649 7,617
Accrued expenses 6,076 5,622 4,408
Notes payable 7,271 4,583 1,641
Obligations under capitalized leases 3,088 1,426
- --------------------------------------------------------------------------------------
Total Liabilities 779,873 628,511 472,523
- --------------------------------------------------------------------------------------
Commitments and Contingencies
Subordinated debt 7,500 5,000
- --------------------------------------------------------------------------------------
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 5,943,381;
5,390,594; and 4,889,747 respectively 59 54 49
Additional paid-in capital 33,024 25,591 20,257
Retained earnings 12,070 18,556 19,153
Less treasury stock at cost (605) (1,927) (1,901)
- --------------------------------------------------------------------------------------
Total Stockholders' Equity 44,548 42,274 37,558
- --------------------------------------------------------------------------------------
Total Liabilities and Stockholders'
Equity $831,921 $675,785 $510,081
======================================================================================
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 Periods Ended December 31, 1997,
December 31, 1996, December 31, 1995, and September 29, 1995
(In thousands of dollars except for number of shares)
Common Stock Additional
Issued Paid-In Retained Treasury Stock
Shares Amount Capital Earnings Shares Amount
=====================================================================================
Balance
September 30, 1994 4,435,454 $ 44 $ 16,489 $ 19,099 (408,450) $ (2,402)
Issuance of re-
stricted stock 186 (155) 19,635 130
Stock dividends
declared 454,293 5 3,582 (3,587) (35,175)
Cash dividends paid (815)
Options exercised (70) 58,251 336
Net income 3,350
- -------------------------------------------------------------------------------------
Balance
September 29, 1995 4,889,747 49 20,257 17,822 (365,739) (1,936)
Cash dividends paid (217)
Options exercised (5) 6,370 35
Net income 1,553
- -------------------------------------------------------------------------------------
Balance
December 31, 1995 4,889,747 49 20,257 19,153 (359,369) (1,901)
Issuance of re-
stricted stock 340 45 74,557 413
Stock dividends
declared 500,847 5 4,994 (4,999) (38,768)
Cash dividends paid (932)
Options exercised (211) 136,276 806
Treasury stock purchase (124,505) (1,245)
Net income 5,500
- -------------------------------------------------------------------------------------
Balance
December 31, 1996 5,390,594 54 25,591 18,556 (311,809) (1,927)
Issuance of re-
stricted stock 261 (39) 51,411 287
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 $ 33,024 $ 12,070 (109,279) $ (605)
=====================================================================================
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)
Three Months
Dec. 31, Dec. 31, Dec.31, Sept. 29,
For the years ended 1997 1996 1995 1995
- -----------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,956 $ 5,500 $ 1,553 $ 3,350
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,562 3,230 691 2,302
Deferred income taxes 2,251 146 587 (1,278)
Undistributed earnings of affiliate (1,168) (555)
Unrealized investment gains (117) (2,343)
Realized gains on sale of investments (770)
(Increase) decrease in operating assets:
Cash and securities segregated under federal regs. 1,300 (1,300)
Securities purchased under agreement
to resell (2,430) (2,869)
Securities borrowed, net (12,243)
Net receivables from brokers, dealers, and
clearing agencies (2,760) (5,165)
Net receivable from customers (53,839) (28,471) (1,210) (10,394)
Net receivable from others (11,662) 15,865
Securities owned, net 33,403 (69,900) (27,354) (33,031)
Other assets (11,945) (4,158) (150) 1,283
Increase (decrease) in operating liabilities:
Securities loaned, net 73,388 6,312 13,335
Net payables to brokers, dealers,
and clearing agencies 5,244 (2,351)
Net payable to others (16,494) 48,934
Accounts payable and accrued expenses 4,098 4,717 487 382
- ------------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities 30,135 (32,913) (55,766) (10,537)
- ------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of furniture, equipment,
and leaseholds (2,682) (8,288) (705) (3,213)
Purchases of investments (15) (1,789) (1,838)
Proceeds from sale of investments 1,045
- ------------------------------------------------------------------------------------------
Net cash used in investing activities (1,652) (10,077) (705) (5,051)
- ------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds (payments) of short-term
bank loans, net (35,010) 22,420 59,004 14,367
Proceeds from subordinated debt 2,500 5,000
Proceeds of notes payable 5,000 5,500 2,000
Payments of notes payable (2,312) (2,558) (150) (303)
Payments of obligations under capitalized
leases (425) (25)
Securities sold under agreement to repurchase 891
Payments for purchases of common stock for
treasury (1,245)
Proceeds from issuance of common stock from
treasury 881 595 31 266
Proceeds from issuance of restricted stock 509 798 161
Net increase (decrease) from borrowing under
line-of-credit agreements (2,499) 11,992
Dividends paid (1,072) (932) (217) (815)
- -------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (31,537) 41,545 58,668 15,676
- -------------------------------------------------------------------------------------------
Increase (decrease) in cash (3,054) (1,445) 2,197 88
Cash at beginning of the period 4,005 5,450 3,253 3,165
- -------------------------------------------------------------------------------------------
Cash at the end of the period $ 951 $ 4,005 $ 5,450 $ 3,253
===========================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES
Income Tax Payments $ 681 $ 3,410 $ 608 $ 1,753
Interest Payments $ 39,808 $ 25,404 $ 6,273 $ 18,989
In 1997 and 1996, the Company entered into capital leases for office and
computer equipment totaling approximately $2,087,000 and $1,451,000,
respectively.
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 and mutual fund assets by making investment decisions, placing
purchase and sales orders, and providing research, statistical analysis, and
continuous supervision of the portfolios. All significant intercompany
balances and transactions have been eliminated in consolidation. Investments
in affiliates which are not majority owned are reported using the equity method.
In July 1996, the Company changed its fiscal year end to a calendar year end.
Accordingly, results from operations for the periods ending December 31, 1997
and December 31, 1996 reflect a twelve-month period ("calendar year") while
results for the transitional period ending December 31, 1995 reflect a three-
month period. Previously, the Company's fiscal year end was the last Friday in
September, and therefore, the Company's fiscal year would contain either a 52 or
53 week period. The fiscal year ended September 29, 1995 contained 52 weeks.
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. 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.
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, 1997 and December 31, 1996, the
Company had entered into resale agreements in the amount of $5,299,000 and
$2,869,000, respectively. At December 31, 1997 and December 31, 1996, the
Company had entered into repurchase agreements with counterparties, in the
amounts of $891,000 and $0, respectively.
Securities-Lending Activities
- -----------------------------
Securities borrowed and securities loaned 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.
Office Equipment and Leasehold Improvements
- -------------------------------------------
Office equipment and leasehold improvements are stated at cost less
accumulated depreciation of $15,624,000 at December 31, 1997, $11,682,000
at December 31, 1996, and $10,513,000 at December 31, 1995 (unaudited).
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.
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.
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.
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.
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Earnings per Common Share
- -------------------------
Earnings per share is presented in accordance with Financial Accounting
Standards No. 128 - "Earnings Per Share." This statement which is
effective for financial statements issued for periods ending after December
15, 1997, simplifies the computation of earnings per share (EPS) by
replacing the "primary" EPS requirement with a "basic" EPS computation
based upon weighted-average shares outstanding. The "dilutive" EPS
computation is consistent with that of "basic" EPS while giving effect to
all dilutive potential common shares that were outstanding during the
period.
Three-month
transition period
December 31, December 31, December 31, September 29,
1997 1996 1995 1995
- ---------------------------------------------------------------------------------
Net Income $ 1,956 $ 5,500 $ 1,553 $ 3,350
- ---------------------------------------------------------------------------------
Weighted average shares
for basic EPS 5,731 5,508 5,504 5,463
Effect of dilutive common
equivalent shares 558 419 380 257
- --------------------------------------------------------------------------------
Weighted average shares
and dilutive common
equivalent shares for
dilutive EPS 6,289 5,927 5,884 5,720
- ---------------------------------------------------------------------------------
Basic EPS $ 0.34 $ 1.00 $ 0.28 $ 0.61
Dilutive EPS $ 0.31 $ 0.93 $ 0.26 $ 0.59
=================================================================================
All per share figures have been restated for all stock dividends declared.
Reclassifications
- -----------------
Certain amounts in the financial statements have been reclassified to
conform with the 1997 presentation.
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, December 31,
1997 1996 1995
(unaudited)
- -------------------------------------------------------------------------------------
Securities failed to deliver $ 4,421 $ 1,856 $ 3,893
Receivable from clearing agencies 3,338
- -------------------------------------------------------------------------------------
Total receivables $ 4,421 $ 1,856 $ 7,231
=====================================================================================
Securities failed to receive $ 2,955 $ 3,150 $ 3,281
- -------------------------------------------------------------------------------------
Total payables $ 2,955 $ 3,150 $ 3,281
=====================================================================================
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 $341,000,
$329,000, and $307,000 as of December 31, 1997, December 31, 1996, and December
31, 1995 (unaudited), respectively. An allowance for doubtful accounts, based
upon specific identification, was recorded for $340,000, $304,000, and $219,000,
as of December 31, 1997, December 31, 1996, and December 31, 1995 (unaudited),
respectively.
NOTE 4. Receivables From Others
Amounts receivable from others as of:
================================================================================
(In thousands of dollars) December 31, December 31, December 31,
1997 1996 1995
(unaudited)
- --------------------------------------------------------------------------------
Adjustment to record securities
on a trade date basis, net $11,249
Others $ 7,760 $ 8,181 6,243
- --------------------------------------------------------------------------------
Total $ 7,760 $ 8,181 $17,492
================================================================================
For proprietary securities transactions, amounts receivable and payable
for securities transactions that have not reached their contractual settlement
date are recorded net 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, December 31,
1997 1996 1995
(unaudited)
- -------------------------------------------------------------------------------------
Sold, but Sold, but Sold, but
not yet not yet not yet
Owned Purchased Owned Purchased Owned Purchased
- -------------------------------------------------------------------------------------
Marketable
U.S. government and
federal agency
obligations $ 18,296 $ 5,482 $ 6,124 $ 2,923 $ 7,149 $ 1,191
State and municipal bonds 94,642 57 137,223 4,976 63,882 231
Corporate obligations 4,646 1,065 9,486 824 2,997 796
Corporate stocks 3,061 1,836 2,171 1,352 5,982 2,189
Options 1 20
Not readily marketable
securities, fair value 471 1,149 556
- -------------------------------------------------------------------------------------
$121,116 $ 8,440 $156,154 $ 10,075 $ 80,586 $ 4,407
=====================================================================================
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.
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6. Investments
At December 31, 1997 the Company owned approximately 2,037,000 common shares
(35% of the shares outstanding) of Mechanical Technology Incorporated (MTI).
The Company's investment in MTI is recorded under the equity method and
approximated $3,616,000, which included goodwill of approximately $783,000 which
is being amortized over ten years. The Company's equity in MTI's net income,
recorded on a one-quarter delay basis, was $1,168,000 for the year ended
December 31, 1997 and related primarily to MTI's extinguishment of debt
(reported as an extraordinary gain) and gain on sale of a division/subsidiary.
For the three month period ended December 31, 1997, MTI reported an unaudited
loss of approximately $1.6 million. The Company's equity in MTI's loss will be
recorded in the quarter ending March 27, 1998. For the year ended December 31,
1996, the Company's equity in MTI's net income was $555,000.
The following presents summarized financial information of MTI for the
year ended September 30,1997:
==============================================
Assets $14,756,000
Liabilities 6,543,000
----------------------------------------------
Shareholder's equity $ 8,213,000
==============================================
==============================================
Revenues $31,980,000
Operating income 580,000
Gain on sale of division/subsidiary 2,012,000
Income before extraordinary
items and income taxes 2,127,000
Gain on extinguishment of
debt, net of taxes 2,507,000
Net income 4,520,000
==============================================
At December 31, 1997, the aggregate market value of the Company's shares in MTI
was $8,147,000. Under the equity method, the market value of MTI's stock is not
included in the calculation of the Company's investment.
At December 31, 1997, the Company owned 155,000 shares of META Group, Inc. The
fair market value of this investment was $3,410,000. During the year ended
December 31, 1997 the Company has recorded a realized gain of $770,000 and net
unrealized gains of $117,000 with respect to this investment. The Company
recorded an unrealized gain of $2.3 million for the year ended December 31,
1996.
NOTE 7. Bank Loans
Short-term bank loans are made under a variety of committed and uncommitted
bank lines of credit 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
6.1%, 5.9%, and 5.7% at December 31, 1997, December 31, 1996, and December 31,
1995, respectively.
Short-term bank loans were collateralized by Company owned securities of
$75,370,000 and customers' margin account securities of $43,622,000 at
December 31, 1997.
A note for $3,208,333, which is collateralized by fixed assets, is payable in
monthly principal payments of $114,583 and accrued interest. Interest is at the
90-day U.S. Treasury Securities rate (4.85% at December 31, 1997) plus 2.5%.
The note matures April 1, 2000.
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A note for $4,062,500, 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") (5.71875 plus 2% on
December 31 ,1997). 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, 1997 was
$3,935,000 . The amount of net capital as of December 31, 1997 was $18,605,000.
This note matures on March 27, 2001.
Future annual principal loan repayment requirements as of December 31, 1997
are as follows:
===========================================
(In thousands of dollars)
-------------------------------------------
1998 $2,625
1999 2,625
2000 1,708
2001 313
-------------------------------------------
Total $7,271
===========================================
NOTE 8. Obligations under Capitalized Leases
The Company entered into capital leases for office equipment. The following
is a schedule of future minimum lease payments under capital leases together
with the present value of the net minimum lease payments as of
December 31, 1997:
================================================
(In thousands of dollars)
------------------------------------------------
1998 $ 917
1999 919
2000 888
2001 650
2002 211
------------------------------------------------
Total Minimum Lease Payments 3,585
Less: Amount Representing Interest 497
------------------------------------------------
Present Value of Minimum Lease Payments $3,088
================================================
NOTE 9. Payables To Others
Amounts payable to others as of:
(In thousands of dollars) December 31, December 31, December 31,
1997 1996 1995
(unaudited)
- --------------------------------------------------------------------------------
Adjustment to record
securities on a trade date
basis, net $ 23,737 $ 39,401
Borrowing under line-of-credit
agreements 10,793 13,292 $ 1,300
Others 2,671 3,922 3,700
- --------------------------------------------------------------------------------
Total $ 37,201 $ 56,615 $ 5,000
================================================================================
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For proprietary securities transactions, amounts receivable and payable for
securities transactions that have not reached their contractual settlement date
are recorded net on the statement of financial condition.
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 26,891 shares of the Company's stock at $18.594 per
share. This right expires December 31, 2002.
The Company also has an additional subordinated debt of $5,000,000 which bears
interest at 9.25%. Interest is paid monthly with the principal amount due at
maturity on December 31, 2002. The lender has the right to exercise stock
options on 88,200 shares of the Company's stock at $11.34 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, 1997 was $3,935,000. The amount of net capital as
of December 31, 1997 was $18,605,000.
NOTE 11. Stockholders' Equity
During 1997, 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 1998, the Board of Directors declared the regular quarterly cash
dividend of $0.05 per share payable on February 26, 1998, to shareholders of
record on February 12, 1998.
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.
The components of income taxes are:
=======================================================================================
Three-Months
(In thousands of dollars) December 31, December 31, December 31, September 29,
1997 1996 1995 1995
- ---------------------------------------------------------------------------------------
Federal
Current $ (956) $ 2,455 $ 260 $ 2,051
Deferred 1,642 (3) 416 (904)
State and local
Current 181 991 82 1,097
Deferred 609 149 171 (374)
- ---------------------------------------------------------------------------------------
Total income taxes $ 1,476 $ 3,592 $ 929 $ 1,870
=======================================================================================
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The reasons for the difference between the expected income tax expense using
the federal statutory rate and the income tax expense are as follows:
Three-Months
(In thousands of dollars) December 31, December 31, December31, September 29,
1997 1996 1995 1995
- --------------------------------------------------------------------------------------------
Income taxes
at federal statutory rate $ 1,167 $ 3,092 $ 844 $ 1,775
State and local income taxes,
net of federal income taxes 439 753 167 477
Tax-exempt interest income, net (405) (420) (126) (514)
Non-deductible expenses 275 167 44 132
- --------------------------------------------------------------------------------------------
Total income taxes $ 1,476 $ 3,592 $ 929 $ 1,870
============================================================================================
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, December 31,
1997 1996 1995
(unaudited)
---------------------------------------------------------------------------
Receivables $ 149 $ 128 $ 67
Securities held for investment (915) (964) (262)
Fixed assets 9 486 309
Deferred compensation 577 1,631 1,633
Other (600) 190 (130)
---------------------------------------------------------------------------
Total deferred tax
assets (liablities) $ (780) $1,471 $1,617
===========================================================================
The Company has not recorded a valuation allowance for deferred tax assets
since income in the carryback period is sufficient to realize the benefit of
future deductions.
NOTE 13. Employee Benefit Plans
The Company maintains a deferred profit sharing plan (Internal Revenue Code
Section 401(k) Plan) which 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, 1997, December 31, 1996, the transitional period ending December 31, 1995,
and the year ended September 29, 1995, the Company contributed $107,000,
$103,000, $0, and $140,000, 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.
Employee and Company contributions are invested solely in the common stock of
the Company. During the years ended December 31, 1997, December 31, 1996, the
transitional period ending December 31, 1995, and the year ended September 29,
1995, the Company contributed $788,000, $617,000, $163,000, and $408,000,
respectively.
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14. Incentive Plans
In 1982, the Company established a Stock Incentive Plan (the "1982 Plan")
which, 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. On February 27, 1989, stockholders approved adoption of the
First Albany Companies Inc. 1989 Stock Incentive Plan (the "1989 Plan").
Coincident with the adoption of the 1989 Plan, the 1982 Plan was terminated.
Options previously granted under the 1982 Plan remain valid in accordance with
the terms of the grant of such options; however, the grant of new options under
the 1982 Plan was ended. Both the 1982 Plan and 1989 Plan enable the Company
to grant incentive stock options (ISOs) which meet the requirements of Section
422A of the Internal Revenue Code of 1954, as amended, and nonqualified stock
options (NSOs). ISOs are granted at prices not less than fair value at the
date of the grant; NSOs may be issued at prices less than fair market value.
ISOs and NSOs may not have a term of more than ten years. Under certain
conditions, the Company is required to purchase shares issued under this Plan
at prices ranging from the original exercise or award price to the greater of
the then book or market value. If NSOs are exercised, the difference between
the option price and the selling price will be recognized as an expense in the
income statement.
In addition, under the 1989 Plan, stock appreciation rights (SARs) may be
granted in tandem with ISOs or NSOs. SARs may be exercised only if the related
options (or portions thereof) are surrendered and at such time as the fair
market value of the shares underlying the option exceeds the option price for
such shares. Upon exercise of SAR and surrender of the related option, an
employee will be entitled to receive an amount equal to the excess of the fair
market value of one share at the time of such surrender over the option price
per share specified in such option times the number of such shares called for by
the option, or portion thereof, which is so surrendered. Payment may be made in
cash, shares of common stock, or a combination thereof. SARs may not be
exercised before six months from date of grant. As of December 31, 1997, no
SARs have been granted.
Option transactions for the 39 month period ended December 31, 1997 under
the 1982 Plan were as follows: (all are ISOs)
Shares Weighted Average
Subject Exercise
to Option Price
- --------------------------------------------------------------------------------
Balance at September 30, 1994 31,600 $ 4.95
Options granted 2,908 4.60
Options exercised (11,605) 4.76
- --------------------------------------------------------------------------------
Balance at September 29, 1995 22,903 4.47
Options granted 1,145 4.08
Options exercised (4,923) 4.26
- --------------------------------------------------------------------------------
Balance at December 31, 1995 19,125 4.04
Options granted 1,959 3.75
Options exercised (4,022) 3.55
- --------------------------------------------------------------------------------
Balance at December 31, 1996 17,062 3.73
Options granted 967 3.15
Options exercised (8,654) 4.04
- --------------------------------------------------------------------------------
Balance at December 31, 1997 9,375 $ 3.07
================================================================================
There were no shares available for grants of options under the 1982 Plan at
December 31, 1997; December 31, 1996; December 31, 1995; and September 29, 1995.
During calendar year 1997, the
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Company declared two 5% common stock dividends. These dividends resulted in an
additional 967 options authorized. All shares subject to options were
exercisable at the end of each period presented. At December 31, 1997, options
outstanding and exercisable under the 1982 Plan had an average exercise price of
$3.07 and an average remaining contractual life of 1.01 years.
Option transactions for the 39 month period ended December 31, 1997 under
the 1989 Plan were as follows: (all are ISOs)
Shares Weighted Average
Subject Exercise
to Option Price
- --------------------------------------------------------------------------------
Balance at September 30, 1994 567,483 $ 5.86
Options granted 199,454 7.28
Options exercised (46,646) 4.59
Options terminated (479) 4.51
- --------------------------------------------------------------------------------
Balance at September 29, 1995 719,812 5.85
Options granted 47,569 6.06
Options exercised (1,447) 7.14
- --------------------------------------------------------------------------------
Balance at December 31, 1995 765,934 5.60
Options granted 262,441 8.51
Options exercised (132,255) 4.39
Options terminated (51,359) 6.59
- --------------------------------------------------------------------------------
Balance at December 31, 1996 844,761 6.11
Options granted 681,161 10.03
Options exercised (164,230) 5.15
Options terminated (50,616) 8.40
- --------------------------------------------------------------------------------
Balance at December 31, 1997 1,311,076 $ 7.46
================================================================================
During calendar year 1997, the Company declared two 5% common stock dividends.
These dividends resulted in an additional 153,143 options authorized.
There were 283,023; 760,402; 337,501; and 332,456 shares available for grants
of options at December 31, 1997, December 31, 1996, December 31, 1995, and
September 29, 1995, respectively.
The following table summarizes information about stock options outstanding
under the 1989 Plan at December 31, 1997:
-----------Outstanding--------- ----Exercisable------
Exercise Average Average
Price Average Life Exercise Exercise
Range Shares (years) Price Shares Price
$3.18-$3.95 330,825 3.44 $3.46 330,825 $3.46
$5.88-$6.70 198,368 5.44 6.63 191,332 6.66
$8.42-$10.20 781,883 7.73 9.36 80,176 8.78
- --------------------------------------------------------------------------------
1,311,076 6.30 $7.46 602,333 $5.19
================================================================================
At December 31, 1997 1,311,076 options were outstanding of which 828,744
were ISOs and 482,332 were NSOs.
The First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
At December 31, 1997, 602,333 options with an average exercise price of $5.19
were exercisable; at December 31, 1996, 581,290 options with an average exercise
price of $5.01 were exercisable; at December 31, 1995, 634,204 options with an
average exercise price of $5.27 were exercisable; and at September 29, 1995,
557,442 options with an average exercise price of $5.41 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
calendar year 1997, calendar year 1996, short period 1995 and fiscal year 1995.
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 $1,956,000 to $1,557,000 in calendar year
1997, $5,500,000 to $5,388,000 in calendar year 1996, $1,553,000 to $1,530,000
in the transitional period 1995 and from $3,350,000 to $3,281,000 in fiscal year
1995. Basic earnings per share would decrease from $0.34 to $0.27 in calendar
year 1997, $1.00 to $0.98 in calendar year 1996, was unchanged in the short year
1995 and from $0.61 to $0.60 in fiscal year 1995. Dilutive earnings per share
would decrease from $0.31 to $0.25 in calendar year 1997, $0.93 to $0.91 in
calendar year 1996, was unchanged in the short year 1995 and from $0.59 to
$0.57 in fiscal year 1995. 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 during 1997, 1996 and 1995
under FAS 123 was $5.53, $3.21 and $2.45, respectively. The fair value of each
option grant 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 1.5% for 1997, and 2.76% for both 1996 and 1995; expected
volatility of 59.4% for 1997, and 54.7% for both 1996 and 1995; risk-free
interest rates of 5.50% in 1997, 5.17% to 6.26% in 1996, and 5.38% to 6.66% in
1995; and expected lives of 5.0, 2.6 and 1.2 years for 1997, 1996 and 1995,
respectively.
In 1992, the Company established the First Albany Companies Inc. Restricted
Stock Plan which authorized the issuance of up to 390,805 shares of common
stock (adjusted for all stock dividends) to certain key employees of the
Company. Awards under this plan expire over a four-year period after the award
date and are subject to certain restrictions including continued employment. As
of December 31, 1997, December 31, 1996 and December 31, 1995, 153,229, 105,226
and 36,880 shares respectively, have been awarded under this plan. The fair
market value of the awards will be amortized over the period in which the
restrictions are outstanding.
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 five years. Costs are
amortized over the vesting period and aggregated $1,271,000 in 1997, $1,983,000
in 1996, $395,000 in the transitional period ending December 31, 1995, and
$1,343,000 for the year ended September 29, 1995.
NOTE 15. Commitments and Contingencies
The Company's headquarters, sales offices, and certain office and
communication equipment are leased under noncancellable operating leases, which
expire at various times through 2008. Future minimum annual rentals payable are
as follows:
The First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
==============================
(In thousands of dollars)
1998 $ 7,500
1999 7,575
2000 5,459
2001 4,896
2002 3,431
Thereafter 15,937
------------------------------
Total $44,798
==============================
Annual rental expense including utilities for the year ended December 31, 1997,
December 31, 1996, the transitional period ending December 31, 1995, and the
fiscal year ended September 29, 1995 approximated $5,565,000, $4,175,000,
$906,000, and $3,630,000, 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 Corporation has been named in a lawsuit relating to certain real estate
investments (in which the provider of these investments was also named) for
which the Corporation acted as placement agent. Plaintiff claims damages of
approximately $16 million and the right to treble damages under the Indiana RICO
statute. The Corporation intends to vigorously defend this action. Management
believes that the risk of any possible liability to the Corporation cannot be
currently estimated. At this time, based on advice of counsel, management
believes that resolution of this matter will not have a material effect on the
inancial position of the Corporation, although it may have a material effect on
the results of operations in the period in which it is resolved. The case is
currently scheduled for trial in early 1999.
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, 1997. In December 1997, the Company entered into an
agreement guaranteeing a note for $800,000 which is collateralized by assets
where the fair value approximates $700,000.
NOTE 16. 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, 1997, the Corporation had net capital of $18,605,000 which equaled
9.5% of aggregate debit balances and $14,670,000 in excess of required minimum
net capital.
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 17. 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 customers' 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
therefore will be obligated to purchase such securities at a future date. The
Company has recorded these obligations in the financial statements at the market
values of the related securities and will incur a loss if the market value of
the securities increases.
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 18. 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
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
following an established credit approval process, monitoring credit limits, and
requiring collateral where appropriate.
The Company purchases debt securities and may have significant positions in its
inventory subject to market and credit risk. In order to control these risks,
security positions are monitored on at least a daily basis. Should the Company
find it necessary to sell such a security, it may not be able to realize the
full carrying value of the security due to the significance of the position
sold. The Company reduces its exposure to changes in securities valuation with
the use of municipal bond index futures contracts. (See Note 20.)
NOTE 19. 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, 1997
approximates its carrying value based on current rates available.
NOTE 20. 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 Three-Months Year Ended
Dec. 31, 1997 Dec. 31, 1996 Dec. 31,1995 Sept.29, 1995
- --------------------------------------------------------------------------------------------
Trading Profits-State
and Municipal Bonds $ 6,840 $ 2,032 $ 2,345 $ 5,068
Index Futures Hedging (2,061) 594 (457) (1,350)
Trading Profits-Corporate Stocks 1,159
Options (206)
- --------------------------------------------------------------------------------------------
Net Revenues $ 4,779 $ 2,626 $ 1,888 $ 4,671
============================================================================================
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)
- --------------------------------------------------------------------------------
As of December 31, 1996, 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 ($7,750) ($5,881)
- --------------------------------------------------------------------------------
First Albany Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of December 31, 1995, 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 ($4,929) ($10,668)
- --------------------------------------------------------------------------------
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 21. New Accounting Standards
Financial Accounting Standards Board No. 125 - "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement, which would be effected for all transfers after December 31, 1997,
addresses several matters that have a significant impact of the Broker/Dealer
industry. It addresses how and when to record transferred assets, transfers of
partial interest, servicing of financial assets, securitizations, transfers of
sales-type and direct financing lease receivables, securities lending
transactions, repurchase agreements including "dollar rolls," "wash sales,"
loan syndications and participations, risk participations in banker's
acceptances, factoring arrangements, transfer of receivables with recourse,
and extinguishment of liabilities, collateral, repurchase agreements and
how to amortize servicing assets and liablities. Management has reviewed
this statement and has determined that it has no material effect on the
presentation of the consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" ("SFAS 130") and "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"), respectively (collectively, the
"Statements"). The Statements are effective for fiscal years beginning after
December 15, 1997. SFAS 130 establishes standards for reporting of
comprehensive income and its components in annual financial statements. 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. Reclassification
or restatement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS 130 and SFAS 131,
respectively, Application of the Statements' requirements is not expected to
have a material impact on the Company's consolidated financial position, results
of operations or earnings per share data as currently reported.
FIRST ALBANY COMPANIES INC.
SUPPLEMENTARY DATA
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
(In thousands of dollars, except per share data)
Quarters Ended
- --------------------------------------------------------------------------------
1997 - Calendar Year Mar. 28 June 27 Sep. 26 Dec. 31
- --------------------------------------------------------------------------------
Total revenues $ 42,059 $ 45,770 $ 49,741 $ 55,402
Interest expense (8,424) (9,516) (10,172) (10,503)
- --------------------------------------------------------------------------------
Net revenues 33,635 36,254 39,569 44,899
Total expenses (excluding
interest) (33,605) (35,933) (38,418) (43,499)
- --------------------------------------------------------------------------------
Income before income taxes 30 321 1,151 1,400
Income tax expense 36 (130) (545) (612)
- --------------------------------------------------------------------------------
Income before extraordinary items 66 191 606 788
Extraordinary gain (net of taxes) 305
- --------------------------------------------------------------------------------
Net income $ 371 $ 191 $ 606 $ 788
================================================================================
Net income per common
and common equivalent share:
Basic $ 0.07 $ 0.03 $ 0.11 $ 0.14
Dilutive $ 0.06 $ 0.03 $ 0.09 $ 0.12
Quarters Ended
- --------------------------------------------------------------------------------
1996 - Calendar Year Mar. 29 June 28 Sep. 27 Dec. 31
- --------------------------------------------------------------------------------
Total revenues $ 40,290 $ 42,213 $ 37,951 $ 47,738
Interest expense (4,954) (5,173) (5,972) (9,932)
- --------------------------------------------------------------------------------
Net revenues 35,336 37,040 31,979 37,806
Total expenses (excluding
interest) (32,479) (34,460) (30,375) (35,756)
- --------------------------------------------------------------------------------
Income before income taxes 2,857 2,580 1,604 2,050
Income tax expense (1,103) (995) (673) (821)
- --------------------------------------------------------------------------------
Net income $ 1,754 $ 1,585 $ 931 $ 1,229
================================================================================
Net income per common
and common equivalent share:
Basic $ .31 $ .29 $ .17 $ .22
Dilutive $ .29 $ .27 $ .16 $ .21
Three months ended
- --------------------------------------------------------------------------------
1995 - Transitional Period Dec. 31
- --------------------------------------------------------------------------------
Total revenues $ 37,404
Interest expense (6,631)
- --------------------------------------------------------------------------------
Net revenues 30,773
Total expenses (excluding interest) (28,291)
- --------------------------------------------------------------------------------
Income before income taxes 2,482
Income tax expense (929)
- --------------------------------------------------------------------------------
Net income $ 1,553
================================================================================
Net income per common
and common equivalent share:
Basic $ .28
Dilutive $ .26
FIRST ALBANY COMPANIES INC.
All per share figures have been restated for common stock dividends paid.
The sum of the quarters' 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 14, 1998. Such information is incorporated herein by
reference to the proxy statement.
Information (not included in the Company's definitive proxy statement for
the 1998 Annual Meeting of Stockholders) regarding certain executive
officers of the Company is as follows:
Timothy R. Welles, age 38, joined the Company in July, 1997 as Vice
President and Chief Financial Officer. Prior to joining the Company, Mr.
Welles was Executive Vice President, Chief Operating Officer and a member
of the Board of Directors of InteliData Technologies Corp. and its
predecessor company, Colonial Data Technologies Corp., from February 1996
through July 1997. Prior to that, Mr. Welles was Senior Vice President -
Investment Banking at First Albany Corporation since 1993.
Stephen P. Wink, age 39, joined First Albany in 1996. He has been
Secretary and General Counsel of the Company since August 1997. Mr. Wink
has been Senior Vice President, General Counsel and Secretary of First
Albany Corporation since 1996, and was Assistant Secretary of the Company
from 1996 through July 1997. Before joining First Albany, Mr. Wink was an
attorney for the law firm of Cleary, Gottlieb, Steen & Hamilton since prior
to 1993.
Item 11. Executive Compensation.
- --------------------------------
The information required by this item will be contained under the caption
"Compensation of Executive Officers and Directors" in the Company's
definitive proxy statement for the Annual Meeting of Stockholders to be
held on or about May 14, 1998. Such information is incorporated herein by
reference to the proxy statement.
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 14, 1998. Such information is incorporated herein by
reference to the proxy statement.
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 14, 1998. Such information is incorporated herein by
reference to the proxy statement.
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 Calendar
Years Ended December 31, 1997, and
December 31, 1996; the three-month
Transition Period ended December 31, 1995; and
the Fiscal Year Ended September 29, 1995
Consolidated Statements of Financial Condition
as of December 31, 1997, December 31, 1996
and December 31, 1995 (unaudited)
Consolidated Statements of Changes in Stockholders'
Equity for the Calendar Years Ended December 31,
1997 and December 31, 1996; the three-month
Transition Period ended December 31, 1995, and
the Fiscal Year Ended September 29, 1995
Consolidated Statements of Cash Flows for the
Calendar Years Ended December 31, 1997 and
December 31, 1996; the Three-month Transition
Period ended December 31, 1995; and the Fiscal
Year Ended September 29, 1995,
Notes to Consolidated Financial Statements
(2) The following financial statement schedule for the periods 1997,
1996, and 1995 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.
(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).
3.2 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-K for 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 (restated for
purpose of this filing).
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).
10.12 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).
10.15 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).
10.16 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).
(3) Exhibits included herein: (continued)
Exhibit
Number Description
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.
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).
10.23 Subordinated Loan Agreement dated December 23, 1997 between First
Albany Companies Inc. and Sharon M. Duker.
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).
11 Computation of per share earnings.
21 List of Subsidiaries of First Albany Companies Inc.
23 Consent of Coopers & Lybrand 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 schedules filed with this report are listed in
section (a)(2) of Item 14 above.
FIRST ALBANY COMPANIES INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
PERIODS ENDED DECEMBER 31, 1997, DECEMBER 31, 1996,
DECEMBER 31, 1995, AND SEPTEMBER 29, 1995
COL. A COL. B COL. C COL. D COL. E
- --------------------------------------------------------------------------------
Additions
Balance at Charged to Balance
Beginning Costs and at End of
Description of Period Expenses Deductions Period
- --------------------------------------------------------------------------------
Allowance for doubtful
accounts -- deducted
from receivables from
customers:
Calendar Year 1997 $ 304,000 $ 120,000 $ 84,000 $ 340,000
Calendar Year 1996 $ 219,000 $ 120,000 $ 35,000 $ 304,000
Three Month
Transition
Period 1995 $ 125,000 $ 94,000 $ 0 $ 219,000
Fiscal Year 1995 $ 106,000 $ 120,000 $ 101,000 $ 125,000
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 23, 1998
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 March 23, 1998
- --------------------- Executive Officer
George C. McNamee
/s/ ALAN P. GOLDBERG President and Co-Chief March 23, 1998
- --------------------- Executive Officer
Alan P. Goldberg
/s/ TIMOTHY R. WELLES Chief Financial Officer March 23, 1998
- --------------------- (Prinicpal Accounting Officer)
Timothy R. Welles
/s/ HUGH A. JOHNSON, JR. Senior Vice President and Director March 23, 1998
- ------------------------
Hugh A. Johnson, Jr.
Director , 1998
- ------------------------
Peter Barton
/s/ J. ANTHONY BOECKH Director March 23, 1998
- ---------------------
J. Anthony Boeckh
/s/ WALTER M. FIEDEROWICZ Director March 23, 1998
- -------------------------
Walter M. Fiederowicz
Director , 1998
- ------------------------
Daniel V. McNamee
/s/ CHARLES L. SCHWAGER Director March 23, 1998
- -----------------------
Charles L. Schwager
/s/ BENAREE P. WILEY Director March 23, 1998
- -----------------------
Benaree P. Wiley