Item 1. Business
First Albany Companies Inc. (the Company), through its wholly owned subsidiary First Albany Corporation (First Albany), conducts an investment banking business with brokerage activity centered in New York and New England. The primary business includes 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 ("Asset Management"). Under management agreements, Asset Management serves as investment manager to individual and institutional customers. Asset Management also serves as a sub-advisor under contract to the Victory Fund for Income, a mutual fund registered under the Investment Company Act of 1940. Asset Management directs the investment of the 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 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 221 to 291, many of whom joined First Albany after previous associations with national brokerage firms.
First Albany has organized its business to focus on and serve the needs and financial/capital requirements of institutions, individuals, corporations, and municipalities. As investment bankers, First Albany is positioned to advise, manage, and conduct a variety of activities as requested including underwritings, initial and secondary offerings, advisory services, mergers and acquisitions, and private placements. As a brokerage firm, First Albany offers customers a full array of investment opportunities.
First Albany operates a total of 29 Retail, Institutional, and Investment Banking offices in 9 states. First Albany's executive office and largest sales office are both located in Albany, New York.
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:
Securities Commissions
In executing customers' orders to buy or sell listed securities and securities in which it does not make a market, First Albany generally acts as an agent and charges a commission.
Principal Transactions
First Albany buys and maintains inventories of municipal debt, corporate debt, and equity securities as a "market maker" for sale of those securities to other dealers and to customers. A staff of 46 traders, underwriters, and assistants manages First Albany's inventory of securities. First Albany Investment Executives work directly with these traders. As of September 29, 1995, First Albany made a market in 291 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.
The majority of revenues derived from principal transactions are on a "riskless" basis. In fiscal 1995, First Albany added an institutional municipal risk trading operation in which 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 interdealer 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 fiscal 1995 by securities category where First Albany acted as principal.
Highest Lowest Average Inventory Inventory Inventory - -------------------------------------------------------------------------------- (In thousands of dollars) State and municipal bonds $ 44,314 $ 7,945 $ 26,349 Corporate obligations 12,873 1,677 4,490 Corporate stocks 3,511 (2,421) 1,903 U.S. Government and federal agencies obligations 6,119 693 3,384
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 --------------------- ------------------------ Fiscal Number of Amount of Number of Amount of Year Issues Offering Participations Participation ------ --------- --------- -------------- ------------- (In thousands of dollars) 1995 13 $ 514,583 203 $ 227,170 1994 13 483,814 334 349,723 1993 3 158,300 344 366,314 1992 4 212,451 322 130,938 1991 1 7,650 159 51,677
Tax-Exempt Bond Offerings -------------------------
Managed or Co-Managed Syndicate Participations Fiscal Number of Dollar Number of Dollar Year Issues Amount Participations Amount ------ --------- ------ -------------- ------ (In thousands of dollars) 1995 113 $ 12,235,469 222 $ 1,362,845 1994 123 14,744,502 332 1,598,182 1993 171 18,379,821 349 1,741,206 1992 179 14,482,448 328 1,137,423 1991 89 14,933,761 332 886,069
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% 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 connection with 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. This is a common occurrence for broker-dealers.
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 ----------------- Fiscal Year High Low Average - ----------- ---- --- ------- 1995 71,407 44,409 54,254 1994 58,245 40,537 47,257 1993 51,745 37,276 43,409 1992 43,068 30,907 36,346 1991 38,744 20,800 31,434
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 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
Customized financial services are available to customers at First Albany.
The Financial Planning Department advises customers on a variety of interrelated financial matters, including investment portfolio review, tax management, insurance analysis, education and retirement planning, and estate 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, 401K, 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
First Albany maintains a professional staff of equity analysts. Research is focused on six industry sectors: technology, health care, financial services, energy, utilities, and basic industry. First Albany employs 16 analysts and 12 research assistants who support First Albany's institutional and retail brokerage and corporate finance activities.
In fiscal 1995, First Albany enlarged the scope ofits 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; review of customer portfolios; preparation of research reports which are provided to retail and institutional customers; and responses to inquiries from customers and Investment Executives. 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 a substantial portion of First Albany's business and are generated through customer purchases and sales of stocks, bonds, mutual funds, and other investment products. For the fiscal years 1995, 1994, and 1993, these revenues accounted for approximately 53%, 54%, and 49% of net revenues, respectively.
Institutional Business
Revenues generated from securities transactions with major institutions in fiscal 1995, 1994, and 1993 accounted for approximately 31%, 29%, and 30% of net revenues, respectively. Institutional revenues are derived from sales of taxexempt securities, taxable debt obligations, and equities, and are serviced by 83 Institutional Salespeople. First Albany Retail Investment Executives cover most of the regional institutions.
Municipal Bond Business
First Albany considers its expertise in municipal bonds to be one of its major strengths. The tax-exempt department consists of 49 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 $12.9 million in fiscal 1995, $8.95 million in fiscal 1994, and $7.5 million in fiscal 1993.
Employees
At September 29, 1995, the Company had 669 full-time employees, of which 193 were Retail Investment Executives, 98 were Institutional Salespeople and Institutional Traders, 129 were in branch sales support, 27 were in home office sales support, 60 were in other revenue producing positions, 60 were in operations, and 102 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
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
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 brokerdealers, 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 49 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; therefore, it imposes a minimum 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 of a firm such as First Albany 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 September 29, 1995, First Albany's net capital was $17,178,000 which was 18% of its aggregate debit balances (2% minimum requirement) and $15,303,000 in excess of required minimum net capital.
Item 2.
Item 2. Properties
The Company has a total of 29 Retail, Institutional, and Investment Banking offices in 9 states, all of which are leased or rented. The Company's executive offices are currently located at 41 State Street, Albany, New York. The order entry, trading, investment banking, research, data processing, operations, and accounting activities are centralized in the Albany office. During 1996, these offices will be relocated to 30 South Pearl Street, Albany, New York. The offices at 30 South Pearl Street will be operated under a lease which currently expires in the year 2002. All other offices are subject to lease or rental agreements which, in the opinion of management, are sufficient to meet the needs of the Company.
Item 3.
Item 3. Legal Proceedings
In the normal course of business, the Company has been named a defendant, or otherwise has possible exposure, in several claims. Certain of these are class actions which seek unspecified damages that could be substantial. Although there can be no assurance as to the eventual outcome of litigation in which the Company has been named as a defendant or otherwise has possible exposure, the Company has provided for those actions most likely to result in adverse dispositions. Although further losses are possible, the opinion of management, based upon the advice of its attorneys and general counsel, is that such litigation will not, in the aggregate, have a material adverse effect on the Company's liquidity or financial position, although it could have a material effect on quarterly or annual operating results in the period in which it is resolved.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. None.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
The Company's common stock has traded on the Nasdaq Stock Market under the symbol "FACT." As of December 14, 1995, there were approximately 875 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:
September 29, 1995 Quarters Ended - ------------------ -------------- Stock Price Range Dec. 31 Mar. 31 June 30 Sept. 29 - ----------------- ------- ------- ------- -------- High $7 1/4 $7 5/8 $8 $8 3/4 Low $6 1/4 $6 1/2 $7 1/8 $7 1/8
Cash Dividend per Share $ .05 $ .05 $ .05 $ .05
September 30, 1994 Quarters Ended - ------------------ -------------- Stock Price Range Dec. 31 Mar. 25 June 24 Sept. 30 - ----------------- ------- ------- ------- -------- High $7 1/2 $7 1/2 $7 1/2 $6 7/8 Low $6 1/4 $6 3/4 $6 3/8 $5 3/4
Cash Dividend per Share $ .05 $ .05 $ .05 $ .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. After the 5% common stock dividend declared on October 26, 1995, the total number of treasury shares was 365,739. When appropriate, the Company will consider making additional purchases.
During fiscal 1995, the Company declared and paid four quarterly cash dividends totaling $.20 per share of common stock, along with declaring and issuing two 5% common stock dividends. During fiscal 1994, the Company also declared and paid four quarterly cash dividends totaling $.20 per share of common stock, along with declaring and issuing two 5% common stock dividends.
On October 26, 1995, subsequent to the period reflected in this report, the Board of Directors declared the regular quarterly cash dividend of $0.05 per share along with a 5% common stock dividend, both payable on November 8, 1995, to shareholders of record on November 22, 1995.
Item 6.
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. FIVE YEAR FINANCIAL SUMMARY --------------------------- (In thousands of dollars except per share amounts)
Sept. 29, Sept. 30, Sept. 24, Sept. 25, Sept. 27, For the years ended 1995 1994 1993 1992 1991 - ------------------- -------- -------- -------- -------- -------- Operating Results Revenues: Commissions $ 31,889 $ 29,553 $ 28,884 $ 24,569 $ 19,445 Principal transactions 43,198 36,167 34,857 31,405 28,443 Investment banking 14,625 19,164 23,265 16,065 8,051 Fees and other 7,214 6,578 5,901 4,782 4,593 - -------------------------------------------------------------------------------- Operating revenues 96,926 91,462 92,907 76,821 60,532 Interest income 26,173 16,222 9,483 8,999 12,047 - -------------------------------------------------------------------------------- Total revenues 123,099 107,684 102,390 85,820 72,579 Interest expense 19,904 10,467 5,257 5,078 8,697 - -------------------------------------------------------------------------------- Net revenues 103,195 97,217 97,133 80,742 63,882 - --------------------------------------------------------------------------------
Expenses Excluding Interest: Compensation and benefits 71,064 65,513 64,388 51,558 40,881 Clearing, settlement and brokerage costs 2,258 1,894 1,981 1,978 2,120 Communications and data processing 7,794 7,198 6,209 5,213 4,770 Occupancy and depreciation 6,660 5,710 5,395 5,130 5,130 Selling 4,817 4,779 4,152 3,410 2,565 Other 5,382 4,755 6,242 4,534 4,831 - -------------------------------------------------------------------------------- Total expenses excluding interest 97,975 89,849 88,367 71,823 60,297 - -------------------------------------------------------------------------------- Income before income taxes 5,220 7,368 8,766 8,919 3,585 Income tax expense 1,870 2,876 3,375 3,352 1,302 - -------------------------------------------------------------------------------- Net income $ 3,350 $ 4,492 $ 5,391 $ 5,567 $ 2,283 ================================================================================ Per Common Share: * Earnings-primary $ 0.71 $ .96 $ 1.14 $ 1.22 $ .52 Cash dividend 0.20 0.20 0.20 0.20 Book value 8.00 7.48 6.69 5.65 4.56 - --------------------------------------------------------------------------------
Financial Condition: Total assets $543,255 $482,749 $514,794 $203,877 $164,679 Long-term note payable 1,791 94 456 1,334 1,900 Subordinated debt 2,250 2,750 3,250 Stockholders' equity 36,192 33,230 30,088 25,272 19,989 - -------------------------------------------------------------------------------- * All per share figures have been restated for common stock dividends declared through October 26, 1995.
Item 7.
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 business earns revenues in direct correlation with the general level of trading activity in the stock and bond markets. This level of activity cannot be controlled by the Company; however, many of the Company's costs are fixed. Therefore, the Company's earnings, like those of others in the industry, reflect the activity in the markets and can fluctuate accordingly.
This is a highly competitive business. The competition includes not only full service national firms and discount houses, but also mutual funds that sell directly to the customer as well as banks that offer a variety of investment products.
1995 was an unusually good year for the financial markets in general and many securities firms in particular. Long term interest rates declined sharply and the economy and profits expanded. As a result, both bond prices and stock prices rose registering returns of 17.5% and 34.8% from December 31, 1994, through November 30, 1995 for the Lehman Brothers Government/Corporate Index and the S&P 500 Index respectively. These returns are unusual in the financial markets. The compound annual returns with all dividends and interest reinvested between 1926 and 1994 for corporate bonds was 5.5%, for government bonds 4.9%, and the return for equities 10.2%. Although First Albany remains optimistic about the outlook for equity prices in 1996, a pullback in prices could occur. If such a pullback was to 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. In such an environment, it would be difficult for all securities firms to maintain growth and earnings comparable to the levels achieved in 1995.
RESULTS OF OPERATIONS
Fiscal Year 1995 Compared with Fiscal Year 1994
Net Income Net income for the 1995 fiscal year was $3.4 million or $0.71 per share compared to $4.5 million or $.96 per share earned in fiscal 1994. During fiscal 1995, both the Company's municipal and equity institutional businesses showed substantial growth, along with an ongoing solid contribution by the retail division. The Company continued to make investments in people and technology. These investments are critical for the firm's long-term success, but have negatively impacted short-term operating results. These investments will strengthen the Company's revenues and profitability in the future.
Commissions
Commission revenues increased $2.3 million or 8% in fiscal 1995, reflecting active trading in institutional equities. Revenues from listed and over-the counter stock commissions increased $4.6 or 25%, while mutual fund commission revenues decreased $2.3 million or 22%.
Principal Transactions
Principal transactions increased $7.0 million or 19% in fiscal 1995. This increase was comprised of an increase in equities of $2.1 million, an increase in municipal bonds of $7.8 million (primarily due to the addition in fiscal 1995 of an institutional municipal risk trading operation), a decrease in taxable fixed income securities of $2.1 million, and a decrease in investment income of $0.8 million. A primary reason for the decrease in investment income was the result of an unrealized gain of $1.4 million recorded in fiscal 1994 due to the Company's investment in a firm which completed an initial public offering in February 1994.
Investment Banking
Investment banking revenues decreased $4.5 million or 24% in fiscal 1995. Revenues from selling concessions decreased $3.4 million (equities decreased $2.4 million, while municipal bonds decreased $1.2 million and taxable fixed income increased $0.2 million), underwriting fees decreased $0.2 million, and investment banking fees decreased $0.9 million (corporate finance fees decreased $0.1 million, while municipal finance fees decreased $0.8 million). The result in investment banking revenues was largely dependent upon an industry-wide decline in underwriting activity.
Compensation and Benefits
Compensation and benefits increased $5.6 million or 8% in fiscal 1995. Salesrelated compensation was $0.9 million higher and salaries increased $3.8 million which impacted benefits (up $0.9 million).
Occupancy and Depreciation
Occupancy and depreciation expense increased $1 million or 17% in fiscal 1995 primarily as a result of our increased investment in new automated systems.
Income Taxes
Income taxes decreased $1.0 million or 35% in fiscal 1995 due to a decrease in pre-tax earnings. The Company's effective tax rate decreased to 36% from 39% as a result of an increased proportion of tax-exempt interest income to income before taxes.
Fiscal Year 1994 Compared with Fiscal Year 1993
Net Income
Net income for the 1994 fiscal year was $4.5 million or $.96 per share compared to $5.4 million or $1.14 per share earned in fiscal 1993. Revenues increased due to a solid contribution made by our retail brokerage business along with significant contributions by our institutional equity and corporate finance areas. However, net income decreased due to the effect of falling bond prices on fixed income sales, trading and underwritings, and because municipal bond refinancings declined significantly from last year.
Principal Transactions
Principal transactions increased $1.3 million or 4% in fiscal 1994. This increase was comprised of an increase in equities of $3.2 million, a decrease in taxable fixed income securities of $4.1 million, an increase in municipal bonds of $0.8 million and an unrealized gain of $1.4 million due to the Company's investment in a firm which completed an initial public offering in February 1994.
Investment Banking
Investment banking revenues decreased $4.1 million or 18% in fiscal 1994. Revenues from selling concessions decreased $0.2 million (equities increased $1.7 million, while municipal bonds decreased $1.8 million and taxable fixed income decreased $0.1 million), underwriting fees decreased $1.1 million (primarily municipal bonds), and investment banking fees decreased $2.8 million (corporate finance fees increased $1.6 million, while municipal finance fees decreased $4.4 million). The result in investment banking revenues was largely dependent upon declining municipal bond activity due to increasing interest rates and a significant decrease in municipal bond refinancings; however, these were partially offset by increasing revenues in equity corporate finance activities.
Net Interest Income
Net interest income increased $1.5 million or 36% in fiscal 1994 due primarily to increased revenues from customer margin balances, and increased stock borrowed and stock loaned activities.
Compensation and Benefits
Compensation and benefits increased $1.1 million or 2% in fiscal 1994. Salesrelated compensation decreased $1.3 million, salaries increased $1.8 million which impacted benefits (up $0.6 million).
Communications and Data Processing
Communications and data processing expense increased $1 million or 16% in fiscal 1994. Communication expense increased $0.8 million mainly as a result of the expansion of the institutional and research divisions. Data processing expense increased $0.2 million due primarily to an increased number of transactions.
Other Expenses
Other expenses decreased $1.5 million or 24% in fiscal 1994 due primarily to a decrease in litigation and to consulting costs.
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 collateralized by loaned securities and bank lines-of credit. Securities borrowed and securities loaned will fluctuate due primarily to the current level of business activity in this area. Receivables from others decreased due primarily to a decrease in the adjustment to record securities owned on a trade date basis. Securities owned increased primarily due to the addition in fiscal 1995 of an institutional municipal risk trading operation. Net receivables from customers increased due to a decrease in customer free credits. Short-term bank loans increased due primarily to an increase in securities owned and an increase in net receivables from customers.
At fiscal year-end 1995, both First Albany Corporation and Northeast Brokerage Services Corporation, subsidiaries of First Albany Companies Inc., were 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 committed and uncommitted bank lines-of-credit_totaling $120,000,000 of which approximately $66,712,000 were unused as of September 29, 1995_will provide sufficient resources to meet present and reasonably foreseeable short-term financial needs.
During fiscal 1995, the Company declared and paid four quarterly cash dividends totaling $ 0.20 per share of common stock, along with declaring and issuing two 5% common stock dividends.
On October 26, 1995, subsequent to the period reflected in this report, the Board of Directors declared the regular quarterly cash dividend of $ 0.05 per share along with a 5% common stock dividend, both payable on November 8, 1995, to stockholders of record on November 22, 1995.
The Company believes that funds provided by operations will be sufficient to fund the acquisition of office equipment and leasehold improvements, and other long-term requirements.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements and Supplementary Data
Page REPORT OF INDEPENDENT ACCOUNTANTS 18
FINANCIAL STATEMENTS:
Consolidated Statements of Income, For the Years Ended September 29, 1995, September 30, 1994, and September 24, 1993 19
Consolidated Statements of Financial Condition, as of September 29, 1995, and September 30, 1994 20
Consolidated Statements of Changes in Stockholders' Equity, For the Years Ended September 29, 1995, September 30, 1994, and September 24, 1993 21
Consolidated Statements of Cash Flows, For the Years Ended September 29, 1995, September 30, 1994, and September 24, 1993 22
Notes to Consolidated Financial Statements 23-34
SUPPLEMENTARY DATA:
Selected Quarterly Financial Data (Unaudited) 35
Report of Independent Accountants
Board of Directors and Stockholders First Albany Companies Inc.
We have audited the consolidated financial statements and the financial statement schedule of First Albany Companies Inc. 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 September 29, 1995, and September 30, 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period 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, present fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P. Albany, New York November 10, 1995
First Albany Companies Inc. CONSOLIDATED STATEMENTS OF INCOME (In thousands of dollars) ---------------------------------
September 29, September 30, September 24, For the years ended 1995 1994 1993 - ------------------- ------------- ------------- ------------- Revenues Commissions $ 31,889 $ 29,553 $ 28,884 Principal transactions 43,198 36,167 34,857 Investment banking 14,625 19,164 23,265 Interest 26,173 16,222 9,483 Fees and other 7,214 6,578 5,901 Total revenues 123,099 107,684 102,390 Interest expense 19,904 10,467 5,257 Net revenues 103,195 97,217 97,133
Expenses excluding interest Compensation and benefits 71,064 65,513 64,388 Clearing, settlement and brokerage costs 2,258 1,894 1,981 Communications and data processing 7,794 7,198 6,209 Occupancy and depreciation 6,660 5,710 5,395 Selling 4,817 4,779 4,152 Other 5,382 4,755 6,242 Total expenses excluding interest 97,975 89,849 88,367
Income before income taxes 5,220 7,368 8,766 Income tax expense 1,870 2,876 3,375 Net income $ 3,350 $ 4,492 $ 5,391
Net income per common and common equivalent share
Primary $ 0.71 $ .96 $ 1.14 Fully diluted $ 0.71 $ .96 $ 1.14
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
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. All significant intercompany balances and transactions have been eliminated. The Company's year-end is the last Friday in September and, therefore, the Company's fiscal year will contain 52 or 53 week periods. The years ended September 29, 1995, September 30, 1994, and September 24, 1993, contained 52 weeks, 53 weeks, and 52 weeks, respectively.
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 not readily marketable for investments purposes and, as a non-broker-dealer values them at cost.
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 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 September 29, 1995, and September 30, 1994, the Company had not entered into any resale or repurchase agreements with counterparties.
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.
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-and-acquisition and financial restructuring advisory services. Investment banking management fees are recorded on offering date, sales concessions on trade
First Albany Companies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 attributable to differences between financial statement and tax basis of existing assets and liabilities.
Office Equipment and Leasehold Improvements
Office equipment and leasehold improvements are stated at cost less accumulated depreciation of $9,834,000 in 1995, and $7,570,000 in 1994, respectively. Depreciation is provided on a straight-line basis over the estimated useful life of the asset or the remaining life of the lease.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers amounts in demand deposit accounts at various financial institutions, other than those segregated under federal regulations, to be cash equivalents.
Earnings per Common Share
Net income per common and common equivalent share have been computed based upon the weighted average number of common shares and dilutive common equivalent shares (stock options) outstanding. The weighted average number of common shares and dilutive common equivalent shares were:
Fiscal Year 1995 Fiscal Year 1994 Fiscal Year 1993 ---------------- ---------------- ---------------- Primary 4,705,306 4,677,757 4,726,030 Fully diluted 4,737,101 4,677,757 4,741,455
All per share figures, as well as the weighted average number of common and dilutive common equivalent shares, have been restated for stock dividends declared through October 26, 1995.
Reclassifications
Certain Amounts in the 1994 and 1993 financial statements have been reclassified to conform with the 1995 presentation.
First Albany Companies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, as of:
(In thousands of dollars) September 29, September 30, 1995 1994 ------------- ------------- Securities failed to deliver $ 1,882 $ 1,511 Receivable from clearing agencies 7 Total receivables $ 1,889 $ 1,511
Securities failed to receive $ 3,060 $ 2,453 Payable to clearing agencies 44 2,624 Total payables $ 3,104 $ 5,077
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 are $125,000 and $204,000 for the fiscal years ended 1995 and 1994, respectively. An allowance for doubtful accounts, based upon an aging of accounts receivable and specific identification, has been recorded for $125,000 and $106,000 for the fiscal years ended 1995 and 1994, respectively.
NOTE 4. Receivables From Others
Amounts receivable from others as of:
(In thousands of dollars) September 29, September 30, 1995 1994 ------------- ------------- Adjustment to record securities on a trade date basis, net $ $15,040 Others 4,965 3,318 Total $ 4,965 $18,358
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.
First Albany Companies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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) September 29, September 30, 1995 1994 ------------- ------------- Sold, but Sold, but not yet not yet Owned Purchased Owned Purchased ----- --------- ----- --------- Marketable U.S. government and federal agencies obligations $ 5,164 $ 1,045 $ 2,943 $ 1,220 State and municipal bonds 39,936 244 10,943 436 Corporate obligations 3,558 1,246 2,698 348 Corporate stocks 4,869 1,357 3,768 1,720 Options 100 Not readily marketable securities, fair value 560 636 Not readily marketable securities, cost 1,838 ------- ------- ------- ------- $56,025 $ 3,892 $20,988 $ 3,724
Securities not readily marketable include investment securities (a) for which there is no market on a securities exchange or no independent publicly quoted market, (b) that cannot be publicly offered or sold unless registration has been effected under the Securities Act of 1933, or (c) that cannot be offered or sold because of other arrangements, restrictions, or conditions applicable to the securities or to the Company.
NOTE 6. 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 under these arrangements. This includes Company owned securities and certain customer owned securities purchased on margin, subject to certain regulatory formulae. These loans bear interest at fluctuating rates based primarily on the Federal Funds interest rate. The weighted average interest rate on these loans were 7.54% and 5.82% at September 29, 1995, and September 30, 1994, respectively.
Short-term bank loans and unused lines of credit were collateralized by Company owned securities of $40,391,000 and customers' margin account securities of $44,719,000 at September 29, 1995.
A note for $1,759,912, which is collateralized by fixed assets, is payable in monthly payments of principal and interest of $65,005. Interest is at the prime rate (8.75% at September 29, 1995) plus 1.5%. The note matures April 1, 1998.
Future annual principal loan repayment requirements are as follows:
(In thousands of dollars) 1996 $ 626 1997 693 1998 441 Total $1,760
First Albany Companies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
An unsecured note for $31,250 is payable in quarterly installments of $15,625 plus interest at the prime rate (8.75% at September 29, 1995) plus 0.5%. The note matures March 25, 1996.
NOTE 7. Stockholders' Equity
During fiscal 1995, the Company declared and paid four quarterly cash dividends totaling $0.20 per share of common stock, along with declaring and issuing two 5% common stock dividends.
On October 26, 1995, subsequent to the period reflected in this report, the Board of Directors declared the regular quarterly cash dividend of $0.05 per share along with a 5% common stock dividend, both payable on November 8, 1995, to shareholders of record on November 22, 1995. Stockholders' Equity and all per share figures have been adjusted to reflect the common stock dividend.
NOTE 8. Income Taxes
Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable for future years to differences between financial statement and tax 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:
(In thousands of dollars) September 29, September 30, September 24, 1995 1994 1993 ------------- ------------- ------------- Federal Current $ 2,051 $ 1,463 $ 2,475 Deferred (904) 466 (165) State and local Current 1,097 755 1,146 Deferred (374) 192 (81) Total income taxes $ 1,870 $ 2,876 $ 3,375
The reasons for the difference between the expected income tax expense using the federal statutory rate and the income tax expense are as follows:
(In thousands of dollars) September 29, September 30, September 24, 1995 1994 1993 ------------- ------------- ------------- Income taxes at federal statutory rate $ 1,775 $ 2,505 $ 2,984 State income taxes, net of federal income taxes 477 625 703 Tax-exempt interest income (514) (348) (357) Non-deductible expenses 132 94 45 Total income taxes $ 1,870 $ 2,876 $ 3,375
First Albany Companies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The temporary differences that give rise to significant portions of deferred tax assets are as follows:
(In thousands of dollars) September 29, September 30, 1995 1994 ------------- ------------- Receivables $ 80 $ 45 Securities held for investment (345) (606) Fixed assets 267 340 Deferred compensation 2,057 824 Other 145 323 Total deferred tax asset $2,204 $ 926
The Company has not recorded a valuation allowance for deferred tax assets as income in the carryback period is sufficient to realize the benefit of future deductions.
NOTE 9. 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. The Company contributed $140,000 in 1995, $56,000 in 1994, and $46,000 in 1993.
The Company also participates in 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 First Albany Companies Inc. The Company contributed $408,000 in 1995, $334,000 in 1994, and $244,000 in 1993.
NOTE 10. 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 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 provide for 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) which may be granted. 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.
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,
First Albany Companies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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. Both 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 a 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.
Option transactions for the 3-year period ended September 29, 1995 under the 1982 Plan were as follows: (all are ISOs unless otherwise noted)
Exercised Issued Or And Options Total Terminated Exercisable Issuable Authorized ---------- ----------- -------- ---------- September 25, 1992 797,000 3,000 0 800,000
Additional options authorized 3,950 3,950 Options expired adjustment (38,000) 38,000 Options exercised at $4.76 5,000 (5,000) September 24, 1993 764,000 39,950 0 803,950
Additional options authorized 3,280 3,280 Options exercised at $4.31 to $5.96 7,220 (7,220) Options forfeited (4,410) 4,410 Options terminated 4,410 (4,410) September 30, 1994 775,630 31,600 0 807,230
Additional options authorized 2,908 2,908 Options exercised at $4.70 to $5.00 11,605 (11,605) September 29, 1995 787,235 22,903 0 810,138
Issued and exercisable options are outstanding at $3.91 - $5.41 per share.
During fiscal year 1995, the Company declared two 5% common stock dividends. These dividends resulted in an additional 2,908 options authorized.
Issued and exercisable options are outstanding at $4.23 - $8.23 per share
During fiscal year 1995, the Company declared two 5% common stock dividends. These dividends resulted in an additional 100,057 options authorized.
First Albany Companies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In 1992, the Company established the First Albany Companies Inc. Restricted Stock Plan which authorized the issuance of up to 331,509 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 September 29, 1995, 36,880 shares 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 $1,343,000 in 1995, $1,828,000 in 1994, and $369,000 in 1993.
NOTE 11. Commitments and Contingencies
The Company's main and sales offices, and certain office and communication equipment are leased under noncancellable operating leases, which expire at various times through 2003. Future minimum annual rentals payable are as follows:
(In thousands of dollars)
1996 $ 2,963 1997 2,379 1998 2,110 1999 1,720 2000 1,014 Thereafter 1,331 Total $11,517
Annual rental expense including utilities for 1995, 1994, and 1993 approximated $3,630,000, $3,955,000, and $3,932,000, 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 most likely to result in adverse dispositions. Although further losses are possible, the opinion of management, based upon the advice of its attorneys and general counsel, is that such litigation will not, in the aggregate, have a material adverse effect on the Company's liquidity or financial position, although it could have a material effect on quarterly or annual operating results in the period in which it is resolved.
The Company is contingently liable under bank stand-by letter of credit agreements, executed in connection with security clearing activities, totaling $3,710,000 at September 29, 1995.
NOTE 12. 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
First Albany Companies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 September 29, 1995, the Corporation had net capital of $17,178,000 which was 18% of aggregate debit balances and $15,303,000 in excess of required minimum net capital.
NOTE 13. Financial Instruments with Off-Balance-Sheet Risk
In the normal course of business, the Company's customer and correspondent clearance 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 statement at the September 29, 1995 market values of the related securities and will incur a loss if the market value of the securities increases subsequent to September 29, 1995.
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. The Company controls this risk by dealing 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.
First Albany Companies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14. Concentrations of Credit Risk
The Company is engaged in various trading and brokerage activities whose counterparties primarily include broker-dealers, banks, and other financial institutions. In the event counterparties do not fulfill their obligations, the Company may be exposed to risk. The risk of default depends on the credit worthiness of the counterparty or issuer of the instrument. The Company seeks to control credit risk by following an established credit approval process, monitoring credit limits, and by 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 16.) If a single security position held in inventory represents a significant portion of net capital, referred to as "undue concentration" as defined by SEC Rule 15c3-1, the Company may not be able to realize the full carrying value of the security if the entire position was required to be sold. The total value of securities held in inventory at September 29, 1995, which met this criterion was $8,659,000. At September 30, 1994, the Company had no securities in inventory which met this criterion.
NOTE 15. Market 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 with the exception of First Albany Companies Inc.'s securities not readily marketable, which are recorded at cost. In December 1995, the value of such securities, as a result of an initial public offering was $5,400,000. The fair value of other financial assets and liabilities (consisting primarily of receivable from and payable to brokers dealers, clearing agencies, customers, securities borrowed and loaned, and bank loans payable) are considered to approximate the carrying value due to the short-term nature of the financial instruments.
The Company also enters into transactions in financial instruments that are not recognized in the Statement of Financial Condition. The notional amounts of the open transactions at September 29, 1995, are disclosed in Note 16.
NOTE 16. Derivative Financial Instruments
The Company does not engage in the proprietary trading of derivative securities with the exception of highly liquid index future contracts and options. These index future 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)
Trading Profits-State and Municipal Bonds $ 5,068 Index Futures Hedging Losses (1,350) Trading Profits-Corporate Stocks 1,159 Options (206) Net Trading Revenues $ 4,671
First Albany Companies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of September 29, 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 $(5,819) $(20,773) Options 121 100
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. The settlement of the aforementioned transactions is not expected to have a material adverse effect on the financial condition of the Company.
The market or fair value of the options are recorded in securities owned while the open equity in the future contracts are recorded as receivables from clearing organizations.
All per share figures have been restated for common stock dividends declared through October 1995. 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.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
There has been no Form 8-K filed within 24 months prior to the date of the most recent consolidated financial statements reporting a change of accountants and/or reporting disagreements on any matter of accounting principle or financial statement disclosure.
PART III
Item 10.
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 April 2, 1996. Such information is incorporated herein by reference to the proxy statement.
Information (not included in the Company's definitive proxy statement for the 1995 Annual Meeting of Stockholders) regarding certain executive officers of the Company is as follows:
Edwin T. Brondo, age 48, Senior Vice President and Chief Administrative Officer, joined First Albany Corporation in 1993 and was elected Vice President of First Albany Companies Inc. in 1994. He previously held senior management positions at Bankers Trust, Goldman Sachs, and Morgan Stanley.
David J. Cunningham, age 49, Senior Vice President and Chief Financial Officer, joined First Albany Corporation in 1975 and has served as Chief Financial Officer of First Albany Corporation since 1980 and First Albany Companies Inc. since fiscal 1986.
Michael R. Lindburg, age 46, Senior Vice President, Secretary, and General Counsel, joined First Albany Corporation in 1986 and has served as Vice President, Secretary, and General Counsel of First Albany Companies Inc. since 1986. He previously served as Vice President and General Counsel of the Boston Stock Exchange.
Item 11.
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 April 2, l996. Such information is incorporated herein by reference to the proxy statement.
Item 12.
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 April 2, 1996. Such information is incorporated herein by reference to the proxy statement.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information required by this item will be contained under the caption "Certain Transactions" in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on or about April 2, 1996. Such information is incorporated herein by reference to the proxy statement.
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) The following financial statements are included in Part II, Item 8:
Report of Independent Accountants
Financial Statements:
Consolidated Statements of Income, For the Years Ended September 29, 1995, September 30, 1994, and September 24, 1993.
Consolidated Statements of Financial Condition, as of September 29, 1995, and September 30, 1994.
Consolidated Statements of Changes in Stockholders' Equity, For the Years Ended September 29, 1995, September 30, 1994, and September 24, 1993.
Consolidated Statements of Cash Flows, For the Years Ended September 29, 1995, September 30, 1994, and September 24, 1993.
Notes to Consolidated Financial Statements
(2) The following financial statement schedule for the years 1995, 1994, and 1993 are submitted herewith:
Schedule VII-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).
4 Specimen Certificate of Common Stock, par value $.01 per share (filed as Exhibit No. 4 to Registration Statement No. 33-1353).
10.2 Lease dated February 9, 1978, between MacFarland Construction Company Inc. and First Albany Corporation for office facilities at 41 State Street, Albany, New York (filed as Exhibit No. 10.2 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).
10.12 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).
10.17 Term Loan Agreement dated March 29, 1995 between First Albany Companies Inc. and The Hudson City Savings Institution.
(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.
11 Computation of per share earnings
22 List of Subsidiaries of First Albany Companies Inc.
24 Consent of experts
(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.
27 Financial Data Schedule BD
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 of the Board
Date: December 19, 1995.
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 of the Board December 19, 1995 - ------------------------- George C. McNamee
/s/ Alan P. Goldberg President and Director December 19, 1995 - ------------------------- Alan P. Goldberg
/s/ J. Anthony Boeckh Director December 19, 1995 - ------------------------- J. Anthony Boeckh
/s/ Hon. Hugh L. Carey Director December 19, 1995 - ------------------------- Hon. Hugh L. Carey
/s/ Edwin T. Brondo Vice President December 19, 1995 - ------------------------- Edwin T. Brondo
/s/ David J. Cunningham Vice President and December 19, 1995 - ------------------------- Chief Financial Officer David J. Cunningham (Principal Accounting Officer)
/s/ Hugh A. Johnson, Jr. Senior Vice President December 19, 1995 - ------------------------- and Director Hugh A. Johnson Jr.
/s/ Michael R. Lindburg Vice President December 19, 1995 - ------------------------- General Counsel Michael R. Lindburg
/s/ Daniel V. McNamee Director December 19, 1995 - ------------------------- Daniel V. McNamee
/s/ Charles L. Schwager Director December 19, 1995 - ------------------------- Charles L. Schwager
Director December 19, 1995 - ------------------------- Benaree P. Wiley