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 centered 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 ("Asset Management"). Asset Management serves as investment manager to individual and institutional customers. Asset Management directs the invest- ment 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 213 to 304, 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 25 Retail, Institutional, and Investment Banking offices in 8 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:
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 - ----------------------
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 53 traders, underwriters, and assistants manages First Albany's inventory of securities. First Albany Investment Executives work directly with these traders. As of December 31, 1996, First Albany made a market in 175 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 1996 by securities category where First Albany acted as principal.
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:
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 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:
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 - ------------------
Customized financial services are available to customers of 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, 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 - --------
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 13 analysts and 15 research assistants who support First Albany's institutional and retail brokerage 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; 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 generated through customer purchases and sales of stocks, bonds, mutual funds, and other investment products. For the calendar year ended December 31, 1996, the three month period ended December 31, 1995 and fiscal years 1995, and 1994, these revenues accounted for approximately 45%, 49%, 53%, and 54% of operating revenues, respectively.
Institutional Business - ----------------------
Revenues generated from securities transactions with major institutions for the calendar year ended December 31, 1996, the three month period ended December 31, 1995 and fiscal years 1995, and 1994, accounted for approximately 34%, 36%, 31%, and 29% 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 70 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 $15.0 million for the calendar year ended December 31, 1996; $3.2 million for the three-month period ended December 31, 1995; $12.9 million in fiscal 1995; and $9.0 million in fiscal 1994.
Employees - ---------
At December 31, 1996, the Company had 769 full-time employees, of which 221 were Retail Investment Executives, 112 were Institutional Salespeople and Institutional Traders, 137 were in branch sales support, 145 were in other revenue producing positions, 78 were in operations, and 76 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 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, 1996, First Albany's net capital was $16,478,000 which was 12% of its aggregate debit balances (2% minimum requirement) and $13,783,000 in excess of required minimum net capital.
Item 2.

Item 2. Properties - -------------------
In February 1997, the Company has a total of 25 Retail, Institutional, and Investment Banking offices in 8 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 this 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 Hartford, CT Oneonta, NY Back Office Retail & Institutional Sales Retail Sales
80 State St. Johnstown, NY Philadelphia, PA Retail Sales Retail Sales Institutional Sales
Bonita Springs, FL Manchester, NH Pittsfield, MA Institutional Sales Retail Sales Retail Sales
Boston, MA Morristown, NJ Sewickley, PA Retail & Institutional Sales Institutional Sales Institutional Investment Banking, DP, Research Sales
Buffalo, NY Nashua, NH Syracuse, NY Retail Sales Retail Sales Retail Sales
Colchester, VT New York, NY Vestal, NY Retail Sales One Penn Plaza Retail Sales Retail & Institutional Sales Elmira, NY Investment Banking, DP, Research Retail Sales Back Office
Fairfield, CT 17 State. St. Wellesley, MA Retail Sales Retail Sales 40 Grove St. Operations Institutional Sales
330 Washington St. Retail Sales 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 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.

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 14, 1997 there were approximately 850 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:
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, 1996, the total number of treasury shares was 311,809. When appropriate, the Company will consider making additional purchases.
During calendar 1996, 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 1997, subsequent to the period reflected in this report, the Company declared the regular quarterly cash dividend of $0.05 per share payable on February 25, 1997 to shareholders of record on February 11, 1997.
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)
*All per share figures have been restated for common stock dividends paid.
FIRST ALBANY COMPANIES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
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 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 that offer a variety of investment products.
1996 was an unusually good year for the equity markets in general and many securities firms in particular. The bond markets did not fare as well as long-term interest rates rose as the economy recovered from the growth recession of 1995. The yield on long-term U.S. Treasury bonds rose from 5.99% to 6.72% while the Dow Jones Industrial Average rose from 5117 to 6448. As a result, stock prices registered a total return of 22.8% as measured by the S&P 500, and bonds registered a return of 2.9% 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 1926 and 1995 for corporate bonds was 5.7%, for government bonds 5.2%, and for equities 10.5%.
Although First Albany remains optimistic about the outlook for equity prices in 1997, 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. In such an environment, it would be difficult for all securities firms to maintain growth and earnings comparable to the levels achieved in 1996.
RESULTS OF OPERATIONS
FIRST ALBANY COMPANIES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
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 $1.02 per share compared to $4.1 million or $0.77 per share a year ago. This year's revenue gain reflects significant increases in both the firm'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 investments in people and systems. Management anticipates that this pressure on margins will continue for the first half of 1997.
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 Others - ---------------
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 firm'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 fiscal 1996 primarily as a result of our continuing investment in new automated systems.
Selling - -------
Selling expense increased $2.0 million or 39% in fiscal 1996 mainly reflecting greater promotional- related expenses resulting from increased retail and institutional activity.
Other - -----
Other expense increased $1.9 million or 33% in fiscal 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.)
FIRST ALBANY COMPANIES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
Three Months Periods Ended December 31, 1995 and December 31, 1994
Net Income - ----------
Net income for the quarter ended December 31, 1995, was $1.6 million or $0.29 per share compared to $0.8 million or $0.18 per share a year ago. Most of the firm'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 Others - ---------------
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 firm'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.)
FIRST ALBANY COMPANIES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
Fiscal Year 1995 Compared with Fiscal Year 1994
Net Income - ----------
Net income for the 1995 fiscal year was $3.4 million or $0.65 per share compared to $4.5 million or $0.87 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, which have negatively impacted short- term operating results.
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 million 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 growth 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 drop in investment banking revenues was largely a result of an industry-wide decline in underwriting activity.
Compensation and Benefits - -------------------------
Compensation and benefits increased $5.6 million or 8% in fiscal 1995. Sales-related compensation was $0.9 million higher and salaries increased $3.8 million causing benefits to rise $0.9 million.
Occupancy and Depreciation - --------------------------
Occupancy and depreciation expense increased $1.0 million or 17% in fiscal 1995 primarily due to the firm's 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.
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 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. Net payables to others increased due primarily to the adjustment to record securities owned on a trade date basis. (Amounts receivable and payable for securities transactions that have not reached their contractual settlement are recorded net on the statement of financial condition.) Securities owned will fluctuate as a result of changes in the level of positions held to facilitate customer transactions and changes in market conditions. Net receivables from customers increased due to an increase in customer margin debits. 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 1996, First Albany Corporation and Northeast Brokerage Services Corporation, both registered broker-dealer subsidiaries of First Albany Companies Inc., were each 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 $200,000,000 of which approximately $65,288,000 were unused as of December 31, 1996-will provide sufficient resources to meet present and reasonably foreseeable short-term financial needs.
During calendar 1996, 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. During the transitional period ending December 31, 1995, the Company declared and paid a quarterly cash dividend of $0.05 per share along with a 5% common stock dividend.
In January 1997, subsequent to the period reflected in this report, the Company declared the regular quarterly cash dividend of $0.05 per share payable on February 25, 1997, to shareholders of record on February 11, 1997.
Management believes that funds provided by operations will be sufficient to fund the acquisition of office equipment, 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 23
FINANCIAL STATEMENTS:
Consolidated Statements of Income For the Calendar Year Ended December 31, 1996; the three-month Transition Period ended December 31, 1995; the Fiscal Year Ended September 29, 1995, and the Fiscal Year Ended September 30, 1994 24
Consolidated Statements of Financial Condition as of December 31, 1996, December 31, 1995 (unaudited) and September 29, 1995 25
Consolidated Statements of Changes in Stockholders' Equity for the Calendar Year Ended December 31, 1996; the three-month Transition Period ended December 31, 1995, the Fiscal Year Ended September 29, 1995, and the Fiscal Year Ended September 30, 1994 26
Consolidated Statements of Cash Flows for the Calendar Year Ended December 31, 1996; the Three-month Transition Period ended December 31, 1995; the Fiscal Year Ended September 29, 1995, and the Fiscal Year Ended September 30, 1994 27
Notes to Consolidated Financial Statements 28-41
SUPPLEMENTARY DATA:
Selected Quarterly Financial Data (Unaudited) 42
Report of Independent Accountants
Board of Directors and Stockholders First Albany Companies Inc.
We have audited the accompanying consolidated statements of financial condition of First Albany Companies Inc. as of December 31, 1996 and September 29, 1995 and the related statements of income, changes in stockholders' equity and cash flows for the year ended December 31, 1996, the three months ended December 31, 1995 and the years ended September 29, 1995 and September 30, 1994 as 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, 1996, and September 29, 1995, and the consolidated results of their operations and their cash flows for the year ended December 31, 1996, the three months ended December 31, 1995, and for each of the years ended September 29, 1995 and September 30, 1994 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.
As described in Note 1, the Company changed its fiscal year from the last Friday in September to a calendar year basis ending December 31.
COOPERS & LYBRAND L.L.P.
Albany, New York February 7, 1997
First Albany Companies Inc. CONSOLIDATED STATEMENTS OF INCOME (In thousands of dollars, except per share amounts)
*All per share figures have been restated to reflect the 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)
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, 1996, December 31, 1995, September 29, 1995, and September 30, 1994 (In thousands of dollars except for number of shares)
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)
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 Security 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 ("Asset Management"). Under management agreements, Asset Management serves as investment manager to individual and institutional customers. Asset Management 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 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. 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 years ended September 29, 1995 and September 30, 1994 contained 52 weeks and 53 weeks, respectively.
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, 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, 1996, the Company had entered into a resale agreement in the amount of $2,869,000.
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 $11,682,000 at December 31, 1996, $10,513,000 at December 31, 1995 (unaudited), and $9,834,000 at September 29, 1995. Depreciation is provided on a straight-line basis over the shorter of the estimated useful life of the asset or the term 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.
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 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 of "temporary differences" which are attributable 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 - -------------------------
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:
All per share figures, as well as the weighted average number of common and dilutive common equivalent shares, have been restated for all stock dividends declared.
Reclassifications - -----------------
Certain amounts in the financial statements have been reclassified to conform with the 1996 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, as of:
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 $329,000, $307,000 and $125,000 as of December 31, 1996, December 31, 1995 (unaudited) and September 29, 1995, respectively. An allowance for doubtful accounts, based upon an aging of accounts receivable and specific identification, was recorded for $304,000, $219,000, and $125,000 as of December 31, 1996, December 31, 1995, (unaudited) and September 29, 1995, respectively.
First Albany Companies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4. Receivables From Others
Amounts receivable from others as of:
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:
Securities not readily marketable include investment securities (a) for which there is no market on a securities exchange or no independent publicly quoted market, (b) that cannot be publicly offered or sold unless registration has been effected under the Securities Act of 1933, or (c) that cannot be offered or sold because of other arrangements, restrictions, or conditions applicable to the securities or to the Company.
NOTE 6. Investments
At year end 1996, the Company owned approximately 2,037,000 common shares (or 35% of the shares outstanding) of Mechanical Technology Incorporated (MTI), which operates in upstate New York. The Company's investment in MTI is recorded under the equity method and approximated $2,588,000, which included goodwill of approximately $922,000 which is being amortized. At December 31, 1996, the aggregate market value of the Company's shares of MTI stock was $4,074,000.
First Albany Companies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company's equity in MTI's net income, recorded on a one-quarter delay basis, was $555,000 during the year ended December 31, 1996, related primarily to a gain recorded from discontinued operations.
At year end 1996, the Company owned 200,000 shares of META Group, Inc. This investment was carried at the value of $3,569,000 at December 31, 1996. Part of this investment is recorded at cost due to certain restrictions placed on the sale of these securities. The other portion of these securities became readily marketable pursuant to Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities", resulting in an unrealized gain of $2.3 million for the year ended December 31, 1996. The fair market value of this investment was $5,400,000 at 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 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 average weighted interest rates on these loans were 6.8%, 5.7% and 7.5% at December 31, 1996, December 31, 1995, and September 29, 1995, respectively. Short-term bank loans and unused lines of credit were collateralized by Company owned securities of $100,244,000 and customers' margin account securities of $106,822,000 at December 31, 1996.
A note for $4,583,333, 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 (7.48% at December 31, 1996) plus 2.5%. The note matures April 1, 2000.
Future annual principal loan repayment requirements as of December 31, 1996 are as follows:
NOTE 8. Obligations under Capitalized Leases
In December, 1996, the Company entered into a capital lease for office equipment totaling approximately $1,451,000.
First Albany Companies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 1996:
NOTE 9. Payables To Others
Amounts payable to others as of:
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 1996, the Company increased its subordinated debt by $5,000,000. This subordinated debt bears interest at 9.25%. Interest is paid monthly with the principal amount due at maturity on July 31, 2001. The loan agreement includes financial covenants for debt and equity. One of the more significant covenants requires First Albany Corporation to maintain a minimum net capital (as defined by Rule 15c 3-1 of the Securities and Exchange Commission) of $7,500,000. The amount of net capital as of December 31, 1996 was $16,478,000. The lender has the right to exercise stock options on 84,000 shares of the Company's stock at $11.90 per share. This right expires July 31, 2000.
NOTE 11. Stockholders' Equity
During calendar 1996, 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. During the transitional period ending December 31, 1995, the Company declared and paid a quarterly cash dividend of $0.05 per share along with a 5% common stock dividend.
In January 1997, subsequent to the period reflected in this report, the Board of Directors declared the regular quarterly cash dividend of $0.05 per share payable on February 25, 1997, to shareholders of record
First Albany Companies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
on February 11, 1997. (Stockholders' Equity and all per share figures have been adjusted to reflect all common stock dividends.)
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:
The reasons for the difference between the expected income tax expense using the federal statutory rate and the income tax expense are as follows:
The temporary differences that give rise to significant portions of deferred tax assets are as follows:
First Albany Companies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 year ended December 31, 1996, the transitional period ending December 31, 1995, and the years ended September 29, 1995, and September 30, 1994 the Company contributed $103,000, $0, $140,000, and $56,000, 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 year ended December 31, 1996, the transitional period ending December 31, 1995, and the years ended September 29, 1995, and September 30, 1994, the Company contributed $617,000, $163,000, $408,000, and $334,000, respectively.
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 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, 1996, no SARs have been granted.
Option transactions for the 3-year period ended December 31, 1996 under the 1982 Plan were as follows: (all are ISOs)
First Albany Companies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
There were no shares available for grants of options under the 1982 Plan at December 31, 1996; December 31, 1995; September 29, 1995; and September 30, 1994. During calendar year 1996, the Company declared two 5% common stock dividends. These dividends resulted in an additional 1,959 options authorized. All shares subject to options were exercisable at the end of each period presented. At December 31, 1996, options outstanding and exercisable under the 1982 Plan had an average exercise price of $3.73 and an average remaining contractual life of 1.48 years.
Option transactions for the 3-year period ended December 31, 1996 under the 1989 Plan were as follows: (all are ISOs)
First Albany Companies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On May 30, 1996, the Company's stockholders approved an amendment to the 1989 Plan, which was adopted by the Board of Directors on April 25, 1996. This amendment increased the number of shares available for issuance under the 1989 plan by 500,000. Additionally, during calendar year 1996, the Company declared two 5% common stock dividends. These dividends resulted in an additional 133,983 options authorized.
There were 760,402; 337,501; 332,456 and 431,374 shares available for grants of options at December 31, 1996, December 31, 1995, September 29, 1995 and September 30, 1994, respectively.
The following table summarizes information about stock options outstanding under the 1989 Plan at December 31, 1996:
At December 31, 1995, 634,204 options with an average exercise price of $5.27 were exercisable; at September 29, 1995, 557,442 options with an average exercise price of $5.41 were exercisable; and at September 30, 1994, 523,625 options with an average exercise price of $5.91 were exercisable.
As discussed in Note 10, the Company granted options to purchase 84,000 shares of the Company's stock pursuant to a subordinated debt agreement entered into in 1996. The market price of the Company's stock at the date of agreement was $10 per share. The exercise price of these options is $11.90 per share, and they expire on July 31, 2000.
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 1996, 1995, and 1994. 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 $5,500,000 to $5,294,000 in 1996 and from $3,350,000 to $3,245,000 in 1995. Primary earnings per share would decrease from $1.02 to $0.98 in 1996 and from $0.65 to $0.63 in 1995. Fully diluted earnings per share would decrease from $1.02 to $0.98 in 1996 and from $0.64 to $0.62 in 1995. The initial impact of FAS 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 1996 and 1995 under FAS 123 was $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 in 1996 and 1995, respectively: dividend yield of 2.76% for both years; expected volatility of 54.7% for both years; risk-free interest rates ranging from 5.17% to 6.26% in 1996 and 5.38% to 6.66% in 1995; and expected lives of 2.6 and 1.2 years for 1996 and 1995, respectively.
In 1992, the Company established the First Albany Companies Inc. Restricted Stock Plan which authorized the issuance of up to 370,996 shares of common stock (adjusted for all stock dividends) to
The First Albany Companies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 1996, 105,226 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 $4,484,000 in 1996, $395,000 in the transitional period ending December 31, 1995, $1,343,000 for the year ended September 29, 1995, and $1,828,000 for the year ended September 30, 1994.
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:
Annual rental expense including utilities for the year ended December 31, 1996, the transitional period ending December 31, 1995, and the fiscal years ended September 29, 1995 and September 30, 1994 approximated $4,175,000, $906,000, $3,630,000, and $3,955,000, respectively.
In the normal course of business, the Company has been named a defendant, or otherwise has possible exposure, in several claims. Certain of these are class actions which seek unspecified damages which could be substantial. Although there can be no assurance as to the eventual outcome of litigation in which the Company has been named as a defendant or otherwise has possible exposure, the Company has provided for those actions it believes are likely to result in adverse dispositions. Although further losses are possible, the opinion of management, based upon the advice of its attorneys and general counsel, is that such litigation will not, in the aggregate, have a material adverse effect on the Company's liquidity or financial position, although it could have a material effect on quarterly or annual operating results in the period in which it is resolved.
The Company is contingently liable under bank stand-by letter of credit agreements, executed in connection with security clearing activities, totaling $3,200,000 at December 31, 1996.
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, 1996, the
First Albany Companies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Corporation had net capital of $16,478,000 which equaled 12% of aggregate debit balances and $13,783,000 in excess of required minimum net capital.
NOTE 17. 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 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.
First Albany Companies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 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.) 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 December 31, 1996, December 31, 1995 (unaudited) and September 29, 1995 which met this criterion was $76,151,000, $29,214,000, and $8,659,000, respectively. The securities held in inventory at December 31, 1996 which met the criterion were sold subsequently at a net realized gain.
NOTE 19. 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 its investments described in Note 6. The fair value of other financial assets and liabilities (consisting primarily of receivables from and payables to brokers, dealers, clearing agencies and customers; securities borrowed and loaned; and bank loans payable) is 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 December 31, 1996 are disclosed in Note 20.
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:
First Albany Companies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During the year ended September 30, 1994, the Company did not engage in proprietary trading of index future contracts and options.
As of December 31, 1996, the contractual or notional amounts related to these financial instruments were as follows:
As of September 29, 1995, the contractual or notional amounts related to these financial instruments were as follows:
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.
FIRST ALBANY COMPANIES INC. SUPPLEMENTARY DATA SELECTED QUARTERLY FINANCIAL DATA (Unaudited) (In thousands of dollars, except per share data)
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.

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 15, 1997. Such information is incorporated herein by reference to the proxy statement.
Information (not included in the Company's definitive proxy statement for the 1997 Annual Meeting of Stockholders) regarding certain executive officers of the Company is as follows:
Edwin T. Brondo, age 49, Vice President of the Company and Senior Vice President and Chief Administrative Officer of First Albany Corporation, 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 50, Chief Financial Officer of the Company and Senior Vice President and Chief Financial Officer of First Albany Corporation, 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 47, Secretary, and General Counsel of the Company, and Senior Vice President, Managing Director of Retail Sales of First Albany Corporation, 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 May 15, 1997. 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 May 15, 1997. 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 May 15, 1997. Such information is incorporated herein by reference to the proxy statement.
Part IV
Item 14.

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 Year Ended December 31, 1996; the three-month Transition Period ended December 31, 1995 and; the Fiscal Year Ended September 29, 1995, and the Fiscal Year Ended September 30, 1994
Consolidated Statements of Financial Condition as of December 31, 1996, December 31, 1995 (unaudited) and September 29, 1995
Consolidated Statements of Changes in Stockholders' Equity for the Calendar Year Ended December 31, 1996; the three-month Transition Period ended December 31, 1995, the Fiscal Year Ended September 29, 1995, and the Fiscal Year Ended September 30, 1994
Consolidated Statements of Cash Flows for the Calendar Year Ended December 31, 1996; the Three-month Transition Period ended December 31, 1995; the Fiscal Year Ended September 29, 1995, and the Fiscal Year Ended September 30, 1994
Notes to Consolidated Financial Statements
(2) The following financial statement schedule for the periods 1996, 1995, and 1994 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 (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.
10.20 Subordinated Loan Agreement dated September 16, 1996 between First Albany Companies Inc. and Sharon M. Duker.
10.21 Master Equipment Lease Agreement dated September 25, 1996 between First Albany Companies Inc. and KeyCorp Leasing Ltd.
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.
11 Computation of per share earnings.
22 List of Subsidiaries of First Albany Companies Inc.
24 Consent of Coopers & Lybrand L.L.P.
24b 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
FIRST ALBANY COMPANIES INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS PERIODS ENDED DECEMBER 31, 1996, DECEMBER 31, 1995, SEPTEMBER 29, 1995, AND SEPTEMBER 30, 1994
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 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ GEORGE C. MCNAMEE Chairman and Co-Chief - --------------------- Executive Officer March 26, 1997 George C. McNamee
/s/ ALAN P. GOLDBERG President and Co-Chief - -------------------- Executive Officer March 26, 1997 Alan P. Goldberg
/s/ DAVID J. CUNNINGHAM Vice President and March 26, 1997 - ----------------------- Chief Financial Officer David J. Cunningham (Principal Accounting Officer)
/s/ HUGH A. JOHNSON, JR. Vice President and Director March 26, 1997 - ------------------------ Hugh A. Johnson, Jr.
/s/ J. ANTHONY BOECKH Director March 26, 1997 - --------------------- J. Anthony Boeckh
/s/ WALTER M. FIEDEROWICZ Director March 26, 1997 - ------------------------- Walter M. Fiederowicz
/s/ DANIEL V. MCNAMEE Director March 26, 1997 - --------------------- Daniel V. McNamee
/s/ CHARLES L. SCHWAGER Director March 26, 1997 - ----------------------- Charles L. Schwager
Director March , 1997 - -------------------- Benaree P. Wiley