First Albany Companies Inc. Business Information, Profile, and History

Company Perspectives:

We will now be directing our efforts and capital to research-driven investment banking, capital markets, and venture capital operations. This positions First Albany as one of the only employee-owned public companies remaining in the securities industry with a pure institutional focus.

History of First Albany Companies Inc.

First Albany Companies Inc., acting through its subsidiaries, conducts a full-service investment banking and brokerage business. These activities include securities brokerage for institutional customers and market making and trading of corporate, government, and municipal securities. First Albany also underwrites and distributes municipal and corporate securities, provides securities clearance activities for other brokerage firms, and offers financial advisory services to its customers, including serving as investment manager, making investment decisions, and providing research, statistical analysis, and continuous supervision of portfolios. It also provides venture capital and merchant banking services to firms in the high-technology sector.

Privately Owned Brokerage and Financial Services Firm: 1953--85

First Albany Corporation was founded in 1953 by Daniel V. McNamee, Jr., a lawyer who also had become a vice-president of his father-in-law's investment brokerage business in Albany, New York. The company established a financial services department in the 1970s, with three units: financial planning, limited partnerships, and insurance. By the time McNamee died in 1977, First Albany had offices in 11 cities in upstate New York and New England, a specialty in selling municipal bonds to the public, and annual revenues of about $7 million. He was succeeded as head of the firm by his son George, who had become president in 1975.

Seeking to attract funds from institutional clients and convinced that the United States would have to rebuild its military forces in the post-Vietnam era, the younger McNamee, in 1979, began concentrating on defense stocks. First Albany sponsored seminars and research reports on military technologies for its institutional clients, and a team of its analysts established five categories for further investigation: lasers, precision guided missiles and electronic guidance systems, high-speed integrated circuits, defense manufacturing technology and advanced strategic metals, and nuclear materials. When the Reagan administration came into office in 1981 and began sponsoring a major military buildup, First Albany's research started to bring in clients--not only institutional investors but also underwriting business for defense-related companies seeking to go public. 'The trick in the research business is to differentiate yourself,' a money manager told Pamela Sherrid of Business Week in 1983. 'By looking at small companies that no one else is, First Albany has made its name.'

McNamee was ably supported by Hugh Johnson, senior vice-president and director of equity services. By 1981 Johnson was respected enough in the financial community to rate an interview in Barron's, where he warned investors to 'hunker down' and avoid speculative investments in the face of a recessionary business climate and bear market but continued to recommend certain defense stocks. He also cast a favorable eye on telecommunications companies that were investing in information technology.

First Albany, in 1981, had 20 offices and was a member of the New York Stock Exchange, the American Stock Exchange, and various regional exchanges. Its revenues rose from $24.37 million in fiscal 1982 (the year ended September 30, 1982) to $58.37 million in fiscal 1986. Net income rose from $79,000 to $3.26 million over this period. It became, as First Albany Companies, a public company in 1985 and was operating 24 offices in five states the following year. Of its fiscal 1986 revenues, securities commissions accounted for 38 percent; interest (mainly from financing of customer margin loans, securities lending activities, and securities owned), 22 percent; principal transactions (trading in stocks, bonds, options, government securities, bank certificates of deposit, mortgage-based securities, and corporate obligations), 17 percent; investment banking, 14 percent; and clearing revenues, five percent. Its retail business accounted for 74 percent of revenues and institutional for only nine percent. Now also a member of the National Association of Securities Dealers, Inc., First Albany was making a market (acting as a specialist or 'broker's broker') for 73 common stock or other equity securities quoted on the NASDAQ market.

First Albany was engaged principally in providing brokerage services to retail clients through its sales force, which had grown from about 60 to 164 over the previous five years. Many of these so-called Investment Executives had joined the company after previous association with large securities firms, and First Albany believed that they were receiving higher compensation for similar levels of production than their counterparts with many of these firms. In addition to selling these clients stocks, bonds, mutual funds, and other investment products, First Albany also made available to selected clients specialized financial services. The Financial Planning Department advised clients on a variety of interrelated financial matters, including investment portfolio review, tax management, insurance analysis, education, and retirement planning and estate analysis. Financial planners prepared detailed reports for clients, with specific recommendations aimed at accumulating wealth and reaching financial goals. First Albany also offered a range of retirement plans, fixed and variable annuities, and life and health insurance programs. In addition, it offered various tax-advantaged investments to its clients, usually in the form of limited partnership interests in real estate, oil and gas drilling, and similar ventures.

Expanding Its Scope: 1986--95

Over the next five years First Albany expanded into three more states and more than doubled the number of securities for which it was serving as market maker. Revenues reached $72.58 million in fiscal 1991, with net income of $2.29 million. Principal transactions were now the chief source of revenue, accounting for 39 percent, followed by securities commissions, at 27 percent. Institutional business had become much more important to the firm, accounting for 29 percent of revenue, compared with 56 percent for retail.

First Albany won favorable mention as an underwriter in 1989 from the business periodical Forbes, which rated 70 percent of its new stock issues between 1982 and 1987 as outperforming Standard & Poor's index of 500 stocks, a ratio higher than any other investment bank surveyed. Nine of the ten were selling in 1989 at more than their offering price. 'You make your reputation by the deals you don't do,' McNamee explained to Richard L. Stern of Forbes. 'We turn away a lot of deals, and some of them turn up at other firms,' he added. Johnson also continued to earn respect from the business press, including Fortune, whose Andrew Serwer interviewed him for the publication's first issue of 1990. Johnson, he wrote, predicted, 'In 1982, on the eve of the great bull market ... that stocks would climb and urged investors to sign on. In 1987, just prior to the October crash, he warned them it was time to bail out.' In the interview, Johnson correctly forecast a recession and advised readers to keep half their portfolios in high-quality bonds. When he recommended particular stocks, Johnson proved to be on target as well. In early 1993 Edward A. Wyatt of Barron's wrote of First Albany, 'Last year, the firm's picks gained 27.5 percent, handsomely outperforming all the major stock issues.'

First Albany Asset Management Corp. was formed in 1991 as a subsidiary with two acquired mutual funds: Investors' Preference Fund for Income and Investors' Preference N.Y. Tax Free Fund, both bond funds purchased from Dollar Dry Dock Savings Bank of New York City, with combined assets of $58.8 million. First Albany also formed a four-person division that fiscal year to sell high-yield securities, and a new venture to provide financial and merger services for banks, savings institutions, and other financial companies, mainly in the Northeast. By the end of fiscal 1995, First Albany's total revenues had reached $123.1 million. Its net income for the year was $3.35 million. That year the firm moved its investment banking arm from Albany to Boston and increased its research, institutional sales, and corporate finance units to 90 people, half of them in Boston. Among the local companies that First Albany helped bring public were Cambridge-based Project Software & Development Inc., Westborough-based Applix Inc., Lexington-based CP Clare Corp., and Natick-based Natural MicroSystems Corp. In all, the firm underwrote three initial public offerings in 1993, six in 1994, and six in 1995, with an emphasis on technology companies.

Also in fiscal 1995, First Albany added an institutional municipal risk-trading operation in which certain inventory positions are hedged by highly liquid future contracts. In addition, that year the company formed a strategic alliance with META Group, Inc., by which it turned over to the latter responsibility for research and analysis of developments and trends in information technology.

Focus on High-Technology Investments: 1998--2000

By 1998 First Albany was focusing on three niche segments other than technology expected to provide exceptional investment opportunities: energy, financial institutions, and health care. That year, the parent company formed First Albany Enterprise Funding, Inc. as a private equity investment company whose business was to provide venture capital and merchant banking services to firms in the high-technology sector. Investment banking accounted for 13 percent of First Albany's revenues of $248.7 million in (calendar year) 1999. Its activities in that field included underwritings, initial and secondary offerings, advisory services, mergers and acquisitions, and private placements.

Principal transactions remained First Albany's largest revenue earner in 1999, with 28.9 percent of the total. These transactions included making a market in 193 common stocks quoted on NASDAQ. Also included were trades in tax-exempt and (beginning in 1999), taxable municipal bonds and taxable debt obligations, including U.S. Treasury bills, notes, and bonds; U.S. government agency notes and bonds; bank certificates of deposit; mortgage-backed securities; and corporate obligations. Securities commissions accounted for 28.5 percent of revenue and interest income for 24.7 percent. The firm's net income was only $413,000 in 1999 after taking a pretax loss of $7.2 million attributed primarily to a decline in book value of the investment portfolio. First Albany had 33 offices in 12 states at the end of 1999.

Brokerage services to private clients accounted for about half of First Albany's 1999 revenue, but in May 2000 the firm agreed to sell its Private Client Group to First Union Securities, Inc. for $100 million. This sale reduced First Albany by about 90,000 accounts, 200 brokers, and $11.4 billion in managed assets. Eighteen offices remained in 11 states: California, Connecticut, Florida, Illinois, Massachusetts, Minnesota, New Jersey, New York, Pennsylvania, Texas, and Virginia. McNamee announced that the firm would henceforth focus on investment banking, capital markets, and venture capital operations.

F.A. Technology Ventures, the First Albany venture capital arm aimed at launching high-technology businesses, had $70 million in its coffers by August 2000, when it received $50 million in investment from the state of New York's pension fund. Some of the revenue from the sale to First Union also was expected to go to this unit, which was to focus on investing in companies in the Northeast and, especially, upstate New York. Based in Albany and Boston, the fund was to focus on information technology, such as software and Internet businesses, and on energy technology, especially new generating processes, transmission, and energy storage devices. First Albany Enterprise, the company's prior venture fund, was managing about $11 million in investments. First Albany Asset Management, the mutual fund subsidiary, had $590 million under management at the end of 1999.

Among the companies in the Albany area receiving financial backing from First Albany in 2000 were Tech Valley Communications of Albany, a new telecommunications firm; PowerAdz.com of Rensselaer, a Web site developer for newspapers; and MapInfo Corp. of North Greenbush, a mapping software developer. McNamee was chairman and a founder of Plug Power Inc. of Latham, an energy provider, and chief executive officer of Mechanical Technology Inc. of Colonie, an incubator for other technology companies. Described as a technology geek and outside-the-box thinker, McNamee told Kenneth Aaron of the Albany Times-Union, 'This is the greatest period of technological opportunities since the 1890s.' McNamee owned 15.3 percent of First Albany's common stock in April 2000. Alan P. Goldberg, president since 1989 and co-chief executive officer since 1992, held 11.6 percent. An employee stock ownership plan owned 22.2 percent.

Principal Subsidiaries: First Albany Asset Management Corporation; First Albany Corporation; First Albany Enterprise Funding, Inc.

Principal Divisions: Equity; Municipal; Taxable Fixed Income.

Principal Competitors: Goldman Sachs and Co.; Merrill Lynch and Company Inc.; PaineWebber Inc.; United Asset Management Corp.

Chronology

• Key Dates:

• 1953: Daniel V. McNamee founds First Albany Corporation.
• 1977: George C. McNamee succeeds his later father as company chairman.
• 1985: The firm becomes a public company as First Albany Companies Inc.
• 1998: First Albany founds a subsidiary aimed at financing high-technology ventures.
• 2000: The firm sells its Private Client Group, which has been accounting for half of its revenue.