SCHEDULE 14A
(Rule 14a-101)

 

INFORMATION REQUIRED IN PROXY STATEMENT

 

SCHEDULE 14A INFORMATION

 

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

o  Preliminary Proxy Statement

o  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

þ  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to Section 240.14a-12

 

First Albany Companies Inc.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

August 31, 2007

 

Dear Fellow Shareholder:

 

Enclosed are the proxy materials for the 2007 annual meeting of First Albany Companies Inc. (the “Company”). Please read those materials carefully.

 

As you may know, on May 14, 2007, the Company announced that the Board of Directors unanimously approved an agreement to recapitalize and receive a $50 million equity investment from an affiliate of MatlinPatterson Global Opportunities Partners II LP, which is a global private equity firm with approximately $4 billion under management. This capital investment will provide the Company with resources to grow its business, to seek to acquire other securities or advisory businesses, to focus on its core investment products and services strengths, to provide incentives to its employees and to better meet the needs of its clients. This transaction will complete a year of restructuring and repositioning for the Company.

 

After experiencing recurring losses, in the spring of 2006 the Board of Directors retained Freeman & Co. Securities LLC as its financial advisor to evaluate and entertain alternatives for recapitalization of the Company. In addition, the Board of Directors of the Company (the “Board”) formed a Special Committee to examine strategic alternatives, evaluate proposals from potential investors and to recommend to the Board the best course of action for the Company and its shareholders. Throughout 2006 and early 2007, the Company had active conversations with numerous potential investors, but ultimately received no offers. In the first quarter of 2007, MatlinPatterson FA Acquisition LLC (“MatlinPatterson”) expressed interest in a transaction. Following intensive discussions and consultation with financial advisors and legal counsel, the Special Committee unanimously recommended to the Board of Directors that the MatlinPatterson proposal was in the best interests of the Company and its shareholders, and the Board of Directors unanimously approved the transaction.

 

This year’s annual meeting is most important since you will be asked, among other things, to consider, act upon and approve five proposals, together authorizing the transaction to recapitalize the Company. In such recapitalization transaction, MatlinPatterson agreed to purchase 33,333,333 newly-issued shares of common stock of the Company (subject to upward adjustment) for an aggregate cash purchase price of $50 million. Upon consummation of the transaction, MatlinPatterson is currently expected to control between 70% and 75% of the voting power of the Company (between 60% and 65% on a fully diluted basis), based on the number of shares of common stock outstanding on June 25, 2007, and after giving effect to an increase in the number of Purchased Shares that may result from the adjustment provisions of the Investment Agreement and which may further increase the number of Purchased Shares. This transaction has important implications for your investment.

 

In connection with the recapitalization transaction:

 

 

 

 

In order for the transaction to proceed, it is important that you vote “FOR” the five recapitalization proposals (Proposals 2 through 6) in the attached proxy.

 

Your vote is very important.  We hope that you are planning to attend the annual meeting personally and we look forward to seeing you. Whether or not you are able to attend in person, it is very important that your shares be represented at the annual meeting. Accordingly, the return of the enclosed proxy as soon as possible will ensure that your shares are represented at the annual meeting. In addition to using the traditional proxy card, most shareholders also have the choice of voting over the Internet or by telephone.

 

Since the approval of some of the recapitalization proposals requires the affirmative vote of holders of a majority of the outstanding shares of the Company’s common stock, the failure to vote your shares will have the same effect as voting against approval and adoption of such proposal.

 

If you have any questions concerning these documents, please feel free to contact:

 

MacKenzie Partners, Inc.

105 Madison Avenue

New York, NY 10016

Call Collect: (212) 929-5500

or

Toll Free: (800) 322-2885

 

On behalf of the Board of Directors and management of First Albany Companies Inc., I would like to thank you for your continued support and confidence.

 

Sincerely yours,

 

 

George C. McNamee
Chairman of the Board

 

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD SEPTEMBER 21, 2007

 

NOTICE IS HEREBY GIVEN that the annual meeting of the shareholders of First Albany Companies Inc. (the “Company”) will be held at the offices of Sidley Austin LLP, 787 Seventh Avenue, 23rd Floor, New York, New York, on September 21, 2007 at 10:00 a.m. (EDT), for the following purposes:

 

(1) To elect three (3) directors whose terms will expire at the 2010 annual meeting of shareholders;

 

(2) To consider and act upon a proposal to approve the Company’s issuance and sale of shares of common stock to certain qualified investors in a private placement;

 

(3) To consider and act upon a proposal to amend the Company’s Certificate of Incorporation to increase the authorized share capital of the Company from 50,000,000 shares of common stock to 100,000,000 shares of common stock with the same par value of $0.01 per share;

 

(4) To consider and act upon a proposal to amend the Company’s Certificate of Incorporation to increase the authorized share capital of the Company from 500,000 shares of preferred stock to 1,500,000 shares of preferred stock with the same par value of $1.00 per share;

 

(5) To consider and act upon a proposal to amend the Company’s Certificate of Incorporation to limit the liability of the directors of the Company to the extent permitted under Section 402(b) of the New York Business Corporation Law (the “NYBCL”);

 

(6) To consider and act upon a proposal to approve the adoption of the First Albany Companies Inc. 2007 Incentive Compensation Plan;

 

(7) To consider and act upon a proposal to ratify the appointment of PricewaterhouseCoopers LLP as independent accountants of the Company for the fiscal year ending December 31, 2007;

 

(8) In the event there are insufficient votes at the time of the annual meeting to adopt Proposals 2, 3, 4, 5 and 6, to consider and act upon a proposal to adjourn or postpone the annual meeting in order to solicit additional proxies; and

 

(9) To consider and act upon such other business as may properly come before the meeting or any adjournment thereof.

 

We ask that you give it your careful attention.

 

The First Albany Companies Inc. Board of Directors unanimously recommends that the shareholders vote (1) “FOR” the election of the three (3) persons named as nominees under “Election of Directors;” (2) “FOR” the proposal to approve the Company’s issuance and sale of shares of common stock to certain qualified investors in a private placement; (3) “FOR” the proposal to amend the Company’s Certificate of Incorporation to increase the authorized share capital of the Company from 50,000,000 shares of common stock to 100,000,000 shares of common stock with the same par value of $0.01 per share, (4) “FOR” the proposal to amend the Company’s Certificate of Incorporation to increase the authorized share capital of the Company from 500,000 shares of preferred stock to 1,500,000 shares of preferred stock with the same par value of $1.00 per share; (5) “FOR” the proposal to amend the Company’s Certificate of Incorporation to limit the liability of the directors of the Company to the extent permitted under Section 402(b) of the NYBCL; (6) “FOR” the proposal to adopt the First Albany Companies Inc. 2007 Incentive Compensation Plan; (7) “FOR” the ratification of the appointment of PricewaterhouseCoopers LLP as independent accountants of the Company for the fiscal year ending December 31, 2007; and (8) “FOR” the proposal to adjourn or postpone the annual meeting in order to solicit additional proxies in the event there are insufficient votes at the time of the annual meeting to adopt Proposals 2, 3, 4, 5 and 6.

As in the past, we will be reporting on your Company’s activities and you will have an opportunity to ask questions about its operations.

 

Holders of common stock of record as of the close of business on August 10, 2007 are entitled to receive notice of and vote at the annual meeting of the shareholders. A list of such shareholders may be examined at the annual meeting.

 

We hope that you are planning to attend the annual meeting personally and we look forward to seeing you. Whether or not you are able to attend in person, it is important that your shares be represented at the annual meeting. For that reason we ask that you promptly sign, date, and mail the enclosed proxy card in the return envelope provided. You may also have the option of voting over the Internet or by telephone. Please refer to your proxy materials or the information forwarded by your bank, broker or other holder of record to see which voting methods are available to you. Shareholders who attend the annual meeting may withdraw their proxies and vote in person.

 

By Order of the Board of Directors

 

 

Peter J. McNierney

President and Chief Executive Officer

 

Albany, New York

August 31, 2007

Table of Contents

 

 

 

677 Broadway
Albany, New York 12207-2990

 

 

PROXY STATEMENT

 

 

QUESTIONS AND ANSWERS ABOUT THIS PROXY MATERIAL AND VOTING

 

The following are some questions that you, as a shareholder of First Albany Companies Inc., may have regarding the private placement and the other matters being considered at the annual meeting of shareholders and the answers to those questions. First Albany Companies Inc. urges you to read carefully the remainder of this document because the information in this section does not provide all the information that might be important to you with respect to the private placement and the other matters being considered at the annual meeting. Additional important information is also contained in the appendices to, and the documents incorporated by reference into, this document. The words “we,” “our,” and “us” as used in this proxy statement refer to First Albany Companies Inc. and its subsidiaries.

 

Why am I receiving these materials?

 

We sent you this proxy statement and the enclosed proxy card because the Board of Directors (the “Board” or “Board of Directors”) of First Albany Companies Inc. (sometimes referred to as the “Company” or “First Albany”) is soliciting your proxy to vote at our annual meeting of the shareholders to be held on September 21, 2007. You are invited to attend the annual meeting to vote on the Proposals described in this proxy statement. However, you do not need to attend the meeting to vote your shares. Instead, you may simply complete, sign and return the enclosed proxy card.

 

We intend to mail this proxy statement and accompanying proxy card on or about August 31, 2007 to all shareholders of record entitled to vote at the annual meeting.

 

What am I voting on?

 

There are eight matters scheduled for a vote at the annual meeting:

 

(1) To elect three (3) directors whose terms will expire at the 2010 annual meeting of shareholders;

 

(2) To consider and act upon a proposal to approve the Company’s issuance and sale of shares of common stock to certain qualified investors in a private placement;

 

(3) To consider and act upon a proposal to amend the Company’s Certificate of Incorporation to increase the authorized share capital of the Company from 50,000,000 shares of common stock to 100,000,000 shares of common stock with the same par value of $0.01 per share;

 

(4) To consider and act upon a proposal to amend the Company’s Certificate of Incorporation to increase the authorized share capital of the Company from 500,000 shares of preferred stock to 1,500,000 shares of preferred stock with the same par value of $1.00 per share;

 

(5) To consider and act upon a proposal to amend the Company’s Certificate of Incorporation to limit the liability of the directors of the Company to the extent permitted under Section 402(b) of the New York Business Corporation Law (the “NYBCL”);

(6) To consider and act upon a proposal to approve the adoption of the First Albany Companies Inc. 2007 Incentive Compensation Plan (the “2007 Plan”); and

 

(7) To consider and act upon a proposal to ratify the appointment of PricewaterhouseCoopers LLP as independent accountants of the Company for the fiscal year ending December 31, 2007.

 

(8) In the event there are insufficient votes at the time of the annual meeting to adopt Proposals 2, 3, 4, 5 and 6, to consider and act upon a proposal to adjourn or postpone the annual meeting in order to solicit additional proxies.

 

(9) To consider and act upon such other business as may properly come before the meeting or any adjournment thereof.

 

What is the Private Placement described in Proposal 2?

 

On May 14, 2007, we entered into an investment agreement (the “Investment Agreement”) pursuant to which we agreed to issue and sell to MatlinPatterson FA Acquisition LLC (“MatlinPatterson”) 33,333,333 shares, subject to upward adjustment as described in the Investment Agreement, of the common stock, par value $0.01 per share, of the Company (the “Purchased Shares”) for an aggregate cash purchase price of $50 million (the “Private Placement”). If Proposal 2, Proposal 3, Proposal 4, Proposal 5 and Proposal 6 (collectively, the “Investment Proposals”) are approved by our shareholders and the Private Placement is completed, we will sell and issue the Purchased Shares currently expected to represent, after the closing, between 70% and 75% of our outstanding common stock (between 60% and 65% on a fully-diluted basis), based on the number of shares outstanding on June 25, 2007, and after giving effect to an increase in the number of Purchased Shares that may result from the adjustment provisions of the Investment Agreement and which may further increase the number of Purchased Shares.

 

Why is the Company selling the Purchased Shares?

 

We have experienced recurring losses and as of June 30, 2007, had cash of approximately $3.5 million and working capital of approximately $17 million. Continuing losses will adversely impact the Company’s liquidity and net capital. We need additional capital to pursue our strategic objectives. If the Investment Proposals are approved by our shareholders, we would be authorized to issue the Purchased Shares and upon satisfaction of the other conditions to closing the Private Placement, we would receive $50 million of gross proceeds from the sale of Purchased Shares, less transaction fees and expenses. The net proceeds from the Private Placement would have a positive impact on our liquidity and net capital and we believe they would improve our ability to pursue our strategic objectives. It is currently expected that approximately $20 million of the proceeds from the Private Placement will be invested in the Company’s subsidiary Descap Securities Inc. to enable it to position more products and take advantage of opportunities that we believe to exist in the mortgage and asset-backed securities markets and to issue primary debt financing. In addition, we currently expect that up to $10 million will be committed to a fund managed by the Company’s subsidiary, FA Technology Ventures Corporation, which invests in the emerging growth sectors of information and energy technology. In addition, pursuant to the Term Loan and Capital Lease Waiver described in our quarterly report on Form 10-Q for the period ended June 30, 2006, we have agreed that upon the closing of the Private Placement and the DEPFA Transaction we will repay all outstanding loan and lease obligations to a certain lender. If the DEPFA Transaction closes prior to the Private Placement, we have agreed to prepay the aggregate amounts of loan and lease obligations equal to 75% of the net proceeds received by the Company and then pay the remaining amounts upon closing of the Private Placement. We believe the remaining proceeds from the Private Placement will also provide us with additional resources to grow our businesses, to seek to acquire other securities or advisory businesses, to focus on our core investment products and service strengths, to provide incentives to employees and to better meet the needs of our clients, and we may also repay some or all of our indebtedness. Immediately following the closing of the Private Placement, we expect the Company to have over $50 million in cash and working capital in excess of $58 million and we believe the proceeds from the Private Placement will allow the Company to increase existing capital levels with each of its broker dealers.

 

We believe that the Private Placement, together with the new incentive compensation plan that is proposed to be adopted in connection with the Private Placement, will further and promote the interests of the Company and our

shareholders by improving our ability to retain and motivate our current employees and to attract additional employees who can help us obtain our strategic objectives. In the past, we have lost a significant number of investment banking, brokerage, research and other professionals and, more recently, we lost several senior professionals. Continuing losses of professionals, particularly key senior professionals or groups of related professionals, could impair our ability to secure or successfully complete client engagements, materially and adversely affect our revenues and make it more difficult to return to profitability. Although we could still lose more employees in the future, we believe that completion of the Private Placement and adoption of the proposed new incentive compensation plan will significantly improve our ability to retain key employees. This belief is strengthened by the fact that 24 of our employees, comprising substantially all of the most senior management of the Company, have signed non-compete and non-solicit agreements conditioned on the closing of the recapitalization transaction.

 

We also believe that the Private Placement will strengthen our investor base with the addition of a new experienced investor who will have a significant stake in our long-term success and will be motivated to provide the support and assistance to protect and enhance its investment. We also believe we will strengthen our Board with the addition of new directors who have significant experience in advising comparable companies.

 

What will happen if Proposal 2 is not approved?

 

Approval of each of the Investment Proposals is a condition to closing of the Private Placement or is otherwise contemplated thereby. In the event that Proposal 2 is not approved, we will not complete the Private Placement or receive any of the proceeds from the sale of the Purchased Shares as described in Proposal 2. We also will not amend our Certificate of Incorporation as described in Proposal 3 and Proposal 4 and we will not adopt the 2007 Plan as described in Proposal 6, even if one or more of such other Investment Proposals is approved by the shareholders. However, if Proposal 5 is approved by the shareholders, our Certificate of Incorporation will still be amended as provided in that Proposal.

 

To what extent will the issuance of the Purchased Shares dilute our existing shareholders’ percentage ownership of the Company?

 

Our shareholders will incur immediate and substantial dilution of their percentage ownership in the Company if the Investment Proposals are approved by the shareholders and the Purchased Shares are issued. Based on the number of shares outstanding on June 25, 2007, the aggregate ownership of all holders of our outstanding common stock immediately prior to the issuance of the Purchased Shares is currently expected to be reduced to between 25% and 30% of the outstanding shares of common stock (between 22% and 26% on a fully diluted basis) based on the number of shares of common stock outstanding on June 25, 2007, and after giving effect to an increase in the number of Purchased Shares that may result from the adjustment provisions of the Investment Agreement and which may further increase the number of Purchased Shares. The aggregate ownership of the Company’s existing affiliated shareholders is expected to be reduced to between 5% and 6% (between 7% and 8% on a fully diluted basis) and the aggregate ownership of the Company’s existing non-affiliated shareholders is expect to be reduced to between 19% and 25% (between 14% and 19% on a fully diluted basis), in each case based on the number of shares of common stock outstanding on June 25, 2007, and after giving effect to an increase in the number of Purchased Shares that may result from the adjustment provisions of the Investment Agreement and which may further increase the number of Purchased Shares.

 

Why is the Company seeking shareholder approval for the Private Placement?

 

We are subject to the rules of the NASDAQ Stock Market because our common stock is currently listed on the NASDAQ Global Market. These rules require us to obtain shareholder approval for any issuance or sale of common stock that is (i) equal to 20% or more of our outstanding common stock before such an issuance or sale and (ii) at a price per share below the greater of book value or market value of such issuance or sale. These rules also require shareholder approval of any issuance of voting stock that would result in a change of control of the issuer, which is defined as the ownership by any shareholder or group of affiliated shareholders of 20% or more of an issuer’s voting stock immediately following the issuance. The rules apply to the sale and issuance of the Purchased Shares both because (i) the issuance of the Purchased Shares will result in a change of control of the Company and (ii) the

maximum price of the Purchased Shares to be issued pursuant to the Investment agreement is $1.50 per share, compared to the $1.60 per share closing price of our common stock on the NASDAQ Global Market on May 11, 2007, the last business day prior to entry into the agreement to sell the Purchased Shares and the Purchased Shares represent more than 20% of our common stock outstanding immediately prior to the completion of the Private Placement. For these reasons, we are required under the NASDAQ Marketplace Rules to obtain shareholder approval prior to issuing the Purchased Shares.

 

In addition, under the Investment Agreement, we agreed to seek the approval of the Private Placement at a meeting of our shareholders to be held as soon as practicable after the execution of the Investment Agreement.

 

Why is the Company seeking to increase the authorized number of shares of common stock as described in Proposal 3?

 

We do not currently have sufficient authorized shares to complete the Private Placement described in Proposal 2. To complete the Private Placement and issue the Purchased Shares, we need to substantially increase the number of shares of our common stock authorized for issuance under our Certificate of Incorporation. It is a condition to the completion of the Private Placement that our shareholders approve Proposal 3. Our current Certificate of Incorporation authorizes 50,000,000 shares of common stock for issuance. As of June 25, 2007, there were approximately 16,040,000 shares of our common stock outstanding and an additional approximately 5,233,000 shares reserved for issuance upon exercise of outstanding options and warrants and reserved for future issuance under our equity compensation plans. As a result, as of June 25, 2007, there were only approximately 28,727,000 authorized shares of our common stock available for issuance. We have proposed increasing the authorized number of shares of common stock to 100,000,000 shares to permit completion of the Private Placement and to provide for additional authorized shares of common stock to issue in the future. The additional shares may be issued for various purposes without further shareholder approval, except to the extent required by applicable NASDAQ Marketplace Rules. The purposes may include raising capital, providing equity incentives to employees, officers, directors or consultants, establishing strategic relationships with other companies, expanding our business or product lines through the acquisition of other businesses or products, and other corporate purposes.

 

What will happen if Proposal 3 is not approved?

 

If Proposal 3 is not approved, we will not amend our Certificate of Incorporation as provided in Proposal 3. As noted above, if our Certificate of Incorporation is not amended to increase the authorized number of shares of common stock, we will not be able to complete the Private Placement. If Proposal 3 is not approved, we will not complete the Private Placement or receive any of the proceeds from the sale of the Purchased Shares as described in Proposal 2, we will not amend our Certificate of Incorporation as described in Proposal 4 and we will not adopt the 2007 Plan as described in Proposal 6, even if one or more of such other Investment Proposals is approved by the shareholders. However, if Proposal 5 is approved by the shareholders, our Certificate of Incorporation will still be amended as provided in that Proposal.

 

Why is the Company seeking to increase the authorized number of shares of preferred stock as described in Proposal 4?

 

Under the Investment Agreement, we agreed to seek the shareholders’ approval of an amendment to our Certificate of Incorporation to increase the authorized number of shares of preferred stock from 500,000 to 1,500,000. The additional shares of preferred stock also relate to the Rights Agreement we entered into on March 30, 1998 with our transfer agent, American Stock Transfer & Trust Company (the “Rights Agreement”), designed to provide for fair and equal treatment for all shareholders in the event that an unsolicited attempt is made to acquire our Company. The Rights Agreement gives each holder of common stock the right to purchase 1/100^th share of preferred stock upon certain triggering events. In connection with the authorization of 100,000,000 shares of common stock in accordance with Proposal 3, 1,000,000 shares of preferred stock will be needed to support these rights. The additional shares of authorized preferred stock may also be issued for various other purposes, including raising capital, providing equity incentives to employees, officers, directors or consultants, establishing strategic relationships with other companies, expanding our business or product lines through the acquisition of other businesses or products, and other corporate purposes.

What will happen if Proposal 4 is not approved?

 

If Proposal 4 is not approved, we will not amend our Certificate of Incorporation as provided in Proposal 4. Approval of the amendment to our Certificate of Incorporation to increase the number of authorized shares of our preferred stock is a condition to the closing of the Private Placement. If the shareholders do not approve Proposal 4, unless MatlinPatterson waives the condition, we will not complete the Private Placement or receive any of the proceeds from the sale of the Purchased Shares as described in Proposal 2, we will not amend our Certificate of Incorporation as described in Proposal 3 and we will not adopt the 2007 Plan as described in Proposal 6, even if one or more of such other Proposals is approved by the shareholders. However, if Proposal 5 is approved by the shareholders, our Certificate of Incorporation will still be amended as provided in that Proposal.

 

Why is the Company seeking to limit the liability of the directors of the Company as described in Proposal 5?

 

Under the Investment Agreement, we agreed to seek the shareholders’ approval of an amendment to our Certificate of Incorporation limiting the liability of the directors of the Company to the extent permitted under Section 402(b) of the NYBCL at the annual meeting. The Board believes that limiting the directors’ personal liability as permitted by the New York statute will enhance the ability of the Company to attract and retain highly qualified directors in the future. In addition, the threat of personal liability may have an adverse effect on the decision-making process of directors. The proposed amendment may also encourage directors to make entrepreneurial decisions that they believe to be in the best interest of the Company with less threat of personal liability for damages for breach of their duty of care.

 

What will happen if Proposal 5 is not approved?

 

Approval of the amendment to our Certificate of Incorporation to limit the liability of the directors of the Company to the extent permitted under Section 402(b) of the NYBCL is a condition to the closing of the Private Placement. If the shareholders do not approve Proposal 5, unless MatlinPatterson waives the condition, we will not complete the Private Placement or receive any of the proceeds from the sale of the Purchased Shares as described in Proposal 2, we will not amend our Certificate of Incorporation as described in Proposal 3 and Proposal 4 and we will not adopt the 2007 Plan as described in Proposal 6, even if one or more of such other Proposals is approved by the shareholders. However, if Proposal 5 is approved by the shareholders, our Certificate of Incorporation will still be amended as provided in that Proposal.

 

Why is the Company seeking to put into effect the new First Albany Companies Inc. 2007 Incentive Compensation Plan as described in Proposal 6?

 

The 2007 Plan is designed to advance the interests of the Company by providing a means through which incentive awards can be granted to officers, other employees and persons who provide services to the Company and its subsidiaries. By making grants of awards under this plan, the Company can attract, retain and reward such persons and, by linking compensation measures to performance, the Company can provide incentives for the creation of shareholder value. In addition, the interests of the Company’s shareholders and the award recipients can be more closely aligned by giving the recipients an interest in the long-term success of the Company.

 

Furthermore, the obligation of MatlinPatterson to complete the Private Placement is conditioned on at least 22 of 27 designated key employees of the Company becoming bound by certain non-competition and non-solicitation covenants conditioned on the closing of the Private Placement and remaining employed by the Company at the closing of the Private Placement. Twenty-four of such 27 designated key employees have already entered into such agreements to become effective as of the closing. The terms on which such designated key employees entered into such non-competition and non-solicitation covenants require that the Company grant to such employees certain awards of restricted stock units under the 2007 Plan if the Private Placement closes. The Company expects to enter into an employment agreement with Mr. Lee Fensterstock that will become effective as of the closing of the Private Placement. Pending the closing of the Private Placement, Mr. Fensterstock has been engaged by the Company as a consultant. The Company has also entered into an employment agreement with Mr. Peter McNierney and an amendment to the existing employment agreement of Mr. Brian Coad that will each become effective as of the

closing of the Private Placement. Under the terms of these employment agreements, following the closing of the Private Placement, Mr. Fensterstock will serve as the new Chairman of the Board and Chief Executive Officer of the Company, Mr. McNierney will become the President and Chief Operating Officer and Mr. Coad will remain the Chief Financial Officer. If the Private Placement is completed, these employment agreements (or amendment in the case of Mr. Coad) will also obligate the Company to award certain restricted stock units to such executives under the 2007 Plan. Accordingly, it is contemplated that, as of the closing of the Private Placement, awards of restricted stock units in respect of up to 6.75 million shares of common stock will be made or committed to be made under the 2007 Plan, representing between 9.2% and 10.7% of the shares of common stock currently expected to be outstanding immediately following the closing of the Private Placement on a fully diluted basis, based on the number of shares outstanding on June 25, 2007 and after giving effect to an increase in the number of Purchased Shares that may result from the adjustment provisions of the Investment Agreement and which may further increase the number of Purchased Shares. If the Private Placement is not consummated, we will not adopt the 2007 plan as proposed.

 

What will happen if Proposal 6 is not approved?

 

If Proposal 6 is not approved at the annual meeting, the 2007 Plan will not go into effect unless approved by our shareholders at a subsequent meeting. If Proposals 2, 3, 4 and 5 are approved, following the closing of the Private Placement, MatlinPatterson will beneficially own a majority of the then outstanding shares of our common stock. As a result, if Proposal 6 is not approved at the annual meeting, there is a likelihood that a proposal to adopt the 2007 Plan will be approved by a majority vote of the shareholders at a meeting subsequent to the closing of the Private Placement. If we are required to hold a special meeting of the shareholders following the closing of the Private Placement in order to reconsider the approval of the 2007 Plan, we will incur additional expenses.

 

Who can vote at the annual meeting?

 

Only shareholders of record at the close of business on August 10, 2007 will be entitled to vote at the annual meeting. At the close of business on this record date, there were 16,000,352 shares of common stock outstanding and entitled to vote.

 

Shareholder of Record: Shares Registered in Your Name

 

If at the close of business on August 10, 2007 your shares were registered directly in your name with our transfer agent, American Stock Transfer & Trust Company, then you are a shareholder of record. As a shareholder of record, you may vote in person at the meeting or vote by proxy. Whether or not you plan to attend the meeting, we urge you to complete and return the enclosed proxy card to ensure your vote is counted.

 

Beneficial Owner: Shares Registered in the Name of a Broker or Bank

 

If at the close of business on August 10, 2007 your shares were held in an account at a brokerage firm, bank, dealer, or other similar organization, then you are the beneficial owner of shares held in street name, and these proxy materials are being forwarded to you by that organization. The organization holding your account is considered the shareholder of record for purposes of voting your shares at the annual meeting. As a beneficial owner, you have the right to direct your broker or other agent on how to vote the shares in your account. You are also invited to attend the annual meeting. However, since you are not the shareholder of record, you will not be able to vote your shares in person at the meeting unless you request and obtain a valid proxy from your broker or other agent.

 

How do I vote?

 

For each of the matters to be voted on, you may vote “For” or “Against” or abstain from voting. The procedures for voting are fairly simple:

 

Shareholder of Record: Shares Registered in Your Name

 

If you are a shareholder of record, you may vote in person at the annual meeting or vote by proxy. Whether or not you plan to attend the meeting, we urge you to vote by proxy to ensure your vote is counted. You may still attend the meeting and vote in person if you have already voted by proxy.

 

Beneficial Owner: Shares Registered in the Name of Broker or Bank

 

If you are a beneficial owner of shares registered in the name of your broker, bank or other agent, you should have received a proxy card and voting instructions with these proxy materials from that organization rather than from us. Simply complete and mail the proxy card to ensure that your vote is counted.

 

To vote in person at the annual meeting, you must obtain a valid proxy from your broker, bank or other agent. Follow the instructions from your broker or bank included with these proxy materials or contact your broker or bank to request a proxy form.

 

IF YOU HAVE ANY QUESTIONS OR NEED ASSISTANCE WITH VOTING YOUR SHARES, PLEASE CALL MACKENZIE PARTNERS, INC., THE FIRM ASSISTING US IN THIS SOLICITATION, TOLL-FREE AT (800) 322-2885.

 

How many votes do I have?

 

On each matter to be voted upon, you have one vote for each share of common stock you own as of August 10, 2007.

 

What if I return a proxy card but do not make specific choices?

 

If you return a signed and dated proxy card without marking any voting selections, your shares will be voted (1) “For” the election of the three (3) persons named as nominees under “Election of Directors;” (2) “For” the proposal to approve the Private Placement; (3) “For” the proposal to amend the Company’s Certificate of Incorporation to increase the authorized share capital of the Company from 50,000,000 shares of common stock to 100,000,000 shares of common stock with the same par value of $0.01 per share, (4) “For” the proposal to amend the Company’s Certificate of Incorporation to increase the authorized share capital of the Company from 500,000 shares of preferred stock to 1,500,000 shares of preferred stock with the same par value of $1.00 per share; (5) “For” the proposal to amend the Company’s Certificate of Incorporation to limit the liability of the directors of the Company to the extent permitted under Section 402(b) of the NYBCL; (6) “For” the proposal to adopt the 2007 Plan; (7) “For” the ratification of the appointment of PricewaterhouseCoopers LLP as independent accountants of the Company for the fiscal year ending December 31, 2007; and (8) “For” the proposal for adjournment or postponement of the annual meeting in order to solicit additional proxies in the event there are insufficient votes at the time of the annual meeting to adopt Proposals 2, 3, 4, 5 and 6.

 

What does it mean if I receive more than one proxy card?

 

If you receive more than one proxy card, your shares are registered in more than one name or are registered in different accounts. Please complete, sign and return each proxy card to ensure that all of your shares are voted.

 

Can I change my vote after submitting my proxy?

 

Yes. You can revoke your proxy at any time before the final vote at the meeting. You may revoke your proxy in any one of three ways:

 

 

How are votes counted?

 

Votes will be counted by the inspector of election appointed for the meeting, who will separately count “For” and “Against” votes, abstentions and broker non-votes. Abstentions will be counted towards a quorum and the vote total for each Proposal and will have the same effect as “Against” votes. Broker non-votes will be counted towards a quorum and depending on the Proposal either will have the same effect as an “Against” vote on the Proposal or will have no effect. Please see the more detailed description of the effect of broker non-votes on specific Proposals in the answer to “How many votes are needed to approve each proposal?” below.

 

If your shares are held by your broker as your nominee (that is, in “street name”), you will need to obtain a proxy card from the institution that holds your shares and follow the instructions included on that proxy card regarding how to instruct your broker to vote your shares. If you do not give instructions to your broker, your broker can vote your shares with respect to “discretionary” items but not with respect to “non-discretionary” items. Discretionary items are proposals considered routine under the rules of the NASDAQ Stock Market and on which your broker may vote shares held in street name in the absence of your voting instructions. On non-discretionary items for which you do not give your broker instructions, the shares will be treated as broker non-votes. The Investment Proposals will all be considered non-discretionary items.

 

How many votes are needed to approve each proposal?

 

 

What is the quorum requirement?

 

A quorum of shareholders is necessary to hold a valid meeting. A quorum will be present if at least a majority of the shares outstanding and entitled to vote as of the record date are represented by shareholders present at the meeting or by proxy. On August 10, 2007, the record date, there were 16,000,352 shares outstanding and entitled to vote. As a result 8,000,177 of these shares must be represented by shareholders present at the meeting or by proxy to have a quorum.

 

Your shares will be counted towards the quorum if you submit a valid proxy vote or vote at the meeting. Abstentions and broker non-votes will also be counted towards the quorum requirement. If there is no quorum, a majority of the votes present at the meeting may adjourn the meeting to another date.

 

How can I find out the results of the voting at the annual meeting?

 

Preliminary voting results will be announced at the annual meeting and announced promptly following the annual meeting in a press release and current report on Form 8-K. Final voting results will be published in our quarterly report on Form 10-Q for the third quarter of 2007 that we are required to file with the Securities and Exchange Commission (the “SEC”) by November 9, 2007.

 

Who is paying for this proxy solicitation?

 

We will pay for the entire cost of soliciting proxies. In addition to these mailed proxy materials, our directors, officers and other employees may also solicit proxies in person, by telephone or by other means of communication. Directors, officers and other employees will not be paid any additional compensation for soliciting proxies. We may also reimburse brokerage firms, banks and other agents for the cost of forwarding proxy materials to beneficial owners. The solicitation of proxies will also be supplemented through the services of MacKenzie Partners, Inc., a proxy solicitation firm. MacKenzie Partners, Inc. will receive a customary fee which we estimate to be approximately $15,000, plus certain other fees for related services and reasonable out-of-pocket expenses.

 

IF YOU HAVE ANY QUESTIONS OR NEED ASSISTANCE WITH VOTING YOUR SHARES, PLEASE CALL MACKENZIE PARTNERS, INC. TOLL-FREE AT (800) 322-2885.

 

When are shareholder proposals due for next year’s annual meeting?

 

The deadline for submitting a shareholder proposal for inclusion in our proxy statement and form of proxy for the 2008 annual meeting of shareholders is no earlier than 90 days before the 2008 annual meeting, and no later than the close of business on the later of either (i) the seventieth (70) day prior to the 2008 annual meeting, or (ii) the tenth day following the day the 2008 annual meeting date was first publicly announced. Shareholders are advised to review our Bylaws, which contain additional requirements with respect to advance notice of shareholder proposals and director nominations. Our current Bylaws are available at the SEC’s website, www.sec.gov, or upon written request to Investor Relations, First Albany Companies Inc., 677 Broadway, Albany, New York 12207-2990. The proposed Amendments to our Certificate of Incorporation referred to in Proposal 3, Proposal 4 and Proposal 5 are appended to this proxy statement as Appendix C and will also be available at www.sec.gov or upon written request to our Investor Relations department following adoption.

 

This summary highlights information contained elsewhere in this document and may not contain all the information that is important to you. First Albany Companies Inc. urges you to read carefully the remainder of this document, including the attached appendices, and the other documents to which we have referred you to because this section does not provide all the information that might be important to you with respect to the Private Placement and the other matters being considered at the annual meeting of shareholders. We have included page references to direct you to a more complete description of the topics presented in this summary. Unless the context otherwise requires, references to “we,” “our” and “us” in this document refer to First Albany Companies Inc. and its subsidiaries.

 

The Companies

 

First Albany Companies Inc.

677 Broadway

Albany, New York 12207-2990

(518) 447-8673

 

First Albany Companies Inc. is an independent investment bank that serves the qualified market, state and local governments and the growing corporate middle market by providing clients with strategic, research-based investment opportunities, as well as advisory and financing services. First Albany offers a diverse range of products through its Equities division and its Municipal Capital Markets division (which is under contract to be sold), as well as Descap Securities Inc., its mortgage-backed security/asset-backed security trading subsidiary, and FA Technology Ventures Inc., its venture capital division. First Albany maintains offices in major business and commercial markets.

 

First Albany, a New York corporation, is traded on the NASDAQ Global Market, which we refer to as NASDAQ, under the symbol “FACT”.

 

MatlinPatterson FA Acquisition LLC

c/o MatlinPatterson Global Advisers LLC

520 Madison Avenue, 35th Floor

New York, New York 10022

(212) 651-9500

 

MatlinPatterson FA Acquisition LLC is a Delaware limited liability company formed by MatlinPatterson Global Opportunities Partners II L.P., an investment fund, and its parallel offshore vehicle (collectively, “MatlinPatterson GOP II”), for the purpose of entering into the Investment Agreement and acquiring the Purchased Shares. MatlinPatterson GOP II is managed by MatlinPatterson Global Advisers LLC, a global investment firm that currently manages, in addition to MatlinPatterson GOP II, MatlinPatterson Global Opportunities Partners L.P. (and its parallel offshore vehicle) and MatlinPatterson Global Opportunities Partner III L.P. (and its parallel offshore vehicle). These partnerships have aggregate assets and commitments of approximately $9 billion.

 

The Annual Meeting

 

The Annual Meeting (See page 21)

 

The First Albany annual meeting will be held at the offices of Sidley Austin LLP, 787 Seventh Avenue, 23rd Floor, New York, New York, 10019, at 10:00 a.m. (EDT), on September 21, 2007. At the First Albany annual meeting, First Albany shareholders will be asked:

 

(1) To elect three (3) directors whose terms will expire at the 2010 annual meeting of shareholders;

 

(2) To consider and act upon a proposal to approve the Private Placement;

 

(3) To consider and act upon a proposal to amend the Company’s Certificate of Incorporation to increase the authorized share capital of the Company from 50,000,000 shares of common stock to 100,000,000 shares of common stock with the same par value of $0.01 per share;

(4) To consider and act upon a proposal to amend the Company’s Certificate of Incorporation to increase the authorized share capital of the Company from 500,000 shares of preferred stock to 1,500,000 shares of preferred stock with the same par value of $1.00 per share;

 

(5) To consider and act upon a proposal to amend the Company’s Certificate of Incorporation to limit the liability of the directors of the Company to the extent permitted under Section 402(b) of the NYBCL;

 

(6) To consider and act upon a proposal to approve the adoption of the 2007 Plan;

 

(7) To consider and act upon a proposal to ratify the appointment of PricewaterhouseCoopers LLP as independent accountants of the Company for the fiscal year ending December 31, 2007;

 

(8) In the event there are insufficient votes at the time of the annual meeting to adopt Proposals 2, 3, 4, 5 and 6, to consider and act upon a proposal to adjourn or postpone the annual meeting in order to solicit additional proxies.

 

(9) To consider and act upon such other business as may properly come before the meeting.

 

You may vote at the First Albany annual meeting if you owned shares of First Albany common stock at the close of business on August 10, 2007. On that date, there were 16,000,352 shares of First Albany common stock outstanding, approximately 21% of which were owned and entitled to be voted by First Albany directors and executive officers and their affiliates. We currently expect that First Albany’s directors and executive officers will vote their shares in favor of the Private Placement, and Messrs. George McNamee and Alan Goldberg, directors of the Company, and Mr. McNierney, a director and the President and CEO of the Company, have agreed with MatlinPatterson to vote the shares of common stock owned by them in favor of the transaction. These persons collectively own approximately 19% of the outstanding shares of common stock. Therefore, shares representing approximately 32% of the outstanding shares of common stock of the Company as of the record date, in addition to those shares representing approximately 19% of the outstanding shares of common stock which are subject to the Voting Agreements with MatlinPatterson to vote in favor of the transaction, must be voted in favor of Proposals 2, 3, 4, 5 and 6 for these proposals to be approved. Approximately 38% of the shares outstanding which are not subject to the Voting Agreements (which is approximately 81% of the outstanding shares of common stock as of the record date) must be voted in favor of Proposals 2, 3, 4, 5 and 6 for these proposals to be approved.

 

You can cast one vote for each share of First Albany common stock you own. The proposals require different percentages of votes in order to approve them:

 

as an “Against” vote. Broker non-votes will not be treated as votes cast at the annual meeting for such purpose.

 

 

Proposal No. 1: Election of Directors (See page 24)

 

Three directors will be elected at the annual meeting to serve for a three-year term expiring at the annual meeting of shareholders in 2010. The Board has nominated three persons as directors. The Board recommends that shareholders vote FOR the election of these nominees.

 

Proposal No. 2: Approval of the Private Placement (See page 28)

 

Background of the Private Placement (See page 30)

 

The Company experienced losses in several of our key segments in 2005 and 2006, including equities sales and trading, equity investment banking and fixed income sales and trading. Recognizing these losses and the need to maintain liquidity requirements, in the spring of 2006 the Board retained Freeman & Co. Securities LLC (“Freeman”) as its financial advisor to establish a comprehensive process to entertain both a strategic sale of, or a strategic investment in, the Company.

 

Throughout 2006 and early 2007, the Company had conversations with numerous potential investors but ultimately received no offers. In the first quarter of 2007, MatlinPatterson expressed interest in investing in the Company. The Board formed a special committee of the Board (the “Special Committee”) to assist in evaluating proposals from potential investors and to make recommendations to the Board regarding any issues requiring Board consideration with respect to any proposals received from such investors. Bingham McCutchen LLP was retained as legal counsel for the Special Committee.

 

The Board and the Special Committee engaged in discussions and consulted with their financial advisors and legal counsel regarding the potential MatlinPatterson transaction. The Special Committee ultimately reported to the Board that it was satisfied with the process and felt that all reasonably possible scenarios and interested parties had been considered and that the efforts made were sufficient to indicate that the MatlinPatterson proposal was the best available for the Company and its shareholders.

 

The Special Committee also requested that Freeman deliver a fairness opinion regarding the consideration to be paid to the Company in connection with the Private Placement.

 

On May 14, 2007, the Company entered into the Investment Agreement with MatlinPatterson described below and attached hereto as Appendix A providing for the issuance and sale of Purchased Shares for gross proceeds of $50 million. Please see the section “Investment Agreement” below for information on the Investment Agreement.

 

Reasons for the Private Placement (See page 35)

 

We have experienced recurring losses and, as of June 30, 2007, had cash of approximately $3.5 million and working capital of approximately $17 million. Continuing losses will adversely impact the Company’s liquidity and net capital. We need additional capital to pursue our strategic objectives. If the Investment Proposals are approved by our shareholders, we would be authorized to issue the Purchased Shares, and upon satisfaction of the other conditions to closing the Private Placement, we would receive $50 million of gross proceeds from the sale of the

Purchased Shares, less transaction fees and expenses. It is currently expected that approximately $20 million of the proceeds from the Private Placement will be invested in the Company’s subsidiary Descap Securities Inc. to enable it to position more products and take advantage of opportunities that we believe to exist in the mortgage and asset-backed securities markets and to issue primary debt financing. In addition, we currently expect that up to $10 million will be committed to a fund managed by the Company’s subsidiary, FA Technology Ventures Corporation, which invests in the emerging growth sectors of information and energy technology. In addition, pursuant to the Term Loan and Capital Lease Waiver described in our quarterly report on Form 10-Q for the period ended June 30, 2006, we have agreed that upon the closing of the Private Placement and the DEPFA Transaction we will repay all outstanding loan and lease obligations to a certain lender. If the DEPFA Transaction closes prior to the Private Placement, we have agreed to prepay the aggregate amounts of loan and lease obligations equal to 75% of the net proceeds received by the Company and then pay the remaining amounts upon closing of the Private Placement. We believe the remaining proceeds from the Private Placement will also provide us with additional resources to grow our businesses, to seek to acquire other securities or advisory businesses, to focus on our core investment products and service strengths, to provide incentives to employees and to better meet the needs of our clients, and we may also repay some or all of our indebtedness. Immediately following the closing of the Private Placement, we expect the Company to have over $50 million in cash and working capital in excess of $58 million and we believe the proceeds from the Private Placement will allow the Company to increase existing capital levels with each of its broker dealers. After considering numerous potential financing and strategic alternatives, the Board determined that the Private Placement was the best available alternative and would provide the greatest potential value for our shareholders, as well as provide the necessary capital to pursue our long-term strategic goals. The determination was the result of careful consideration by the Board of a number of factors, including (i) that the Private Placement will strengthen our financial condition and reduce our financial risk, (ii) that the Private Placement will strengthen our investor base with the addition of a new experienced investor who will have a significant stake in our long-term success and will be motivated to provide the support and assistance to protect and enhance its investment and (iii) that we believe we will strengthen our Board with the addition of new directors who have significant experience in advising comparable companies. In its review of the Private Placement, the Board also considered a number of potentially negative factors, including (i) that the Private Placement will have a highly dilutive effect on our current shareholders and option holders, (ii) that MatlinPatterson is currently expected to control between 70% and 75% of the voting power of our capital stock immediately upon the closing of the Private Placement (between 60% and 65% on a fully diluted basis), after giving effect to an increase in the number of Purchased Shares that may result from the adjustment provisions of the Investment Agreement and which may further increase the number of Purchased Shares and (iii) the Private Placement will result in restrictions on our ability to use our net operating loss carryforwards to offset future taxable income. The Board recognized that there can be no assurance that we would be able to achieve all or significantly all of each anticipated benefit or advantage or that it had identified and accurately assessed each risk and negative factor. However the Board concluded that the potential benefits and advantages of the Private Placement significantly outweigh the risks and negative factors that it had identified.

 

Recommendations of the Board of Directors (See page 59)

 

After careful consideration and on the unanimous recommendation of the Special Committee, the Board unanimously approved the Investment Agreement on May 14, 2007. For the factors considered by the Board in reaching its decision to approve the Investment Agreement, see the section entitled “Proposal 2, Approval of the Private Placement — Reasons for the Private Placement” beginning on page 28. The First Albany Board of Directors unanimously recommends that the First Albany shareholders vote “For” the proposal to approve the issuance of First Albany common stock in the Private Placement.

 

Opinion of our Independent Financial Advisor (See page 37)

 

On May 14, 2007, First Albany’s financial advisor, Freeman, delivered to the Board its opinion that, as of the date of the opinion and based upon the assumptions made, matters considered and limits of review set forth in its written opinion, the consideration to be paid to the Company was fair from a financial point of view. A copy of Freeman’s written opinion is attached to this proxy statement as Appendix B.

 

First Albany encourages you to read carefully both the section entitled “Proposal 2, Approval of the Private Placement — Opinion of Our Financial Advisor” beginning on page 37 and Freeman’s written opinion in its entirety for a description of the assumptions made, matters considered and limits on the scope of review undertaken by Freeman. Freeman’s opinion was intended for the use and benefit of the Board of Directors, does not address the merits of the underlying decision by First Albany to enter into the Investment Agreement or any of the transactions contemplated thereby, including the Private Placement, and does not constitute a recommendation as to how any holder of common stock should vote on, or take any action with respect to, the Private Placement or any related matter.

 

Financial Projections (See page 41)

 

The Company’s senior management provided financial forecasts to MatlinPatterson in connection with their consideration of a possible transaction with the Company. These projections were also provided to our Board and to Freeman. We have included a subset of these projections in this proxy statement to give our shareholders access to certain nonpublic information deemed material by our Board for purposes of considering and evaluating the Private Placement. The inclusion of these projections should not be regarded as an indication that management, our Board, MatlinPatterson, Freeman, or any other recipient of this information considered, or now considers, these projections to be a reliable prediction of future results, and they should not be relied on as such. In addition, as we have only included a subset of the projections in this proxy statement, you are cautioned not to rely on this information as complete in making a decision whether to vote in favor of the Private Placement.

 

The projections reflect numerous estimates and assumptions with respect to industry performance, general business, economic, regulatory, market and financial conditions and other matters, including assumed effective interest rates and effective tax rates consistent with the Company’s historical levels, all of which are difficult to predict and many of which are beyond the Company’s control. The projections are also subject to significant uncertainties in connection with changes to the Company’s business and its financial condition and results of operation. In addition, the projections reflect projected information without regard to the Investment Agreement with MatlinPatterson, which may cause actual results to materially differ as well. As a result, there can be no assurance that the projected results will be realized or that actual results will not be significantly higher or lower than those contained in the projections; it is expected that there will be differences between actual and projected results. Since the projections cover multiple years, such information by its nature becomes less reliable with each successive year.

 

Terms of the Private Placement (See page 44)

 

The following is a summary of the terms of the Private Placement and the provisions of the Investment Agreement, the Registration Rights Agreement, the Voting Agreements and the Amendment of the Rights Agreement referred to below. The sale of the Purchased Shares has not been registered under the Securities Act of 1933, as amended (the “Securities Act”). The Purchased Shares will be sold to MatlinPatterson FA Acquisition LLC, an accredited investor, and possibly additional co-investors who are accredited investors, in reliance upon exemptions from registration under Section 4(2) of the Securities Act and SEC Rule 506 of Regulation D. None of the Purchased Shares may be offered or sold in the United States absent registration under or exemption from the Securities Act and any applicable state security laws.

 

THIS SUMMARY OF THE TERMS OF THE PRIVATE PLACEMENT IS INTENDED TO PROVIDE YOU WITH BASIC INFORMATION CONCERNING THE TRANSACTION. IT IS NOT A SUBSTITUTE FOR REVIEWING THE INVESTMENT AGREEMENT, THE FORM OF REGISTRATION RIGHTS AGREEMENT, THE VOTING AGREEMENTS AND THE AMENDMENT TO RIGHTS AGREEMENT APPENDED TO THIS PROXY STATEMENT AS APPENDIX A. YOU SHOULD READ THIS SUMMARY IN CONJUNCTION WITH THE AGREEMENTS APPENDED HERETO AS APPENDIX A.

 

Investment Agreement (See page 44)

 

On May 14, 2007, the Company entered into the Investment Agreement with MatlinPatterson FA Acquisition LLC providing for the purchase by MatlinPatterson FA Acquisition LLC and certain co-investors which may be

designated by it (collectively referred to herein as “MatlinPatterson”), upon the terms and subject to the conditions of the Investment Agreement, of 33,333,333 newly issued shares of the Company’s common stock, par value $0.01 per share, for an aggregate cash purchase price of $50 million. The number of shares issuable to MatlinPatterson in consideration of the $50 million purchase price (referred to herein as the “Purchased Shares”) is subject to an upward adjustment if the Company incurs certain incremental employment-related obligations as a result of the DEPFA Transaction (as defined below) not having closed prior to closing the Private Placement and if the Company’s net tangible book value per share at closing is less than $1.60. The proceeds to the Company from the sale of shares to MatlinPatterson would be invested in the Company’s ongoing businesses, consistent with a strategic plan to be developed by the Company and MatlinPatterson. The development of the strategic plan is expected to be completed following the closing of the Private Placement. It is currently expected that approximately $20 million of the proceeds from the Private Placement will be invested in the Company’s subsidiary Descap Securities Inc. to enable it to position more products and take advantage of opportunities that we believe to exist in the mortgage and asset-backed securities markets and to issue primary debt financing. In addition, we currently expect that up to $10 million will be committed to a fund managed by the Company’s subsidiary, FA Technology Ventures Corporation, which invests in the emerging growth sectors of information and energy technology. We believe the remaining proceeds from the Private Placement will also provide us with additional resources to grow our businesses, to seek to acquire other securities or advisory businesses, to focus on our core investment products and service strengths, to provide incentives to employees and to better meet the needs of our clients, and we may also repay some or all of our indebtedness. Immediately following the closing of the Private Placement, we expect the Company to have over $50 million in cash and working capital in excess of $58 million and we believe the proceeds of the Private Placement will allow the Company to increase existing capital levels with each of its broker dealers.

 

The Company previously announced its agreement to sell the Municipal Capital Markets Group of First Albany Capital Inc., the Company’s wholly-owned subsidiary, to DEPFA BANK plc (sometimes referred to herein as the “DEPFA Transaction”). In the event that the DEPFA Transaction closes after the closing of the Private Placement, certain employees of the Company, who will remain employed by the Company at the time of the closing of the Private Placement and who would have otherwise have become employed by DEPFA had the DEPFA Transaction closed prior to the Private Placement, would be entitled to receive certain cash payments and accelerated vesting of certain equity awards triggered by MatlinPatterson gaining control of the Company that they would not have been entitled to if the DEPFA Transaction had closed first. In such an event, the Investment Agreement provides that the number of Purchased Shares will be increased to account for the cash bonuses or other amounts paid or payable by the Company to any employee of the Municipal Capital Markets Group that would not have been so paid had the DEPFA Transaction closed prior to the closing of the Private Placement, as well as the accelerated vesting of the restricted stock awards and stock options held by such employees that would not have occurred if the DEPFA Transaction had closed prior to the closing of the Private Placement. In the event that our employees entitled to receive such payments and to benefit from the accelerated vesting of such awards and options do not waive such rights, we expect the number of Purchased Shares to be increased at the closing, without MatlinPatterson being required to contribute more than the $50 million already contemplated by the Investment Agreement. To the extent that the affected employees are willing to waive their rights to such payments and accelerated vesting, the number of additional Purchased Shares will be reduced accordingly.

 

The Investment Agreement also provides that the number of Purchased Shares will be further adjusted upwards, in addition to the adjustment described above, if our net tangible book value per share is less than $1.60 as of the closing date. In such case, the number of Purchased Shares will be increased by a factor reflecting the percentage shortfall represented by the net tangible book value per share as of the closing date compared to a target of $1.69 per share. If the DEPFA Transaction closes prior to the closing of the Private Placement, there will first be a pro forma adjustment to eliminate the effects of the closing of the DEPFA Transaction on net tangible book value per share. If the DEPFA Transaction has not closed prior to the closing of the Private Placement, there will instead be a pro forma elimination of the incremental cash payments and accelerated restricted stock awards and stock options referred to above.

 

Upon the closing of the Private Placement, and after giving effect to the contemplated issuance to certain employees of restricted stock units as described herein, MatlinPatterson currently is expected to own between 70%

and 75% of the outstanding common stock (between 60% and 65% on a fully diluted basis), based on the number of shares outstanding on June 25, 2007, and after giving effect to an increase in the number of Purchased Shares that may result from the adjustment provisions of the Investment Agreement and which may further increase the number of Purchased Shares.

 

In connection with entering into the Investment Agreement, the Company has terminated the Company’s previously announced plans to reprice outstanding employee stock options and to replace outstanding employee restricted stock awards with stock appreciation rights.

 

The Investment Agreement contains other covenants of the Company, including an agreement of the Company to operate its business in the ordinary course until the purchase is completed. The Company has also agreed not to solicit or initiate discussions with third parties regarding other competing proposals and to certain restrictions on its ability to respond to any unsolicited competing proposal. The Investment Agreement also includes customary representations and warranties of the Company and MatlinPatterson, indemnification provisions for MatlinPatterson and termination provisions for both the Company and MatlinPatterson.

 

The summary above of the Investment Agreement does not purport to be complete and is qualified in its entirety by the more detailed description contained herein as well as the full text of such agreement, a copy of which is attached in Appendix A hereto.

 

The Investment Agreement contains representations and warranties of the Company and MatlinPatterson made to each other. The statements embodied in those representations and warranties are qualified by information in confidential disclosure schedules that the Company and MatlinPatterson have exchanged in connection with signing the Investment Agreement. Please note that certain representations and warranties were made as of a specified date, may be subject to a contractual standard of materiality different from those generally applicable to shareholders, or may have been used for the purpose of allocating risk between the parties rather than establishing matters as fact.

 

Registration Rights Agreement (See page 50)

 

We agreed to enter into a Registration Rights Agreement with MatlinPatterson (the “Registration Rights Agreement”), pursuant to which we would be required upon the demand of MatlinPatterson on up to three occasions to file with the SEC a registration statement for the resale of Purchased Shares. The Registration Rights Agreement would obligate us to use our best efforts to have the registration statement declared effective as soon as practicable after it is filed. The Registration Rights Agreement also provides MatlinPatterson with piggyback registration rights exercisable if we file certain registration statements on our own initiative or upon the request of another shareholder. We would bear all of the costs of any demand or piggyback registration other than underwriting discounts and commissions and certain other expenses.

 

The summary above of the Registration Rights Agreement does not purport to be complete and is qualified in its entirety by the more detailed description contained herein as well as the full text of such agreement, a copy of which is attached in Appendix A hereto.

 

Voting Agreements (See page 50)

 

MatlinPatterson has entered into certain voting agreements with Messrs. Alan Goldberg, George McNamee and Peter McNierney, individually (the “Voting Agreements”), pursuant to which each such shareholder has agreed to vote the shares of common stock beneficially owned by him in favor of approval of each of the Investment Proposals. Messrs. Goldberg, McNamee and McNierney have agreed, among other things (i) to vote their shares of common stock in favor of the Private Placement and the other Investment Proposals, (ii) not to solicit, encourage or recommend to other shareholders of the Company that they vote their shares of common stock in any contrary manner, that they refrain from voting their shares, that they tender, exchange or otherwise dispose of their shares of common stock pursuant to a “Competing Transaction” (as defined in the Voting Agreements), or that they attempt to exercise any statutory appraisal or other similar rights they may have, (iii) unless otherwise instructed in writing by MatlinPatterson, to vote their shares against any Competing Transaction and (iv) not to, and not to permit any of their employees, attorneys, accountants, investment bankers or other agents or representatives to, initiate, solicit,

negotiate, encourage, or provide confidential information in order to facilitate any Competing Transaction. These persons collectively own approximately 19% of the outstanding shares of common stock. Therefore, shares representing approximately 32% of the outstanding shares of common stock of the Company as of the record date, in addition to those shares representing approximately 19% of the outstanding shares of common stock which are subject to the Voting Agreements with MatlinPatterson to vote in favor of the transaction, must be voted in favor of Proposals 2, 3, 4, 5 and 6 for these proposals to be approved. Approximately 38% of the shares outstanding which are not subject to the Voting Agreements (which is approximately 81% of the outstanding shares of common stock as of the record date) must be voted in favor of Proposals 2, 3, 4, 5 and 6 for these proposals to be approved.

 

The summary above of the Voting Agreements does not purport to be complete and is qualified in its entirety by the more detailed description contained herein as well as the full text of each such agreement, a copy of which is attached in Appendix A hereto.

 

Amendment of the Rights Agreement (See page 51)

 

On March 30, 1998, we entered into the Rights Agreement with our transfer agent, American Stock Transfer & Trust Company, designed to provide for a fair and equal treatment for all shareholders in the event that an unsolicited attempt is made to acquire our Company. The effect of the Rights Agreement is to discourage acquisitions of more than 15% of our common stock without negotiations with the Board. As required under the Investment Agreement, we entered into an amendment to the Rights Agreement (the “Amendment to the Rights Agreement”) to provide that entry into the Investment Agreement and the Private Placement will be exempt from the Rights Agreement and that MatlinPatterson and certain related persons would not be deemed to be “Acquiring Persons” thereunder.

 

Notice and Waiver Letter Agreement (See page 51)

 

On July 25, 2007, we entered into a Notice and Waiver Letter Agreement with DEPFA (the “DEPFA Waiver”). Pursuant to the DEPFA Waiver, DEPFA agreed to waive the condition to closing the DEPFA Transaction requiring that we present a management proposal at the annual meeting to amend our Certificate of Incorporation to change our corporate name to a name that does not include the words “First Albany” or “FA” or any derivatives thereof (the “Charter Amendment”). Under the terms of the DEPFA Waiver, we agreed to use commercially reasonable efforts to hold a special meeting of shareholders to approve the Charter Amendment (the “Special Meeting”) prior to or (if necessary) following the closing of the DEPFA Transaction, including following the closing of the Private Placement. The DEPFA Waiver also provides that we and DEPFA will enter into a license agreement (the “License Agreement”) to allow us limited continued use of the name “First Albany” in the event the DEPFA Transaction closes before the Charter Amendment is approved at the Special Meeting. If the Charter Amendment is not effected within sixty days following the closing of the DEPFA Transaction, then the Company will pay DEPFA an annual royalty fee of $50,000 under the terms of the License Agreement.

 

We currently intend to hold the Special Meeting following the closing of the Private Placement and expect that, if the Investment Proposals are approved by our shareholders and the Private Placement is completed, MatlinPatterson will be a record holder of our common stock entitled to vote at the Special Meeting. As a condition to the DEPFA Waiver, DEPFA entered into a voting agreement with MatlinPatterson effective as of June 29, 2007 pursuant to which MatlinPatterson agreed to vote its shares of common stock at the Special Meeting in favor of the Charter Amendment. We currently expect that the shareholder proposal regarding the Charter Amendment (the “Charter Amendment Proposal”) to be presented at the Special Meeting will provide that the name of the Company will be changed to Broadpoint Securities Group, Inc. MatlinPatterson has also indicated its intention to vote its shares in favor of a management proposal we intend to present to our shareholders at the Special Meeting to amend the Certificate of Incorporation of the Company to permit our shareholders to act by less than unanimous written consent (the “Consent Proposal” and, together with the Charter Amendment Proposal, the “Special Meeting Proposals”). Following the approval of the Consent Proposal at the Special Meeting, if MatlinPatterson is the holder of a majority of our outstanding common stock, it would be able to take unilateral action by written consent without a shareholder meeting for those actions requiring majority shareholder approval until such time as its ownership interest decreases to fifty percent (50%) or less. If the Investment Proposals are approved by our shareholders and the Private Placement is completed, and we hold the Special Meeting following the closing of the Private Placement when MatlinPatterson is a record holder of our common stock, as we currently

intend, MatlinPatterson will have the power acting alone to determine the outcome of the Special Meeting Proposals and they will be approved at the Special Meeting.

 

No Appraisal Rights (See page 57)

 

The shareholders are not entitled to appraisal rights with respect to the Private Placement, and we will not independently provide the shareholders with any such rights.

 

Proposal No. 3: Amend the Certificate of Incorporation to Increase
the Company’s Authorized Common Stock from 50,000,000 shares to 100,000,000 shares (See page 60)

 

We do not currently have sufficient authorized shares to complete the Private Placement described in Proposal 2. To complete the Private Placement and issue the Purchased Shares, we need to substantially increase the number of shares of our common stock authorized for issuance under our Certificate of Incorporation. It is a condition to the completion of the Private Placement that our shareholders approve Proposal 3. Our current Certificate of Incorporation authorizes 50,000,000 shares of common stock for issuance. As of June 25, 2007, there were approximately 16,040,000 shares of our common stock outstanding and an additional approximately 5,233,000 shares reserved for issuance upon exercise of outstanding options and warrants and reserved for future issuance under our equity compensation plans. As a result, as of June 25, 2007, there were only approximately 28,727,883 authorized shares of our common stock available for issuance. We have proposed increasing the authorized number of shares of common stock to 100,000,000 shares to permit completion of the Private Placement, for the Company to reserve 25% of our shares of common stock outstanding from time to time for issuance under the 2007 Plan and our existing long-term incentive plans and to provide additional authorized shares of common stock available to issue in the future. The additional authorized shares may be issued for various purposes without further shareholder approval, except to the extent required by applicable NASDAQ Marketplace Rules. The purposes may include raising capital, providing equity incentives to employees, officers, directors or consultants, establishing strategic relationships with other companies, expanding our business or product lines through the acquisition of other businesses or products, and other corporate purposes.

 

If our shareholders do not approve the amendment to our Certificate of Incorporation to increase the authorized number of shares of common stock, we will not be able to complete the Private Placement and we will not receive any of the proceeds from the sale of the Purchased Shares. In such event, we will also not amend our Certificate of Incorporation as described in Proposal 4 and we will not adopt the 2007 Plan as described in Proposal 6, even if one or more of such other Proposals is approved by the shareholders. However, if Proposal 5 is approved by the shareholders, our Certificate of Incorporation will still be amended as provided in that Proposal.

 

Proposal No. 4: Amend the Certificate of Incorporation to Increase
the Company’s Authorized Preferred Stock from 500,000 shares to 1,500,000 shares (See page 62)

 

Under the Investment Agreement, we agreed to seek the shareholders’ approval of an amendment to our Certificate of Incorporation to increase the authorized number of shares of preferred stock from 500,000 to 1,500,000. The additional shares of preferred stock also relate to the Rights Agreement we entered into on March 30, 1998 with our transfer agent, American Stock Transfer & Trust Company (the “Rights Agreement”), designed to provide for fair and equal treatment for all shareholders in the event that an unsolicited attempt is made to acquire our Company. The Rights Agreement gives each holder of common stock the right to purchase 1/100^th share of preferred stock upon certain triggering events. In connection with the authorization of 100,000,000 shares of common stock in accordance with Proposal 3, 1,000,000 shares of preferred stock will be needed to support these rights. The additional shares of authorized preferred stock may also be issued for various other purposes, including raising capital, providing equity incentives to employees, officers, directors or consultants, establishing strategic relationships with other companies, expanding our business or product lines through the acquisition of other businesses or products, and other corporate purposes.

 

Approval of the amendment to our Certificate of Incorporation to increase the number of authorized shares of our preferred stock is a condition to the closing of the Private Placement and if the shareholders do not approve Proposal 4, we will not be able to complete the Private Placement and we will not receive any proceeds from the sale of the Purchased Shares, unless MatlinPatterson waives the condition. In such event, we also will not amend our Certificate of Incorporation as described in Proposal 3 and we will not adopt the 2007 Plan as described in

Proposal 6, even if one or more of such other Proposals is approved by the shareholders. However, if Proposal 5 is approved by the shareholders, our Certificate of Incorporation will still be amended as provided in that Proposal.

 

Proposal No. 5: Amend the Certificate of Incorporation to
Limit the Liability of the Directors of the Company to the Extent Permitted
under Section 402(b) of the New York Business Corporation Law (See page 64)

 

Under the Investment Agreement, we agreed to seek the shareholders’ approval of an amendment to our Certificate of Incorporation limiting the liability of the directors of the Company to the extent permitted under Section 402(b) of the NYBCL. The current policy set forth in the Company’s Certificate of Incorporation does not eliminate or limit personal liability of the directors for damages for any breach of duty in their capacity as directors. Section 402(b) of the NYBCL allows a corporation to eliminate or limit the personal liability of its directors and specifically provides that “The certificate of incorporation may set forth a provision eliminating or limiting the personal liability of directors to a corporation or its shareholders for damages for any breach of duty in such capacity, provided that no such provision shall eliminate or limit: (1) the liability of any director if a judgment or other final adjudication adverse to him establishes that his acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law or that he personally gained in fact a financial profit or other advantage to which he was not legally entitled or that his acts violated section 719, or (2) the liability of any director for any act or omission prior to the adoption of a provision authorized by this paragraph.” The Company proposes to amend its Certificate of Incorporation so as to limit the personal liability of the Company’s directors to the extent permitted under Section 402(b).

 

The Board believes that limiting the directors’ personal liability as permitted by the New York statute will enhance the ability of the Company to attract and retain highly qualified directors in the future. In addition, the threat of personal liability may have an adverse effect on the decision-making process of directors. The proposed amendment may also encourage directors to make entrepreneurial decisions which they believe to be in the best interest of the shareholders with less threat of personal liability for damages for breach of their duty of care.

 

Approval of the amendment to our Certificate of Incorporation to limit the liability of the directors and officers of the Company is a condition to the closing of the Private Placement and if the shareholders do not approve Proposal 5, we will not be able to complete the Private Placement and we will not receive any proceeds from the sale of the Purchased Shares, unless MatlinPatterson waives the condition. In such event, we also will not amend our Certificate of Incorporation as described in Proposal 3 and Proposal 4 and we will not adopt the 2007 Plan as described in Proposal 6, even if one or more of such other Proposals is approved by the shareholders. If Proposal 5 is approved by the shareholders, we intend to amend our Certificate of Incorporation as contemplated by Proposal 5, even if none of the other Proposals are approved.

 

Proposal No. 6: Adopt the First Albany Companies Inc. 2007 Incentive
Compensation Plan (See page 66)

 

The 2007 Plan is designed to advance the interests of the Company by providing a means through which incentive awards can be granted to officers, other employees and persons who provide services to the Company and its subsidiaries. By making grants of awards under this plan, the Company can attract, retain and reward such persons and, by linking compensation measures to performance, the Company can provide incentives for the creation of shareholder value. In addition, the interests of the Company’s shareholders and the award recipients can be more closely aligned by giving the recipients an interest in the long-term success of the Company. The 2007 Plan provides that the number of shares of common stock available for outstanding awards under that plan and our existing long-term incentive plans will be equal to 25% of the total number of shares of common stock outstanding from time to time.

 

Furthermore, the obligation of MatlinPatterson to complete the Private Placement is conditioned on at least 22 of 27 designated key employees of the Company becoming bound by certain non-competition and non-solicitation covenants conditioned on the closing of the Private Placement and remaining employed by the Company at the closing of the Private Placement. Twenty-four of such 27 designated key employees have entered into such

agreements to become effective as of the closing. The terms on which such designated key employees entered into such non-competition and non-solicitation covenants require that the Company grant to such employees certain awards of restricted stock units under the 2007 Plan if the Private Placement closes. The Company also expects to enter into an employment agreement with Mr. Fensterstock that will become effective at the closing of the Private Placement. Pending the closing of the Private Placement, Mr. Fensterstock has been engaged by the Company as a consultant. The Company has also entered into an employment agreement with Mr. McNierney and an amendment to the existing employment agreement of Mr. Coad that will each become effective as of the closing of the Private Placement. If the Private Placement is completed, these employment agreements (or amendment in the case of Mr. Coad) will also obligate the Company to award certain restricted stock units to such executives under the 2007 Plan. Accordingly, it is contemplated that, as of the closing of the Private Placement, awards of restricted stock units in respect of up to 6.75 million shares of common stock will be made or committed to be made under the 2007 Plan, representing between 9.2% and 10.7% of the shares of common stock currently expected to be outstanding immediately following the closing on a fully diluted basis, based on the number of shares of common stock outstanding on June 25, 2007 and after giving effect to an increase in the number of Purchased Shares that may result from the adjustment provisions of the Investment Agreement and which may further increase the number of Purchased Shares. If the Private Placement is not consummated, we will not adopt the 2007 plan as proposed.

 

If Proposal 6 is not approved at the annual meeting, the 2007 Plan will not go into effect unless approved by our shareholders at a subsequent meeting. If Proposals 2, 3, 4 and 5 are approved, following the closing of the Private Placement, MatlinPatterson will beneficially own a majority of the then outstanding shares of our common stock. As a result, if Proposal 6 is not approved at the annual meeting, there is a likelihood that a proposal to adopt the 2007 Plan will be approved by a majority vote of the shareholders at a meeting subsequent to the closing of the Private Placement. If we are required to hold a special meeting of the shareholders following the closing of the Private Placement in order to reconsider the approval of the 2007 Plan, we will incur additional expenses.

 

Proposal No. 7: Ratification of Selection of Independent Accountants (See page 71)

 

The Audit Committee of the Board of Directors has selected PricewaterhouseCoopers LLP as the Company’s independent accountants for fiscal year ending December 31, 2007. We are submitting the selection of independent accountants for shareholder ratification at the annual meeting.

 

Proposal No. 8: Adjournment or Postponement of Annual Meeting (See page 73)

 

If there are insufficient votes at the time of the annual meeting to adopt Proposal 2, Proposal 3, Proposal 4, Proposal 5 and Proposal 6, we may propose that the annual meeting be adjourned or postponed for a period of time for the purpose of soliciting additional proxies to adopt these proposals. We do not intend to propose to adjourn or postpone the annual meeting if there are sufficient votes to adopt Proposals 2, 3, 4, 5 and 6.

 

ANNUAL MEETING OF SHAREHOLDERS

September 21, 2007

 

This proxy statement is being furnished to the shareholders of First Albany in connection with the solicitation by the Board of Directors of proxies for use at the annual meeting to be held at the offices of Sidley Austin LLP, 787 Seventh Avenue, 23rd Floor, New York, New York on September 21, 2007 at 10:00 a.m. (EDT), and any postponements or adjournments thereof. The mailing address of the principal office of the Company is 677 Broadway, Albany, New York 12207-2990 and its telephone number is (518) 447-8500.

 

At the annual meeting, the shareholders of the Company will be asked (1) to elect the three (3) persons named as nominees under “Election of Directors;” (2) to consider and act upon a proposal to approve the Private Placement; (3) to consider and act upon a proposal to amend the Company’s Certificate of Incorporation to increase the authorized share capital of the Company from 50,000,000 shares of common stock to 100,000,000 shares of common stock with the same par value of $0.01 per share; (4) to consider and act upon a proposal to amend the Company’s Certificate of Incorporation to increase the authorized share capital of the Company from 500,000 shares of preferred stock to 1,500,000 shares of preferred stock with the same par value of $1.00 per share; (5) to consider and act upon a proposal to amend the Company’s Certificate of Incorporation to limit the liability of the directors of the Company to the extent permitted under Section 402(b) of the NYBCL; (6) to consider and act upon a proposal to approve the adoption of the 2007 Plan; (7) to consider and act upon a proposal to ratify the appointment of PricewaterhouseCoopers LLP as independent accountants of the Company for the fiscal year ending December 31, 2007; and (8) in the event there are insufficient votes at the time of the annual meeting to adopt Proposals 2, 3, 4, 5 and 6, to consider and act upon a proposal to adjourn or postpone the annual meeting in order to solicit additional proxies.

 

Proxy Solicitation

 

This proxy statement and the enclosed form of proxy are expected to be mailed on or about August 31, 2007. All expenses of the Company in connection with this solicitation of proxies will be borne by the Company. Proxies may be solicited by directors, officers and other employees of the Company in person or by mail, telephone, facsimile or e-mail, without additional compensation. Representatives of MatlinPatterson may also contact shareholders in connection with the solicitation of proxies. The Company has also retained MacKenzie Partners, Inc. to aid in the solicitation of proxies with respect to shares held by broker-dealers, financial institutions, and other custodians, fiduciaries and nominees for a fee of approximately $15,000, plus certain other fees for related services and reasonable out-of-pocket expenses. The Company will also request brokerage firms, nominees, custodians and fiduciaries to forward proxy materials to the beneficial owners of shares held of record by such persons and will reimburse such persons and the Company’s transfer agent for their reasonable out-of-pocket expenses in forwarding such materials but these individuals will receive no additional compensation for these solicitation services.

 

Voting by Mail, Internet or Telephone

 

Shareholders who cannot attend the annual meeting in person can be represented by proxy. Most shareholders have a choice of voting over the Internet, using a toll-free telephone number or completing the proxy card in the form enclosed and mailing it in the envelope provided. Please refer to your proxy card or the information forwarded by your bank, broker or other nominee to see which options are available to you.

 

A proxy may be revoked at any time before it is exercised by giving notice of revocation to the Secretary of the Company, by executing a later-dated proxy (including an Internet or telephone vote) or by attending and voting in person at the annual meeting. The execution of a proxy will not affect a shareholder’s right to attend the annual meeting and vote in person, but attendance at the annual meeting will not, by itself, revoke a proxy. Proxies properly completed and received prior to the annual meeting and not revoked will be voted at the annual meeting.

 

Proxies will be voted as specified or, if no direction is indicated on a proxy, will be voted (1) “For” the election of the three (3) persons named as nominees under “Election of Directors;” (2) “For” the proposal to approve the Private Placement; (3) “For” the proposal to amend the Company’s Certificate of Incorporation to increase the authorized share capital of the Company from 50,000,000 shares of common stock to 100,000,000 shares of common stock with the same par value of $0.01 per share, (4) “For” the proposal to amend the Company’s Certificate of Incorporation to increase the authorized share capital of the Company from 500,000 shares of preferred stock to 1,500,000 shares of preferred stock with the same par value of $1.00 per share; (5) “For” the proposal to amend the Company’s Certificate of Incorporation to limit the liability of the directors of the Company to the extent permitted under Section 402(b) of the NYBCL; (6) “For” the proposal to adopt the 2007 Plan; (7) “For” the ratification of the appointment of PricewaterhouseCoopers LLP as independent accountants of the Company for the fiscal year ending December 31, 2007; and (8) “For” the proposal for adjournment or postponement of the annual meeting in order to solicit additional proxies in the event there are insufficient votes at the time of the annual meeting to adopt Proposals 2, 3, 4, 5 and 6.

 

As to any other matter or business which may be brought before the annual meeting, including any adjournment(s) or postponement(s) thereof, a vote may be cast pursuant to the proxy in accordance with the judgment of the person or persons voting the same. As of the date hereof, the Board does not know of any such other matter or business.

 

The close of business on August 10, 2007 has been fixed as the record date for the determination of shareholders entitled to vote at the annual meeting. 16,000,352 shares of common stock were outstanding as of the record date. Each shareholder will be entitled to cast one vote, in person or by proxy, for each share of common stock held. There are no other shares of voting stock of the Company outstanding. The presence, in person or by proxy, of the holders of at least a majority of the shares of common stock entitled to vote at the annual meeting is necessary to constitute a quorum at the annual meeting. Abstentions and broker non-votes (as described below) and votes to “withhold authority” are counted in determining whether a quorum has been reached on a particular matter. Votes to withhold authority are treated the same as abstentions for purposes of the voting requirements described below.

 

If you hold your shares in “street name” through a broker or other nominee, your broker or nominee may not be permitted to exercise voting discretion with respect to certain matters. Thus, if you do not give your broker or nominee specific instructions, your shares may not be voted on those matters and will not be counted in determining the number of shares necessary for approval. Your broker will be permitted to exercise voting discretion with respect to Proposal 1, Proposal 7 and Proposal 8. Your broker will not be permitted to exercise voting discretion with respect to any of the Investment Proposals.

 

You can cast one vote for each share of First Albany common stock you own. The proposals require different percentages of votes in order to approve them:

 

 

 

The Board unanimously recommends that the shareholders vote “FOR” (1) the election of the three (3) persons named as nominees under “Election of Directors;” (2) the proposal to approve the Company’s issuance and sale of shares of common stock to certain qualified investors in a private placement; (3) the proposal to amend the Company’s Certificate of Incorporation to increase the authorized share capital of the Company from 50,000,000 shares of common stock to 100,000,000 shares of common stock with the same par value of $0.01 per share, (4) the proposal to amend the Company’s Certificate of Incorporation to increase the authorized share capital of the Company from 500,000 shares of preferred stock to 1,500,000 shares of preferred stock with the same par value of $1.00 per share; (5) the proposal to amend the Company’s Certificate of Incorporation to limit the liability of the directors of the Company to the extent permitted under Section 402(b) of the NYBCL; (6) the proposal to adopt the First Albany Companies Inc. 2007 Incentive Compensation Plan; (7) the ratification of the appointment of PricewaterhouseCoopers LLP as independent accountants of the Company for the fiscal year ending December 31, 2007; and (8) the proposal for adjournment or postponement of the annual meeting in order to solicit additional proxies in the event there are insufficient votes at the time of the annual meeting to adopt Proposals 2, 3, 4, 5 and 6.

 

The Bylaws of the Company provide that effective as of the annual meeting the Board shall consist of seven directors elected in three classes. Three directors will be elected at the annual meeting to serve for a three-year term expiring at the annual meeting of shareholders in 2010. The Board has nominated three persons as directors. The Board recommends that shareholders vote FOR the election of these nominees.

 

If the enclosed proxy card is duly executed and received in time for the annual meeting, and if no contrary specification is made as provided therein, it will be voted in favor of the election of persons nominated as directors by the Board.

 

Each of the nominees has consented to serve as a director if elected. Should any nominee for director become unable or unwilling to accept election, proxies will be voted for a nominee selected by the Board, or the size of the Board may be reduced accordingly. The Board has no reason to believe that any of the nominees will be unable or unwilling to serve if elected to office. Any vacancy occurring during the term of office of any director may be filled by the remaining directors for a term expiring at the next meeting of shareholders at which the election of directors is in the regular order of business. Each of the nominees is presently a director of the Company. The annual meeting shall constitute a special meeting for the election of directors as may be required by the provisions of Section 603 of the New York Business Corporation Law.

 

As discussed more fully below with respect to “Proposal No. 2 Approval of the Private Placement,” the Company has agreed that on or prior to the closing date of the Private Placement, the Company will cause the size of its Board of Directors to be increased from seven to nine and to cause certain of its current directors designated by MatlinPatterson to resign. The remaining directors would appoint directors designated by MatlinPatterson to fill the resulting vacancies. The Company has been advised that MatlinPatterson currently intends to nominate to the Board three representatives of MatlinPatterson and its affiliates, as well as Mr. Fensterstock. Mr. McNamee and Mr. McNierney will continue as members of the Board. It is currently expected that Nicholas A. Gravante, Jr., Dale Kutnick and Carl Carlucci will also continue as members of the Board following the closing of the Private Placement until asked to resign in accordance with the Investment Agreement, at which time, the remaining directors will fill the resulting vacancies with directors designated by MatlinPatterson.

 

Set forth below is certain information furnished to the Company by the director nominees and by each of the incumbent directors whose terms will continue following the Meeting.

 

Directors of the Company

 

The directors nominated for election whose terms will expire in 2010 are as follows:

 

PETER J. MCNIERNEY, age 42, joined First Albany in 2002 as the Director of Investment Banking, and was appointed as President and Chief Executive Officer in June 2006. Prior to joining First Albany, Mr. McNierney was a Managing Director and the Head of the Healthcare and Communications Services groups at Robertson Stephens. Prior to that, Mr. McNierney was a Vice President in the Healthcare Group at Smith Barney. Mr. McNierney received a BA and a JD/MBA from the University of Texas at Austin. Mr. McNierney has been a director of the Company since June 2006.

 

ALAN P. GOLDBERG, age 62, joined First Albany in 1980. Mr. Goldberg became Vice Chairman of the Company in June 2006. Mr. Goldberg served as the Company’s President from 1989 to June 2006, as Chief Executive Officer from 2003 to June 2006 and as Co-Chief Executive Officer from 1993 until 2002. Mr. Goldberg is a Director of MVP Health Care (a private company that provides health benefit plans). He is active in industry and civic organizations and serves on the board of several nonprofit institutions. Mr. Goldberg has been a director of the Company since its incorporation in 1985.

 

CARL P. CARLUCCI, Ph.D., age 58, has been Executive Vice President and Chief Financial Officer of the University of South Florida since 2001. Prior to joining the University of South Florida he was appointed First Deputy Comptroller, Office of the State Comptroller, State of New York from 1999 to 2001. From 1993 to

1999, Dr. Carlucci was Executive Vice President of the University at Albany, State University of New York. Dr. Carlucci’s public service has included the positions of Secretary to the New York State Assembly Ways & Means Committee and Director of the New York Assembly Higher Education Committee. His prior experience in higher education has also included the position of Vice President for Administration at Brooklyn College and serving on the faculty of the Public Administration Departments of Baruch College of City University of New York and the University at Albany’s Rockefeller College. Dr. Carlucci is Chair of the Audit Committee and is a member of the Executive Compensation Committee; he has served as a director of the Company since 2003.

 

The Board recommends a vote FOR each of the three Director nominees.

 

The following directors’ terms will expire at the annual meeting of shareholders in 2008:

 

GEORGE C. McNAMEE, age 60, joined First Albany in 1969. Mr. McNamee has been Chairman of the Company since its inception and also serves as Managing Partner and Managing Director of FA Technology Ventures. Mr. McNamee was Co-Chief Executive Officer of the Company from 1993 to 2002. In addition, Mr. McNamee is Chairman of Plug Power Inc. (a leading fuel cell developer) and a director of iRobot Corporation (a designer and manufacturer of robots). Additionally, he is a director of several private companies including Autotask Corporation, CORESense Inc., MetaCarta Inc., and StreetEasy. He also serves on the Board of Directors of the New York Conservation Education Fund and is a Trustee of the Albany Academy for Girls. He received his Bachelor of Arts degree from Yale University. Mr. McNamee has been a director of the Company since its incorporation in 1985.

 

SHANNON P. O’BRIEN, age 48, is Chief Executive Officer of the Girl Scouts, Patriot’s Trail Council, Inc. since February 2005. Ms. O’Brien was the State Treasurer and Receiver General for the Commonwealth of Massachusetts from 1999 to January 2003. The 2002 Democratic Nominee for Governor of Massachusetts, Ms. O’Brien also served previously for eight years in the Massachusetts Legislature. She was Vice President for External Affairs for Community Care Systems, a behavioral healthcare network and taught at Boston University School of Communications. A graduate of Yale University and Boston University School of Law, she practiced law with the firm of Morrison Mahoney and Miller before entering the legislature. Ms. O’Brien is Chair of the Committee on Directors and Corporate Governance, a member of the Audit Committee and has been a director of the Company since 2003.

 

The following directors’ terms will expire at the annual meeting of shareholders in 2009:

 

NICHOLAS A. GRAVANTE, JR., age 46, has been a partner at the law firm of Boies Schiller & Flexner LLP since July 1, 2000. Prior to that time he was a partner at Barrett, Gravante, Carpinello & Stern, LLP in New York City since 1992. Mr. Gravante practices law in the areas of corporate litigation and white-collar criminal defense. He is also a Trustee of the Community Service Society of New York, the Brooklyn Public Library, the Columbia Law School Association, a member of the Board of Governors at the Lords Valley Country Club in Lords Valley, Pennsylvania and a member of the Alumni Board of Governors at Poly Prep Country Day School. Mr. Gravante is Chair of the Executive Compensation Committee, a member of the Committee on Directors and Corporate Governance and has been a director of the Company since 2003.

 

DALE KUTNICK, age 57, is Senior Vice President of Research at Gartner, Inc., and has been there since April 2005 when Gartner acquired his previous employer, Meta Group. He was co-founder, Chairman and a director of Meta Group, Inc., a research and consulting firm focusing on information technology and business transformation. Mr. Kutnick served as Chief Executive Officer and Research Director of Meta Group, Inc. since its inception in January 1989 until 2002. Prior to co-founding Meta Group, Inc., Mr. Kutnick was Executive Vice President of Research at Gartner Group, Inc. and an Executive Vice President at Gartner Securities. Prior to his experience at Gartner Group, Inc., he served as an Executive Director, Research Director and Principal at Yankee Group and as a Principal at Battery Ventures, a venture capital firm. Mr. Kutnick is a graduate of Yale University. Mr. Kutnick is a member of the Committee on Directors and Corporate Governance, a member of the Audit Committee and has been a director of the Company since 2003.

GOVERNANCE OF THE COMPANY

 

The Board of Directors held nineteen (19) meetings during the Company’s fiscal year ended December 31, 2006. The committees of the Board each held the number of meetings noted below in “Committees of the Board”. During 2006, each Director attended at least 86% of the total number of meetings of the Board (while he or she was a member) and at least 82% of the total number of meetings of committees of the Board on which he or she served. Directors are encouraged to attend the annual meeting of shareholders, and all directors attended last year’s meeting. Walter Fiederowicz served as the Board’s lead director until he resigned effective September 28, 2006, and the position previously held by him is currently vacant. The Board determined that each of Messrs. Carlucci, Gravante, Fiederowicz, Arthur J. Roth, and Kutnick and Ms. O’Brien qualify as an “independent director” as defined in the NASDAQ Stock Market listing standards. Messrs. Fiederowicz and Roth ceased to be directors on September 28, 2006.

 

The Company has a Code of Business Conduct and Ethics applicable to all employees of the Company and members of the Board of Directors. The Code, as well as the current charters of each of the Committees listed below, are available on the Company’s website (www.firstalbany.com). The Company intends to post amendments to or waivers from its Code at this location on its website.

 

The Company has also adopted a procedure by which shareholders may send communications as defined within Item 407(f) of Regulation S-K under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to one or more members of the Board of Directors by writing to such director(s) or to the whole Board of Directors in care of the Company’s Corporate Secretary at the following address: First Albany Companies Inc., 677 Broadway, Albany, New York 12207-2990, Attn: Corporate Secretary. Any such communications will be promptly distributed by the Corporate Secretary to such individual director(s) or to all directors if addressed to the whole Board of Directors.

 

Committees of the Board

 

The Board of Directors has three standing committees: the Audit Committee, the Executive Compensation Committee and the Committee on Directors and Corporate Governance.

 

The Audit Committee.  The Audit Committee, responsible for reviewing the Company’s financial statements, met eleven (11) times during 2006. The Audit Committee operates pursuant to a written charter that the Committee and the Board reviews each year to assess its adequacy. Among the primary purposes of the Audit Committee are assisting the Board of Directors in its oversight of the integrity of the Company’s financial reporting process; its compliance with legal and regulatory requirements; the qualifications, independence and performance of its independent auditors; and the performance of the Company’s internal accounting controls. In addition, the Audit Committee decides whether to appoint, retain or terminate the Company’s independent auditors and pre-approves all audit, audit-related, tax and other services, if any, to be provided by the independent auditors. The Audit Committee also prepares the Audit Committee report required by the rules of the Securities and Exchange Commission (“SEC”) for inclusion in the Company’s annual proxy statement. Until September 28, 2006, this committee was comprised of Mr. Roth, who served as chair, Ms. O’Brien and Mr. Fiederowicz. Messrs. Roth and Fiederowicz ceased to be directors on September 28, 2006. Currently, this committee is comprised of Mr. Carlucci, who serves as Chair, Ms. O’Brien and Mr. Kutnick. Each member of the Audit Committee is an “independent director” as defined in the NASDAQ Stock Market listing standards, and is independent within the meaning of Rule 10A-3 under the Exchange Act and the Company’s Corporate Governance Guidelines. Each of Mr. Carlucci and Mr. Kutnick are qualified as an audit committee financial expert within the meaning of Item 401(h) of Regulation S-K under the Exchange Act, and the Board has determined that they have accounting and related financial management expertise within the meaning of the NASDAQ Stock Market listing standards.

 

We have adopted policies on reporting of concerns regarding accounting, internal accounting controls or auditing matters (“Accounting Matters”). Any employees who have concerns about Accounting Matters may report their concerns to any of the following: (i) the employee’s supervisor, (ii) an attorney in the Legal Department of First Albany, (iii) the Company’s toll free anonymous voice mailbox at 1-866-480-6132, or (iv) the Company’s

anonymous drop-box, which may be accessed through the Company’s website (www.firstalbany.com). The full text of the Complaint Procedures for Accounting and Auditing Matters is available on our website.

 

The Audit Committee’s procedures for the pre-approval of the audit and permitted non-audit services are described in “Audit Committee Report — Audit Committee Pre-Approval Policy.”

 

The Executive Compensation Committee.  Under its charter, the primary purposes of the Executive Compensation Committee are to determine and approve the compensation of the Company’s Chief Executive Officer and make recommendations to the Board of Directors with respect to executive compensation (including compensation of executive officers other than the Chief Executive Officer) and the Company’s incentive-based compensation and equity-based plans that are subject to Board approval. Based on recommendations from the Chief Executive Officer, the Executive Compensation Committee reviews and approves the compensation of all executive officers of the Company other than the Chief Executive Officer. The Committee also administers the Company’s 1999 Long-Term Incentive Plan, 2001 Long-Term Incentive Plan and the 2003 Senior Management Bonus Plan and will administer the 2007 Plan, if approved by the shareholders. The Committee assists the Board of Directors in its oversight of the development, implementation and effectiveness of the Company’s policies and strategies relating to its human capital management function, including but not limited to those policies and strategies regarding recruiting, retention, career development and progression, management succession (other than that within the purview of the Committee on Directors and Corporate Governance), diversity and employment practices. In addition, the Executive Compensation Committee also prepares its report regarding the Compensation Discussion and Analysis as required by the rules and regulations of the SEC.

 

The Executive Compensation Committee is composed of two independent directors and operates under a written charter adopted by the Board, which was amended January 2004. Until September 28, 2006, it was comprised of Messrs. Carlucci and Fiederowicz. Currently, it is comprised of Mr. Gravante, who serves as Chair, and Mr. Carlucci. The Board annually reviews the NASDAQ Stock Market listing standards definition of independence and has determined that each member of the Committee is independent. During the year 2006, the Committee met seven (7) times.

 

The Committee on Directors and Corporate Governance.  The Board established the Committee on Directors and Corporate Governance in fiscal year 2002. The Committee held two (2) meetings during 2006. Among its specific duties, the Committee determines criteria for service as director, reviews candidates and considers appropriate governance practices. The Committee also oversees the evaluation of the performance of the Board of Directors and Chief Executive Officer and annually reviews the Corporate Governance Guidelines, reporting to the Board any recommended changes. The Committee considers nominees for directors proposed by shareholders. To recommend a prospective nominee for the Committee’s consideration, shareholders should submit the candidate’s name and qualifications to the Company’s Corporate Secretary in writing to the following address: First Albany Companies Inc., 677 Broadway, Albany, New York 12207-2990, Attn: Corporate Secretary. The Committee on Directors and Corporate Governance is comprised of Ms. O’Brien, who serves as Chair, and Messrs. Gravante and Kutnick. In identifying and recommending nominees for positions on the Board of Directors, the Committee on Directors and Corporate Governance places primary emphasis on the criteria set forth in our Corporate Governance Guidelines which include diversity, age and skills, all in the context of an assessment of the perceived needs of the Board. Recommendations by shareholders that are made in accordance with these procedures will receive the same consideration.

 

On May 14, 2007, the Company entered into an Investment Agreement with MatlinPatterson providing for the issuance to MatlinPatterson and certain co-investors which may be designated by it, upon the terms and subject to the conditions of the Investment Agreement, of 33,333,333 newly issued shares of the Company’s common stock, par value $0.01 per share, for an aggregate cash purchase price of $50 million. The number of shares issuable to MatlinPatterson in consideration of the $50 million purchase price (the “Purchased Shares”) is subject to upward adjustment (i) if the Company incurs certain incremental employment-related obligations as a result of the DEPFA Transaction not having closed prior to the closing of the Private Placement and (ii)if the Company’s consolidated net tangible book value per share at closing is less than $1.60, as more fully described below.

 

In the event that the DEPFA Transaction closes after the closing of the Private Placement, certain employees of the Company, who will remain employed by the Company at the time of the closing of the Private Placement and who would have otherwise have become employed by DEPFA had the DEPFA Transaction closed prior to the Private Placement, would be entitled to receive certain cash payments and accelerated vesting of certain equity awards triggered by MatlinPatterson gaining control of the Company that they would not have been entitled to if the DEPFA Transaction had closed first. In such an event, the Investment Agreement provides that the number of Purchased Shares will be increased to account for the cash bonuses or other amounts paid or payable by the Company to any employee of the Municipal Capital Markets Group (“MCMG”) that would not have been so paid had the DEPFA Transaction closed prior to the closing of the Private Placement, as well as the accelerated vesting of the restricted stock awards and stock options held by such employees that would not have occurred if the DEPFA Transaction had closed prior to the closing of the Private Placement. In the event that our employees entitled to receive such payments and to benefit from the accelerated vesting of such awards and options do not waive such rights, we expect the number of Purchased Shares to be increased at the closing, without MatlinPatterson being required to contribute more than the $50 million already contemplated by the Investment Agreement. To the extent that the affected employees are willing to waive their rights to such payments and accelerated vesting, the number of additional Purchased Shares will be reduced accordingly.

 

The Investment Agreement also provides that the number of Purchased Shares will be further adjusted upwards, in addition to the adjustment set forth above, if the net tangible book value per share is less than $1.60 as of the closing date. In such case, the number of Purchased Shares will be increased by a factor reflecting the percentage shortfall represented by the net tangible book value per share as of the closing date compared to a target of $1.69 per share. There will first be a pro forma adjustment to eliminate the effects of the DEPFA Transaction on net tangible book value per share, including a pro forma elimination of the incremental cash payments and accelerated restricted stock awards and stock options referred to above if the DEPFA Transaction has not closed prior to the closing of the Private Placement. The net tangible book value per share is calculated as the quotient of the tangible book value on a given date (representing the sum of shareholder’s equity plus temporary capital less intangible assets) divided by the actual number of shares outstanding on such date. As of June 30, 2007, the Company’s net tangible book value per share was $1.62.

 

Upon the closing of the Private Placement, and after giving effect to the contemplated issuance to certain employees of restricted stock units as described herein, MatlinPatterson is currently expected to own between 70% and 75% of the outstanding common stock (between 60% and 65% on a fully diluted basis), based on the number of shares outstanding on June 25, 2007, and after giving effect to an increase in the number of Purchased Shares that may result from the adjustment provisions of the Investment Agreement and which may further increase the number of Purchased Shares.

 

The proceeds to the Company from the sale of the shares to MatlinPatterson would be invested in the Company’s ongoing businesses, consistent with a strategic plan to be developed by the Company and MatlinPatterson. The development of the strategic plan is expected to be completed following the closing of the Private Placement. It is currently expected that approximately $20 million of the proceeds from the Private Placement will be invested in the Company’s subsidiary Descap Securities Inc. to enable it to position more products and take advantage of opportunities that we believe to exist in the mortgage and asset-backed securities markets and to issue primary debt financing. In addition, we currently expect that up to $10 million will be committed to a fund managed

by the Company’s subsidiary, FA Technology Ventures Corporation, which invests in the emerging growth sectors of information and energy technology. In addition, pursuant to the Term Loan and Capital Lease Waiver described in our quarterly report on Form 10-Q for the period ended June 30, 2006, we have agreed that upon the closing of the Private Placement and the DEPFA Transaction we will repay all outstanding loan and lease obligations to a certain lender. If the DEPFA Transaction closes prior to the Private Placement, we have agreed to prepay the aggregate amounts of loan and lease obligations equal to 75% of the net proceeds received by the Company and then pay the remaining amounts upon closing of the Private Placement. We believe the remaining proceeds from the Private Placement will also provide us with additional resources to grow our businesses, to seek to acquire other securities or advisory businesses, to focus on our core investment products and service strengths, to provide incentives to employees and to better meet the needs of our clients, and we may also repay some or all of our indebtedness. Immediately following the closing of the Private Placement, we expect the Company to have over $50 million in cash and working capital in excess of $58 million and we believe the proceeds from the Private Placement will allow the Company to increase existing capital levels with each of its broker dealers. The Private Placement is expected to close in the third quarter of 2007. The terms of the Investment Agreement and the related Registration Rights Agreement and Voting Agreements are more fully described below under “Summary of Terms of the Private Placement,” and copies of the Investment Agreement, the form of the Registration Rights Agreement and the Voting Agreements are appended to this proxy statement as Appendix A.

 

It is expected that, if the Private Placement is completed, the Company will hire Mr. Lee Fensterstock, a securities industry veteran, to act as the Company’s Chief Executive Officer. Mr. Fensterstock would also be elected to the Company’s Board of Directors and serve as its Chairman. Pending the closing of the Private Placement, Mr. Fensterstock has been engaged by the Company as a consultant. Mr. Peter J. McNierney, currently the Company’s President and Chief Executive Officer, would become the Company’s President and Chief Operating Officer.

 

Mr. Fensterstock, 59, served on the Board of Directors of PaineWebber, Inc. from January 1991 to September 1995 and Gruntal & Co. from June 1996 to August 2000. In February 2001, Mr. Fensterstock founded and became Chairman and Co-Chief Executive Officer of Bonds Direct Securities LLC, a market maker in investment grade fixed income instruments for institutional investors. From October 2004 until March 2007, Mr. Fensterstock was a Managing Director at Jeffries & Co., co-heading its fixed income division. From May 1, 2007 until June 30, 2007, Mr. Fensterstock served as a consultant to MatlinPatterson. Since July 1, 2007, Mr. Fensterstock has served as a consultant to the Company and will continue in such a capacity until the sooner of the closing of the Private Placement or September 30, 2007.

 

In connection with the Private Placement, the Company would issue or commit to issue under the 2007 Plan restricted stock units in respect of up to 6,750,000 shares of common stock to key employees who enter into non-compete and non-solicit agreements with the Company and pursuant to the employment agreement that the Company expects to enter into with Mr. Fensterstock and has entered into with Mr. McNierney. The restricted stock units would vest over a three-year period following issuance.

 

The Company has agreed that on or prior to the closing date of the Private Placement, the Company will cause the size of its Board of Directors to be increased from seven to nine and to cause certain of its current directors designated by MatlinPatterson to resign. The remaining directors would appoint directors designated by MatlinPatterson to fill the resulting vacancies. The Company has been advised that MatlinPatterson currently intends to nominate to the Board three representatives of MatlinPatterson and its affiliates, as well as Mr. Fensterstock. Mr. McNamee and Mr. McNierney will continue as members of the Board. It is currently expected that Nicholas A. Gravante, Jr., Dale Kutnick and Carl Carlucci will also continue as members of the Board following the closing of the Private Placement until asked to resign in accordance with the Investment Agreement, at which time the remaining directors will fill the resulting vacancies with directors designated by MatlinPatterson. As the holder of a majority of the outstanding shares of common stock following the closing of the Private Placement, MatlinPatterson will have the power to replace any or all of such directors in the future and has indicated its intention to seek other qualified individuals with experience in the securities industry or other relevant skills or knowledge to become directors of the Company after the closing.

In connection with the Investment Agreement, the Company has agreed with MatlinPatterson to terminate the Company’s previously announced plans to reprice outstanding employee stock options and to replace outstanding employee restricted stock awards with stock appreciation rights.

 

The Company has agreed to reimburse MatlinPatterson for certain reasonably incurred, documented expenses incurred in connection with the negotiation and execution of the Investment Agreement and the completion of the transactions contemplated thereby, subject to certain limits. The Investment Agreement contains other covenants of the Company, including an agreement of the Company to operate its business in the ordinary course until the purchase is completed. The Company has also agreed not to solicit or initiate discussions with third parties regarding other competing proposals and to certain restrictions on its ability to respond to any unsolicited competing proposal. The Investment Agreement also includes customary representations and warranties of the Company and MatlinPatterson, indemnification provisions for MatlinPatterson and termination provisions for both the Company and MatlinPatterson.

 

Under applicable NASDAQ Marketplace Rules, the Private Placement is subject to approval by a majority of the Company’s shareholders. Messrs. George McNamee and Alan Goldberg, directors of the Company, and Mr. McNierney have agreed with MatlinPatterson to vote the shares of common stock owned by them in favor of the transaction. These persons collectively own approximately 19% of the outstanding shares of common stock. Therefore, shares representing approximately 32% of the outstanding shares of common stock of the Company as of the record date, in addition to those subject to the voting agreement with MatlinPatterson to vote in favor of the transaction, must be voted in favor of Proposals 2, 3, 4 and 5 for these proposals to be approved. The completion of the Private Placement is also subject to the satisfaction or waiver of a variety of other closing conditions.

 

The Purchased Shares would be sold by the Company in the Private Placement in reliance on an exemption from the registration requirements of the Securities Act. MatlinPatterson and the Company would, at the closing of the Private Placement, enter into a Registration Rights Agreement pursuant to which MatlinPatterson would acquire rights to cause the Company to register, under specified circumstances, the subsequent offer and resale of the Purchased Shares.

 

The Investment Agreement contains representations and warranties of the Company and MatlinPatterson made to each other. The statements embodied in those representations and warranties are qualified by information in confidential disclosure schedules that the Company and MatlinPatterson have exchanged in connection with signing the Investment Agreement. Please note that certain representations and warranties were made as of a specified date, may be subject to a contractual standard of materiality different from those generally applicable to shareholders, or may have been used for the purpose of allocating risk between the parties rather than establishing matters as fact.

 

Background of the Private Placement

 

The Company experienced losses in several of our key segments in 2005 and 2006, including equities sales and trading, equity investment banking and fixed income sales and trading.

 

Recognizing these losses and the need to maintain liquidity requirements, in the spring of 2006 the Board retained Freeman & Co. Securities LLC (“Freeman”) as its financial advisor to establish a comprehensive process to entertain both a strategic sale of, or a strategic investment in, the Company. We began to work immediately on preparing materials for potential investors, and in the spring and summer of 2006 a broad target list of over thirty names was developed, which led to focused discussions with twenty-two parties. After discussions and preliminary due diligence, three potential investors emerged. The first of these formally withdrew without providing a letter of intent or a term sheet and while both the second and third gave verbal indications of interest at a valuation of approximately tangible book value, neither provided a written letter of intent or term sheet, and the process concluded unsuccessfully.

 

The Board’s conclusions from the formal process were that (1) there was apparent potential market interest to buy the entire Company for tangible book value, but no written offers were received, (2) the process was beginning to have a negative effect upon employee retention and (3) the Company should focus on its strategy to repair the

financials of the Company that was begun in June 2006 and suspend the formal process while still selectively entertaining or soliciting interest in a sale or investment.

 

During the December 22, 2006 meeting of the Board of Directors, Peter McNierney provided the Board with an update on the financial performance of the Company. He noted that the results were below budget projections by $3-4 million and stated that although the Company could continue to survive as a stand-alone entity, this would not be the preferred course of action. Mr. McNierney then presented an analysis and comparison of potential transactions the Company might undertake through a merger, an acquisition or by a third party investment.

 

In the first quarter of 2007, the Company had active conversations with seven potential investors. The first contacted Peter McNierney to make an employment offer, and after a formal decline, took a concentrated look at purchasing the Company as a whole. Ultimately, it formally withdrew due to uncertainty of integration of the Company into its existing platform. Two additional firms took an active look at the Municipal Capital Markets Group (“MCMG”), one of which took a second active look at MCMG and the Descap division, but ultimately, both companies also withdrew. DEPFA BANK plc (“DEPFA”) also expressed a strong interest in MCMG. The conversations with DEPFA resulted in the sale of MCMG to DEPFA for a cash purchase price equal to $12 million plus the value of the municipal bond inventory used in the business, which is expected to range between $40-$50 million at closing. Following entry into the MCMG transaction with DEPFA, two investors took an active look at the remaining divisions of the Company. One investor decided not to submit a proposal at the time based on employee turnover and the continued losses of the Company. The second investor, composed of two parties, was unable to get comfortable with the key employee turnover and viewed the fixed income business as non-productive, whose only value was from capital, less the closing costs. MatlinPatterson then indicated its interest in the Company.

 

On March 20, 2007, MatlinPatterson executed a confidentiality agreement with the Company pursuant to which the Company was to provide confidential information to MatlinPatterson in connection with a potential transaction. Following initial due diligence and discussions with senior management at the Company, MatlinPatterson indicated interest in pursuing a direct investment in the Company.

 

During the January 3, 2007 meeting of the Board, a special committee of the Board (the “Special Committee”), comprised of Nicholas A. Gravante, Jr., Carl P. Carlucci, Dale Kutnick and Shannon P. O’Brien, was formed to assist in evaluating proposals from potential investors and to make recommendations to the Board regarding any issues requiring Board consideration with respect to any proposals received from such investors. Bingham McCutchen LLP was then retained as legal counsel for the Special Committee.

 

At the Board meeting on April 5, 2007, Mr. McNierney gave an update on the operating results for the quarter. He stated that the Company expected to report a significant loss for the quarter. Mr. McNierney then lead the Board in a discussion of potential transactions, including a potential transaction with MatlinPatterson. The duties of the outside directors and the role of the Special Committee was also discussed. The Board appointed Ms. O’Brien and Mr. Kutnick co-chairs of the Special Committee.

 

On April 25, 2007, MatlinPatterson delivered a draft letter of intent and term sheet (the “Letter of Intent”) to the Board for its review and approval. It contemplated a $40 million capital infusion into the Company at $1.50 per share, thereby obtaining an approximate 52.9% ownership position in the Company on a fully diluted basis after grants of restricted stock based awards by the Company for employee retention. In addition, the Letter of Intent included an exclusivity period until May 9, 2007 during which the Company would not negotiate with or solicit competing proposals from other bidders.

 

On April 26, 2007, at a meeting of the Board, members of the Company’s management reviewed with the Board the draft Letter of Intent submitted by MatlinPatterson. The Company’s financial and legal advisors participated in the meeting, as did counsel for the Special Committee. Mr. Gravante reported on the Special Committee’s efforts to confirm the level of interest of other interested parties, including the Special Committee’s direct communications with such other interested parties without management present, and the Special Committee’s discussions with Freeman, which anticipated the delivery of a fairness opinion to the Board prior to authorization of a definitive agreement in light of the potential for MatlinPatterson to exercise voting control following completion of the proposed investment. The Special Committee reported that it was satisfied with the

process and felt that all reasonably possible scenarios and interested parties had been considered and that the efforts made were sufficient to indicate that the MatlinPatterson proposal was the best available for the Company and its shareholders. At this meeting, the Company’s Board discussed their fiduciary duties with respect to the proposed Letter of Intent presented. Following the discussion, the Board requested that certain revisions to the Letter of Intent be proposed to MatlinPatterson and their counsel, including that the Letter of Intent provide for a “go shop” provision to be included in the definitive agreement giving the Company the ability to solicit other potential investors following execution of the definitive agreements with MatlinPatterson. The Board expressed that, in consideration for a “go-shop” provision in the definitive agreement, it would be willing to agree to a period of exclusivity ending on May 17, 2007, during which the Company would not negotiate with other bidders.

 

Also at the meeting on April 26, 2007, members of the Company’s management reviewed with the Board a revised draft of the Letter of Intent received from MatlinPatterson. The Company’s legal advisors and counsel for the Special Committee participated in the meeting. The revised Letter of Intent outlined a “no shop” provision to be included in the definitive agreement. In accordance with the proposed “no shop” provision, the Company would not solicit other investors following execution of the definitive agreement but could consider unsolicited offers from other investors in accordance with the Board’s fiduciary duties and the terms of the definitive agreement. The revised Letter of Intent also provided for a cap on the reimbursement to MatlinPatterson of its expenses in the event the Company accepted an unsolicited offer in accordance with the terms of the definitive agreement. In addition, the revised Letter of Intent provided for an exclusivity period until May 9, 2007, during which the Company could not negotiate with potential investors other than MatlinPatterson. After considering the revised Letter of Intent, the Board authorized members of the Company’s senior management to execute the Letter of Intent with MatlinPatterson. The Letter of Intent was executed by the Company and MatlinPatterson on April 26, 2007.

 

At a meeting of the Special Committee on May 1, 2007, Mr. McNierney provided a status report regarding the negotiations with, and the due diligence conducted by, MatlinPatterson to date. He explained that MatlinPatterson planned to have Mr. Fensterstock serve as the new Chairman of the Board and Chief Executive Officer of the Company following the closing of the Private Placement, with Mr. McNierney becoming the President and Chief Operating Officer and Mr. Coad remaining the Chief Financial Officer. MatlinPatterson also required execution of the definitive Investment Agreement to be contingent upon certain designated Company employees entering into non-compete and non-solicit agreements that would become effective upon the closing of the Private Placement, and with such closing being conditioned on a certain number of additional employees entering into such agreements and remaining employed by the Company at the closing of the proposed investment. The Special Committee set a tentative agenda for its upcoming meetings and discussed the timeline for receiving certain reports from its officers, legal counsel and financial advisor regarding the Company’s financial performance, including receipt of a written fairness opinion from the Company’s financial advisor, as well as the possible consequences of the investment by MatlinPatterson. Please see the section entitled “Opinion of our Independent Financial Advisor” below for information on Freeman and the fairness opinion. The Special Committee then discussed whether there existed any potential conflicts of interest among its members that might impact its impartiality. The Special Committee determined that no member had any potential conflicts of interest in addressing the issues presented and noted that the Special Committee was well positioned to act impartially in the best interests of the shareholders, particularly with respect to equity awards and employment matters.

 

The Special Committee met again on May 4, 2007 without management present and during which it reviewed its duties under the Company’s Certificate of Incorporation and relevant fiduciary law. After management was asked to join the meeting, Mr. McNierney provided a status report regarding the transaction structure, due diligence and process. First and second rounds of due diligence had been completed by MatlinPatterson and no significant issues had arisen. The Special Committee considered certain specific regulatory matters raised as part of legal and regulatory due diligence.

 

During the Special Committee meeting on May 6, 2007, Freeman presented an overview of its market survey on behalf of the Company. Mr. McNierney provided a status report on the Company’s efforts to secure key employees’ continued employment as part of the transaction, including MatlinPatterson’s indication that it would require Messrs. McNierney and Coad to amend their employment agreements prior to the execution of the Investment Agreement, that it would similarly require certain other key employees to execute non-compete and

non-solicit agreements that would be conditioned on the closing of the proposed investment and that it would require certain additional key employees to execute such non-compete and non-solicit agreements between the signing of the Investment Agreement and closing and remaining employed by the Company at the closing of the proposed investment. The Special Committee engaged in a lengthy discussion of specific provisions contained in the draft Investment Agreement received from MatlinPatterson’s counsel. The Special Committee also discussed the challenges and logistics of the resignation of current directors and the appointment of new directors as required by the Investment Agreement. Ms. O’Brien also reported separately to the Special Committee the conversation she and Mr. Kutnick had with Mr. Fensterstock regarding MatlinPatterson’s plans for the future financial success of the Company and its intentions with respect to employee compensation. The Special Committee resolved that it would not seek compensation for performance of their duties on the Committee, other than the usual per-meeting fees.

 

During a telephonic discussion between members of the Special Committee and its financial advisors and management on May 8, 2007, Dewey Ballantine LLP, outside counsel to the Company, provided an update on the status of negotiations with counsel for MatlinPatterson. There were several key provisions of the Investment Agreement that the parties were continuing to negotiate. Dewey Ballantine LLP also reported that MatlinPatterson would be seeking voting agreements from Messrs. McNierney, McNamee and Goldberg. Freeman reviewed its draft presentation to the Board, which covered an overview of the situational analysis, the process leading up to the MatlinPatterson offer and the financial analysis of the proposed investment, to be presented to the full Board.

 

Freeman’s presentation characterized the Company as being in a “critical survival” situation due to continued financial losses and key employee losses. Freeman was concerned that continued losses could be funded only by sales of inventory to free-up capital and this would continue to erode the tangible book value at an accelerated pace. The Special Committee discussed additional concerns that this could threaten the DEPFA Transaction as the purchase agreement entered into with DEPFA contained conditions to closing that set forth minimum net capital requirements on a pro-forma stand alone basis. Therefore, Freeman recommended that the Company accept the formal, fully vetted and diligenced offer by MatlinPatterson instead of risking the deal by postponing it and pursuing another offer.

 

During that meeting, Mr. McNierney reported that MatlinPatterson was considering increasing its investment in the Company from $40 million to $50 million. The Special Committee asked that, in the event such a proposal materialized, it receive analysis from its financial advisor with respect to the merits of such an increased investment. Mr. McNierney also reported on the status of discussions with a group of employees from another middle-market institutional investment bank considering joining the Company.

 

The Board met on May 9, 2007 and Mr. McNierney updated the Board on the MatlinPatterson deal discussions. He summarized the outstanding issues as the following: a per share purchase price adjustment in the event that the DEPFA Transaction has not closed prior to the closing of the MatlinPatterson investment; a per share purchase price adjustment based on a significant drop in net tangible book value; the retention of key employees; the indemnification language; reimbursable expenses upon breakup of the transaction; the drop dead date; and the material adverse change definition. Representatives of Dewey Ballantine LLP led the Board through a discussion of the significance of each of the above issues, as well as other terms of the deal, including a discussion of the Registration Rights Agreement and the Voting Agreements. Mr. McNierney then described MatlinPatterson’s proposal to increase its investment in the Company. The Board then considered MatlinPatterson’s proposal to (a) extend the exclusivity period from May 9 to May 14, 2007, and (b) increase the proposed capitalization to $50 million. The Board resolved to authorize extension of the exclusivity period under the Letter of Intent to May 14, 2007, and decided to discuss the proposed increase in capitalization further. In that regard, the Board asked counsel to review whether an increase in ownership could impact any supermajority thresholds in the organizational documents of the Company, and asked Freeman to analyze the financial impact of an increase in the size of the proposed investment to $50 million.

 

At a meeting of the Special Committee on May 11, 2007, Freeman provided its analysis of the proposed $10 million additional capitalization. Freeman stated that the additional capitalization would provide MatlinPatterson with a voting interest of 59.9% on an undiluted basis and 58.4% on a fully-diluted basis compared with a voting interest of 54.4% undiluted and 52.9% fully diluted if MatlinPatterson’s investment were limited to $40 million. These percentages were calculated taking into account approximately 6.0 million restricted stock units

to be issued to certain key employees in connection with the proposed investment, as was contemplated at the May 11, 2007 Special Committee meeting, based upon the assumption that each restricted stock unit granted under the 2007 Plan would carry one vote upon being granted and would vote with the Company’s common stock. Based on this analysis, the Company’s legal advisors reported that the increased ownership interest of MatlinPatterson based on the proposed $10 million addition capitalization would not provide MatlinPatterson with the ability to unilaterally meet any supermajority voting thresholds under the NYBCL or the Company’s organizational documents. It was subsequently determined that restricted stock units granted under the 2007 Plan would have no votes upon granting and the number of restricted stock units was increased to 6.75 million. Taking into account the fact that the restricted stock units would have no votes upon granting, we currently expect that, upon closing of the Private Placement, MatlinPatterson will have a voting interest between 70% and 75% of our outstanding common stock (between 60% and 65% on a fully diluted basis) based on the number of shares outstanding on June 25, 2007, and after giving effect to an increase in the number of Purchased Shares that may result from the adjustment provisions of the Investment Agreement and which may further increase the number of Purchased Shares. These currently expected voting interests would also not provide MatlinPatterson with the ability to unilaterally meet any supermajority voting thresholds under the NYBCL or the Company’s organizational documents. Please see the section entitled “Proposal No. 2 Approval of the Private Placement” above for a discussion of MatlinPatterson’s undiluted and fully-diluted voting interest taking into account the non-voting characteristic of the restricted stock units and the additional 750,000 restricted stock units to be granted. Freeman’s analysis also found that the additional $10 million would increase the Company’s pro forma tangible book value per share. The Special Committee discussed MatlinPatterson’s intention to earmark the additional $10 million investment for FA Technology Ventures Corporation (“FATV”), the Company’s investment fund manager. Freeman reported that it strongly supported the increased investment by MatlinPatterson, noting that it would increase tangible book value per share and achieve a more favorable tangible book value to cash ratio. Mr. Coad further stated that the additional $10 million would benefit the Company from an operational perspective. Freeman also reported that it would be very comfortable that the price at which the increased investment would be made ($1.50 per share) would be fair to the Company from a financial perspective. At the meeting, the Special Committee questioned management regarding the likelihood that a potential pricing adjustment in the Investment Agreement may be triggered if the net tangible book value targets are not met as of the closing date.

 

At a meeting of the Board and the Special Committee on May 13, 2007, management presented an analysis on the MatlinPatterson transaction from legal, operational, and financial perspectives. Representatives of Dewey Ballantine LLP reviewed in detail the terms of the proposed Investment Agreement, form of Registration Rights Agreement and Voting Agreements. The Board discussed various contingencies with respect to the closing of the transaction, including the need for additional non-compete and non-solicit agreements to be secured from key employees, the risk of a potential price adjustment in the event the net tangible book value target were not met, and the ability of competing bidders to initiate a potential alternative transaction.

 

Freeman then provided a financial analysis of the transaction and its valuation of the Company. Freeman described the Company’s current financial status, including fifteen consecutive quarterly operating losses leading to a reduced tangible book value and stock price, and a negative impact on employee retention. Freeman described the process by which the Company had undertaken an attempt to find potential buyers or strategic investors, as described above, concluding with its belief that there were no other bidders besides MatlinPatterson. Freeman further discussed the price adjustment feature based on the net tangible book value trigger in the Investment Agreement. Freeman further concluded that the consideration to be paid by MatlinPatterson in the Private Placement was fair, from a financial point of view, to the Company and described the procedures and basis for that opinion.

 

Management discussed the operational and financial impacts of the transaction, and recommended approval of the transaction. The Special Committee also reviewed the numerous meetings and substantial process undertaken by the Special Committee in its evaluation of the transaction, confirmed the independence of its members and the process undertaken, and offered its unanimous recommendation that the Board approve the transaction. Following discussion of the fairness opinion and the terms of the various agreements, the Board unanimously approved the Private Placement and authorized the officers to enter into the Investment Agreement and related documents substantially as presented at the meeting.

On May 14, 2007, the Company entered into the Investment Agreement with MatlinPatterson described below and attached hereto as Appendix A providing for the issuance and sale of Purchased Shares for gross proceeds of $50 million. Please see the section “Investment Agreement” below for information on the Investment Agreement.

 

Reasons for the Private Placement

 

We believe that we need additional capital to more effectively pursue our strategic objectives. After considering numerous potential financing and strategic alternatives, including alternate financing structures, seeking to sell the Company, seeking a merger of the Company with another entity, and the liquidation of the Company, the Board determined that the Private Placement was the best available alternative and would provide the greatest potential value for the shareholders, as well as provide the necessary capital to pursue our long-term strategic goals.

 

In making its determination to approve the Private Placement, the Board formed an independent Special Committee to assist management in evaluating various aspects of the transaction, and to make recommendations to the Board regarding any issues requiring Board consideration with respect to the transaction. As part of that process, the Board and the Special Committee consulted with our officers with respect to strategic and operational matters. The Board and the Special Committee also consulted with Freeman regarding financial matters and Dewey Ballantine LLP and Bingham McCutchen LLP regarding legal matters, including the Investment Agreement and related documents. The determination was the result of careful consideration by the Board and the Special Committee of a number of factors, including the following positive factors:

 

 

 

 

 

 

 

 

 

 

 

 

In its review of the Private Placement, the Board also considered a number of potentially negative factors, including the following factors:

 

 

The Board conducted an overall analysis of the Private Placement in which it weighed the benefits and advantages against the risks and negative factors described above. The Board did not view any of the factors as

determinative or assign any rank or relative weight to the factors. Throughout the process, the Board continued to consider alternatives to the Private Placement, including alternate financing structures, the sale of the Company or its merger with another entity, and the liquidation of the Company. The Board recognized that there can be no assurance that we would be able to achieve all or significantly all of each anticipated benefit or advantage or that it had identified and accurately assessed each risk and negative factor. However the Board concluded that the potential benefits and advantages of the Private Placement significantly outweighed the risks and negative factors.

 

After taking into account these and other factors, the Board unanimously determined that the Private Placement was fair to and in the best interests of the Company and its shareholders and approved the issuance and sale of the Purchased Shares to MatlinPatterson.

 

Opinion of Our Independent Financial Advisor

 

Our Board of Directors retained Freeman to render an opinion as to whether the consideration to be received by the Company in the Private Placement is fair to the Company from a financial point of view. The opinion, which we sometimes refer to in this proxy statement as the “Fairness Opinion,” was prepared at the request of our Board of Directors and the Special Committee to assist them in evaluating the Private Placement. The Fairness Opinion of Freeman does not constitute a recommendation as to how any security holder should vote at the annual meeting. The full text of Freeman’s written opinion, dated May 14, 2007, is attached to this proxy statement as Appendix B and this summary is qualified in its entirety by reference to the full text of the opinion. You are encouraged to read the Fairness Opinion carefully in its entirety for a description of the assumptions made, matters considered and limitations on the review undertaken.

 

At the May 13, 2007 meeting of our Board of Directors, Freeman presented its analysis and verbally rendered to our Board its opinion that, based on and subject to the matters described in the Fairness Opinion, the consideration to be received by the Company in the Private Placement is fair to the Company from a financial point of view. Freeman issued its written opinion on May 14, 2007 in connection with the execution of the Investment Agreement.

 

No limitations were imposed upon Freeman by our Board with respect to the investigations made or procedures followed by Freeman in rendering its opinion. Freeman has not been requested and does not intend to update, revise or reaffirm its Fairness Opinion, including, but not limited to, to reflect any circumstances or events that have occurred since May 14, 2007. You should understand that the Fairness Opinion speaks only as of its date. Events that could affect the fairness of the consideration received by the Company in the Private Placement from a financial point of view include adverse changes in industry performance or changes in market conditions and changes to our business, financial condition and results of operations.

 

Freeman made such reviews, analyses and inquiries as it deemed necessary to assess the fairness, from a financial point of view, of the consideration to be received by the Company in the Private Placement. In arriving at its Fairness Opinion, Freeman reviewed and considered such financial and other matters as it deemed relevant, including, among other things:

 

 

 

No material relationship existed between Freeman and us or our affiliates, none has since developed and none is mutually understood to be contemplated, other than our engagement of Freeman in the spring of 2006 to establish a comprehensive process to entertain both a strategic sale of, or strategic investment in, the Company, to advise us on the previously announced sale of our Municipal Capital Markets Group in the DEPFA Transaction, and the May 10, 2007 engagement with respect to delivery of the Fairness Opinion. Freeman received a $100,000 retainer in conjunction with the engagement in the spring of 2006 which was paid in 2006. This 2006 retainer will be subtracted from a fee of $1,125,000 which is payable to Freeman only upon the closing of the DEPFA Transaction. Freeman was not separately compensated for the delivery of a fairness opinion in connection with the DEPFA Transaction. Freeman will be paid $250,000 for the delivery of the Fairness Opinion to the Board in respect of the Private Placement. Freeman, as part of its investment banking business, is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, private placements and valuations for corporate and other purposes. None of the fees paid to Freeman are contingent upon the adoption of the Private Placement.

 

Freeman used several methodologies to assess the fairness of the consideration to be received by the Company in connection with the Private Placement. The following is a summary of the material financial analyses undertaken by Freeman in connection with providing its Fairness Opinion. This summary is qualified in its entirety by reference to the full text of the Fairness Opinion.

 

Freeman’s analyses of the Company were performed on a current situational analysis, an analysis of the MatlinPatterson discount, and a post-Private Placement potential analysis. The current situational analysis considered the Company’s operating pre-tax earnings for the past fifteen consecutive quarters and included an analysis of the Company’s tangible book value and stock price based upon the prices at which the Company’s common stock was trading on the NASDAQ Global Market. The current situational analysis also considered the Company’s operating losses, investment portfolio gains, capitalization of fixed income businesses and key employee turnover.

 

The analysis of the MatlinPatterson discount considered the discounted stock price at which the Purchased Shares will be sold to MatlinPatterson in relation to the closing trading prices of the Company’s common stock and discounts given in similar private investment in public equity transactions (sometimes referred to herein as “PIPE transactions” or “PIPEs”).

 

The post-Private Placement potential analysis calculated the Company’s pro forma tangible book value based on the investment by MatlinPatterson and compared it to current trading multiples of publicly-traded broker-dealers similar to the Company. The post-Private Placement analysis gave consideration to the matters contemplated by the Investment Agreement and Registration Rights Agreement, including the contemplated immediate infusion of approximately $50 million of additional capital (net of certain fees and expenses) from the Private Placement and the contemplated dilutive impact of shares to be issued in connection with the Private Placement.

 

Current Situational Analysis of the Company

 

Analysis of Specific Performance Factors.  As part of its current situational analysis of the Company, Freeman considered the following factors:

 

 

 

MatlinPatterson Transaction Analysis.  Based on the Investment Agreement that contemplates a $50 million capital infusion into First Albany at $1.50 per share, Freeman determined that MatlinPatterson’s ownership position on a pro forma basis would be 59.9% on a primary basis or 58.4% on a fully diluted basis. Both pro forma ownership estimates were calculated after taking into consideration the grants of 6.0 million restricted shares by MatlinPatterson to key executives and personnel. The number of restricted stock units was later increased to 6.75 million. Please see “Proposal No. 2 Approval of the Private Placement” above for a discussion of MatlinPatterson’s undiluted and fully-diluted voting interest taking into account the additional 750,000 restricted stock units.

 

Analysis of MatlinPatterson Discount

 

Freeman reviewed the closing trading prices of the Company’s common stock over a thirty day period ending May 11, 2007 and determined that MatlinPatterson’s $1.50 per share investment ranged from 3.8% to 13.8% of a discount to market price. Based on the closing price of the Company’s common stock on May 11, 2007 (the last business day prior to announcement of the Private Placement) of $1.60, the per share investment price of $1.50 represented a 6.25% discount. Freeman noted that the investment by MatlinPatterson, atypically for a speculative transaction of this nature, proposes no additional warrants or preferred stock which could further dilute existing shareholders.

 

Freeman analyzed PIPE transactions of a similar nature over a trailing twelve-month period and divided the transactions into three segments based on structure: unregistered common stock, PIPEs with warrants and registered direct placements. Freeman noted that the majority of these transactions did not involve a change of control.

 

Unregistered Common Stock.  This segment represents the traditional PIPE structure where investors are granted unregistered securities that must become registered in a 90-120 day period. For the trailing twelve-month period, Freeman reviewed fifty-four completed transactions and calculated their mean discount to be 14.2% below the target stock price on the last trading day prior to sale.

 

PIPEs with Warrants.  This segment represents the PIPE transaction structure used for more speculative investments. Freeman viewed this as the most relevant segment when comparing the current MatlinPatterson investment. For the trailing twelve-month period, there were 136 transactions completed with a calculated mean discount of 18.3% from the last sale price of the target’s stock, excluding any implied discount from the issue of warrants in connection with each transaction.

 

Registered Direct Placements.  This segment represents transactions used largely for bulletin board growth stocks where the investor is granted registered common stock that is able to be traded immediately. Over the trailing twelve-month period, thirty-nine transactions had an average discount of 8.4% from the target stock price on the last trading day prior to sale.

Post-Private Placement Analysis of the Company

 

As a result of the cash infusion from the Private Placement, Freeman calculated that the Company will have a pro forma tangible book value of $1.40 per share based on pro forma financials ending in the second quarter of 2007. The second quarter 2007 pro forma financials prior to the proposed Private Placement showed tangible shareholders equity of $27.4 million with 16,371,000 shares outstanding with the proposed Private Placement increasing shareholders equity to $77.4 million and increasing shares outstanding to 55,329,000. These numbers were calculated taking into account the issuance of 33,333,333 shares of common stock to MatlinPatterson for $50 million and approximately 6.0 million restricted stock units to be issued to certain key employees in connection with the Private Placement, as was contemplated at the May 11, 2007 Special Committee meeting. The number of restricted stock units was later increased to 6.75 million. Please see the section entitled “Proposal No. 2 Approval of the Private Placement” above for a discussion of MatlinPatterson’s undiluted and fully-diluted voting interest taking into account the addition 750,000 restricted stock units. Based on a potential trading range established from the current trading multiples of publicly traded broker-dealers, Freeman determined that the tangible book value multiple could range from a high of 3.1 and a low of 1.7, resulting in potential post-Private Placement per share prices ranging from a high of $4.34 to a low of $2.38. Notwithstanding the above analysis that was conducted by Freeman as a small subset of its overall analysis in determining its Fairness Opinion, Freeman specifically expressed no view as to the price or trading range for shares of the common stock of the Company following the consummation of the Private Placement.

 

Conclusion

 

Based on the analyses described above (which should be read in conjunction with the full text of the Fairness Opinion), and with consideration to the various assumptions and limitations set forth in the Fairness Opinion, Freeman determined that, as of the date of the Fairness Opinion, the consideration to be received by the Company in connection with the Private Placement is fair to the Company from a financial point of view.

 

In conducting its review and arriving at its opinion, Freeman, with the Company’s consent, assumed and relied, without independent investigation, upon the accuracy and completeness of all financial and other information provided by the Company or which is publicly available. While Freeman did meet with the management of the Company to review and discuss the analyses and forecasts provided by management, Freeman’s assumption as to the accuracy and completeness of such analyses and forecasts was based on contractual provisions in its engagement letter with the Company, pursuant to which Freeman was entitled to rely upon the accuracy and completeness of all information furnished by the Company. In addition, Freeman did not conduct nor assume any obligation to conduct any physical inspection of the properties or facilities of the Company. Freeman relied upon the assurance of the management of the Company that it was unaware of any facts that would make the information provided to Freeman incomplete or misleading in any respect. Freeman, with the Company’s consent, assumed that the financial forecasts which they examined were reasonably prepared by the management of the Company on the basis reflecting the best currently available estimates and good faith judgments of management as to the future performance of the Company. The Board reviewed the financial forecasts prepared by the Company and posed questions regarding their accuracy and completeness at the May 13, 2007 Board meeting, and, based on its review, the Board determined that Freeman’s reliance upon the forecasts was reasonable at that time.

 

Freeman did not make or obtain any independent evaluations, valuations or appraisals of the assets or liabilities of the Company, nor was it furnished with such materials. With respect to all legal matters relating to the Company, Freeman relied on the advice of legal counsel to the Company. Freeman’s services to the Company in connection with the transaction contemplated by the Investment Agreement have been to bring both potential investors and acquirers to the Company, assist management in those negotiations and render an opinion from a financial point of view with respect to the consideration offered in the Private Placement. Freeman’s opinion is necessarily based upon economic and market conditions and other circumstances as they existed on May 14, 2007. It should be understood that although subsequent developments may affect Freeman’s opinion, Freeman does not have any obligation to update, revise or reaffirm its opinion and expressly disclaims any responsibility to do so.

 

For purposes of rendering its opinion Freeman assumed in all respects material to its analysis that the representations and warranties of each party contained in the Investment Agreement were true and correct, that each

party will perform all of the covenants and agreements required to be performed by it under the Investment Agreement and that all conditions to the consummation of the transaction contemplated in the Investment Agreement will be satisfied without waiver thereof. Freeman also assumed that all governmental, regulatory and other consents and approvals contemplated by the Investment Agreement will be obtained and that in the course of obtaining those consents and approvals no restrictions will be imposed or waivers made that would have an adverse effect on the contemplated benefits of the Private Placement.

 

Freeman’s opinion does not constitute a recommendation to any shareholder of the Company to take any action in connection with the transactions contemplated by the Investment Agreement or otherwise. Freeman has not been requested to opine as to, and its opinion does not in any manner address, the Company’s underlying business decision to effect the transactions contemplated by the Investment Agreement. Furthermore, Freeman expressed no view, and specifically currently expresses no view, as to the price or trading range for shares of the common stock of the Company following the consummation of the transactions contemplated by the Investment Agreement.

 

Financial Projections

 

The Company does not as a matter of course make public projections as to future performance or earnings and is especially wary of making projections for extended earnings periods due to the unpredictability of the underlying assumptions and estimates. However, senior management did provide financial forecasts to MatlinPatterson in April of 2007 in connection with their consideration of a possible transaction with the Company. These projections were also provided to our Board and to Freeman. We have included a subset of these projections in this proxy statement to give our shareholders access to certain nonpublic information deemed material by our Board for purposes of considering and evaluating the Private Placement. The inclusion of these projections should not be regarded as an indication that management, our Board, MatlinPatterson, Freeman, or any other recipient of this information considered, or now considers, these projections to be a reliable prediction of future results, and they should not be relied on as such. In addition, as we have only included a subset of the projections in this proxy statement, you are cautioned not to rely on this information as complete in making a decision whether to vote in favor of the Private Placement.

 

We believe the assumptions the Company’s management used as a basis for the projections were reasonable at the time the projections were prepared, given the information the Company’s management had at the time. However, the projections do not take into account any circumstances or events occurring after the date they were prepared and you should not assume that the projections will continue to be accurate or reflective of the Company’s management’s view at the time you consider whether to vote for the Private Placement. The Company advised the recipients of the projections that its internal financial forecasts, upon which the projections were based, are subjective in many respects and thus susceptible to various interpretations.

 

The projections reflect numerous estimates and assumptions with respect to industry performance, general business, economic, regulatory, market and financial conditions and other matters, including assumed effective interest rates and effective tax rates consistent with the Company’s historical levels, all of which are difficult to predict and many of which are beyond the Company’s control. The projections are also subject to significant uncertainties in connection with changes to the Company’s business and its financial condition and results of operation. In addition, the projections reflect projected information without regard to the Investment Agreement with MatlinPatterson, which may cause actual results to materially differ as well. As a result, there can be no assurance that the projected results will be realized or that actual results will not be significantly higher or lower than those contained in the projections; it is expected that there will be differences between actual and projected results. Since the projections cover multiple years, such information by its nature becomes less reliable with each successive year.

 

The financial projections were prepared for internal use and for our Board, to assist MatlinPatterson with their due diligence investigations of the Company and for use by Freeman in its financial analysis and not with a view toward public disclosure or toward complying with United States generally accepted accounting principles, the published guidelines of the SEC regarding projections or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. The Company’s independent registered public accounting firm has not examined or compiled any of the financial projections,

expressed any conclusion or provided any form of assurance with respect to the financial projections and, accordingly, assumes no responsibility for them.

 

Readers of this proxy statement are cautioned not to place undue reliance on the specific portions of the financial projections set forth below. No one has made or makes any representation to any person regarding the validity, reasonableness, accuracy or completeness of the information included in these projections or the ultimate performance of the Company compared to such information.

 

For the foregoing reasons, as well as the bases and assumptions on which the financial projections were compiled, the inclusion of specific portions of the financial projections in this proxy statement should not be regarded as an indication that such projections will be an accurate prediction of future events, and they should not be relied on as such. Except as required by applicable securities laws, the Company does not intend to update, or otherwise revise the financial projections or the specific portions presented to reflect circumstances existing after the date when made or to reflect the occurrence of future events, even in the event that any or all of the assumptions are shown to be in error.

FIRST ALBANY COMPANIES INC.

 

SUMMARY CONSOLIDATED FINANCIAL DATA

($000s)

 

 

The following were the material assumptions made by the Company in connection with the preparation of the financial projections:

 

1. The sale of the Municipal Capital Markets Division of the Company to DEPFA would be completed as of June 30, 2007. Does not reflect potential gain on sale related to the DEPFA Transaction of between $7 million and $8 million.

 

2. The Company’s equities business would return to historical performance levels.

 

3. The Company’s Descap Securities Inc. subsidiary would experience improvement in the market environment in the second half of 2007.

 

4. The projections included an estimated charge to reduce administration expenses relative to the size of the Company’s business going forward.

 

5. Historical results are from continuing operations.

 

6. Results for Q4 06 exclude an impairment charge of $7.9 million related to the write-down of an intangible asset.

 

Summary of Terms of the Private Placement

 

Investment Agreement

 

The following summarizes material provisions of the Investment Agreement which is attached in Appendix A to this document and is incorporated by reference herein. The rights and obligations of the parties are governed by the express terms and conditions of the Investment Agreement and not by this summary or any other information contained in this proxy statement. First Albany shareholders are urged to read the Investment Agreement carefully and in its entirety as well as this document before deciding how to vote their shares on the Proposals. The Investment Agreement has been attached to this document to provide First Albany shareholders with information regarding its terms. The assertions embodied in the representations and warranties contained in the Investment Agreement (and summarized below) are qualified by information in confidential disclosure schedules provided by First Albany to MatlinPatterson in connection with the signing of the Investment Agreement. The Company and MatlinPatterson do not consider the information contained in the disclosure schedules to be information that is required to be disclosed pursuant to the federal securities laws. These disclosure schedules contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the Investment Agreement. Moreover, certain representations and warranties in the Investment Agreement were used for the purpose of allocating risk between First Albany and MatlinPatterson rather than establishing matters as facts. Accordingly, you should not rely on the representations and warranties in the Investment Agreement (or the summaries contained herein) as characterizations of the actual state of facts about First Albany because they are modified by such disclosure schedules.

 

Purchase and Sale of Stock

 

The Company will issue and sell, and MatlinPatterson will purchase, 33,333,333 shares of the common stock of the Company, subject to potential upward adjustment as described below (the “Purchased Shares”). The purchase price for the Purchased Shares will be equal to $50 million, less certain reimbursable expenses as described below.

 

If the DEPFA Transaction has not been consummated prior to the Private Placement closing date, the number of Purchased Shares will be increased to account for the cash bonuses or other amounts paid or payable by the Company to any employee of its Municipal Capital Markets Group as a result of the Private Placement closing prior to the closing of the DEPFA Transaction, as well as any restricted stock awards and employee stock options held by employees of the Municipal Capital Markets Group that become vested as a result of the closing of the Private Placement and that would not have become so vested had the DEPFA Transaction closed prior to the Private Placement closing date. Pursuant to this adjustment mechanism, the number of Purchased Shares will be increased by multiplying the number of Purchased Shares that would otherwise be issuable by a fraction that is determined by (i) dividing the aggregate amount of Excess Compensation resulting from the failure of the DEPFA Transaction to close prior to the closing of the Private Placement by the number of shares of common stock outstanding as of the closing date, (ii) expressing such amount as a fraction of $1.50 and (iii) adding such fraction to one. “Excess Compensation” is in effect defined as the amount of incremental bonuses or other cash amounts paid or payable by the Company to or in respect of the employees of the Municipal Capital Markets Group as a result of the closing of the Private Placement taking place prior to the closing of the DEPFA Transaction plus the number of shares of restricted stock awarded to such employees that become vested as a result of the closing of the Private Placement multiplied by $1.50 per share plus the number of shares issuable upon the exercise of any stock options held by such employees with an exercise price of less than $1.50 per share that become vested as a result of the closing of the Private Placement multiplied by the difference between $1.50 and such exercise price. In the event that the DEPFA Transaction closes after the closing of the Private Placement, as of the closing of the Private Placement, the employees of the Municipal Capital Markets Group would become entitled to Excess Compensation of approximately $2,429,696, in the aggregate. To the extent that such employees do not waive their rights to receive such Excess Compensation, the adjustment formula set forth in the Investment Agreement would result in an increase in the number of Purchased Shares.

 

In addition, if the Net Tangible Book Value Per Share (as defined in the Investment Agreement, including adjustments to eliminate any effects of a prior closing of the DEPFA Transaction on tangible net book value) is less than $1.60 as of the Private Placement closing date, the number of Purchased Shares will be increased by multiplying the number of Purchased Shares that would otherwise be issuable by a fraction that is determined by (i) expressing the difference between $1.50 and 88.86% of the Net Tangible Book Value Per Share as of the Private Placement closing date as a fraction of $1.50 and (ii) adding that fraction to one.

We currently expect that as of the closing of the Private Placement, MatlinPatterson will own between 37,000,000 and 47,000,000 shares, representing between 70% and 75% of the outstanding common stock (between 60% and 65% on a fully diluted basis) based on the number of shares of common stock outstanding on June 25, 2007 and after giving effect to the adjustment provisions described above which may further increase the number of Purchased Shares.

 

Closing of the Purchase and Sale of Stock

 

Unless the parties agree otherwise, the closing of the Private Placement will take place on a date specified by the parties, but no later than the second business day following the day on which the last of the closing conditions have been satisfied or waived, at the offices of Sidley Austin LLP, 787 Seventh Avenue, 23rd Floor, New York, New York 10019.

 

We currently expect to complete the Private Placement by the end of the third quarter of 2007, subject to receipt of required shareholder and regulatory approvals and satisfaction of the other conditions to closing.

 

Closing Conditions

 

MatlinPatterson’s obligation to purchase the shares in the Private Placement is subject to the satisfaction or waiver of the following conditions:

 

 

First Albany’s obligation to issue and sell the Purchased Shares to MatlinPatterson in the Private Placement is subject to the to the satisfaction or waiver of the following conditions:

 

 

 

No Solicitation

 

The Investment Agreement provides that the Company shall not authorize or permit any of its officers, trustees, directors, employees, agents or representatives to directly or indirectly:

 

 

The Company has also agreed to take all actions reasonably necessary to cause its officers, trustees, directors, employees, agents or representatives to immediately cease any discussions or negotiations with any other person with respect to, or that would reasonably be expected to lead to, a competing transaction.

 

Further, the Company has agreed to notify MatlinPatterson of any proposal which the Company receives relating to a competing transaction and to keep MatlinPatterson informed on a timely basis of the status and any material developments regarding such proposal.

 

However, if the Company receives a bona fide proposal for a competing transaction that the Board believes in good faith, after consultation with outside counsel and with the Company’s financial advisors, constitutes or may reasonably be expected to result in a superior competing transaction (as defined below), and which was not the result of a breach of the no solicitation provisions in the Investment Agreement, the Board may, to the extent required by its fiduciary obligations:

 

 

 

In addition, the Company agreed that the Board will not change its recommendation in favor of the Private Placement or terminate the Investment Agreement as provided above unless the Board has:

 

 

A “competing transaction” is defined in the Investment Agreement as:

 

 

 

A “superior competing transaction” is defined in the Investment Agreement as bona fide proposal for a competing transaction made by a third party which was not, directly or indirectly, the result of a breach of the no solicitation provisions set forth in the Investment Agreement:

 

 

Termination of Obligations under Investment Agreement

 

The Investment Agreement may be terminated by the Company and MatlinPatterson by mutual consent. It also may be terminated by either MatlinPatterson or the Company if any permanent order, decree, ruling or other action of a court or other competent authority permanently restraining, enjoining or otherwise preventing the consummation of any of the transactions contemplated in the Investment Agreement, has become final and non-appealable, or the closing has not occurred before September 30, 2007.

 

MatlinPatterson may terminate the Investment Agreement if there is a material breach of any of the Company’s representations or warranties, if there is a material breach of any of the Company’s covenants or agreements that has not been cured within ten business days, or the Board accepts, approves or authorizes a superior competing transaction.

 

The Company may terminate the Investment Agreement if there is a material breach of any of MatlinPatterson’s representations or warranties, there is a material breach of any of MatlinPatterson’s covenants or agreements that has not been cured within ten business days, or, after the Company has paid certain reimbursable expenses to MatlinPatterson, if the Company’s Board accepts, approves or authorizes a superior competing transaction. Other than the reimbursement of such expenses, the Company has no obligation to pay a “break-up” fee to MatlinPatterson if the Board accepts, approves or authorizes such a superior competing transaction.

 

Indemnification

 

The Company has agreed to indemnify MatlinPatterson against breaches of the Company’s representations, warranties and covenants contained in the Investment Agreement and the Registration Rights Agreement. MatlinPatterson may not seek indemnification until its aggregate claims exceed $3,000,000, whereupon MatlinPatterson will be entitled to seek indemnification with respect to all damages incurred by it. The Company’s aggregate liability for breaches of its representations, warranties and covenants shall not exceed $17,500,000. Generally, claims for breaches of Company representations, warranties and covenants must be brought by April 30, 2009.

 

Conduct of Business

 

The Company generally covenants to operate its business in the ordinary course of business, to use commercially reasonable efforts to keep available the services of its current officers and employees, and to preserve the goodwill of its customers, suppliers, licensors, lessors, third-party payors and others having business relations with the Company.

The Investment Agreement also includes certain negative covenants covering actions that the Company agrees not to take without MatlinPatterson’s prior written consent, including amending the Company’s certificate of incorporation or bylaws, issuing or encumbering the Company’s capital stock, declaring or paying dividends, entering into any acquisitions of businesses or sales of certain assets, incurring indebtedness, entering into any reorganization or recapitalization, changing its accounting principles, making certain capital expenditures, settling or compromising certain liabilities, preparing or filing certain tax returns or taking any action giving rise to tax liability, amending certain Company contracts, violating any legal requirements, terminating certain key employees, increasing compensation or making certain changes in employee benefits.

 

Other Covenants and Agreements

 

The Company covenants to cause the number of directors on the Board to be increased to nine and to procure the resignation of each of the directors not continuing to be members of the Board following consummation of the Private Placement and to, on the closing date of the Private Placement, to cause the remaining members of the Board to appoint the directors appointed by MatlinPatterson to fill the resulting vacancies.

 

The Company and MatlinPatterson agree to cooperate in developing a new strategic plan designed to restore the Company to profitability and to provide a platform for future growth.

 

The Company and MatlinPatterson covenant to refrain from taking any actions which would render any representation or warranty in the Investment Agreement inaccurate. Each party is to reasonably notify the other of any event or matter that would reasonably be expected to cause any of its representations or warranties to be untrue in any material respect or any action, suit or proceeding that shall be instituted or threatened against any such party to restrain, prohibit or otherwise challenge the legality of any of the transactions contemplated under the Investment Agreement.

 

The Company and MatlinPatterson agree to use their reasonable best efforts to cause each of the closing conditions described above to be satisfied as soon as practicable.

 

The Company agrees to notify MatlinPatterson of any Company material adverse effect, any lawsuit, claim or proceeding threatened or commenced against the Company or any subsidiary or any of their officers, directors or employees, any notice or communication with a third person alleging the consent of such third person is required in connection with the transactions contemplated by the Investment Agreement, any material default under certain of the Company’s contracts or any event which would become a material default on or prior to the Private Placement closing date, and any notice from any governmental authority in connection with or relating to any of the transactions contemplated by the Investment Agreement.

 

The Company and MatlinPatterson agree to cooperate fully with each other and assist each other in defending any lawsuits or other legal proceedings brought against either party challenging the Investment Agreement or the Registration Rights Agreement or the consummation of the transactions contemplated by the Investment Agreement.

 

The Company covenants to act diligently and reasonably, and MatlinPatterson agrees to cooperate, in order to obtain all Company contractual consents required in connection with the Private Placement, provided that neither party is to have any obligation to offer or pay any consideration in order to obtain such consents, and provided further that the Company may not make any agreement affecting the Company or any of its subsidiaries or any of their respective businesses as a condition for obtaining such consents without MatlinPatterson’s prior written consent.

 

The Company and MatlinPatterson agree to cooperate and use commercially reasonable efforts to obtain all necessary approvals from any governmental authority, self regulatory organization (including the National Association of Securities Dealers), and stock exchange of which the Company or any subsidiary is a member in connection with the transactions contemplated by the Investment Agreement or to otherwise satisfy the closing conditions described above, provided that neither the Company nor MatlinPatterson is obligated to execute settlements or other similar agreements, sell or otherwise convey any particular assets or businesses of the Company or MatlinPatterson or otherwise take actions that after the Private Placement closing date would limit the freedom of action the Company or its subsidiaries or MatlinPatterson with respect to one or more of its or their businesses, product lines or assets, in order to avoid the entry of or effect the dissolution of any order in any suit or proceeding that would otherwise have the effect of preventing or materially delaying the closing.

The net proceeds received by the Company from the issuance of the Purchased Shares are to be used in a manner consistent with the new strategic plan to be developed by the Company and MatlinPatterson.

 

Representations and Warranties

 

The Investment Agreement contains representations and warranties, many of which are qualified by materiality, made by each party to the other. The Company has made representations and warranties relating to, among other topics, the following:

 

 

In addition, MatlinPatterson has made representations and warranties relating to, among other topics, the following:

 

 

The representations described above and included in the Investment Agreement were made for purposes of the Investment Agreement and are subject to qualifications and limitations agreed by the respective parties in connection with negotiating the terms of the Investment Agreement. In addition, certain representations and warranties were made as of a specific date, may be subject to a contractual standard of materiality different from what might be viewed as material to shareholders, or may have been used for purposes of allocating risk between the respective parties rather than establishing matters as facts. This description of the representations and warranties, and their reproduction in the copy of the Investment Agreement attached to this proxy statement as Appendix A, are included solely to provide shareholders with information regarding the terms of the Investment Agreement. Accordingly, the representations and warranties and other provisions of the Investment Agreement should not be

read alone, but instead should be read together with the information provided elsewhere in this proxy statement and in the documents incorporated by reference into this proxy statement. The majority of the representations and warranties will survive until April 30, 2009.

 

Registration Rights Agreement

 

The following summary of the provisions of the Registration Rights Agreement is qualified in its entirety by the full text of the form of Registration Rights Agreement included in Appendix A and incorporated by reference herein.

 

We agreed to enter into a Registration Rights Agreement with MatlinPatterson at the closing of the Private Placement pursuant to which we would be required upon the demand of MatlinPatterson on up to three occasions to file with the SEC a registration statement for the resale of Purchased Shares. The Registration Rights Agreement obligates us to use our best efforts to have the registration statement declared effective as soon as practicable after it is filed and to maintain its effectiveness for up to 270 days (or three years, if the registration statement is a shelf registration statement).

 

The Registration Rights Agreement also provides MatlinPatterson with piggyback registration rights exercisable if we were to file certain registration statements on our own initiative or upon the request of another shareholder.

 

We would bear all of the costs of any registration other than underwriting discounts and commissions and certain other expenses.

 

The Registration Rights Agreement contains customary indemnification provisions that obligate us to indemnify and hold harmless MatlinPatterson, its controlling persons and their officers, directors, partners and employees and any underwriter for losses caused by (i) any untrue statement of material fact or omission of a material fact in the registration statement or any prospectus included therein, (ii) the violation by us of the Securities Act or the Exchange Act, or any rule or regulation thereunder relating to our acts or omissions in connection with the registration statement.

 

The Registration Rights Agreement also contains other customary terms found in such agreements, including provisions concerning registration procedures.

 

Voting Agreements

 

The following summary of the provisions of the Voting Agreements is qualified in its entirety by the full text of the Voting Agreements included in Appendix A and incorporated by reference herein.

 

MatlinPatterson has entered into certain voting agreements with Messrs. Alan Goldberg, George McNamee and Peter McNierney, individually. Pursuant to the Voting Agreements, such shareholders, who beneficially own in the aggregate 3,120,148 shares of common stock, which represents approximately 19% of the shares of common stock deemed to be outstanding pursuant to Rule 13d-3(d)(1) under the Exchange Act and approximately 19% of the currently outstanding voting power of the Company, have agreed, among other things (i) to vote their shares of common stock (a) in favor of the Private Placement and the Investment Proposals, (ii) not to solicit, encourage or recommend to other shareholders of the Company that they vote their shares of common stock in any contrary manner, that they refrain from voting their shares, that they tender, exchange or otherwise dispose of their shares of common stock pursuant to a “Competing Transaction” (as defined in the Voting Agreements), or that they attempt to exercise any statutory appraisal or other similar rights they may have, (iii) unless otherwise instructed in writing by MatlinPatterson, to vote their shares against any Competing Transaction and (iv) not to, and not to permit any of their employees, attorneys, accountants, investment bankers or other agents or representatives to, initiate, solicit, negotiate, encourage, or provide confidential information in order to facilitate any Competing Transaction. The Voting Agreements expire at the earlier of: (i) the closing of the Private Placement, (ii) the due and proper termination of the Investment Agreement in accordance with its terms, or (iii) the mutual consent of MatlinPatterson and each of Messrs. Goldberg, McNamee and McNierney.

 

The purpose of the Voting Agreements is to increase the likelihood that the Private Placement and the Investment Proposals will be approved by the shareholders of the Company at the annual meeting.

Amendment of the Rights Agreement

 

The following summary of the provisions of the Amendment of the Rights Agreement is qualified in its entirety by the full text of the Amendment of the Rights Agreement included in Appendix A and incorporated by reference herein.

 

As of May 14, 2007, we entered into an amendment to the Rights Amendment with our transfer agent, American Stock Transfer & Trust Company, designed to provide for a fair and equal treatment for all shareholders in the event that an unsolicited attempt is made to acquire us.

 

The rights provided under the Rights Agreement are exercisable only if a person or group (an “Acquiring Person”, as defined in the Rights Agreement) acquires 15% or more of our common stock or announces a tender offer for 15% or more of our common stock. If an Acquiring Person acquires 15% or more of our common stock, all holders of such rights except the Acquiring Person will be entitled to acquire our common stock at a discount. The effect is to discourage acquisitions of more than 15% of our common stock without negotiations with the Board.

 

MatlinPatterson will beneficially own more than 15% of our outstanding common stock following the closing of the Private Placement. We agreed with MatlinPatterson in the Investment Agreement that we would amend the Rights Agreement to provide (i) that entry into the Investment Agreement and the Private Placement would be exempt from the Rights Agreement and (ii) neither MatlinPatterson FA Acquisition LLC (together with its affiliates and associations) or any group in which it is a member will be deemed to be an “Acquiring Person”. We entered into an amendment to Rights Agreement (the “Amendment of the Rights Agreement”) with American Stock Transfer & Trust Company as of May 14, 2007 to effect the required amendments. As a consequence, neither the issuance of the Purchased Shares to MatlinPatterson nor the acquisition by MatlinPatterson or any related person referred to above of any additional shares of our common stock will cause the rights issued under the Rights Agreement to become exercisable. The continued effectiveness of this amendment is a condition to MatlinPatterson’s obligations to purchase the Purchased Shares at the closing of the Private Placement.

 

Under the Rights Agreement, we have the express authority to amend the Rights Agreement without shareholder approval. Accordingly, no shareholder action was required to amend the Rights Agreement.

 

Notice and Waiver Letter Agreement

 

On July 25, 2007, we entered into a Notice and Waiver Letter Agreement with DEPFA (the “DEPFA Waiver”). Pursuant to the DEPFA Waiver, DEPFA agreed to waive the condition to closing the DEPFA Transaction requiring that we present a management proposal at the annual meeting to amend our Certificate of Incorporation to change our corporate name to a name that does not include the words “First Albany” or “FA” or any derivatives thereof (the “Charter Amendment”). Under the terms of the DEPFA Waiver, we agreed to use commercially reasonable efforts to hold a special meeting of shareholders to approve the Charter Amendment (the “Special Meeting”) prior to or (if necessary) following the closing of the DEPFA Transaction, including following the closing of the Private Placement. The DEPFA Waiver also provides that we and DEPFA will enter into a license agreement (the “License Agreement”) to allow us limited continued use of the name “First Albany” in the event the DEPFA Transaction closes before the Charter Amendment is approved at the Special Meeting. If the Charter Amendment is not effected within sixty days following the closing of the DEPFA Transaction, then the Company will pay DEPFA an annual royalty fee of $50,000 under the terms of the License Agreement.

 

We currently intend to hold the Special Meeting following the closing of the Private Placement and expect that, if the Investment Proposals are approved by our shareholders and the Private Placement is completed, MatlinPatterson will be a record holder of our common stock entitled to vote at the Special Meeting. As a condition to the DEPFA Waiver, DEPFA entered into a voting agreement with MatlinPatterson effective as of June 29, 2007 pursuant to which MatlinPatterson agreed to vote its shares of common stock at the Special Meeting in favor of the Charter Amendment. We currently expect that the shareholder proposal regarding the Charter Amendment (the “Charter Amendment Proposal”) to be presented at the Special Meeting will provide that the name of the Company will be changed to Broadpoint Securities Group, Inc. MatlinPatterson has also indicated its intention to vote its shares in favor of a management proposal we intend to present to our shareholders at the Special Meeting to amend the Certificate of Incorporation of the Company to permit our shareholders to act by less than unanimous written consent (the “Consent Proposal” and, together with the Charter Amendment Proposal, the “Special Meeting Proposals”). Following the approval of the Consent Proposal at the Special Meeting, if MatlinPatterson is the holder

of a majority of our outstanding common stock, it would be able to take unilateral action by written consent without a shareholder meeting for those actions requiring majority shareholder approval until such time as its ownership interest decreases to fifty percent (50%) or less. If the Investment Proposals are approved by our shareholders and the Private Placement is completed, and we hold the Special Meeting following the closing of the Private Placement when MatlinPatterson is a record holder of our common stock, as we currently intend, MatlinPatterson will have the power acting alone to determine the outcome of the Special Meeting Proposals and they will be approved at the Special Meeting.

 

The DEPFA Waiver, the License Agreement and the voting agreement between DEPFA and MatlinPatterson are filed as exhibits to the Company’s current report on Form 8-K filed with the SEC on July 31, 2007.

 

Interest of Certain Persons in the Private Placement

 

Certain members of our Board and certain of our executive officers, in their capacities as such, have certain interests in the Private Placement that are in addition to or different from their interests as First Albany shareholders generally. The Board was aware of these actual and potential conflicts of interest and considered them, among other matters, in approving the Investment Agreement and the transactions contemplated thereby and in recommending that shareholders vote in favor of the Investment Proposals. As a result of these interests, these directors and executive officers may be more likely to support and to vote to approve the Investment Proposals than if they did not have these interests. Shareholders should consider whether these interests may have influenced those directors and executive officers to support or recommend approval of the Investment Proposals. These interests are described below. As of the close of business on the record date for the annual meeting, our directors and executive officers and their affiliates were entitled to vote approximately 3,291,863 shares of common stock, representing approximately 21% of the common stock entitled to vote on the Investment Proposals.

 

If the Private Placement is completed, the Company will become obligated to issue restricted stock units in respect of an aggregate of up to 6,750,000 shares of common stock to certain key employees who enter into non-compete and non-solicit agreements with the Company and pursuant to the Company’s employment agreements with Mr. Fensterstock and Mr. McNierney. The restricted stock units would vest over a three-year period following issuance.

 

Change in Control Provisions in Employment Agreements

 

The Company is a party to employment agreements with Peter McNierney, dated June 30, 2006, and with Brian Coad, dated June 30, 2006, as described in the section entitled “McNierney and Coad Agreements” on page 88. These employment agreements provide that the employee will have “Good Reason” to terminate his employment if certain adverse actions are taken by Company with respect to such employee, as described in the sections entitled “McNierney Agreement” or “Coad Agreement”, respectively, on page 88. Actions constituting good reason include the assignment to the employee of any duties materially inconsistent with his position (including status, offices, titles or reporting relationships); however, Mr. McNierney and Mr. Coad will not have Good Reason under this provision if, after a change of control they continue serving, respectively, as the senior most executive officer or senior-most financial officer of the Company and its subsidiaries as conducted immediately prior to the change of control. If Good Reason exists for termination, Mr. McNierney and Mr. Coad, as the case may be, would receive severance payments as described in the sections entitled “McNierney Agreement” or “Coad Agreement”, respectively, on page 88. In the event of change in control of the Company, if compensation payments to Mr. McNierney or Mr. Coad become subject to excise tax under Section 4999 of the Code, the Company will pay such executive a “gross up” payment in an amount equal to the amount of the excise tax imposed on such compensation payments.

 

On May 14, 2007, the Company entered into a new employment agreement with Mr. McNierney (the “New McNierney Employment Agreement”). This agreement, should it become effective, would supersede in most respects the employment agreement between the Company and Mr. McNierney entered into on June 30, 2006 (the “Prior Agreement”). The New McNierney Employment Agreement is made as of, and will become effective only upon, the closing of the Private Placement. On that date, the Prior Agreement will terminate, with limited exceptions. The New McNierney Employment Agreement provides that the Company will employ Mr. McNierney as its President and Chief Operating Officer for a three-year term commencing on the closing of the Private Placement. Mr. McNierney would be entitled to receive an annual base salary of $300,000 and to participate in the

Company’s annual bonus pool. Mr. McNierney would also be entitled to an initial grant of restricted stock units in respect of 600,000 shares of common stock, to be made upon closing of the Private Placement, and to subsequent grants of restricted stock units in respect of up to 500,000 shares of common stock, to be made over a period commencing on June 30, 2008 and ending January 1, 2010. The grant of restricted stock units made upon the closing of the Private Placement will be 10% vested as of such closing, and will vest an additional 30% on each of the first, second and third anniversaries of the closing. Upon termination of employment, whether voluntary or involuntary, Mr. McNierney would be entitled to a cash severance payment equal to $1.8 million less the market value of the common stock underlying any restricted stock units granted to him that have vested as of the date of termination of his employment with the Company or upon the expiration of the agreement. Upon expiration or termination of employment, whether voluntary or involuntary, Mr. McNierney would be entitled to a cash severance payment equal to $1.8 million less the aggregate market value of any granted restricted stock units that have vested as of the termination date. He would also be entitled to other additional payments upon termination of employment, the amount of which depends upon the circumstances of termination. In particular, in the event of his termination from the Company “Without Cause” he would also receive his base salary for twelve (12) months following termination, a prorated bonus for the fiscal year in which the twelve (12) month base salary continuation period ends, continuation health coverage paid by the Company for twelve (12) months following termination, any earned but unpaid bonus and, if he executes a release agreement (which will include an 18-month restrictive covenant), continued vesting in accordance with the schedule provided in the agreement of any restricted stock units granted to him prior to termination. If Mr. McNierney terminates his employment without “Good Reason,” he will be entitled to any unpaid base salary and unpaid benefits and any earned but unpaid bonus. If Mr. McNierney terminates his employment for Good Reason, he will be entitled to any unpaid base salary and unpaid benefits, any earned but unpaid bonus, a pro-rated bonus for the year in which termination occurs and, if he executes a settlement and release agreement (which will include an 18-month restrictive covenant), continued vesting in accordance with the schedule provided in the agreement of any restricted stock units granted to him prior to termination. If Mr. McNierney is terminated by the Company for “Cause,” he will be entitled to any unpaid base salary and unpaid benefits and any earned but unpaid bonus. The New McNierney Employment Agreement also contains confidentiality, non-solicitation and other restrictive covenants. “Good Reason,” for purposes of the New McNierney Employment Agreement, means: (i) a failure by Company to perform fully the terms of the agreement, or any plan or agreement referenced in the agreement, other than an immaterial and inadvertent failure not occurring in bad faith and remedied by Company promptly (but not later than five days) after receiving notice thereof from Mr. McNierney; (ii) any reduction in Mr. McNierney’s base salary or failure to pay any bonuses or other material amounts due under the agreement; (iii) the assignment to Mr. McNierney of any duties inconsistent in any material respect with his position or with his authority, duties or responsibilities as President and Chief Operating Officer, or any other action by Company which results in a diminution in such position, authority, duties or responsibilities, or reporting relationship, excluding for this purpose any immaterial and inadvertent action not taken in bad faith and remedied by Company promptly (but not later than ten (10) days after receiving notice from Executive); (iv) any change in the place of Mr. McNierney’s principal place of employment to a location outside New York City; or (v) any failure by Company to obtain an assumption and agreement to perform the agreement by a successor. “Cause,” for purposes of the New McNierney Employment Agreement, means: (i) Mr. McNierney’s conviction of, or plea of guilty or “no contest” to, any felony; (ii) Mr. McNierney’s conviction of, or plea of guilty or “no contest” to, a violation of criminal law involving the Company and its business; (iii) Mr. McNierney’s commission of an act of fraud or theft, or material dishonesty in connection with his performance of duties to Company; or (iv) Mr. McNierney’s willful refusal or gross neglect to perform the duties reasonably assigned to him and consistent with his position with Company or otherwise to comply with the material terms of the agreement, which refusal or gross neglect continues for more than fifteen days after Mr. McNierney receives written notice thereof from the Company providing reasonable detail of the asserted refusal or gross neglect (and which is not due to a physical or mental impairment).

 

The Company entered into a consulting agreement with Lee Fensterstock which will commence on July 1, 2007 and will end on the earlier of (i) the occurrence of the closing contemplated by the Investment Agreement; (ii) termination of the Investment Agreement or (iii) September 30, 2007, during which Mr. Fensterstock will serve as a financial consultant to the Company. Mr. Fensterstock shall have an office at the New York City headquarters of the Company that is satisfactory to Mr. Fensterstock and Mr. Fensterstock shall spend substantially all of his time

providing the Financial Consulting Services. During the term of the agreement, Mr. Fensterstock will earn a consulting fee of $30,000 for each calendar month.

 

The Company also expects to enter into an employment agreement with Mr. Fensterstock (the “Fensterstock Employment Agreement”) to be effective at the closing of the Private Placement. The Fensterstock Employment Agreement provides that the Company shall employ Mr. Fensterstock as its Chief Executive Officer and Chairman of the Board for a three-year term commencing on the closing date of the Private Placement, automatically extended for one additional year upon the third anniversary of the effective date without any affirmative action, unless either party to the agreement provides at least six (6) months’ advance written notice to the other party that the employment period will not be extended. Upon the effective date of the agreement, Mr. Fensterstock will be entitled to receive an annual base salary of $350,000 and to participate in the Company’s annual bonus pool (the bonus for the fiscal year that begins prior to the first anniversary of the effective date shall be pro-rated to correspond to the portion of such fiscal year that follows the first anniversary of the effective date). Mr. Fensterstock will also be entitled to an initial grant of restricted stock units in respect of 1,000,000 shares of common stock, to be made upon closing of the Private Placement, and to subsequent grants of restricted stock units in respect of up to 1,000,000 shares of common stock, to be made over a period commencing on June 30, 2008 and ending January 1, 2010. The grant of restricted stock units made upon the closing of the Private Placement will be 10% vested as of such closing, and will vest an additional 30% on each of the first, second and third anniversaries of the closing.

 

The Fensterstock Employment Agreement provides that upon termination of employment, Mr. Fensterstock will be entitled to certain payments or benefits, the amount of which depends upon the circumstances of termination. In particular, in the event of his termination from the Company “Without Cause” he will also receive his base salary for twelve months following termination; a prorated bonus for the fiscal year in which the twelve-month base salary continuation period ends; continuation health coverage paid by the Company for twelve months following termination; any earned but unpaid bonus; and, if he executes a settlement and release agreement (which will include an 18-month restrictive covenant), continued vesting in accordance with the schedule provided in the agreement of any restricted stock units granted to him prior to termination. If Mr. Fensterstock terminates employment without “Good Reason” he will be entitled to any unpaid base salary and unpaid benefits and his earned but unpaid bonus. If Mr. Fensterstock terminates employment for “Good Reason,” but not because of a “Change of Control,” he will be entitled to any unpaid base salary and unpaid benefits; any earned but unpaid bonus; a pro-rated bonus for the year in which termination occurs; and, if he executes a settlement and release agreement (which will include an 18-month restrictive covenant), continued vesting in accordance with the schedule provided in the agreement of any restricted stock units granted to him prior to termination. If Mr. Fensterstock is terminated by the Company for “Cause,” he will be entitled to any unpaid base salary and unpaid benefits and his earned but unpaid bonus. If Mr. Fensterstock terminates employment with the Company for “Good Reason,” because a “Change of Control” occurs and Mr. Fensterstock does not continue thereafter as the most senior executive officer of the business of the Company as conducted immediately prior to the Change of Control, Mr. Fensterstock shall be entitled to any unpaid base salary and unpaid benefits, any earned but unpaid bonus, a pro-rated bonus for the year in which termination occurs. In addition, all restricted stock units granted to Mr. Fensterstock prior to the termination of his employment shall immediately vest upon termination; and restricted stock units specified in the Fensterstock Employment Agreement that have not yet been granted to Mr. Fensterstock, including without limitation all shares the grant of which is otherwise contingent on achieving certain performance targets, shall be granted to Mr. Fensterstock on the date of his termination and shall immediately vest upon such date.

 

The Fensterstock Employment Agreement also contains confidentiality, non-solicitation and other restrictive covenants. “Change of Control” means a transaction or event as a result of which MatlinPatterson Global Opportunities Partners II, L.P. (and/or one or more of its affiliates) shall no longer have the right to elect all the members of the Board. “Good Reason,” for purposes of the Fensterstock Employment Agreement, means: (i) a failure by Company to perform fully the terms of the Fensterstock Employment Agreement, or any plan or agreement referenced in such agreement, other than an immaterial and inadvertent failure not occurring in bad faith and remedied by Company promptly (but not later than five (5) days) after receiving notice thereof from Mr. Fensterstock ; (ii) any reduction in Mr. Fensterstock ’s base salary or failure to pay any bonuses or other material amounts due under the agreement; (iii) the assignment to Mr. Fensterstock of any duties inconsistent in any material respect with his position or with his authority, duties or responsibilities as Chief Executive Officer and Chairman of the Board, or any other action by Company which results in a diminution in such position, authority,

duties or responsibilities, or reporting relationship, excluding for this purpose any immaterial and inadvertent action not taken in bad faith and remedied by Company promptly (but not later than ten (10) days after receiving notice from Executive); (iv) any change in the place of Mr. Fensterstock ’s principal place of employment to a location outside New York City; (v) any failure by Company to obtain an assumption and agreement to perform the agreement by a successor; or (vi) a “Change of Control” occurs and Mr. Fensterstock does not continue thereafter as the most senior executive officer of the business of the Company as conducted immediately prior to the Change of Control. “Cause,” for purposes of the Fensterstock Employment Agreement, means: (i) Mr. Fensterstock ’s conviction of, or plea of guilty or “no contest” to, any felony; (ii) Mr. Fensterstock ’s conviction of, or plea of guilty or “no contest” to, a violation of criminal law involving the Company and its business; (iii) Mr. Fensterstock ’s commission of an act of fraud or theft, or material dishonesty in connection with his performance of duties to Company; or (iv) Mr. Fensterstock ’s willful refusal or gross neglect to perform the duties reasonably assigned to him and consistent with his position with Company or otherwise to comply with the material terms of the agreement, which refusal or gross neglect continues for more than fifteen (15) days after Mr. Fensterstock receives written notice thereof from the Company providing reasonable detail of the asserted refusal or gross neglect (and which is not due to a physical or mental impairment).

 

In connection with the Private Placement, Mr. Coad, the Company’s Chief Financial Officer, executed a Non-Compete and Non-Solicit Agreement in favor of the Company. This agreement will take effect only if the Private Placement is consummated. In consideration of this agreement, Mr. Coad will be awarded restricted stock units in respect of 200,000 shares of common stock. This grant is also contingent on closing of the Private Placement. In connection with the foregoing, the Company agreed to pay Mr. Coad a lump-sum, cash severance payment under certain circumstances. Specifically, in the event that as a result of action by the Company Mr. Coad no longer serves as the Company’s Chief Financial Officer, or is assigned duties that are materially inconsistent with the position of Chief Financial Officer or that constitute a diminution of Mr. Coad’s authority, duties or responsibilities as Chief Financial Officer, Mr. Coad may at his election resign from his employment with the Company and receive upon termination a severance payment. The amount of the severance payment would be $525,000 less the market value of the common stock underlying any previous restricted stock units granted to Mr. Coad that have vested as of the date of termination of his employment with the Company.

 

Continued Service on the Board of Directors

 

Mr. McNamee and Mr. McNierney are expected to continue as members of the Board immediately following the Private Placement. The Board shall be increased from seven to nine members following the Private Placement and the four new directors shall be Mr. Fensterstock and three representatives of MatlinPatterson and its affiliates. In addition, it is currently expected that Nicholas A. Gravante, Jr., Dale Kutnick and Carl Carlucci will continue as members of the Board following the closing of the Private Placement until asked to resign by MatlinPatterson in accordance with the terms of the Investment Agreement. At such time the remaining directors will fill the resulting vacancies with directors designated by MatlinPatterson.

 

Vesting of Equity Incentive Plans

 

Under both the 1999 Long Term Incentive Plan and 2001 Long Term Incentive Plan (referred to collectively herein as the “Long Term Incentive Plans”), if a Change of Control occurs (i) all stock options then unexercised and outstanding will become fully vested and exercisable and (ii) all restrictions, terms and conditions applicable to restricted shares then outstanding will be deemed lapsed and satisfied, each as of the date of the Change of Control. The definition of “Change in Control” as in these plans is described in the section entitled “The 1999 Long Term Incentive Plan and the 2001 Long Term Incentive Plan” on page 89.

 

Under the 2003 Non-Employee Directors Stock Plan, if a Change of Control occurs (i) all stock options then unexercised and outstanding will become fully vested and exercisable and (ii) all restrictions, terms and conditions applicable to restricted shares then outstanding will be deemed lapsed and satisfied, each as of the date of the Change of Control. The definition of “Change in Control” in this plan is defined in the section entitled “Director Compensation for Fiscal Year 2006” on page 75.

 

As of the record date, there were approximately 3,332 shares underlying outstanding unvested options granted to directors and executive officers under the Long Term Incentive Plans. As of the record date, there were approximately 138,839 restricted shares outstanding under the Long Term Incentive Plans to directors and

executive officers. The following table identifies, for each director and executive officer, the aggregate number of common shares subject to outstanding unvested options that will become vested in connection with the completion of the Private Placement and the weighted average exercise price and value of such unvested options. The information assumes that all options remain outstanding on the closing date of the Private Placement. The following table also identifies, for each of the First Albany directors and executive officers, the aggregate number of restricted shares whose restrictions will lapse in connection with the completion of the Private Placement. The information assumes that all restricted shares remain outstanding on the closing date of the Private Placement.

 

 

 

 

 

Vesting of Deferred Compensation Plans

 

Under the 2005 Deferred Compensation Plan for Key Employees, the 2005 Deferred Compensation Plan for Professional and Other Highly Compensated Employees, the Deferred Compensation Plan for Key Employees and the Deferred Compensation Plans for Professional and Other Highly Compensated Employees (collectively, the “2005 and Predecessor Plans”), the Administrative Committee may provide for accelerated vesting of amounts credited to any participant under such plans in the event the participant is terminated without cause (as defined in the plans) within two years following a Change of Control. The definition of “Change in Control” for these plans is defined in the section entitled “The 2005 Plans and the Predecessor Plans” on page 90. The following table also

identifies, for each of the First Albany directors and executive officers, the aggregate value of amounts that will vest in connection with the completion of the Private Placement.

 

 

 

 

 

In the event the DEPFA Transaction does not close prior to the Private Placement, the interests of the directors and officers in the Private Placement should not be affected. Because the DEPFA transaction is not anticipated to be a change of control for the Company, there will be no affect on the change of control provisions relating to the Private Placement.

 

No Appraisal Rights

 

The shareholders are not entitled to appraisal rights with respect to the Private Placement, and we will not independently provide the shareholders with any such rights.

 

Impact of the Private Placement on Existing Shareholders — Advantages and Disadvantages

 

Before voting, each shareholder also should consider the following advantages and disadvantages of the Private Placement:

 

Advantages

 

The Private Placement will provide significant additional funding, which is important for us to continue operations in accordance with our current plan and to maintain our listing on the NASDAQ Global Market. Each shareholder should consider that the continued operation of our business is costly and capital intensive and that our current capital resources are limited.

 

The Company, with a current market capitalization of $26.6 million as of June 25, 2007, expects to reduce its cash compensation expenses by reducing the amount of cash bonuses compared to past practices in light of the issuance of the restricted stock units to key employees. The Company also expects savings from reductions in back office personnel and related costs.

 

If the Private Placement is not completed, we may be forced to preserve our cash position through a combination of additional cost reduction measures and sales of assets at values that may be significantly below their potential worth or augment our cash through additional dilutive financings. Should we seek additional funds to replace the funds that we would have received from the Private Placement, there can be no assurance that we could obtain funds on terms that are as favorable to us as the terms of the Private Placement or at all. Any of the alternatives to the Private Placement described above may potentially diminish the value of our common stock and

thus your investment in us. Moreover, the current market process has led to no other investors and/or acquirers after the initial due diligence process. Please see a more detailed description of the current market process in the sections entitled “Background of the Private Placement” on page 30 and “Opinion of Our Independent Financial Advisor” on page 37.

 

The Private Placement will strengthen our financial condition and reduce our financial risk, which we believe will reassure our employees of our continued viability and long-term prospects as a place to work, improve our ability to raise additional funding through debt or equity financings on favorable terms and make our common stock more attractive to prospective investors for purchase on the open market and for use as an acquisition currency.

 

We believe the 2007 Plan will further and promote the interests of the Company and its shareholders by enabling the Company to attract, retain and motivate employees and officers or those who will become employees or officers of the Company, to link compensation to measures of the Company’s performance in order to provide additional incentives and to align the interests of those individuals and the Company’s shareholders.

 

We believe the Private Placement will strengthen our investor base with the addition of a new experienced investor who will have a significant stake in our long-term success and will be motivated to provide the support and assistance to protect and enhance its investment.

 

The Private Placement will assist us in our efforts to maintain our listing on the NASDAQ Global Market by augmenting our shareholders’ equity.

 

The securities issued in the Private Placement will be shares of common stock rather than debt or preferred stock, which will place the new investors at the same rank as the existing shareholders and allow us to maintain a less complicated capital structure.

 

Our prior market check process only led to verbal indications of interest for transactions that we believe are less favorable to shareholders than the Private Placement. We received the opinion of Freeman that the consideration to be received by us in the Private Placement is fair to us from a financial point of view. Please see the market survey discussion in the section entitled “Opinion of Our Independent Financial Advisor” on page 37 for further information.

 

In contrast to a sale of the Company, the Private Placement will permit the existing shareholders to continue to own shares of our common stock thereby giving them the opportunity to share in any increase in value that we are able to create following the infusion of funds.

 

Disadvantages

 

The Private Placement will have a highly dilutive effect on our current shareholders and option holders. The aggregate percentage ownership of our current shareholders will decline significantly as a result of the Private Placement. The number of shares issued pursuant to the Private Placement and the issuance of restricted stock units in respect of up to 6,750,000 shares of common stock to key employees who have entered into non-compete and non-solicit agreements or employment agreements with the Company will increase substantially the number of shares of common stock currently outstanding. This means that our current shareholders will own a much smaller interest in our Company as a result of the Private Placement.

 

For purposes of example only, a shareholder who owned approximately 1.0% of our outstanding stock as of May 8, 2007, would own approximately 0.3% of the shares outstanding immediately after the Private Placement assuming the issuance of 33,333,333 shares of common stock to MatlinPatterson.

 

Furthermore, MatlinPatterson is currently expected to control between 70% and 75% (between 60% and 65% on a fully diluted basis) of the voting power of our capital stock immediately upon the closing of the Private Placement, based on the number of shares of common stock outstanding on June 25, 2007, and after giving effect to an increase in the number of Purchased Shares that may result from the adjustment provisions of the Investment Agreement and which may further increase the number of Purchased Shares. Accordingly, MatlinPatterson will exercise a controlling influence over our business and affairs and will have the power to determine matters submitted to a vote of our shareholders, such as the election of directors and approval of significant corporate transactions, including the approval of the Special Meeting Proposals. MatlinPatterson could cause some corporate actions to be taken even if the interests of MatlinPatterson conflict with the interests of our other shareholders. This concentration of voting power could have the effect of deterring or preventing a change in control of the Company

that might otherwise be beneficial to our shareholders. The interests of MatlinPatterson as a controlling shareholder may conflict with your interests.

 

Also, completion of the Private Placement is conditioned upon, among other things, the receipt of all material consents and approvals of certain third parties, including material contractual consents from landlords, customers and vendors and certain approvals of governmental authorities and self-regulatory organizations required for consummation of the proposed transaction. The need to obtain these consents and approvals could delay or prevent the completion of the Private Placement. It cannot be assumed that these consents and approvals will be obtained, or that their terms, conditions and timing will not be detrimental to the Company.

 

All Purchased Shares will be entitled to certain registration rights. Upon any effective registration of such shares pursuant to the Registration Rights Agreement, such shares will be freely transferable without restriction under the Securities Act (but to the extent that MatlinPatterson remains an affiliate, it will be subject to the volume limitations of Rule 144 of the Securities Act and may be subject to the short-swing profit rules and other restriction under the Exchange Act). Such free transferability could materially and adversely affect the market price of our common stock if a sufficient number of such shares are sold into the market. Even if the Purchased Shares are not so registered, MatlinPatterson may be eligible to sell some of the common stock pursuant to SEC Rule 144 commencing one year after the closing of the Private Placement.

 

Although our common stock will continue to be quoted on a securities exchange, we may differ in important respects from most publicly owned corporations in that our activities could be controlled by a majority shareholder.

 

In addition, the Private Placement will limit the Company’s use of its net operating loss carryforwards. As of December 31, 2006, the Company had approximately $24.4 million of net operating loss carryforwards for U.S. federal income tax purposes, which expire between 2023 and 2025. In preparing its financial statements, the Company must assess the likelihood that its net operating loss carryforwards will be recovered from future taxable income and, to the extent that the Company believes that recovery is not likely, it must establish a valuation allowance. The Company has recorded a valuation allowance as a result of uncertainties related to the realization of its net operating loss carryforwards, at December 31, 2006. The valuation allowance was established as a result of weighing all positive and negative evidence, including the Company’s history of cumulative losses over the past three years and the difficulty of forecasting future taxable income. The valuation allowance reflects the conclusion of management that it is more likely than not that the benefit of the net operating loss carryforwards will not be realized.

 

Under Section 382 of the Internal Revenue Code, in the event of an ownership change, subject to certain exceptions, the amount of pre-ownership-change net operating loss carryforwards that the company may use to offset future taxable income in any post-ownership-change taxable year is limited to an amount that will be determined, in general, by multiplying the fair market value of the company’s outstanding capital stock immediately prior to the ownership change by the “long-term tax-exempt rate” which is published monthly by the Internal Revenue Service (the “Annual Section 382 Limitation”). Any unused annual limitation can be carried forward to subsequent years.

 

As a result of the Private Placement, the Company will likely incur such an ownership change which, subject to certain exceptions, will limit the Company’s ability to utilize its net operating loss carryforwards to the extent that the Company has future net operating profits. Management believes that these limitations, if required, would restrict the Company’s ability to offset any future U.S. taxable income against its net operating loss carryforwards over the U.S. statutory carryforward periods to the Annual Section 382 Limitation before the net effect of certain future recognized “built-in” gains or losses, if any, existing as of the date of the ownership change

 

Required Vote

 

Required Approval. The affirmative vote of a majority of the votes cast at the annual meeting and entitled to vote thereat is required for the approval of the Private Placement. The Board has unanimously voted in favor of the proposed adoption.

 

The Board unanimously recommends that the Company’s shareholders vote “For” the Private Placement. If the shareholders do not approve both Proposal 2 and Proposal 3, we will be unable to complete the Private Placement and will not receive any cash from the proposed sale of common stock.

 

PROPOSAL NO. 3

 

AMEND THE CERTIFICATE OF INCORPORATION TO INCREASE THE COMPANY’S

AUTHORIZED COMMON STOCK FROM 50,000,000 SHARES TO 100,000,000 SHARES

 

The Board has authorized, approved and recommended that the shareholders of the Company approve an amendment to our Certificate of Incorporation providing for an increase of authorized shares of common stock from 50,000,000 shares to 100,000,000 shares.

 

The Board believes that the Private Placement is in the Company’s best interests and the best interests of our shareholders. Currently, we do not have sufficient authorized shares to complete the Private Placement described in Proposal 2. To complete the Private Placement and issue the Purchased Shares, we need to substantially increase the number of shares of our common stock authorized for issuance under our Certificate of Incorporation. It is a condition to the completion of the Private Placement that our shareholders approve Proposal 3. Our current Certificate of Incorporation authorizes 50,000,000 shares of common stock for issuance. As of June 25, 2007, there were approximately 16,040,000 shares of our common stock outstanding and an additional approximately 5,233,000 shares reserved for issuance upon exercise of outstanding options and warrants and reserved for future issuance under our equity compensation plans. As a result, as of June 25, 2007, there were only approximately 28,727,000 authorized shares of our common stock available for issuance. We have proposed increasing the authorized number of shares of common stock to 100,000,000 shares to permit completion of the Private Placement, for the Company to reserve 6,750,000 shares of common stock for issuance under the 2007 Plan and to provide additional authorized shares of common stock available to issue in the future.

 

Furthermore, the additional shares will be available for issuance from time to time by us at the discretion of the Board, subject to shareholder approval as may be required under New York law or, if then applicable, exchange or NASDAQ regulations. By increasing the authorized common stock at this time, the Board will then be able to respond to potential business opportunities and to pursue important objectives designed to enhance shareholder value such as raising capital, including, without limitation, shares of common stock, warrants, convertible notes and shares underlying these warrants and notes issued in conjunction with the Investment Agreement, as more fully described below. In addition, in some situations prompt action may be required which would not permit seeking shareholder approval to authorize additional shares for a specific transaction on a timely basis. Additional authorized shares will also provide us with greater flexibility to use our capital stock for various other business purposes including providing equity incentives to employees, officers and directors and establishing strategic relationships with other companies. Other than the arrangements and agreements to issue common stock discussed below, we have no specific arrangements or plans that would involve the issuance of the proposed additional authorized shares.

 

Our Board believes that it is important to have the flexibility to act promptly in the best interests of its shareholders. The increase in the number of authorized shares of common stock could have an anti-takeover effect, although this is not the intent of the Board in proposing the amendment. For instance, our authorized but unissued common stock could be issued in one or more transactions that would make more difficult or costly, and less likely, a takeover of the Company.

 

The proposed amendment to the Certificate of Incorporation would be reflected in Article FOURTH of such Certificate, as detailed in the Certificate of Amendment attached hereto as Appendix C. As set forth in the Certificate of Incorporation, no holder of common stock shall have any preemptive rights.

 

The proposed amendment will become effective, following shareholder approval and closing of the Private Placement, upon the filing of a Certificate of Amendment to the Company’s Certificate of Incorporation by the New York Secretary of State.

 

The completion of the sale of Purchased Shares is subject to various conditions. In the event that the sale is not consummated, we will not amend our Certificate of Incorporation as proposed above.

 

Required Approval. The affirmative vote of the holders of a majority of the outstanding common stock of the Company is required for the approval of the amendment to the Certificate of Incorporation to increase the

authorized common stock from 50,000,000 shares to 100,000,000 shares. The Board has unanimously voted in favor of the proposed amendment.

 

The Board recommends that the Company’s shareholders vote “For” the amendment of the Company’s Certificate of Incorporation to increase the Company’s authorized common stock from 50,000,000 shares to 100,000,000 shares. If the shareholders do not approve both Proposal 2 and Proposal 3, we will be unable to complete the Private Placement and will not receive any cash from the proposed sale of common stock.

 

PROPOSAL NO. 4

 

AMEND THE CERTIFICATE OF INCORPORATION TO INCREASE THE COMPANY’S

AUTHORIZED PREFERRED STOCK FROM 500,000 SHARES TO 1,500,000 SHARES

 

The Board has authorized, approved and recommended that the shareholders of the Company approve an amendment to our Certificate of Incorporation providing for an increase of authorized shares of preferred stock from 500,000 shares to 1,500,000 shares.

 

The Board believes that the Private Placement is in the Company’s best interests and the best interests of our shareholders. Currently, we do not have sufficient authorized shares of preferred stock to support the rights under the Rights Agreement upon completion of the Private Placement described in Proposal 2. On March 30, 1998, we entered into the Rights Agreement with our transfer agent, American Stock Transfer & Trust Company, designed to provide for fair and equal treatment for all shareholders in the event that an unsolicited attempt is made to acquire our Company. The effect of the Rights Agreement is to discourage acquisitions of more than 15% of our common stock without negotiations with the Board. The Rights Agreement gives each holder of common stock the right to purchase 1/100^th share of junior preferred stock upon certain triggering events. With the approval of Proposal 3, 100,000,000 shares of common stock will be authorized, and 1,000,000 shares of preferred stock will be needed to support these rights. Our current Certificate of Incorporation authorizes 500,000 shares of preferred stock for issuance. The additional shares may be issued for other purposes including raising capital, providing equity incentives to employees, officers, directors or consultants, establishing strategic relationships with other companies, expanding our business or product lines through the acquisition of other businesses or products, and other corporate purposes.

 

Approval of the amendment to our Certificate of Incorporation to increase the number of authorized shares of our preferred stock is a condition to the closing of the Private Placement and if the shareholders do not approve Proposal 4, we will not be able to complete the Private Placement and we will not receive any proceeds from the sale of the Purchased Shares, unless MatlinPatterson waives the condition. In such event, we also will not amend our Certificate of Incorporation as described in Proposal 3 and we will not adopt the 2007 Plan as described in Proposal 6, even if one or more of such other Proposals is approved by the shareholders. However, if Proposal 5 is approved by the shareholders, our Certificate of Incorporation will still be amended as provided in that Proposal.

 

The additional shares will be available for issuance from time to time by us at the discretion of the Board, subject to shareholder approval as may be required under New York law or, if then applicable, exchange or NASDAQ regulations. By increasing the authorized common stock at this time, the Board will then be able to respond to potential business opportunities and to pursue important objectives designed to enhance shareholder value such as raising capital. In addition, in some situations prompt action may be required which would not permit seeking shareholder approval to authorize additional shares for a specific transaction on a timely basis. Additional authorized preferred shares will also provide us with greater flexibility to use our capital stock for various other business purposes.

 

The additional preferred stock consisting of junior preferred stock to support the rights under the Rights Agreement upon completion of the Private Placement will include the following rights:

 

 

 

The additional preferred stock not designated as junior preferred stock will have the rights and preferences as determined by the Board at its discretion pursuant to the Certificate of Incorporation. At the present time, we have no specific arrangements or plans that would involve the issuance of the proposed additional authorized shares. Therefore, the rights and preferences of the additional preferred stock cannot be stated or estimated at this time.

 

This proposal would permit the Board, in its discretion, subject to shareholder approval as may be required under New York law or, if then applicable, exchange or NASDAQ regulations, to establish any series of preferred stock. Accordingly, the terms of the preferred shares, including dividend or interest rates, conversion prices, voting rights, redemption rights, maturity dates and similar matters will be determined by the Board, subject to shareholder approval as may be required under New York law or, if then applicable, exchange or NASDAQ regulations.

 

Our Board believes that it is important to have the flexibility to act promptly in the best interests of its shareholders. The increase in the number of authorized shares of preferred stock could have an anti-takeover effect, although this is not the intent of the Board in proposing the amendment. For instance, our authorized but unissued preferred stock could be issued in one or more transactions that would make more difficult or costly, and less likely, a takeover of the Company.

 

The proposed amendment to the Certificate of Incorporation would be reflected in Article FOURTH of such Certificate, as detailed in the Certificate of Amendment attached hereto as Appendix C.

 

The proposed amendment will become effective, following shareholder approval and closing of the Private Placement, upon the filing of a Certificate of Amendment to the Company’s Certificate of Incorporation by the New York Secretary of State.

 

The completion of the sale of Purchased Shares is subject to various conditions. In the event that the sale is not consummated, we will not amend our Certificate of Incorporation as proposed above.

 

Required Approval. The affirmative vote of the holders of a majority of the outstanding common stock of the Company is required for the approval of the amendment to the Certificate of Incorporation to increase the Company’s authorized preferred stock from 500,000 shares to 1,500,000 shares. The Board has unanimously voted in favor of the proposed amendment.

 

The Board recommends that the Company’s shareholders vote “For” the amendment of the Company’s Certificate of Incorporation to increase the Company’s authorized preferred stock from 500,000 shares to 1,500,000 shares. Proposal 4 is a condition to the closing of the Private Placement. If the shareholders do not approve Proposal 4, we will be unable to complete the Private Placement and will not receive any cash from the proposed sale of common stock, unless MatlinPatterson waives the condition.

 

PROPOSAL NO. 5

 

AMEND CERTIFICATE OF INCORPORATION TO LIMIT THE LIABILITY OF THE DIRECTORS OF THE COMPANY TO THE EXTENT PERMITTED UNDER SECTION 402(b) OF THE NEW YORK BUSINESS CORPORATION LAW

 

The Board has unanimously approved and recommends to the shareholders that they consider and approve a proposal to amend the Company’s Certificate of Incorporation to limit the liability of directors to the extent permitted by Section 402(b) of the NYBCL. If the proposed amendment is approved, the Certificate of Incorporation would be amended by adding an Article NINTH reading in its entirety as follows:

 

“NINTH, To the fullest extent now or hereafter permitted by law, no director of the corporation shall be personally liable to the corporation or its shareholders for damages for any breach of duty in such capacity.”

 

Approval of the amendment to our Certificate of Incorporation to limit the liability of the directors is a condition to the closing of the Private Placement and if the shareholders do not approve Proposal 5, we will not be able to complete the Private Placement and we will not receive any proceeds from the sale of the Purchased Shares, unless MatlinPatterson waives the condition. In such event, we also will not amend our Certificate of Incorporation as described in Proposal 3 and Proposal 4 and we will not adopt the 2007 Plan as described in Proposal 6, even if one or more of such other Proposals is approved by the shareholders. However, if Proposal 5 is approved by the shareholders, our Certificate of Incorporation will still be amended as provided in this Proposal.

 

This proposal would add to the Company’s Certificate of Incorporation a provision specifically authorized by an amendment to Section 402(b) of the NYBCL, which became effective in 1987. As amended, Section 402(b) of the NYBCL authorizes a corporation, in its original certificate of incorporation or by an amendment, to eliminate or limit the personal liability of members of its Board for damages for breach of a director’s duty of care. If the proposed amendment is approved, a shareholder will be able to prosecute an action against a director for damages only if the shareholder can show a breach of the duty of loyalty, a failure to act in good faith, intentional misconduct, a knowing violation of law, a personal gain of a financial profit or other advantage to which the director was not legally entitled, an illegal dividend, distribution, loan or stock repurchase or distribution of assets after dissolution without providing for satisfaction of corporate liabilities, and not “negligence” or “gross negligence” in satisfying his duty of care. One effect of the proposed amendment would be to deprive shareholders of a cause of action against the directors for breach of the duty of care, including grossly negligent business decisions, in the context of an attempt to acquire control of the Company. The amendment will not limit or eliminate the right of the Company or any shareholder to seek an injunction or any other non-monetary relief in the event of a breach of a director’s duty of care, it will not limit the right to obtain monetary damages where the acts of “bad faith” listed above are shown, nor will it affect a director’s liability under, or duty to comply with, the federal securities laws. In some situations, however, injunctions or other non-monetary relief may not be useful. The amendment applies only to claims against a director arising out of his or her role as a director and not, if the director is also an officer, the director’s role as an officer or in any other capacity or to his or her responsibilities under any other law, such as the federal securities laws.

 

The amendment does not eliminate the fiduciary duty of care of the Company’s directors. The amendment does not limit in any way the right of the Company or any shareholder to seek equitable relief, such as an injunction or recision, in the event of a breach of a director’s duty of care. The effect of the amendment is to eliminate personal liability of directors for monetary damages for breaches of their duty of care. However, although equitable remedies may be available, under certain circumstances they may not be sufficient as a practical matter. The amendment applies only to personal liability of directors and has no effect on the potential liability of persons for their actions as officers (whether or not they also are directors) of the Company.

 

The Board believes that in many instances capable persons may be unwilling to serve as directors of a corporation without the protection of adequate directors’ liability insurance. Although no director of the Company has threatened to resign, and to the best of the Company’s knowledge, no qualified person has refused to serve on the Company’s Board because of the threat of personal liability, the Board believes that limiting the directors’ personal liability as permitted by the New York statute will enhance the ability of the Company to attract and retain highly qualified directors in the future. In addition, the threat of personal liability may have an adverse effect on the

decision-making process of directors. The proposed amendment may also encourage directors to make entrepreneurial decisions which they believe to be in the best interest of the Company with less threat of personal liability for damages for breach of their duty of care.

 

Over the long term, the adoption of the proposed amendment is expected to facilitate continuation of the Company’s directors’ liability insurance coverage and make such coverage less costly, although there can be no assurance that the amendment will have these effects. The proposed amendment to the Company’s Certificate of Incorporation is not being proposed in response to any specific resignation, threat of resignation, or refusal to serve by any director or potential director of the Company, and the Company is not aware of any threatened resignation if the proposed amendment is not adopted. New York law dealing with limitations on director liability does not permit limiting liability of a director for any act or omission occurring prior to the effective date of the proposed amendment, and thus the proposed amendment will have a prospective effect only. The Company has not received notice of any pending or threatened claim, suit or proceeding to which the proposed amendment would apply.

 

Although the proposed amendment to the Certificate of Incorporation would eliminate one source of recovery available to the Company and its shareholders for a director’s breach of fiduciary duty of care, and although it is acknowledged that the members of the Board have a personal interest in the approval of the proposed amendment by the shareholders, the Board believes that the proposed amendment is in the best interests of the Company and its shareholders. The Board believes that the proposed amendment will help the Company in its ability to attract and retain qualified directors and in the ability of its directors to make the best business decisions of which they are capable.

 

The proposed amendment to the Certificate of Incorporation would be reflected in Article NINTH of such Certificate, as detailed in the Certificate of Amendment attached hereto as Appendix C.

 

The proposed amendment will become effective, after shareholder approval, upon the filing of a Certificate of Amendment to the Company’s Certificate of Incorporation by the New York Secretary of State.

 

If Proposal 5 is approved, we will amend our Certificate of Incorporation as proposed above regardless of whether Proposal 2, Proposal 3, Proposal 4 and Proposal 6 are approved.

 

Required Approval. The affirmative vote of the holders of a majority of the outstanding common stock of the Company is required for the approval of the amendment to the Certificate of Incorporation to limit the liability of directors. The Board has unanimously voted in favor of the proposed amendment.

 

The Board recommends that the Company’s shareholders vote “FOR” the amendment of the Company’s Certificate of Incorporation to limit the liability of the directors of the Company to the extent permitted under Section 402(b) of the NYBCL. Proposal 5 is a condition to the closing of the Private Placement. If the shareholders do not approve Proposal 5, we will be unable to complete the Private Placement and will not receive any cash from the proposed sale of common stock, unless MatlinPatterson waives the condition. However, if Proposal 5 is approved by the shareholders, our Certificate of Incorporation will be amended as provided in this Proposal regardless of whether Proposal 2, Proposal 3, Proposal 4 and Proposal 6 are approved.

 

PROPOSAL NO. 6

 

ADOPT THE FIRST ALBANY COMPANIES INC.

2007 INCENTIVE COMPENSATION PLAN

 

On June 11, 2007, the Board approved the 2007 Plan, subject to shareholder approval.

 

Set forth below for the convenience of the Company’s shareholders is a summary description of the 2007 Plan. This description is qualified in its entirety by reference to the actual 2007 Plan, copies of which are attached to the electronic copy of this proxy statement filed with the Securities and Exchange Commission and may be accessed from the Commission’s home page (www.sec.gov). In addition, copies of the 2007 Plan may be obtained upon written request to: Jessica Stanley, Executive Associate, First Albany Companies Inc., 677 Broadway, Albany, NY 12207-2990.

 

The 2007 Plan is intended to qualify certain compensation awarded under the 2007 Plan as “performance-based” compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), to the extent deemed appropriate by the Compensation Committee which administers the 2007 Plan.

 

Purpose

 

The 2007 Plan is designed to advance the interests of the Company by providing a means through which incentive awards can be granted to officers, other employees and persons who provide services to the Company and its subsidiaries. By making grants of awards under this plan, the Company can attract, retain and reward such persons and, by linking compensation measures to performance, the Company can provide incentives for the creation of shareholder value. In addition, the interests of the Company’s shareholders and the award recipients can be more closely aligned by giving the recipients an interest in the long-term success of the Company. The 2007 Plan provides that the number of shares of common stock available for issuance of awards under that plan and our existing long-term incentive plans will be equal to 25% of the total number of shares of common stock outstanding from time to time.

 

Number of Shares

 

Awards may be made under the 2007 Plan if, at the time of grant, the aggregate number of shares subject to outstanding awards under the 2007 Plan and outstanding awards under the First Albany Restricted Stock Inducement Plan, the 1989 Stock Incentive Plan, 1999 Long-Term Incentive Plan, and the 2001 Long-Term Incentive Plan (the “Preexisting Plans”) plus the number of shares subject to the award being granted under the 2007 Plan do not exceed 25% of the number of shares issued and outstanding immediately prior to the grant of such award. The 2007 Plan provides that no further awards will be granted under the Preexisting Plans. There is a maximum of 2.5 million shares that may be subject to incentive stock options granted under the 2007 Plan.

 

Administration

 

Authority of the Committee — The 2007 Plan shall be administered by the Executive Compensation Committee (the “Executive Compensation Committee”). The Executive Compensation Committee shall have the full and final authority to, among other matters, select the persons to whom awards may be granted; determine the type(s) of awards that may be granted under the 2007 Plan to each participant; determine under what circumstances awards may be settled or the exercise price of an award may be paid in cash, shares, other awards or other property, or an award may be canceled, forfeited or surrendered; and to construe and interpret the provisions of the 2007 Plan and outstanding awards.

 

Manner of Exercise of Committee Authority — Any action taken by the Executive Compensation Committee with respect to the 2007 Plan shall be final, conclusive, and binding on all persons, including the Company, its subsidiaries, participants, and any person claiming any rights under the 2007 Plan from or through any participant or shareholder. In addition, the express grant of specific authority does not indicate a limitation of power in areas not expressly granted.

The Executive Compensation Committee may delegate to officers or managers of the Company or its subsidiaries, the authority to perform functions designated by the Executive Compensation Committee, to the extent that such delegation is permitted under applicable laws. In addition, the Board of directors may perform any function of the Executive Compensation Committee in order to ensure that transactions under the 2007 Plan are exempt under Rule 16b-3.

 

Eligibility

 

Persons eligible to receive awards under the 2007 Plan include (a) executive officers, other officers or employees of the Company and its subsidiaries, including directors, (b) any person who provides substantial personal services to the Company or any subsidiary not solely in the capacity as a director, and (c) any person who has agreed to become an employee of the Company or any subsidiary provided that such person cannot receive any payment or exercise any right relating to an award until such person has begun employment.

 

Awards under the 2007 Plan

 

Options — An option is the right to acquire shares of common stock at a fixed price for a fixed period of time. Under the 2007 Plan, the Executive Compensation Committee is authorized to grant options to purchase shares to participants under the following terms. The exercise price of the option shall be determined by the Executive Compensation Committee, however, the exercise price may not be below the fair market value (on the date of grant) of the shares covered by the option. The Executive Compensation Committee shall determine the time an option may be exercised and method by which a exercise price may be deemed paid, as well as the form of such payment. The Executive Compensation Committee shall determine at the time of grant the terms of vesting and forfeiture of the options. Options granted under the 2007 Plan may be nonqualified stock options or options that qualify are “incentive stock options” under Section 422 of the Code.

 

Stock Appreciation Rights — SARs are awards that give a participant the right to receive payment from the Company in an amount equal to (1) the excess of the fair market value of a share on the date of exercise over the exercise price, multiplied by (2) the number of shares with respect to which the award is exercised. The grant price of the SAR shall not be less than the fair market value of one share on the date of grant. The Executive Compensation Committee determines the terms and conditions of each SAR, including time(s) when an SAR may exercised, method of settlement, and method of delivery. The Executive Compensation Committee shall determine at the time of grant the terms of vesting and forfeiture of the SARs.

 

Restricted Stock — Restricted stock awards are shares of the Company’s common stock which vest in accordance with terms established by the Executive Compensation Committee in its discretion. Restricted stock shall be subject to restrictions on transferability and other restrictions that the Executive Compensation Committee may impose. These restrictions may lapse separately or in combination as the Executive Compensation Committee may determine. Except as restricted under the terms of the 2007 Plan and any award agreement regarding restricted stock, a participant shall have all the rights of a shareholder including the right to vote restricted stock or the right to receive dividends. Except as otherwise determined by the Executive Compensation Committee, upon termination of employment or service during the applicable restriction period, restricted stock shall be forfeited and reacquired by the Company.

 

The Executive Compensation Committee may require that cash dividends paid on a share of restricted stock may be automatically reinvested in additional shares of restricted stock or applied to the purchase of additional awards under the 2007 Plan.

 

Deferred Stock — Deferred stock awards refer to shares to be delivered to participants at a specified future date. Shares will be issued at the expiration of the deferral period specified for an award of deferred stock by the Executive Compensation Committee. In addition the Executive Compensation Committee may impose restrictions that may lapse at the expiration date, an earlier specified date, or otherwise as the Executive Compensation Committee may determine.

Except as otherwise provided by the Executive Compensation Committee, upon termination of employment during the applicable deferral period or portion thereof to which forfeiture conditions apply, all deferred stock that is subject to such risk of forfeiture shall be forfeited.

 

Bonus Shares and Awards in Lieu of Cash Obligations — The Executive Compensation Committee is authorized to grant shares as a bonus or grant shares in lieu of Company obligations to pay cash or other awards under other 2007 plans or compensatory arrangements. These shares or awards shall be subject to terms determined by the Executive Compensation Committee.

 

Other Stock-Based Awards — The Executive Compensation Committee is authorized to grant such other awards as may be denominated in, payable in, or otherwise based on the stock of the Company. These shares or awards shall be subject to terms determined by the Executive Compensation Committee.

 

Deferred Compensation Awards — The Executive Compensation Committee is authorized to grant awards in lieu of cash compensation or upon the deferral of cash compensation payable by the Company, including cash amounts payable under other plans. Such awards may be granted at a discount related to the value of the Award in lieu of the deferred compensation.

 

Performance-Based Awards — The Executive Compensation Committee may establish performance goals for individual employees, groups of employees or the Company as a whole. It may make grants of awards contingent upon the attainment of such goals.

 

Annual Incentive Awards — The Executive Compensation Committee may grant awards as a form of bonus as an alternative to a traditional cash bonus.

 

New Plan Benefits

 

Although the granting of awards under the 2007 Plan is discretionary, the Company has entered into certain non-compete and non-solicit agreements that will provide awards under the 2007 Plan as described below. You may also reference the Grants of Plan-Based Awards During Fiscal Year 2006 table on page 82 for an example of similar awards made in 2006.

 

2007 INCENTIVE COMPENSATION PLAN

 

 

 

 

Recapitalization Adjustments

 

Without the prior approval of shareholders, the Executive Compensation Committee shall not materially increase the number of shares to be issued under the 2007 Plan (other than to reflect a reorganization, stock split, merger, spinoff or similar transaction); make any material increase in benefits to participants, including repricing of outstanding options, or extend the duration of a plan.

The Executive Compensation Committee may make adjustments to the number and kind of awards to participants in the event of any change in the number of outstanding shares, as equitably determined by the Executive Compensation Committee in order to preserve, without enlarging, the rights of participants. by reason of any share dividend or splits, reorganization, recapitalizations, merger, consolidation, spin-off, combination or exchange of shares, repurchase, liquidation, dissolution or other corporate exchange, any large, special and non-recurring dividend or distribution to shareholders or similar corporate transaction.

 

Amendment, Suspension or Termination of the Plan

 

The Board may amend, suspend, discontinue or terminate the 2007 Plan without the consent of shareholders or participants, except that any amendment shall be subject to the approval of the Company’s shareholders at or before the next annual meeting of shareholders for which the record date is after such Board action if such shareholder approval is required by any federal or state law or regulation or the rules of the NASDAQ Stock Market, and the Board may otherwise, in its discretion, determine to submit other such amendments to shareholders for approval; provided, however, that, without the consent of an affected participant, no such action may materially impair the rights of such participant under any award previously granted.

 

Certain Federal Income Tax Consequences of The Plan

 

The following summarizes the United States federal income tax consequences of awards under the 2007 Plan to participants who are subject to United States tax. The tax consequences of the 2007 Plan to the Company and participants in other jurisdictions are not summarized below. The federal income tax treatment of certain types of awards under the 2007 Plan may be affected by tax legislation.

 

Stock Options.  An optionee will not generally recognize taxable income upon the grant of a nonqualified stock option to purchase shares of common stock. Upon exercise of the option, the optionee will generally recognize ordinary income for federal income tax purposes equal to the excess of the fair market value of the shares of common stock over the exercise price. The tax basis of the shares of common stock in the hands of the optionee will equal the exercise price paid for the shares of common stock plus the amount of ordinary compensation income the optionee recognizes upon exercise of the option, and the holding period for the shares of common stock for capital gains purposes will commence on the day the option is exercised. An optionee who sells any of the shares of common stock will recognize short-term or long-term capital gain or loss measured by the difference between the tax basis of the shares of common stock and the amount realized on the sale. The Company will be entitled to a federal income tax deduction equal to the amount of ordinary compensation income recognized by the optionee. The deduction will be allowed at the same time the optionee recognizes the income.

 

An optionee will not generally recognize income upon the grant of an incentive stock option to purchase shares of common stock and will not generally recognize income upon exercise of the option, provided that the optionee is an employee of the Company or a subsidiary at all times from the date of grant until three months prior to exercise. If an optionee who has exercised an incentive stock option sells the shares of common stock acquired upon exercise more than two years after the grant date and more than one year after exercise, capital gain or loss will be recognized equal to the difference between the sales price and the exercise price. An optionee who sells the shares of common stock before the expiration of the foregoing holding periods will generally recognize ordinary income upon the sale, and the Company will be entitled to a corresponding federal income tax deduction at the same time the participant recognizes ordinary income.

 

Other Awards.  The current United States federal income tax consequences of other awards authorized under the 2007 Plan are generally in accordance with the following: (i) stock appreciation rights are generally subject to ordinary income tax at the time of settlement; (ii) restricted stock is generally subject to ordinary income tax at the time the restrictions lapse, unless the recipient elects to accelerate recognition as of the date of grant; (iii) stock units and performance awards are generally subject to ordinary income tax at the time of payment and (iv) unrestricted stock awards are generally subject to ordinary income tax at the time of grant. In each of the foregoing cases, the

Company will generally be entitled to a corresponding federal income tax deduction at the same time the participant recognizes ordinary income.

 

Section 162(m).  Section 162(m) of the Code generally disallows the corporate tax deduction for certain compensation paid in excess of $1,000,000 annually to each of the chief executive officer and the four other most highly paid executive officers of publicly held companies. Awards that qualify as “performance-based compensation” are exempt from Section 162(m), thus allowing the Company the full federal tax deduction otherwise permitted for such compensation. If approved by the Company’s stockholders, the 2007 Plan will enable the Executive Compensation Committee to grant awards that will be exempt from the deduction limits of Section 162(m).

 

The completion of the sale of Purchased Shares is subject to various conditions. In the event that the sale is not consummated, we will not adopt the 2007 Plan as proposed above.

 

Required Approval.  The affirmative vote of a majority of the votes cast at the annual meeting and entitled to vote thereat is required for the adoption of the 2007 Plan. The Board has unanimously voted in favor of the 2007 Plan.

 

The Board recommends that the Company’s shareholders vote “FOR” the First Albany Companies Inc. 2007 Incentive Compensation Plan.

 

PROPOSAL NO. 7

 

RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS

 

The Audit Committee of the Board of Directors has selected PricewaterhouseCoopers LLP as the Company’s independent accountants for fiscal year ending December 31, 2007. We are submitting the selection of independent accountants for shareholder ratification at the annual meeting.

 

A representative of PricewaterhouseCoopers LLP is expected to be present at the annual meeting, will have the opportunity to make a statement if he or she desires to do so and will be available to respond to appropriate questions from shareholders.

 

Our organizational documents do not require that our shareholders ratify the selection of PricewaterhouseCoopers LLP as our independent accountants. We are doing so because we believe it is a matter of good corporate practice. If our shareholders do not ratify the selection, the Audit Committee will reconsider whether or not to retain PricewaterhouseCoopers LLP but still may retain them. Even if the selection is ratified, the Audit Committee, in its discretion, may change the appointment at any time during the year if it determines that such a change would be in the best interests of the Company and its shareholders. The Audit Committee, or a designated member thereof, pre-approved each audit and non-audit service rendered by PricewaterhouseCoopers LLP to the Company.

 

The Board recommends that the Company’s shareholders vote “FOR” the ratification of the appointment of PricewaterhouseCoopers LLP as independent accountants of the Company for the fiscal year ending December 31, 2007.

 

Principal Accounting Firm Fees

 

The following table shows information about fees paid by the Company to PricewaterhouseCoopers LLP:

 

 

 

 

Audit Committee Pre-Approval Policy

 

In accordance with the Company’s Audit Committee Pre-Approval Policy (the “Pre-Approval Policy”), all audit and non-audit services performed for the Company by the Company’s independent accountants were pre-approved by the Audit Committee, which concluded that the provision of such services by PricewaterhouseCoopers LLP was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions.

The Pre-Approval Policy provides for categorical pre-approval of specified audit and permissible non-audit services and requires the specific pre-approval by the Audit Committee, prior to engagement, of such services that are individually estimated to result in an amount of fees that exceed $50,000. In addition, services to be provided by the independent accountants that are not within the category of pre-approved services must be approved by the Audit Committee prior to engagement, regardless of the service being requested or the dollar amount involved.

 

Requests or applications for services that require specific separate approval by the Audit Committee are required to be submitted to the Audit Committee by both the independent accountants and the Company’s chief financial officer, and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC’s rules on auditor independence.

 

The Audit Committee may delegate pre-approval authority to one or more of its members. The member or members to whom such authority is delegated shall report any pre-approval decisions to the Audit Committee at its next scheduled meeting. The Audit Committee does not delegate its responsibilities to pre-approve services performed by the independent accountants to management.

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Based on the Company’s review of reports filed by directors, executive officers and 10% shareholders of the Company on Forms 3, 4 and 5 pursuant to Section 16(a) of the Exchange Act, the Company believes that all such reports were filed on a timely basis during fiscal year 2006 with the exception of Mr. Goldberg who did not timely file a transaction on Form 5 with respect to transactions in 2006, but subsequently reported such transaction on a Form 5 within two days thereafter.

 

PROPOSAL NO. 8

 

ADJOURNMENT OR POSTPONEMENT OF THE ANNUAL MEETING

TO SOLICIT ADDITIONAL PROXIES

 

In this proposal, we are asking you to authorize the holder of any proxy solicited by our Board to vote in favor of an adjournment or postponement of the annual meeting if there are insufficient votes at the time of the annual meeting to adopt Proposal 2, the Private Placement, Proposal 3, to amend the Company’s Certificate of Incorporation to increase the authorized shares of common stock, Proposal 4, to amend the Company’s Certificate of Incorporation to increase the authorized shares of preferred stock, Proposal 5, to amend the Company’s Certificate of Incorporation to limit the liability of the directors of the Company to the extent permitted under Section 402(b) of the NYBCL, and Proposal 6, to adopt the 2007 Incentive Compensation Plan. In that case, we may adjourn or postpone the annual meeting for a period of time for the purpose of soliciting additional proxies to adopt Proposal 2, Proposal 3, Proposal 4, Proposal 5 and Proposal 6. We do not intend to adjourn or postpone the annual meeting if there are sufficient votes to adopt Proposals 2, 3, 4, 5 and 6.

 

The Board believes it is in the best interests of our shareholders to enable it to have the flexibility to continue to seek to obtain sufficient votes to adopt Proposal 2, Proposal 3, Proposal 4, Proposal 5 and Proposal 6, if the number of shares voted at the annual meeting is insufficient to do so.

 

Required Approval. The affirmative vote of a majority of the votes cast at the annual meeting and entitled to vote thereat is required for the adjournment or postponement of the annual meeting, whether or not a quorum is present.

 

The Board recommends that the Company’s shareholders vote “FOR” Proposal 8, should it be submitted to a vote at the annual meeting. If there are insufficient votes at the time of the annual meeting to adopt Proposal 2, Proposal 3, Proposal 4, Proposal 5 and Proposal 6, and the shareholders do not approve Proposal 8, we will be unable to complete the Private Placement and will not receive any cash from the proposed sale of common stock.

 

STOCK OWNERSHIP OF PRINCIPAL OWNERS AND MANAGEMENT

 

The following table sets forth information concerning the beneficial ownership of common stock of the Company as of June 25, 2007, by (i) persons owning more than 5% of the common stock, (ii) each director of the Company and the current and former executive officers included in the Summary Compensation Table and (iii) all directors and current executive officers of the Company as a group. An asterisk in the percentage column indicates that a person or group beneficially owns less than 1% of the outstanding shares.

 

 

 

 

DIRECTOR COMPENSATION FOR FISCAL YEAR 2006

 

The following table sets forth certain information regarding the compensation of the Company’s directors for the fiscal year ended December 31, 2006 other than Messrs. McNamee, McNierney and Goldberg whose compensation is discussed below under “Compensation of Executive Officers.”

 

 

 

 

During 2006, the Company paid directors who are not current or former officers of the Company (the “Non-Employee Directors”) an annual retainer of $30,000 and, in addition, an annual retainer of $40,000 to the lead director. In addition, the Company paid Non-Employee Directors $1,000 per Board or committee meeting attended ($500 for attendance by conference call), plus reimbursement of reasonable expenses. The chair of the Audit Committee was paid an additional annual retainer of $30,000 and the Non-Employee Directors who were members

of such committee were paid additional annual retainers of $10,000. The chairs of other committees on the Board were paid additional annual retainers of $10,000 and Non-Employee Directors who were members of such other committees were paid additional annual retainers of $5,000. Employee directors do not receive any compensation for their service as members of the Board.

 

Under the 2003 Non-Employee Directors Stock Plan, the number of options or restricted shares awarded are generally within the discretion of the Board, except that no Non-Employee Director may receive an option covering more than 5,000 shares or 2,000 restricted shares in any year. All options that may be granted under the 2003 Non-Employee Directors Stock Plan will have an exercise price equal to the fair market value of the common stock on the date of grant, become exercisable in three equal installments beginning on the first anniversary of the date of grant, and have a ten-year term. Shares of restricted stock will be subject to vesting conditions as set forth in the award agreement. If a person ceases to be a director for any reason (other than death or total disability), any unvested restricted shares or unexercisable stock options will be forfeited. In the case of death or total disability of a director, he or she (or the estate or other legal representatives) shall become 100% vested in any restricted shares as of the date of termination of service on the Board. Such Non-Employee Director’s right to exercise any then-exercisable stock option will terminate 90 days after the date of such termination (but not beyond the stated term of such stock option). If a Non-Employee Director dies or becomes totally disabled, such director (or the estate or other legal representative of the Non-Employee Director), to the extent the stock options are exercisable immediately prior to the date of death or total disability, will be entitled to exercise any stock options at any time within the one-year period following such death or disability, but not beyond the stated term of such stock option. If a Change of Control occurs (i) all stock options then unexercised and outstanding will become fully vested and exercisable and (ii) all restrictions, terms and conditions applicable to restricted shares then outstanding will be deemed lapsed and satisfied, each as of the date of the Change of Control.

 

In addition to any annual grant of options or restricted shares, under the 2003 Non-Employee Directors Stock Plan, the Board may from time to time make additional discretionary grants (subject to the limits noted above) and may permit a Non-Employee Director to elect to receive all or a portion of his/her annual cash retainer in restricted shares.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

On April 26, 2007, the Board of Directors adopted a new Related Party Transactions Policy (the “Policy”). Under the Policy only those related party transactions that have terms comparable to those that could be obtained in arm’s length dealings with an unrelated third party and that are approved or ratified by the Audit Committee, the disinterested members of the Board of Directors, and, if and to the extent involving compensation, the Executive Compensation Committee, may be consummated or permitted to continue. “Related Parties” include any senior officer (including all executive officers of the Company and its subsidiaries) or director of the Company, any shareholder owning more than 5% of the Company (or its controlled affiliates), any person who is an immediate family member of a senior officer or director, and any entity owned or controlled by such persons or in which such persons have a substantial ownership interest. “Related Party Transactions” include any transaction between the Company and any Related Party (including any transactions requiring disclosure under Item 404 of Regulation S-K under the Exchange Act) except transactions available to all employees generally or those involving less than $5,000 when aggregated with all similar transactions. Pursuant to the Policy, any proposed Related Party Transactions may be submitted for consideration at the Audit Committee’s regular quarterly meetings. Following the Audit Committee’s review, the Committee will either approve or disapprove such transactions. In the event that management recommends any transactions in between regularly scheduled meetings, management will confer with the Chair of the Audit Committee as to whether the Company may preliminarily enter into such arrangement subject to ratification by the full Audit Committee at the next regularly scheduled meeting.

 

In the ordinary course of its business, First Clearing, LLC, a clearing firm with which First Albany Capital has contracted for broker dealer trading activities, extends credit to employees, including directors and executive officers, under Regulation T, which regulates credit in cash and margin accounts. However, should the account holder fail to meet a margin call and the securities in the account holder’s account prove insufficient to satisfy the

margin call, First Albany may be obligated to satisfy the call on behalf of the account holder. Such extensions of credit are performing and are made on the same terms as for customers.

 

As of December 31, 2006, the Company had a commitment to invest as a limited partner up to $3.8 million in FA Technology Ventures, L.P. (the “Fund”), a technology fund with total limited partner equity commitments of $100 million. The Company also had a commitment as of that date to invest up to an additional $0.3 million in parallel with the Fund; this parallel commitment may be satisfied by investments from the Company’s employee funded investment vehicles established by the Company to allow select employees to invest along with the Fund. These commitments extended initially to the end of the Fund’s commitment period, which expired in July 2006; however, the general partner may continue to make capital calls up through July 2011 for additional investments in portfolio companies and the payment of management fees. Messrs. Goldberg and Fiederowicz are also limited partners in this Fund. The Fund is managed by FA Technology Ventures Corporation, a wholly-owned subsidiary of the Company, which receives management fees for its services. George McNamee is an employee of this subsidiary and received compensation from it, which is reflected in the summary compensation table below. In addition, Mr. McNamee is a member of FATV GP LLC, the general partner of the Fund, with a current 16.50% membership interest. As a result of this interest in the general partner, he would be entitled to receive 17.20% of the 20% carried interest that may become payable by the Fund to its general partner if the Fund’s investments are successful. Mr. McNamee is required under the partnership agreement for the Fund to devote a majority of his business time to the conduct of the Fund and any parallel funds.

 

As of February 1, 2005, the Company entered into a Consulting Agreement with Hugh A. Johnson, Jr., a former director of the Company and Chairman of Johnson Illington (“JIA”) (the “Consulting Agreement”). JIA purchased the Albany, New York operations of FA Asset Management Inc. in February 2005. As part of the consideration for the purchase, JIA is obligated to pay the Company a percentage of its revenues earned through 2009. No such payments were made in 2006. In addition, the Company made payments of $36,706 in 2006 to JIA for certain management fees for investments. Under the terms of the Consulting Agreement, Mr. Johnson ended his employment with the Company and began serving as a consultant to the Company for a three-year period beginning on the date that certain sale transactions occurred (the “Sale Transactions”). The Sale Transactions are governed by an Asset Purchase Agreement between JIA, First Albany Companies Inc. (“FACI”), and First Albany Asset Management Inc. (“FAAM”). The Consulting Agreement further provides that Mr. Johnson receives an annual consulting fee of $250,000 and FACI provides Mr. Johnson with an office, and reimbursement for reasonable travel expenses in connection with the consulting services. During the first year after the consummation of the Sale Transactions, FACI provided Mr. Johnson (i) any equipment necessary to perform the consulting services and (ii) subscriptions to various services in connection with the performance of the consulting period in an amount not to exceed $15,000.

 

In connection with the termination of Arthur Murphy’s employment by First Albany Capital as Executive Managing Director, Mr. Murphy, also a former member of the Board of Directors of the Company, filed an arbitration claim against First Albany Capital, Alan Goldberg, former President and Chief Executive Officer, and George McNamee, Chairman of First Albany Companies Inc. with the National Association of Securities Dealers on June 24, 2005. The claim alleged damages in the amount of $8 million based on his assertions that he was fraudulently induced to remain in the employ of First Albany Capital. Without admitting or denying any wrongdoing or liability, on December 28, 2006, First Albany Capital, entered into a settlement agreement with Arthur Murphy in connection with such arbitration claim.

 

COMPENSATION OF EXECUTIVE OFFICERS

 

Compensation Discussion & Analysis

 

Compensation Philosophy.  2006 was a year of transition for the Company. In June, the Board adopted a new strategic plan for the Company and appointed a new chief executive officer and a new chief financial officer to implement it. It also focused much of its efforts on retaining those key employees necessary for the continued viability of the Company. While the Company’s overall compensation philosophy of pay for performance has not changed, the Company’s compensation practice continues to evolve.

Compensation Components.  In the financial services industry, base salaries tend to be a relatively modest portion of the total compensation of the Company’s employees, including its executive officers, as compared to annual cash bonuses and equity-related grants. Base salaries at the Company are typically set at levels that the Executive Compensation Committee believes are generally competitive with those of executives in similar positions at comparable financial services companies. A significant portion of the total compensation has been historically paid in the form of annual cash bonuses. This practice is intended to maximize the portion of an individual’s compensation that is subject to fluctuation each year based upon corporate and individual performance. Equity-related grants make up the other important component of total compensation and focus on longer-term company objectives. As a result, the predominant portion of our executive officers’ compensation is directly related to short and long-term corporate performance.

 

We continue to believe that the compensation of our executive officers should be structured to link the executives’ financial reward directly to the performance of the business unit they lead or, as the case may be, to the performance of the Company as a whole as well as to their individual performance.

 

In June 2006, the Company entered into employment agreements with Mr. McNierney (our chief executive officer), Mr. Coad (our chief financial officer) and Mr. Goldberg (our former chief executive officer and current vice chairman). The employment agreements were structured both to retain and energize the new management team of Messrs. McNierney and Coad, to ensure a smooth transition from Mr. Goldberg to Mr. McNierney as chief executive officer and to promote Mr. Goldberg’s new role as policy adviser to the Board.

 

Base Salary.  Base salaries are typically set by reference to job position within the Company with increases as a reward for superior performance or as a means to attract or retain necessary executive talent. The Executive Compensation Committee considers the chief executive officer’s recommendations in determining the salary of each of the other executive officers. The base salaries of Messrs. McNierney, Coad and Goldberg were agreed upon in their employment agreements. Messrs. Goldberg, McNierney and Coad were given increases over their prior salaries. The increase in Messrs. Goldberg and McNierney’s base salaries was given in order to restore their salaries to their 2005 levels. The increase in Mr. Coad’s base salary was given in recognition of the increase in his responsibilities to the Company. There was no change in the salaries of Messrs. Fox and McNamee.

 

Annual Cash Bonus.  In 2006, in light of the Company’s newly adopted business plan and turnover in management, annual cash bonuses were handled differently from past practice. Under their employment agreements, Mr. McNierney and Mr. Coad each were given the opportunity to earn an annual bonus with a target amount set by the Board and with bonus objectives consistent with the Company’s strategic plan developed by the Board after consultation with Mr. McNierney. For 2006, the bonus for each of Messrs. McNierney and Coad was based upon the Executive Compensation Committee’s qualitative assessment of the overall success in implementation of the Company’s strategic plan in the second half of the year and of his individual contribution to such success.

 

In accordance with his agreement, Mr. Goldberg did not receive a bonus for 2006. Mr. Fox’s bonus was also determined by the Executive Compensation Committee in consultation with the chief executive officer and based on a qualitative assessment of his performance in 2006. In setting Mr. Fox’s bonus, the Executive Compensation Committee also took into account the cash payment made to Mr. Fox in August of 2006 in recognition of the additional responsibilities added to his position at that time. Mr. McNamee’s bonus was set in recognition of his contribution to the Company through the profitability of the Company’s investments as well as his contribution to the Company’s investment banking activities.

 

Historically, annual cash bonuses have been paid pursuant to the Senior Management Bonus Plan. The specific bonus an executive received was determined by the Executive Compensation Committee with reference to his level of responsibility, individual performance and the performance of his or her business unit and/or the Company. The Executive Compensation Committee evaluated levels of responsibility annually. The Executive Compensation Committee also made assessments of individual performance annually after receiving the recommendations of the chief executive officer. The approved recommendations were based on a number of factors, including the achievement of pre-established individual and corporate performance targets, but also initiative, business judgment, management skills and potential contribution to the firm. The Executive Compensation Committee intends to reestablish this bonus practice.

Long-Term Equity Incentives.  The Company had historically relied upon annual grants of stock options and, then in the last three years, restricted stock to retain its executive officers and to focus them on increasing shareholder value over the long term. These grants were made in mid-February in conjunction with the payment of annual cash bonuses for the prior fiscal year and were based upon job level, Company and individual performance during the prior fiscal year. The Executive Compensation Committee determined at the time of the spring annual grants that no executive officers would receive equity grants with respect to 2005. Mr. Coad did receive a restricted stock grant prior to his promotion to chief financial officer in accordance with the Company’s annual award practice. Certain extraordinary grants of restricted stock were made to executive officers in 2006. Each of Messrs. McNierney and Coad received a restricted stock grant in June 2006 upon their promotion to their current positions, and Mr. Fox received a restricted stock grant in May 2006 under a retention bonus plan established by the Company to retain its key employees. None of the other executive officers received any equity grants in 2006.

 

As previously discussed in our amended Annual Report on Form 10-K/A for the year ended December 31, 2006, which was filed with the SEC on April 30, 2007, the Company had, on March 27, 2007, launched a tender offer to exchange each outstanding share of restricted stock for three cash-settled and/or stock-settled stock appreciation rights with an exercise price of fair market value on the date of grant. In addition, the Company had also planned to offer employees the opportunity to exchange outstanding underwater options for new options at an exercise price of fair market value on the date of grant. Both offers were to be subject to shareholder approval, which the Company had planned to seek at the next annual meeting of shareholders. The Company had also contemplated implementing new performance-based equity incentive programs under a new equity plan for which shareholder approval would also have been required. However, the Company has agreed to terminate these plans due to the events and for the reasons described in the Current Report on Form 8-K filed by the Company on May 15, 2007.

 

Deferred Compensation Plans.  Historically, the Company has offered its employees, including its executive officers, tax planning opportunities through nonqualified deferred compensation plans. It first adopted the Deferred Compensation Plan for Key Employees and the Deferred Compensation Plans for Professional and Other Highly Compensated Employees (the “Predecessor Plans”). It then froze these plans in 2005 and adopted new plans (the 2005 Deferred Compensation Plan for Key Employees (“Key Plan”) and the 2005 Deferred Compensation Plan for Professional and Other Highly Compensated Employees (“Professional Plan”) (collectively, the “2005 Plans”)) as a result of changes in the tax laws. However, the Company has decided to freeze the 2005 Plans as well. As a result of declining participation, the costs of administrating the 2005 Plans were determined to outweigh the benefits of maintaining them.

 

Equity-Based Awards Policy.  The Executive Compensation Committee made specific stock option, restricted stock and other equity-based awards (the “Equity-Based Awards”) to employees of the Company. Management of the Company provided recommendations to the Executive Compensation Committee with respect to the Equity-Based Awards and the Executive Compensation Committee met as necessary to consider such awards on a timely basis. All Equity-Based Awards approved by the Executive Compensation Committee were granted as of the date of approval, and the exercise price of any Equity-Based Awards (as applicable) awarded was fixed as of the closing price on the date of grant.

 

Termination of Employment; Change in Control.  The Company does not have a severance plan or change in control plan in place for its employees or its executive officers generally. Under their employment agreements, Messrs. McNierney and Coad would receive severance payments upon their termination of employment by the Company without cause or for good reason. The Company believed it necessary to provide this protection to Messrs. McNierney and Coad in return for their taking on responsibility for implementing the Company’s new strategic plan. For the same reasons, the Company offered tax gross ups to Messrs. McNierney and Coad for any excise taxes they might incur as a result of a change in control of the Company. Under his agreement, Mr. Goldberg will continue to receive his salary until the end of his contract regardless of any termination of employment unless he voluntarily leaves or is terminated by the Company for cause. The Company believed that this would help to promote a smoother organizational transition.

 

Mr. Paul Kutey resigned as acting Chief Financial Officer in June 2006, and subsequently from the firm in August 2006. In return for a general release of possible claims against the Company, an agreement not to solicit

employees of the Company and for an agreement to cooperate with transition matters, the Company paid Mr. Kutey a lump sum amount of $300,000.

 

No individual separation agreement was entered into with Mr. Fox upon his departure in February 2007.

 

Most of the Company’s outstanding equity awards vest immediately upon a change in control. However, restricted stock awards granted in May 2006 under the retention bonus plan vest ahead of schedule only upon a termination of employment for good reason or without cause in connection with the change in control. Of the named executive officers, only Mr. Fox received a restricted stock award subject to such provisions (which was forfeited upon his departure). This change in the 2006 awards was designed to help retain people in their jobs in the event of a change in control.

 

Tax and Accounting.  Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), places a limit on the tax deduction for compensation in excess of $1 million paid to certain “covered employees” of a publicly held corporation (generally the corporation’s chief executive officer and its next four most highly compensated executive officers in the year that the compensation is paid). Compensation that is considered qualified “performance-based compensation” generally does not count toward Section 162(m)’s $1 million deduction limit. While the Company is mindful of the limitations that Section 162(m) may have on the deductibility of compensation, the Company also determined that other reasons for compensation structure could sometimes take precedence over potential tax deductions. The Senior Management Bonus Plan is designed to assure that all annual bonus compensation paid to our covered employees is considered qualified performance-based compensation within the meaning of Section 162(m). Although based on Company and individual performance, cash bonuses paid to executive officers in 2006 did not technically qualify as performance-based compensation due to the shift in performance objectives in June to correspond with the new Company strategic plan. Also, the restricted stock grants, as they vest based upon service only, also do not technically qualify as performance-based compensation under Section 162(m). Nonetheless, the only executive officer that received compensation for which the Company could not take a deduction by reason of Section 162(m) was Mr. McNierney.

 

Summary Compensation Table for Fiscal Year 2006

 

The following table sets forth certain information regarding compensation of (i) each person who served as Chief Executive Officer during fiscal year 2006, (ii) each person who served as Chief Financial Officer during fiscal year 2006, and (iii) the Company’s three most highly compensated executive officers other than the Chief Executive Officer and Chief Financial Officer who were serving as executive officers as of December 31, 2006 (collectively referred to as the “Named Executive Officers”).

 

 

 

 

Grants of Plan-Based Awards During Fiscal Year 2006