SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
----------------------------------------------
For Quarter Ended:
June 30, 1999 Commission File Number: 1-9137
ATALANTA/SOSNOFF CAPITAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 13-3339071
- -------------------------------- -------------------------------
(State or other jurisdiction (I.R.S. Employer I.D. No.)
of incorporation or organization)
101 PARK AVENUE, NEW YORK, NEW YORK 10178
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(Address of principal executive offices) (zip code)
(212) 867-5000
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(Registrant's Telephone Number, including area code)
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(Former name, former address and former fiscal year if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such following
requirements for the past 90 days.
Yes X No
As of August 5, 1999 there were 9,587,401 shares of common stock outstanding.
ATALANTA/SOSNOFF CAPITAL CORPORATION
INDEX
Part I - Financial Information PAGE NO.
--------
Item 1 - Financial Statements
Condensed Consolidated Statements
of Financial Condition - June 30, 1999
and December 31, 1998 3
Condensed Consolidated Statements
of Income and Comprehensive Income -
Three and Six Months Ended June 30, 1999 and 1998 4-5
Condensed Consolidated Statement
of Changes in Shareholders' Equity -
Six Months Ended June 30, 1999 6
Condensed Consolidated Statements of
Cash Flows - Six Months Ended
June 30, 1999 and 1998 7
Notes to Condensed Consolidated 8-10
Financial Statements
Special Note Regarding Forward-Looking Statements 11
Item 2 - Management's Discussion and Analysis
of Results of Operations and Financial
Condition 12-17
Part II - Other Information
Items 1-6 18
Signatures 19
Exhibit Index 20
Exhibit 11 - Computation of Earnings Per Share 21
Exhibit 27 - Financial Data Schedule 22
2
ATALANTA/SOSNOFF CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
ASSETS JUNE 30, 1999 DECEMBER 31, 1998
- ------ ------------- -----------------
Assets:
Cash and cash equivalents $7,906,797 $3,993,963
Accounts receivable 3,057,101 3,319,185
Investments, at market 71,360,162 73,802,294
Investments in limited partnerships 13,290,156 7,565,780
Fixed assets, net 957,519 659,311
Exchange memberships, at cost 402,000 402,000
Other assets 1,481,932 943,870
--------- -------
Total assets $98,455,667 $90,686,403
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and other liabilities $736,116 $773,970
Accrued compensation payable 501,262 648,611
Income taxes payable 9,624,825 6,541,427
Payable to clearing broker 251,189 -------
Separation costs payable 350,000 700,000
------- -------
Total liabilities 11,463,392 8,664,008
---------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $1.00 per share;
5,000,000 shares authorized; none issued ------- -------
Common stock, $.01 par value; 30,000,000
shares authorized; 9,587,401 shares
issued and outstanding 95,874 95,874
Additional paid-in capital 24,389,499 24,389,499
Retained earnings 66,494,779 58,412,561
Accumulated other comprehensive income -
unrealized gains from investments, net of deferred
tax liabilities of $3,865,693 and $4,996,227 5,798,539 7,494,341
Unearned compensation (5,063,411) (6,188,615)
Treasury stock, at cost, 503,174 and 249,000 shares (4,723,005) (2,181,265)
----------- -----------
Total shareholders' equity 86,992,275 82,022,395
---------- ----------
Total liabilities and shareholders' equity $98,455,667 $90,686,403
=========== ===========
Book value per share $9.58 $8.78
===== =====
See Notes to Condensed Consolidated Financial Statements
3
ATALANTA/SOSNOFF CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED
------------------
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
Revenues:
Advisory fees $4,032,947 $4,117,086
Commissions and other 463,838 394,702
------- -------
Total revenues 4,496,785 4,511,788
--------- ---------
Costs and expenses:
Employees' compensation 3,026,638 2,404,362
Clearing and execution costs 175,023 136,675
Selling expenses 80,715 122,295
General and administrative expenses 786,084 782,780
------- -------
Total costs and expenses 4,068,460 3,446,112
--------- ---------
Operating income 428,325 1,065,676
------- ---------
Other income (expense):
Interest and dividend income 268,585 404,694
Interest expense (8,994) (9,052)
Realized and unrealized gains
from investments, net 8,454,646 1,790,795
--------- ---------
Other income, net 8,714,237 2,186,437
--------- ---------
Income before provision for income taxes 9,142,562 3,252,113
Provision for income taxes 3,957,000 1,368,000
--------- ---------
Net income $5,185,562 $1,884,113
========== ==========
Earnings per common share - basic $0.56 $0.20
===== =====
Earnings per common share - diluted $0.56 $0.20
===== =====
Net income, as presented above $5,185,562 $1,884,113
Other comprehensive income (loss):
Net unrealized gain (loss) from investments,
net of deferred income taxes (credit)
of ($2,410,045) and $2,242,385 (3,615,067) 3,363,577
---------- ---------
Comprehensive income $1,570,495 $5,247,690
========== ==========
See Notes to Condensed Consolidated Financial Statements
4
ATALANTA/SOSNOFF CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
SIX MONTHS ENDED
----------------
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
Revenues:
Advisory fees $7,856,297 $8,113,232
Commissions and other 863,475 842,220
------- -------
Total revenues 8,719,772 8,955,452
--------- ---------
Costs and expenses:
Employees' compensation 5,861,298 4,883,327
Clearing and execution costs 312,340 301,992
Selling expenses 219,803 227,068
General and administrative expenses 1,481,421 1,405,740
--------- ---------
Total costs and expenses 7,874,862 6,818,127
--------- ---------
Operating income 844,910 2,137,325
------- ---------
Other income (expense):
Interest and dividend income 445,259 917,678
Interest expense (30,109) (28,631)
Realized and unrealized gains
from investments, net 13,001,158 3,424,105
---------- ---------
Other income, net 13,416,308 4,313,152
---------- ---------
Income before provision for income taxes 14,261,218 6,450,477
Provision for income taxes 6,179,000 2,776,000
--------- ---------
Net income $8,082,218 $3,674,477
========== ==========
Earnings per common share - basic $0.87 $0.38
===== =====
Earnings per common share - diluted $0.87 $0.38
===== =====
Net income, as presented above $8,082,218 $3,674,477
Other comprehensive income (loss):
Net unrealized gain (loss) from investments,
net of deferred income taxes (credit)
of ($1,130,534) and $3,242,189 (1,695,802) 4,863,283
---------- ---------
Comprehensive income $6,386,416 $8,537,760
========== ==========
See Notes to Condensed Consolidated Financial Statements
5
ATALANTA/SOSNOFF CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
Accumulated other
comprehensive
Additional income -
Common Paid-In Retained unrealized Unearned Treasury
Stock Capital Earnings gains, net Compensation Stock Total
----- ------- -------- ---------- ------------ ----- -----
Balance -
December 31, 1998 $95,874 $24,389,499 $58,412,561 $7,494,341 ($6,188,615) ($2,181,265) $82,022,395
Purchase of treasury stock (2,541,740) (2,541,740)
Amortization of unearned 1,125,204 1,125.204
compensation
Unrealized gains (losses)
from investments,
net of deferred taxes (1,695,802) (1,695,802)
Net Income 8,082,218 8,082,218
------- --------- --------- ---------- ----------- ---------- ---------
Balance -
June 30, 1999 $95,874 $24,389,499 $66,494,779 $5,798,539 ($5,063,411) ($4,723,005) $86,992,275
======= =========== =========== ========== ============ ============ ===========
See Notes to Condensed Consolidated Financial Statements
6
ATALANTA/SOSNOFF CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
1999 1998
----------------------- -----------------------
Cash flows from operating activities:
Net income $8,082,218 $3,674,477
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 112,187 92,947
Amortization of unearned compensation 1,125,204 1,125,204
Realized and unrealized gains from
investments, net (13,001,158) (3,424,105)
Increase (decrease) from changes in:
Accounts receivable 262,084 455,882
Other assets (538,062) 212,877
Accounts payable and other liabilities (37,854) 111,656
Accrued compensation payable (147,349) (403,526)
Income taxes payable 4,213,933 (619,511)
Payable to clearing broker 251,189
Separation costs payable (350,000) (350,000)
--------- ---------
Net cash provided by (used in) operating activities (27,608) 875,901
-------- -------
Cash flows from investing activities:
Receivable from clearing broker, net 1,323,473
Purchases of fixed assets (410,395) (28,887)
Purchases of investments (66,674,638) (61,013,292)
Proceeds from sales of investments 73,567,215 60,108,485
---------- ----------
Net cash provided by investing activities 6,482,182 389,779
--------- -------
Cash flows from financing activities:
Purchase of treasury stock (2,541,740) -----0-----
Net cash used in financing activities (2,541,740) -----0-----
----------- -----------
Net increase in cash and cash equivalents 3,912,834 1,265,680
Cash and cash equivalents, beginning of year 3,993,963 3,805,243
--------- ---------
Cash and cash equivalents, end of period $7,906,797 $5,070,923
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $30,109 $28,631
======= =======
Income taxes $1,965,067 $3,395,511
========== ==========
See Notes to Condensed Consolidated Financial Statements
7
ATALANTA/SOSNOFF CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Unaudited Information
The accompanying condensed consolidated financial statements include the
accounts of Atalanta/Sosnoff Capital Corporation ("Holding Company") and its
direct and indirect wholly-owned subsidiaries, Atalanta/Sosnoff Capital
Corporation (Delaware) ("Capital"), Atalanta/Sosnoff Management Corporation
("Management"), and ASCC Corporation ("ASCC").
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments (which include only normal
recurring accruals) necessary to present fairly the Company's financial position
as of June 30, 1999, and the results of its operations for the three and six
months ended June 30, 1999 and 1998. Certain information normally included in
the financial statements and related notes prepared in accordance with generally
accepted accounting principles has been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto appearing in the
Company's December 31, 1998 Annual Report on Form 10-K. Information included in
the condensed consolidated balance sheet as of December 31, 1998 has been
derived from the audited condensed consolidated financial statements appearing
in the Company's Annual Report on Form 10-K.
Note 2: Investments, at Market
The Company records its investments in equity and debt securities in accordance
with the provisions of Statement of Financial Accounting Standards ("SFAS") No.
115, with the exception of investments held by Management. The Company has
designated those investments held by the Holding Company, Capital and ASCC in
equity and debt securities as "available for sale," and accordingly recorded at
market value with the related unrealized gains and losses net of deferred taxes
reported as a separate component of shareholders' equity. Investments held by
Management are recorded at market value, with the related unrealized gains and
losses reflected in other income on the consolidated statements of income and
comprehensive income.
Investments are recorded on trade date. The cost of investments sold is
determined on the first-in first-out method. Dividends and interest are accrued
as earned. Securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sales price as of the
last business day of the period. Investments in mutual funds are valued based
upon the net asset value of shares held as reported by the fund. Securities with
no reported sales on such date are valued at their last closing bid price.
Capital serves as a general partner for three Company-sponsored investment
partnerships (the "Partnerships") and as the investment manager for a
Company-sponsored offshore investment fund (the "Offshore Fund"). Investments in
limited partnerships are carried in the accompanying financial statements at the
Company's share of the net asset values as reported by the respective
Partnerships. Limited partners whose capital accounts in the aggregate are
two-thirds of the total capital accounts of all limited partners may, at any
time, require Capital to withdraw as the general partner of the Partnerships.
Therefore, the Company is not deemed to have control of the Partnerships and
accordingly, the accounts of the Partnerships are not included in these
condensed consolidated financial statements.
8
Notes to Condensed Consolidated Financial Statements (cont'd)
Note 3: Non-Cash Compensation Charges ("NCCC")
NCCC of approximately $563,000 was charged to operations in the second quarters
of 1999 and 1998, respectively. NCCC of approximately $1.13 million was charged
to operations in the first six months of 1999 and 1998, respectively (See Note
4).
Note 4: 1996 Long Term Incentive Plan ("LTIP")
In September 1997, the Company awarded 775,000 shares of restricted stock at the
issue price of $.01 per share to two senior executives under the terms of the
LTIP. Such awards vest annually over four years. The difference of $9.0 million
between market value ($11.625 per share) on the date of grant and the purchase
price was recorded as unearned compensation in shareholders' equity and is being
amortized over a four-year period which commenced with the fourth quarter of
1997 (approximately $563,000 per quarter and $2.25 million annually).
Note 5: Senior Vice President Accounts
Certain high net worth accounts subject to the overall supervision and control
of the Company are under the management of a Senior Vice President (the "SVP
Accounts"). Effective October 1, 1998, the Company entered into a facilities
agreement with the SVP for the period ending December 31, 2000 under which the
SVP is relinquishing the right to receive revenues generated by the investment
management and brokerage services provided to the SVP Accounts to the Company.
Pursuant to this Agreement, the Company has or will make payments to the SVP in
three installments in January of 1999, 2000 and 2001 based upon a multiple of
annualized revenues of the SVP Accounts in the fourth quarter of 1998, 1999 and
2000, respectively. The Company estimates that the related compensation will
total approximately $3 million, based on the SVP Accounts' current asset value,
and will be recognized ratably as compensation expense over the term of the
arrangement.
Additionally, the SVP's compensation related to the pre-tax operating income
generated by the SVP Accounts will decline from 100% in the twelve-month period
ended September 30, 1998, to 50% in the comparable 1999 period, and to 25% in
the comparable 2000 period. The SVP will be required to remain an employee of
the Company through 2000, and may remain an employee or consultant thereafter.
Pursuant to this Agreement, compensation expense of $375,000 and $750,000 was
recorded in the three months and six months ended June 30, 1999, respectively.
9
Notes to Condensed Consolidated Financial Statements (cont'd)
Note 6: Compensation Expense
Pursuant to an agreement, an officer of the Company receives a bonus based upon
the pre-tax operating profits generated by the Company as general partner of a
Partnership managed by the officer. In addition, under the Company's Management
Incentive Plan a bonus is earned by the Chief Executive Officer based upon the
pre-tax earnings of certain managed assets of the Company in excess of a base
indexed return, subject to a ceiling of 10% of pre-tax Company profits. Included
in compensation expense are accrued bonuses to these officers of approximately
$299,000 and $64,000 for the six months ended June 30, 1999 and 1998,
respectively.
Note 7: Treasury Stock
On December 9, 1998, the Company repurchased 249,000 shares of its common stock
at a market price of $8.75 per share. On June 8, 1999, the Company repurchased
254,174 shares of its common stock from a former officer at a market price of
$10.00 per share.
Note 8: Net Income Per Share
Basic earnings per share amounts were computed based on 9,274,159 and 9,587,401
weighted average common shares outstanding in the second quarters of 1999 and
1998, respectively, and 9,306,103 and 9,587,401 for the six months ended June
30, 1999 and 1998, respectively.
Diluted earnings per share amounts were computed based on 9,282,673 and
9,609,520 weighted average common shares outstanding in the second quarters of
1999 and 1998, respectively, and 9,314,322 and 9,608,178 for the six months
ended June 30, 1999 and 1998, respectively. The shares outstanding have been
adjusted to reflect the impact of in the money options, using the Treasury Stock
method.
See Exhibit 11 for further details on the computation of net income per share.
Note 9: Income Taxes
The Company records income taxes in accordance with the provisions of SFAS No.
109. Accordingly, deferred taxes are provided to reflect temporary differences
between the recognition of income and expense for financial reporting and tax
purposes.
10
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q under the caption
"Management's Discussion and Analysis of Results of Operations and Financial
Condition", and elsewhere in this Report constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors, which may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions; the loss of, or the failure to replace, any significant clients;
changes in the relative investment performance of client or firm accounts and
changes in the financial marketplace, particularly in the securities markets;
and the Year 2000 Issue. These forward-looking statements speak only as of the
date of this Quarterly Report. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions or circumstances on
which any such statement is based.
11
Part I. Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition.
I. General
Assets totaled $98.5 million at June 30, 1999, compared with $90.7
million at December 31, 1998, and book value per share totaled $9.58 at
June 30, 1999, compared with $8.78 at December 31, 1998.
Cash and cash equivalents totaled $7.9 million at June 30, 1999
compared with $4.0 million at December 31, 1998. Investments (at
market) totaled $71.3 million at June 30, 1999, compared with $73.8
million at the end of 1998. Unrealized gains on investments included in
shareholders' equity, net of deferred taxes, totaled $5.8 million at
June 30, 1999, compared with $7.5 million at December 31, 1998.
Owing to the loss of several sizeable institutional accounts, and some
withdrawals from existing accounts, offset by positive performance
results in managed accounts over the last year, assets under management
at June 30, 1999 totaled $2.36 billion, 6% greater than a year ago, and
2% less than year-end 1998.
Net income totaled $5.2 million ($.56 per common share diluted) for the
three months ended June 30, 1999, compared with $1.9 million ($.20 per
common share diluted) for the same period in 1998. For the 1999 second
quarter, income from money management operations before taxes
("operating income") decreased 60% compared with the same period in
1998, while other income nearly quadrupled. Excluding non-cash
compensation charges (see Note 3 to financial statements) and the 1999
charge related to payments to a senior officer under a revised
facilities agreement involving certain managed accounts (the "SVP
Accounts" - see Note 5), operating income declined 16% in the 1999
quarter compared with the second quarter of 1998.
Net income for the six months ended June 1999 was $8.1 million ($.87
per common share diluted) compared to $3.7 million ($.38 per common
share diluted) for the same period in 1998. Operating income for the
six months ended June 1999 decreased 61% to $845,000 compared to $2.1
million in 1998 while other income more than tripled in 1999 to $13.4
million compared to $4.3 million in 1998. Excluding non-cash
compensation (see Note 3 to financial statements) and 1999 charge
related to payments to a senior officer under a revised facilities
agreement involving SVP Accounts, operating income decreased 17% in the
1999 period compared with the same period in 1998.
While total operating revenues may decline in 1999, the Company intends
to keep operating expenses under close control.
II. Assets Under Management
Assets under management totaled $2.36 billion at June 30, 1999 compared
with $2.41 billion on December 31, 1998, and $2.22 billion on June 30,
1998.
Average assets under management decreased 4% to $2.43 billion in the
second quarter of 1999, compared with $2.54 billion in the comparable
period a year ago. Average managed assets decreased 2% compared with
the first quarter of 1999. Assets under management at June 30, 1999
totaled $2.36 billion, or 2% less than at the end of 1998 and 6%
greater than a year ago. Net client withdrawals totaling $241 million
over the last twelve months were more than offset by strong performance
results in equity and balanced accounts.
12
During the second quarter of 1999, new accounts totaled $6 million, net
withdrawals out of client accounts totaled $161 million, and
performance added $38 million to managed assets.
In the twelve months ended June 30, 1999, new accounts totaled $24
million, net withdrawals out of client accounts totaled $269 million,
and performance added $386 million to managed assets.
Investment performance for clients over the last eighteen months was
strong on an absolute and relative basis, and the Company's peer group
rankings have improved.
III. Results of Operations
Quarterly Comparison
Operating revenues were flat at $4.5 million for the second quarters
ended June 30, 1999 and 1998.
Operating expenses increased 18% to $4.1 million, compared with $3.4
million a year ago. After adjusting for the non-cash compensation
charges and SVP charges, operating expenses increased 9% to total $3.1
million, compared with $2.8 million in the 1998 quarter. As a result,
operating income as adjusted declined 16% to $1.4 million (30% margin),
compared with $1.6 million (36% margin) in the 1998 quarter.
Other income totaled $8.7 million in the 1999 quarter, which included
$6.0 million in net realized capital gains and $2.5 million in net
unrealized capital gains. Other income totaled $2.2 million for the
same period a year ago, reflecting net realized and unrealized capital
gains of $1.8 million.
The following table depicts variances in significant income statement
items for the three months ended June 30, 1999 compared with the
respective period in 1998. Explanations of the variances follow the
table.
(000's)
3 Months Ended June 30
---------------------- Percentage
1999 1998 Change
------ ------ -------
A. Advisory fees $4,033 $4,117 -2%
B. Employees' compensation 3,027 2,404 +26
C. Non-compensation expenses 1,042 1,042 0
D. Other income, net 8,714 2,186 +299
E. Income taxes 3,957 1,368 +189
o The 2% decrease in advisory fees is due to the 4% decline in average
assets under management previously discussed, partially offset by an
increase in the weighted fee yield.
13
o The increase in employees' compensation is the result of $375,000 in
SVP charges and an accrued bonus of $200,000 earned under the
Company's Management Incentive Plan in the 1999 quarter, compared
with none in the 1998 period. Excluding these charges, compensation
expense decreased 2%.
o Non-compensation expenses remained flat from a year ago.
o Other income nearly quadrupled from a year ago due to the increases
in net realized and unrealized capital gains previously discussed.
o Income taxes increased due to the 189% increase in pre-tax income.
Six Month Comparison
Operating revenues decreased 3% to $8.7 million for the six months
ended June 1999 from $9.0 million for the 1998 comparable period.
Operating expenses increased 16% to $7.9 million in 1999, compared with
$6.8 million in 1998. After adjusting for the non-cash compensation
charges and SVP charges, operating expenses increased 5% to total $6.0
million, compared with $5.7 million in the comparable 1998 period. As a
result, operating income as adjusted declined 17% to $2.7 million (31%
margin) compared with $3.3 million (36% margin) in the comparable 1998
period.
Other income totaled $13.4 million in the six months ended June 1999
which included $7.9 million in net realized gains and $5.1 million in
net unrealized gains on investments. Other income totaled $4.3 million
for the comparable 1998 period reflecting net realized gains of $7.9
million and unrealized gains of $.9 million on investments.
The following table depicts variances in significant income statement
accounts for the six months ended June 30, 1999 compared to the
respective period in 1998. Explanations of the variances follow the
table.
(000's)
6 Months Ended June 30
---------------------- Percentage
1999 1998 Change
------ ------ ------
A. Advisory fees $7,856 $8,113 -3%
B. Employees' compensation 5,861 4,883 +20
C. Non-compensation expenses 2,014 1,935 +4
D. Other income, net 13,416 4,313 +211
E. Income taxes 6,179 2,776 +123
14
o The 3% decrease in advisory fees is due to the 6% decline in average
assets under management, partially offset by an increase in the
weighted fee yield.
o The increase in employees' compensation is the result of $750,000 in
SVP charges and an accrued bonus of $200,000 earned under the
Company's Management Incentive Plan in the six months ended June
1999 compared with none in the 1998 period. Excluding these charges,
compensation expense increased 1% from the 1998 period.
o Non-compensation expenses increased from a year ago due to an
increase of 5% in general and administrative expenses primarily
related to one time professional services.
o Other income increased 211% from the 1998 comparable period due to
increases in net realized and unrealized gains on investments.
o Income taxes increased 123% due to the 121% increase in net Company
pre-tax profits.
IV. Liquidity and Capital Resources
At June 30, 1999 the Company had cash and cash equivalents of $7.9
million, compared with $4.0 million at the end of 1998. Operating
activities generated net cash outflows of $28,000 in the six months
ended June 30, 1999, compared with $876,000 of inflows in the same
period in 1998, reflecting the changing levels of operating income and
net income over those periods. Net cash provided by investing
activities totaled $6.5 million in the 1999 period, compared with
$390,000 in the similar 1998 period. The increase in 1999 was primarily
due to the net proceeds from sales of investments. Net cash outflows in
1999 from financing activities totaled $2.5 million, resulting from the
purchase of treasury stock.
Investments in marketable securities aggregated $71.4 million at June
30, 1999 compared with $73.8 million at the end of 1998. During 1998,
the Company invested $9.1 million in its new mutual fund, the
Atalanta/Sosnoff Fund, and an additional $3 million in investment
partnerships. At the start of 1999, the Company invested an additional
$3 million in investment partnerships.
Shareholders' equity totaled $87.0 million at June 30, 1999, compared
with $82.0 million at the end of 1998, primarily from net income of
$8.1 million recorded in the first six months of 1999 and unrealized
losses in the investment portfolio. The Company has adopted SFAS No.
115, requiring it to reflect a net unrealized gain of $5.8 million in
shareholders' equity at June 30, 1999, compared with $7.5 million at
December 31, 1998.
At June 30, 1999, the Company's investment portfolio at market totaled
$92.6 million (cost basis $82.9 million), compared with $85.4 million
(cost $70.3 million) at the end of 1998, comprised of cash and cash
equivalents, corporate and convertible debt, large-cap equity
securities, and investments in limited partnerships and the
Atalanta/Sosnoff Fund. At June 30, 1999, the Company was invested in 14
separate large-cap equity securities, in a more concentrated fashion
than it does for its managed client accounts. The largest position was
in Microsoft, at 14% of the portfolio, with an unrealized gain of $5.2
million at quarter-end.
15
If the equity market (defined as the S&P 500 index) were to decline by
10%, the Company might experience unrealized losses of approximately
$9.3 million; if the market were to decline by 20%, the Company might
experience unrealized losses of $18.6 million. However, incurring
unrealized losses of this magnitude is unlikely with active management
of the portfolio. Since the positions are primarily large-cap holdings,
they can be sold easily on short notice with little market impact.
Ultimately, the Company will raise and hold cash to reduce market risk.
In 1998, Atalanta paid a special dividend of $.25 per share.
Additionally, in December 1998, the Company repurchased 249,000 shares
of its common stock at a market price of $8.75 per share and in June
1999, the Company repurchased 254,174 shares of its common stock from a
former officer of the Company at a market price of $10.00 per share. At
June 30, 1999, there were no liabilities for borrowed money.
V. Year 2000
As all businesses in the securities industry, the Company's operating
businesses are materially dependent on the efficient and continuous
operation of their information technology systems (consisting of
computer software, hardware, local and remote communications networks)
and the imbedded microprocessors in its equipment. Substantially all
aspects of the securities industry's activities are time sensitive,
including the execution, processing, settlement and recording of
securities transactions, the maintenance and transmission of
information about such transactions and the collection and analysis of
information about issuers, markets and economies. Moreover, all of
these functions are highly interdependent and rely on the functioning
of the information technology systems of other organizations in the
securities industry, including counterparties, brokers, clearing agents
and custodians.
Because of the potential impact of the Year 2000 Issue ("Y2K") on the
securities industry, the Securities and Exchange Commission and other
regulatory and self-regulatory securities organizations have monitored
and required reports from their members concerning Y2K and encouraged
planning for system wide function tests. Y2K arises because of concern
that there is widely distributed in information technology systems and
imbedded microprocessors date recognition and processing functions
which designate and recognize a year by the year's last two digits and
therefore would not distinguish a year in the twenty-first century from
one in the twentieth century.
The Company has conducted a full assessment of its information
technology systems and imbedded technology to determine whether they
are Y2K compliant (i.e., that they will recognize and specify dates to
properly function in the year 2000 and thereafter). The remediation and
testing of all existing critical systems was substantially completed by
the end of 1998. Point-to-point testing with the systems of third
parties with which our existing systems interface is also substantially
completed. While the Company's existing critical systems were mostly
Y2K compliant, to reduce the cost of maintenance associated with such
systems, the Company decided to replace its two core critical systems,
trading and portfolio accounting, with off-the-shelf commercial
software packages that are also Y2K compliant. This process is now
complete.
16
Implementation of remediation and testing of non-critical systems is
substantially complete. Because much of our information technology
systems were proprietary and maintained by its designer and MIS
employees, Y2K compliance has been conducted in the normal course of
business without material incremental expenditures or personnel. In the
cases where external support in the form of software upgrades or
services are required, such support was provided by suppliers in the
fourth quarter of 1998. Based on its progress to date, we do not
believe that the costs of Y2K compliance will have a material effect on
the Company's financial position, results of operations or cash flow.
However, the Company is closely monitoring the progress of third
parties' information technology systems in Y2K compliance on which its
systems are dependent. It has solicited and received assurances of
progress from such third parties and is evaluating their responses. The
Company has developed contingency plans in the event of Y2K compliance
failure by such third parties based on more traditional systems for
securities execution, processing, settlement and record keeping which
it intends to continue to develop based on the results of testing this
year. We are not currently in a position to assess the effect of
critical third parties' ability to achieve Y2K compliance but believe
that the impact of failure would be adverse to our business.
17
Part II. Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Default upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security
At the Company's Annual Meeting of Stockholders held
on May 6, 1999, the election of the Board of
Directors' nominees was approved, the amendment to
the Company's Management Incentive Plan was approved,
and the ratification of the appointment of the
Company's independent auditors was approved.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit
Number Description
------ -----------
2 None.
4 None.
11 Computation of Earnings per Share.
15 None.
18 None.
19 None.
20 None.
23 None.
24 None.
25 None.
27 Financial Data Schedule
28 None.
Reports on Form 8-K: None.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Atalanta/Sosnoff Capital Corporation
Date: August 5, 1999 /s/ Martin T. Sosnoff
-----------------------------------------
Martin T. Sosnoff
Chairman of the Board and Chief Executive
Officer
Date: August 5, 1999 /s/ Anthony G. Miller
-----------------------------------------
Anthony G. Miller
Executive Vice President, Chief Operating
Officer and Chief Financial Officer
19
EXHIBIT INDEX
Exhibit
Number Description Page
------ ----------- ----
2 None
4 None
11 Computation of Earnings per Share 21
15 None
18 None
19 None
20 None
23 None
24 None
25 None
27 Financial Data Schedule 22
28 None
Reports on Form 8-K: None
20