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:
September 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
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(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 filing
requirements for the past 90 days.
Yes [X] No ____
As of November 5, 1999 there were 9,075,127 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 - September 30, 1999
and December 31, 1998 3
Condensed Consolidated Statements
of Income and Comprehensive Income -
Three and Nine Months Ended
September 30, 1999 and 1998 4-5
Condensed Consolidated Statement
of Changes in Shareholders' Equity -
Nine Months Ended September 30, 1999 6
Condensed Consolidated Statements of
Cash Flows - Nine Months Ended
September 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 AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
ASSETS SEPTEMBER 30, 1999 DECEMBER 31, 1998
- ------ ------------------ -----------------
Assets:
Cash and cash equivalents $ 2,200,762 $ 3,993,963
Accounts receivable 2,993,337 3,319,185
Due from broker 1,445,478
Investments, at market 72,238,321 73,802,294
Investments in limited partnerships 13,834,977 7,565,780
Fixed assets, net 1,225,783 659,311
Exchange memberships, at cost 402,000 402,000
Other assets 1,933,013 943,870
------------ ------------
Total assets $ 96,273,671 $ 90,686,403
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and other liabilities $ 975,256 $ 773,970
Accrued compensation payable 1,053,917 648,611
Income taxes payable 7,468,204 6,541,427
Separation costs payable 175,000 700,000
------------ ------------
Total liabilities 9,672,377 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 95,874 95,874
Additional paid-in capital 24,242,495 24,389,499
Retained earnings 67,877,670 58,412,561
Accumulated other comprehensive income -
unrealized gains from investments, net of deferred
tax liabilities of $2,406,046 and $4,996,227 3,609,069 7,494,341
Unearned compensation (4,500,809) (6,188,615)
Treasury stock, at cost, 503,174 and 249,000 shares (4,723,005) (2,181,265)
------------ ------------
Total shareholders' equity 86,601,294 82,022,395
------------ ------------
Total liabilities and shareholders' equity $ 96,273,671 $ 90,686,403
============ ============
Book value per share $ 9.53 $ 8.78
============ ============
See Notes to Condensed Consolidated Financial Statements
3
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED
------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
Revenues:
Advisory fees $ 3,744,958 $ 3,592,550
Commissions and other operating revenues 451,740 375,351
Realized and unrealized gains from
principal securities transactions 2,344,099 3,143,714
Interest and dividend income, net 187,138 365,086
----------- -----------
Total revenues 6,727,935 7,476,701
----------- -----------
Costs and expenses:
Employees' compensation and benefits 3,196,743 2,432,017
Clearing and execution costs 192,685 129,856
Selling expenses 65,507 95,828
General and administrative expenses 826,108 494,250
----------- -----------
Total costs and expenses 4,281,043 3,151,951
----------- -----------
Income before provision for income taxes 2,446,892 4,324,750
Provision for income taxes 1,064,000 1,886,000
----------- -----------
Net income $ 1,382,892 $ 2,438,750
=========== ===========
Earnings per common share - basic $ 0.15 $ 0.25
=========== ===========
Earnings per common share - diluted $ 0.15 $ 0.25
=========== ===========
Net income, as presented above $ 1,382,892 $ 2,438,750
Other comprehensive income (loss):
Net unrealized gain (loss) from investments,
net of deferred income taxes (credit)
of ($1,459,291) and $(3,035,999) (2,189,475) (4,554,000)
----------- -----------
Comprehensive income (loss) $ (806,583) $(2,115,250)
=========== ===========
See Notes to Condensed Consolidated Financial Statements
4
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
NINE MONTHS ENDED
-----------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
Revenues:
Advisory fees $ 11,601,255 $ 11,705,783
Commissions and other operating revenues 1,315,215 1,217,570
Realized and unrealized gains from
principal securities transactions 15,345,257 6,567,818
Interest and dividend income, net 602,288 1,254,132
------------ ------------
Total revenues 28,864,015 20,745,303
------------ ------------
Costs and expenses:
Employees' compensation and benefits 9,058,044 7,315,343
Clearing and execution costs 505,024 431,848
Selling expenses 285,310 322,896
General and administrative expenses 2,307,528 1,899,990
------------ ------------
Total costs and expenses 12,155,906 9,970,077
------------ ------------
Income before provision for income taxes 16,708,109 10,775,226
Provision for income taxes 7,243,000 4,662,000
------------ ------------
Net income $ 9,465,109 $ 6,113,226
============ ============
Earnings per common share - basic $ 1.03 $ 0.64
============ ============
Earnings per common share - diluted $ 1.03 $ 0.64
============ ============
Net income, as presented above $ 9,465,109 $ 6,113,226
Other comprehensive income (loss):
Net unrealized gain (loss) from investments,
net of deferred income taxes (credit)
of ($2,590,181) and $206,189 (3,885,272) 309,283
------------ ------------
Comprehensive income $ 5,579,837 $ 6,422,509
============ ============
See Notes to Condensed Consolidated Financial Statements
5
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
Accumulated
other compre-
Additional hensive 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
compensation (147,004) 1,687,806 1,540,802
Net unrealized gains
(losses) from investments,
net of deferred taxes (3,885,272) (3,885,272)
Net Income 9,465,109 9,465,109
-------- ------------ ----------- ---------- ------------- ------------- -----------
Balance -
September 30, 1999 $95,874 $24,242,495 $67,877,670 $3,609,069 $(4,500,809) $(4,723,005) $86,601,294
======= =========== =========== ========== ============ =========== ===========
See Notes to Condensed Consolidated Financial Statements
6
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
1999 1998
---- ----
Cash flows from operating activities:
Net income $9,465,109 $6,113,226
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 186,986 140,796
Amortization of unearned compensation 1,687,806 1,687,806
Realized and unrealized gains from
principal securities transactions, net (15,345,257) (6,567,818)
Increase (decrease) from changes in:
Accounts receivable 325,848 717,127
Due from broker (1,445,478) --
Other assets (989,143) (386,497)
Accounts payable and other liabilities 201,284 111,317
Accrued compensation payable 405,306 (468,959)
Income taxes payable 3,369,954 713,489
Separation costs payable (525,000) (525,000)
------------ ------------
Net cash provided by (used in) operating activities (2,662,585) 1,535,487
------------ ------------
Cash flows from investing activities:
Receivable from clearing broker, net 1,204,482
Purchases of fixed assets (753,457) (58,596)
Purchases of investments (101,780,529) (105,011,666)
Proceeds from sales of investments 105,945,110 102,116,442
------------ ------------
Net cash provided by investing activities 3,411,124 (1,749,338)
------------ ------------
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 (decrease) in cash and cash equivalents (1,793,201) (213,851)
Cash and cash equivalents, beginning of year 3,993,963 3,805,243
------------ ------------
Cash and cash equivalents, end of period $2,200,762 $3,591,392
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $52,140 $38,684
------------ ------------
Income taxes $3,502,630 $4,207,511
============ ============
See Notes to Condensed Consolidated Financial Statements
7
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
Note 1: Unaudited Information
The accompanying condensed consolidated financial statements of Atalanta/Sosnoff
Capital Corporation and Subsidiaries (the "Company") 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 September 30, 1999, and the results of its operations and cash flows for
the three and nine months ended September 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 statement of financial
condition 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 as revenues.
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
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
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 third quarters
of 1999 and 1998, respectively. NCCC of approximately $1.7 million was charged
to operations in the first nine 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 to the Company the revenues generated by the investment
management and brokerage services provided to the SVP Accounts.
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 $1,125,000 was
recorded in the three months and nine months ended September 30, 1999,
respectively.
Note 6: Compensation Expense
Pursuant to an agreement, the President of the Company earns a bonus based upon
the pre-tax operating profits earned by the Company as general partner of the
hedge fund managed by the President. Included in compensation expense related to
this bonus was $108,000 and $62,000 for the nine months ended September 30, 1999
and 1998, respectively.
9
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
Notes to Condensed Consolidated Financial Statements (cont'd)
In addition, under the Company's Management Incentive Plan adopted in 1999, an
annual bonus is earned by the Chief Executive Officer (CEO) based upon the
pre-tax earnings of certain managed assets of the Company in excess of a base
indexed return, as defined, subject to a ceiling of 10% of total pre-tax income.
Included in compensation expense related to the MIP are accrued bonuses to the
CEO totaling $550,000 and $750,000 for the three and nine months ended September
30, 1999, 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 9,084,227 and 9,587,401
weighted average common shares outstanding in the third quarters of 1999 and
1998, respectively, and 9,231,331 and 9,587,401 for the nine months ended
September 30, 1999 and 1998, respectively.
Diluted earnings per share amounts were computed based on 9,093,906 and
9,596,232 weighted average common shares outstanding in the third quarters of
1999 and 1998, respectively, and 9,239,824 and 9,602,054 for the nine months
ended September 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 $96.3 million at September 30, 1999, compared with $90.7
million at December 31, 1998, and book value per share totaled $9.53 at
September 30, 1999, compared with $8.78 at December 31, 1998.
Cash and cash equivalents totaled $2.2 million at September 30, 1999
compared with $4.0 million at December 31, 1998. Investments (at market)
totaled $72.2 million at September 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 $3.6 million at September 30, 1999,
compared with $7.5 million at December 31, 1998.
Assets under management at September 30, 1999 totaled $2.22 billion, 10%
greater than a year ago, and 9% less than year-end 1998. Net client
withdrawals totaling $285 million over the last twelve months were more
than offset by strong performance results in equity and balanced accounts.
Net income totaled $1.4 million ($.15 per common share diluted) for the
three months ended September 30, 1999, compared with $2.4 million ($.25 per
common share diluted) for the same period in 1998. Net income for the nine
months ended September 30, 1999 was $9.5 million ($1.03 per common share
diluted) compared to $6.1 million ($.64 per common share diluted) for the
same period in 1998.
II. Assets Under Management
Average assets under management increased 9% to $2.28 billion in the third
quarter of 1999, compared with $2.10 billion in the comparable period a
year ago. Average managed assets were $2.43 billion for the second quarter
of 1999. Assets under management at September 30, 1999 totaled $2.22
billion. Performance from the end of 1997 to date is strong on an absolute
and relative basis, and peer group rankings have improved. Although
operating revenues may decline in 1999, operating expenses will remain
under close control.
During the third quarter of 1999, new accounts totaled $15 million, net
client withdrawals totaled $60 million, and performance subtracted $101
million from managed assets.
In the nine months ended September 30, 1999, new accounts totaled $35
million, net client withdrawals totaled $329 million, and performance added
$100 million to managed assets.
In the twelve months ended September 30, 1999, new accounts totaled $37
million, net client withdrawals totaled $322 million, and performance added
$480 million to managed assets.
12
III. Results of Operations
Quarterly Comparison
Total revenues for the third quarter of 1999 decreased 10% to $6.7 million,
from $7.5 million in the third quarter of 1998. Revenue from advisory fees
and commissions ("operating revenue") increased 6% to $4.2 million in 1999,
as compared with $4.0 million in 1998
Expenses for the third quarter of 1999 increased 36% to $4.3 million, from
$3.2 million in the third quarter of 1998. The increase is primarily due to
charges related to payments to a senior officer under a revised facilities
agreement involving certain managed accounts (the "SVP Accounts" - see Note
5) of $375,000, and accrued bonus compensation related to the Company's
Management Incentive Plan ("MIP Expense" - see Note 6) of $550,000.
Non-cash compensation charges of $563,000 ("NCCC" - see Note 3) are also
included in both the third quarter of 1999 and 1998.
After eliminating these charges, pre-tax income from operations was $1.4
million for the third quarter of 1999 and 1998, respectively.
Total revenues from principal securities transactions and net interest and
dividend income was $2.5 million for the third quarter of 1999, which is a
28% decrease from the $3.5 million recorded in the third quarter of 1998.
Substantially all of the net realized and unrealized gains from principal
securities transactions of $2.3 million and $3.1 million included in the
statements of income for the three months ended September 30, 1999 and
1998, respectively, were realized gains.
The following table depicts variances in significant income statement items
for the three months ended September 30, 1999 compared with the respective
period in 1998. Explanations of the variances follow the table.
(000's)
3 Months Ended September 30
--------------------------- Percentage
1999 1998 Change
---- ---- ------
A. Advisory fees $3,745 $3,593 +4%
B. Realized and unrealized gains from
principal securities transactions 2,344 3,144 -25%
C. Employees' compensation 3,197 2,432 +31%
D. Non-compensation expenses 1,084 720 +51%
E. Income taxes 1,064 1,886 -44%
o The 4% increase in advisory fees is due to the 9% increase in average
assets under management previously discussed, partially offset by a
decrease in the weighted fee yield.
o Realized and unrealized gains from principal securities transactions
decreased 25% from the 1998 comparable period due to decreases in net
realized and unrealized gains on investments, as previously discussed.
13
o The increase in employees' compensation is the result of $375,000 in
SVP charges and an accrued bonus of $550,000 earned under the
Company's Management Incentive Plan in the 1999 quarter, compared with
none in the 1998 period. Excluding these charges, compensation expense
was 7% less than the similar period in 1998.
o Non-compensation expenses increased 51% for the three months ended
September 30, 1999 as compared to the 1998 period. The increase was
primarily related to one time professional service charges and mutual
fund expenses incurred with the start of three new funds effective
July 1, 1999.
o Income taxes in 1999 decreased 44% due to a comparable decrease in
pre-tax income.
Nine Month Comparison
Total revenues for the nine months ended September 30, 1999 increased 39%
to $28.9 million, from $20.7 million in the 1998 comparable period.
Operating revenue was flat at $12.9 million in both 1999 and 1998.
Expenses for the nine months ended September 30, 1999 increased 22% to
$12.2 million, from $10.0 million in the comparable 1998 period. The
increase is primarily due to SVP charges of $1.1 million recorded in 1999
(versus none in the 1998 period), and accrued bonus compensation related to
the MIP of $750,000 in 1999 (versus none in the 1998 period). NCCC of $1.7
million are also included in both the 1999 and 1998 nine month periods.
After eliminating these charges, pre-tax income from operations was $4.3
million for the nine months ended September 30, 1999, as compared with $4.6
million in 1998, which represents a decrease of 7%.
Year to date revenue from principal securities transactions and net
interest and dividend income was $15.9 million for 1999, which is an
increase of 104% from the $7.8 million recorded in 1998. Net realized gains
from principal securities transactions were $10.2 million for the nine
months ended September 30, 1999, versus $6.6 million for the comparable
1998 period.
The following table depicts variances in significant income statement
accounts for the nine months ended September 30, 1999 compared to the same
period in 1998. Explanations of the variances follow the table.
(000's)
3 Months Ended September 30
--------------------------- Percentage
1999 1998 Change
---- ---- ------
A. Advisory fees $11,601 $11,706 -1%
B. Realized and unrealized gains from
principal securities transactions 15,345 6,568 +134%
C. Employees' compensation 9,058 7,315 +24%
D. Non-compensation expenses 3,098 2,655 +17%
E. Income taxes 7,243 4,662 +55%
14
o Advisory fees remained approximately flat from a year ago. Although
average managed assets declined 9% for the nine months, the fee yield
increased to offset it.
o Realized and unrealized gains from principal securities transactions
increased 134% from the 1998 comparable period due to increases in net
realized and unrealized gains on investments, as previously discussed.
o The increase in employees' compensation is the result of $1.1 million
in SVP charges and an accrued bonus of $750,000 earned under the
Company's Management Incentive Plan in the nine months ended September
30, 1999, compared with none in the 1998 period. Excluding these
charges, compensation expense decreased 2% from the 1998 period.
o Non-compensation expenses increased 17% for the nine months ended
September 30, 1999 as compared to the 1998 period. The increase was
primarily related to one time professional service charges and mutual
fund expenses incurred with the start of three new funds effective
July 1, 1999.
o Income taxes in 1999 increased 55% due to a comparable increase in
pre-tax income.
IV. Liquidity and Capital Resources
At September 30, 1999 the Company had cash and cash equivalents of $2.2
million, compared with $4.0 million at the end of 1998. Operating
activities generated net cash outflows of $2.7 million in the nine months
ended September 30, 1999, compared with $1.5 million 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 $3.4 million in the 1999 period, compared with a net use of $1.7
million 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 $72.2 million at September
30, 1999 compared with $73.8 million at the end of 1998. During 1998, the
Company invested $9.1 million in its first mutual fund and an additional $3
million in investment partnerships. During 1999, the Company invested an
additional $3 million in investment partnerships and $2 million each in its
three new mutual funds.
Shareholders' equity totaled $86.6 million at September 30, 1999, compared
with $82.0 million at the end of 1998, primarily from net income of $9.5
million recorded in the first nine months of 1999, partially offset by
unrealized losses on investments available for sale (see Note 2). The
Company had a net unrealized gain of $3.6 million in shareholders' equity
at September 30, 1999, compared with $7.5 million at December 31, 1998.
At September 30, 1999, the Company's investment portfolio at market totaled
$88.3 million (cost basis $75.4 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 Funds. At
September 30, 1999, the Company was invested in 16 separate large-cap
equity securities, in a more concentrated fashion of what it does for its
managed client accounts. The largest position was in Apple Computer, at 9%
of the portfolio, with an unrealized gain of $638,000 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 $8.6
million; if the market were to decline by 20%, the Company might experience
unrealized losses of $17.2 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 September 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 was completed in the summer of 1999.
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.
16
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 Holders
None
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: November 8, 1999 /s/ Martin T. Sosnoff
------------------------------------
Martin T. Sosnoff
Chairman of the Board and
Chief Executive Officer
Date: November 8, 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