10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 2001
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File Number 1-9137
ATALANTA/SOSNOFF CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3339071
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 Park Avenue, New York, New York 10178
- ----------------------------------------- -----
(Address of principal executive officers) (zip code)
(Registrant's telephone number, including area code) (212) 867-5000
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
Common Stock, par value $.01 per share New York Stock Exchange
- -------------------------------------- -----------------------
Securities registered pursuant to Section 12 (g) of the Act:
NONE (Title of Class)
----
1
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 12 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Number of shares of common stock *
outstanding at March 22, 2002: 8,875,705
* (voting; only class outstanding)
Aggregate market value of voting and
non-voting common equity held by non-
affiliates, as of March 22, 2002: $ 12,015,140
Documents incorporated by reference: Proxy Statement for the 2002 Annual Meeting
of Stockholders (incorporated in part in Form 10-K, Part III)
Exhibit Index is located on page 29.
2
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K under the
captions "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations", 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. These forward-looking statements speak
only as of the date of this Annual 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.
3
PART I
Item 1. Business
GENERAL
Atalanta/Sosnoff Capital Corporation, a New York Stock Exchange listed
company, through its operating subsidiaries, Atalanta/Sosnoff Capital
Corporation (Delaware) ("Capital") and Atalanta/Sosnoff Management Corporation
("Management"), provides discretionary investment advisory, brokerage and other
related services. The term "Company" as used herein refers to Atalanta/Sosnoff
Capital Corporation and its subsidiaries. Capital and Management are both
federally registered investment advisors. Management is also federally
registered as a broker-dealer.
CLIENT RELATIONSHIPS
General. Investment advisory clients include corporate and public
retirement plans, endowments, charitable and religious organizations, and
individuals in both taxable and tax-exempt accounts. The Company provides
investment advisory services to its clients under investment advisory
agreements. These agreements are generally terminable upon short notice and
provide for compensation based on the market value of the client assets under
management. Generally, annual institutional account fees start at 1% of assets
under management, and, for larger accounts, may include performance fees or
reductions in fees on incremental assets to as low as 0.2%. Individual and
smaller institutional account fees are generally 1% of assets under management.
Some institutional account clients have consented to the use of Management as
broker for certain portfolio transactions. Most of the Company's individual and
smaller institutional account clients use Management as the broker for certain
portfolio transactions.
The largest single client of the Company generated approximately 3% of the
Company's operating revenues for the year ended December 31, 2001. The Company's
ten largest clients, as of December 31, 2001, accounted for approximately 22% of
total operating revenues for the year then ended.
Assets under management decreased 13% in 2001, from $2.71 billion at
December 31, 2000 to $2.36 billion at December 31, 2001. This net decrease is
primarily the result of $196 million of new assets raised in 2001 offset by net
cash outflows in client accounts and closed accounts of $305 million and
negative performance of $242 million in 2001. (See the following pages and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Summary" for further discussion)
The following table depicts assets under management at the last three
year-ends by type of client:
($ millions)
2001 2000 1999
---- ---- ----
Institutional $1,509 $1,905 $2,086
High Net Worth 368 393 376
Investment Partnerships 203 200 126
Wrap Programs 244 179 72
Mutual Funds 32 30 26
------ ------ ------
Totals $2,356 $2,707 $2,686
====== ====== ======
4
Institutional Clients. Capital manages accounts of institutional clients
with assets under management of approximately $1.5 billion as of December 31,
2001, compared with $1.9 billion at the end of 2000, and $2.1 billion at the end
of 1999. The following table shows the types of institutional clients whose
assets are managed by Capital and, for each type, the assets under management as
of December 31, 2001:
Dollars in
Type of Account Millions % of Total
--------------- -------- ----------
Corporate employee
benefit plans $303 20%
Not-for-profit
Organizations 278 19
Jointly-trusteed
collective bargaining
employee plans 564 37
Governmental employee
benefit plans 268 18
Taxable 96 6
------ ----
Total $1,509 100%
====== ====
While relative investment performance in 2001 was again strong for equity
accounts, net outflows in client accounts of $212 million and negative
performance of $184 million accounted for the net decrease of 21% in 2001.
High Net Worth ("HNW") Clients. Since 1984, Management has managed assets
of individual and smaller institutional accounts. Assets under management in
this HNW business decreased 6% during 2001 to $368 million at December 31, 2001,
from $393 million at December 31, 2000 and $376 million at December 31, 1999.
Net cash outflows and negative performance accounts for the decrease in assets
under management in 2001. Certain of these accounts are exclusively managed and
serviced (the "SVP Accounts") by a Senior Vice President of Management, Mr.
William M. Knobler ("SVP").
Company-Sponsored Investment Partnerships. Capital is the general partner
of three investment limited partnerships and the investment advisor of an
offshore investment fund, all with different investment objectives and client
profiles, with total aggregate assets of $203 million at December 31, 2001,
compared with $200 million at the end of 2000 and $126 million at the end of
1999. Capital earns a management fee from each entity at an annual rate of 1% of
total assets, as defined. The partnership agreements contain various provisions
regarding the bearing of expenses by each of the entities. Capital charges one
of the partnerships and the offshore fund, both formed in 1997, an incentive fee
of 20% of net profits earned, as defined.
5
Wrap Program Accounts. The Company manages $244 million of accounts
custodied at and sponsored by various financial services firms (i.e. "Wrap"
accounts) at December 31, 2001, compared with $179 million at the end of 2000
and $72 million at the end of 1999. At the end of 1999, the Company was selected
to participate in one of the premier wrap programs in the country, the Salomon
Smith Barney Fiduciary Services program ("SSB FS"). The Company raised $67
million and $88 million in assets, net, in this program in 2001 and 2000,
respectively.
Mutual Funds. In June, 1998 the Company started its first mutual fund, the
Atalanta/Sosnoff Fund. In July 1999, the Company started three additional mutual
funds: the Atalanta/Sosnoff Value Fund, the Atalanta/Sosnoff Balanced Fund, and
the Atalanta/Sosnoff Focus Fund. In July 2001, the Company started a fifth
mutual fund: the Atalanta/Sosnoff Mid Cap Fund (collectively the "Funds").
Capital acts as the investment advisor to the Funds, and Management acts as the
distributor. The Company invested $9.1 million in the Funds in 1998, an
additional $6 million during 1999, an additional $3.1 million in reinvested
dividends in 2000, and an additional $2.1 million in contributions and
reinvested dividends in 2001. The market value of the Funds totaled $32 million
at December 31, 2001, and $30 million at the end of 2000. Capital earns an
advisory fee of .75% per annum on each Fund, subject to certain fee and expense
waivers currently in place.
INVESTMENT MANAGEMENT AND RESEARCH
The Company currently manages $2.36 billion in equity, balanced and fixed
income accounts for corporations, public funds, Taft-Hartley clients,
foundations, charitable organizations and individuals. Institutional clients
were the source of 64% of total managed assets at the end of 2001. The Company's
subsidiaries have been registered as investment advisors since 1982 (Capital)
and 1984 (Management), respectively. Institutional clients are managed by
Capital. Management also provides brokerage services to some of its advisory
clients and to certain of Capital's clients.
The Company's investment philosophy seeks to identify companies that are
entering into a cycle of accelerating earnings momentum. Clients retain the
Company primarily as a domestic large-cap core equity and/or balanced account
manager.
The Company's equity methodology focuses on two levels: thematics and stock
selection. Through its Investment Policy Committee, composed of Martin T.
Sosnoff and Craig B. Steinberg, the Company seeks to identify change at the
margin. Major themes unfold during economic cycles they embrace, geopolitical
realignments, changes in government regulation and Federal Reserve Board policy
emphasis.
The process seeks to identify and overweight "event-driven" companies and
sectors with benevolent product profile cycles and accelerating earnings. The
Company believes that the vision and motivation of management are common
critical variables in outperformance. The Company's methodology is biased toward
management with meaningful equity participation.
The two principals, Martin T. Sosnoff and Craig B. Steinberg, have worked
together in the investment arena for more than 16 years. The continuity of the
team and its years of experience are critical elements in managing investments.
The portfolio managers are all experienced research analysts. Portfolio
decisions are implemented on behalf of all the Company's clients, subject to
individual client guidelines, restrictions and cash flows.
The Company's Investment Policy Committee, headed by Mr. Sosnoff as Chief
Investment Officer, is responsible for managing the portfolios of the Company's
clients. All members of the Committee participate in the management of all
accounts, except the SVP Accounts. When requested, Mr. Knobler participates in
the Investment Policy Committee process on an ad hoc basis. Each client
portfolio is comprised of securities selected by the Committee, subject to risk
tolerances, concentration limits, leverage policies and other restrictions
6
determined by each client with, in certain cases, the assistance of the Company.
Mr. Sosnoff has managed money since the late-1960's through several market
cycles. Throughout that time, Mr. Sosnoff has applied a consistent investment
style and philosophy to the management of client accounts.
The Company believes that, in addition to performance, client service is
paramount in the money management business. Portfolio managers are particularly
attuned to the needs of the Company's clients. The Company believes that its
consistent investment style since inception and continued emphasis on frequent
communication with clients distinguishes it from other managers.
The Company's mission is to maintain a top quartile performance ranking
year over year, cycle over cycle and decade over decade. Strong absolute and
relative performance results for the four years ended December 31, 2001, have
substantially improved the Company's peer group rankings.
MARKETING AND BUSINESS DEVELOPMENT
Institutional. The Company's institutional clients generally allocate their
assets among several investment managers and may change the allocation from time
to time. In addition, clients allocate their assets among various market sectors
and types of investments, and may change these allocations in response to
prevailing market conditions or changes in the client's investment objectives.
Net withdrawals from institutional client accounts totaled $212 million in
2001, compared with net withdrawals of $174 million in 2000, and net withdrawals
of $347 million in 1999. The Company believes the net cash outflows for the
three years ended 2001 are primarily the result of clients reallocating assets
away from the Company in an effort to preserve their desired asset allocation.
HNW. Individual and smaller institutional client portfolios are managed on
the same basis as the management of the accounts of institutional clients.
Account service representatives assist new clients in determining appropriate
risk tolerances, concentration limits, leverage policies and other restrictions,
and provide ongoing account servicing to existing clients. Net cash withdrawals
in HNW client accounts totaled $6 million in 2001, compared with net additions
of $15 million in 2000 and net cash withdrawals of $6 million in 1999. The
Company continues to devote additional resources to the HNW market.
Investment Partnerships. At December 31, 2001 the Company was the
general partner of and managed $203 million in three limited partnership
vehicles, primarily for the benefit of high net worth individuals as limited
partners. Two of the partnerships, Atalanta Partners, L.P. and Atalanta Variable
Fund, L.P., have been managed by Mr. Sosnoff since the late 1960's. The other
limited partnership, Sabre Partners, L.P., which began in 1997, is primarily
managed by Mr. Steinberg. The Company received net contributions to the
Partnerships totaling $21 million in 2001, compared with $57 million in 2000 and
$12 million in 1999.
Wrap Programs. The Company continues to increase marketing efforts on the
managed account ("Wrap") programs offered by certain large financial services
firms. As of December 31, 2001, $244 million was under management from such
programs, compared with $179 million at the end of 2000 and $72 million at the
end of 1999. The growth in 2001 and 2000 is primarily the result of the
Company's efforts in the SSB FS program. The Company believes this business
represents an efficient means for the Company to gather assets, and is
optimistic about its future growth, subject to performance considerations. The
Company has also devoted additional resources to this market.
7
Mutual Funds. The Company began its first mutual fund in 1998, the
Atlanta/Sosnoff Fund. In July 1999, the Company started three additional mutual
funds: the Atalanta/Sosnoff Value Fund, the Atalanta/Sosnoff Balanced Fund, and
the Atalanta/Sosnoff Focus Fund and in July 2001, the Company started its fifth
mutual fund; the Atalanta/Sosnoff Mid Cap Fund (collectively the "Funds"). The
Company invested $6.0 million in the Funds during 1999, an additional $3.1
million of reinvested dividends during 2000, and an additional $2.1 million of
contributions and reinvested dividends in 2001. The Company is marketing the
Funds through Management directly to certain of its current clients and
prospects, directly to financial planners and small registered investment
advisors as well as through several no-transaction-fee programs sponsored by
large financial services companies.
COMPETITION
The investment management business is highly competitive. The Company
competes with numerous investment management firms having varying investment
methods and philosophies. In addition to competition from other discretionary
investment managers, the Company, particularly in its individual and smaller
institutional account business, competes with investment alternatives offered by
mutual funds, insurance companies, banks, securities dealers and other financial
institutions. Also, the allocation by many clients of assets away from active
equity investment to index funds and similar products has enhanced the ability
of firms offering non-equity products and passive equity management which the
Company does not offer, including much larger firms with diversified product
lines, to compete with the Company.
The Company's performance results since inception rank above the median
among peer group money managers. Because of the strong relative equity
performance results for each of the four years ended December 31, 2001, the
Company's performance rankings are very good. The Company believes that the most
important factors affecting its capacity to compete for new business are
sustained top quartile investment performance results, the perceived quality and
productivity of investment professionals, a continued commitment to a strong
marketing effort and an exemplary level of client service.
Most prospective clients perform a thorough review of an investment
manager's background, investment policies and performance before committing
assets to that manager. In many cases, prospective clients invite a number of
competing firms to make presentations. The process of obtaining a new client
typically takes from 6 to 18 months from the time of the initial contact.
The Company believes it has the capacity to continue to increase the number
of client accounts under management without significant increases in fixed costs
or personnel and without adversely affecting the quality of service to existing
clients. The Company has continued to implement enhancements to its portfolio
accounting, allocation, monitoring and reporting systems to enable it to more
efficiently manage client accounts.
BROKERAGE
Many of the Company's clients use Management as broker for their account
transactions, to the extent consistent with the client's best interests and as
permitted by applicable law. As of December 31, 2001, some of Capital's
institutional clients have consented to the use of Management as broker. Such
clients generated approximately $30,000 in commission revenue in 2001. The use
of Management as broker is an integral part of the services offered to many of
Management's HNW clients (except for those accounts obtained through Wrap
programs). Management also provides brokerage services to the Company's officers
and employees.
8
Management clears and carries all accounts on a fully-disclosed basis
through Bear, Stearns Securities Corp. ("Bear Stearns"). Under these
arrangements, Bear Stearns performs administrative functions, such as record
keeping, confirmation of transactions and preparation and transmission of
monthly statements. Bear Stearns also extends margin credit to Management's
brokerage customers.
Management owns a seat on the New York Stock Exchange, Inc. ("NYSE") and is
a member of, and owns a seat on, the Chicago Board Options Exchange, Inc.
("CBOE"). These seats are leased at market rates to unrelated third parties and
aggregate lease rentals for 2001 and 2000 totaled approximately $358,000 and
$330,000, respectively.
EMPLOYEES
At December 31, 2001, the Company employed 46 persons on a full-time basis,
comprised of 3 senior executives, 5 research, 9 sales and marketing, 10 client
service, 9 operations, accounting and systems, 3 trading and 7 administrative or
secretarial positions. The Company considers its employee relations to be good.
Sales personnel receive additional compensation based upon the advisory
fees of clients which they were responsible for successfully soliciting on
behalf of the Company. In addition, the Company has entered into agreements with
various sales personnel which, among other things, limit the extent to which
such personnel may solicit clients of the Company if their employment is
terminated. Some of these agreements provide that, in certain circumstances, an
employee, in the event of termination, may continue to receive a percentage of
fees received by the Company from clients solicited by that employee. The
amounts payable with respect to these salespersons' agreements are not expected
to be material.
REGULATION
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. Management is registered as a
broker-dealer and investment advisor with the Securities and Exchange Commission
("SEC"), and Capital is registered as an investment advisor with the SEC.
Management's brokerage operations are also subject to regulation by
self-regulatory organizations, including the National Association of Securities
Dealers, Inc., and the CBOE. Securities firms are also subject to regulation by
state securities administrators in the states in which they conduct business.
The Company's subsidiaries are registered as a broker-dealer and/or an
investment advisor in all 50 states.
Broker-dealers and investment advisors are subject to regulation covering
virtually all aspects of their business. Additional legislation, changes in
rules promulgated by the SEC and self-regulatory organizations, or changes in
the interpretation or enforcement of existing laws and rules, may directly
affect the mode of operation and profitability of the Company. The SEC,
self-regulatory organizations and state securities commissions conduct routine
inspections of the Company's businesses and may conduct administrative
proceedings which can result in censure, fine, suspension or expulsion of a
broker-dealer or an investment advisor, and/or their officers or employees in
the event of violations of the laws and regulations they administer.
The Company's investment advisory agreements with its clients provide that
they may not be assigned without the consent of the client. "Assignment" is
defined in the Investment Advisers Act of 1940 to include the direct or indirect
transfer or hypothecation of a controlling block of the Company's voting
securities. Martin T. Sosnoff, Chairman of the Board of the Company, owns
approximately 79% of the NYSE listed company, Atalanta/Sosnoff Capital
Corporation (the "Holding Company"), which directly or indirectly owns Capital
and Management, both of which are registered investment advisors. Accordingly,
the voluntary transfer (by sale, merger or other disposition) or involuntary
transfer (by death or disability) by him of a controlling block of the Holding
Company's securities would result in such an "assignment" requiring client
consent. Although no assurance can be given in these circumstances,
9
the Company believes it would be able to substantially retain its existing
client base. The Company's Certificate of Incorporation contains provisions
intended to preclude the possibility that the accumulation by third parties of a
substantial position in the Company's common stock would be deemed an
"assignment" of the Company's advisory agreements.
Many of the Company's clients are subject to the Employee Retirement Income
Security Act of 1974 ("ERISA"). The accounts of these clients are subject to a
number of ERISA provisions governing, among other things, fiduciary obligations
and permissible investments and investment methods.
As a registered broker dealer, Management is required under the rules of
the SEC to maintain minimum net capital at all times equal to at least $250,000.
In addition, Management's ratio of aggregate indebtedness to net capital may not
exceed 15 to 1, and equity capital may not be withdrawn, or dividends paid, from
Management if the resulting ratio of aggregate indebtedness to net capital would
exceed 10 to 1. Management's minimum net capital requirement as of December 31,
2001 was $250,000; it had net capital at such date of $10.7 million, and a ratio
of aggregate indebtedness to net capital of 0.20 to 1.
Item 2. Properties.
The Company occupies office space at 101 Park Avenue, New York, New York
under a lease whose term expires in August 2002. In October 1999, the Company
entered into a new 15 year lease on its existing office space in New York, which
commences in September 2002 (see Note 7 to the Financial Statements).
Item 3. Legal Proceedings.
There are no legal proceedings to which the Company or any of its property
is subject which, in the opinion of the Company's management, would have a
material adverse effect upon the Company's business or operations.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during the
fourth quarter of 2001.
10
PART II
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Item 5. Market for the Registrant's Common Equity and Related Stockholders
Matters.
The Company's common stock is listed on the NYSE under the trading symbol
"ATL." The following table sets forth for the quarters indicated, the high and
low closing sales prices of the common stock, as reported on the New York Stock
Exchange Composite Transactions Tape, together with special dividends declared
each year.
2001 2000 1999
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
------------- ---- --- ---- --- ---- ---
March 31 $11.25 $9.90 $10.50 $7.88 $10.56 $6.75
June 30 11.60 10.00 10.63 9.00 10.00 7.50
September 30 11.45 9.40 10.75 9.50 10.13 7.13
December 31 10.71 9.45 11.63 10.25 8.88 7.63
Special Dividends
Declared $.20 $.25 None
The approximate number of record holders of common stock was 35 on December
31, 2001.
The Company's Board of Directors will periodically review the Company's
earnings, liquidity and anticipated cash needs and, subject to these
considerations, it may consider the payment of dividends in the future.
For information with respect to stock and option awards made during 2001,
see "Executive Compensation" and "Stock Option and Long Term Incentive Plans" in
the Company's Proxy Statement for its 2002 Annual Meeting of Stockholders,
incorporated by reference in Item 11 of Part III of this Annual Report on Form
10-K. Shares of common stock awarded in 1997 under the Long Term Incentive Plan
were issued to senior executives of the Company without registration under the
Securities Act of 1933 in reliance on the exemption therefrom in Section 4(2)
thereof for transactions not involving a public offering.
11
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
FIVE YEAR REVIEW
(dollars and shares in thousands,
except per share amounts) 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
SUMMARY OF OPERATIONS:
Net income $ 283 $ 11,503 $ 17,564 $ 7,784 $ 9,849
Per share - diluted $ .03 $ 1.27 $ 1.91 $ .81 $ 1.08
- basic $ .03 $ 1.27 $ 1.91 $ .81 $ 1.09
Total Revenues $ 15,090 $ 40,588 $ 51,075 $ 27,304 $ 31,680
Operating revenues (1) $ 15,458 $ 21,179 $ 18,270 $ 16,980 $ 18,829
Operating expenses (2) $ 14,627 $ 18,008 $ 16,611 $ 13,609 $ 13,707
Operating income $ 831 $ 3,171 $ 1,659 $ 3,371 $ 5,122
Operating margin 5% 15% 9% 20% 27%
Per employee:
Operating revenues (1) $ 336 $ 460 $ 406 $ 435 $ 471
Operating expenses (2) $ 318 $ 391 $ 369 $ 349 $ 343
Operating income $ 18 $ 69 $ 37 $ 86 $ 128
Net interest and dividend income $ 1,047 $ 1,234 $ 708 $ 1,557 $ 2,997
Net realized and unrealized
gains (losses) from investments $ (1,415) $ 18,176 $ 32,097 $ 8,767 $ 9,854
Return on average equity Nil 11% 19% 10% 15%
YEAR-END POSITION:
Total assets $ 109,495 $ 126,914 $ 123,623 $ 90,686 $ 75,413
Shareholders' equity $ 102,403 $ 107,066 $ 101,776 $ 82,022 $ 70,556
Book value per share $ 11.52 $ 11.89 $ 11.21 $ 8.78 $ 7.36
Cash dividends declared per share $ .20 $ .25 None $ .25 $ .20
Common stock, shares outstanding 8,886 9,005 9,075 9,338 9,587
Number of employees 46 46 45 39 40
Assets under management (millions) $ 2,356 $ 2,707 $ 2,686 $ 2,410 $ 2,682
AVERAGE ASSETS UNDER MANAGEMENT
(MILLIONS) $ 2,202 $ 2,638 $ 2,412 $ 2,402 $ 2,804
Percentage of average assets:
Operating revenues (1) .70% .80% .76% .71% .67%
Operating expenses (2) .66% .68% .69% .57% .49%
Operating income .04% .12% .07% .14% .18%
(1) Operating revenues consist of advisory fees, commissions and other
operating revenue.
(2) Operating expenses consist of total costs and expenses less investment
performance bonuses of $2,626,000 and $3,446,000 in 2000 and 1999,
respectively, pursuant to the Management Incentive Plan, which were paid to
the Chief Executive Officer and President. There were no investment
performance bonuses payable for 2001. (See Management's Discussion and
Analysis.)
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FINANCIAL SUMMARY
For the fourth consecutive year, investment performance was above market in
2001 for equity clients. Net new client assets raised of $196 million in 2001,
offset by net client withdrawals of $305 million and negative performance of
$242 million, caused a net decrease of $351 million in assets under management
during 2001. Average assets under management totaled $2.20 billion in 2001,
compared with $2.64 billion in 2000 and $2.41 billion in 1999.
After elimination of non-operating charges, pretax operating income
decreased 62% to $2.5 million in 2001, compared with $6.5 million in 2000 and
$5.4 million in 1999. Earnings per share totaled $0.03 in 2001, compared with
$1.27 in 2000 and $1.91 in 1999 (all earnings per share amounts represent
diluted earnings per share). Net income was $283,000 in 2001, compared with
$11.5 million in 2000 and $17.6 million in 1999.
Owing to the continued decline in the market during 2001, total revenue for
2001 decreased 63% to $15.1 million, from $40.6 million in 2000 and $51.1
million in 1999. Revenue from advisory fees and commissions ("operating
revenues") decreased 27% to $15.5 million in 2001, from $21.2 million in 2000
and $18.3 million in 1999. The Company had a net loss on investments of $368,000
in 2001, compared with net investment income of $19.4 million in 2000 and $32.8
million in 1999.
Costs and expenses for 2001 decreased 29% to $14.6 million, from $20.6
million in 2000 and $20.1 million in 1999. After eliminating non-operating
charges, operating expenses were $12.9 million, $14.6 million and $12.9 million
for 2001, 2000 and 1999, respectively. The following table depicts operating
income, as adjusted, for the years ended December 31:
- --------------------------------------------------------------------------------
OPERATING INCOME ($000)
- ---------------- ------
2001 2000 1999
-------- -------- --------
Operating revenues, reported $ 15,458 $ 21,179 $ 18,270
Costs and expenses, reported (14,627) (20,634) (20,057)
Add MIP investment performance bonuses -- 2,626 3,446
-------- -------- --------
Operating income before adjustments 831 3,171 1,659
Adjustments:
Non-cash compensation charges 1,688 2,250 2,250
SVP account charges -- 1,125 1,500
-------- -------- --------
Operating income, adjusted $ 2,519 $ 6,546 $ 5,409
======== ======== ========
- --------------------------------------------------------------------------------
Balance sheet assets totaled $109 million at December 31, 2001, compared
with $127 million a year ago. Book value per share decreased 3% to $11.52 at
December 31, 2001, compared with $11.89 at the end of 2000. Before the $0.20 per
share special dividend paid on December 31, 2001, book value decreased by 1%.
13
ASSETS UNDER MANAGEMENT
Managed assets totaled $2.36 billion at the end of 2001, compared with
$2.71 billion at the end of 2000 and $2.69 billion at the end of 1999. A
breakdown of assets under management by client type as of the end of each of the
last three years is as follows:
- --------------------------------------------------------------------------------
($ millions)
2001 2000 1999
------ ------ ------
Institutional $1,509 $1,905 $2,086
High Net Worth 368 393 376
Investment Partnerships 203 200 126
Wrap Programs 244 179 72
Mutual Funds 32 30 26
------ ------ ------
Total Managed Assets $2,356 $2,707 $2,686
====== ====== ======
- --------------------------------------------------------------------------------
The $351 million net decrease in managed assets during 2001 is comprised
of increases of $196 million from new client accounts, reduced by (i) $146
million in closed client accounts; (ii) $159 million in net withdrawals from
existing accounts and; (iii) $242 million in negative performance results.
In the two years ended December 31, 2001, managed assets decreased by $330
million, comprised of increases of $443 million in new client accounts, reduced
by (i) $210 million in closed client accounts; (ii) $336 million in net
withdrawals from existing accounts; and (iii) $227 million in negative
performance results.
EARNINGS
Operating revenues decreased 27% in 2001 to $15.5 million, compared with
$21.2 million in 2000 and $18.3 million in 1999. Average assets under management
decreased 17% in 2001 compared with 2000, and 9% compared with 1999. The
decrease in operating revenues in 2001 is due in part to the decrease in average
assets. In addition, performance based fees earned on one of the investment
partnerships managed by the Company totaled $2.4 million in 2000 and $539,000 in
1999, compared with none in 2001.
In 2001 operating revenues were .70% of average managed assets, compared
with .80% in 2000 and .76% in 1999. This reflects the absence of performance
based fees in 2001, and a significant decline in average assets under management
in 2001 compared with 2000 and 1999.
14
Advisory fees, which are earned based on the value of assets under
management, are the Company's primary source of operating revenues. Advisory
fees decreased 29% to $13.8 million in 2001, compared with $19.4 million in 2000
and $16.3 million in 1999. Advisory fees were approximately 90% of operating
revenues in each of the three years ended December 31, 2001.
Transaction fees (commissions) earned by Management are the primary source
of the Company's other operating revenues. Commissions are derived from some of
Management's individual and small institutional accounts, investment
partnerships and specific institutional accounts that have given Management the
authority to execute trades. Commissions decreased 14% to $1.25 million in 2001,
compared with $1.45 million in 2000 and $1.44 million in 1999.
The following table depicts operating expenses, as adjusted, for the years ended
December 31:
- --------------------------------------------------------------------------------
OPERATING EXPENSES ($000)
- ------------------ ------
2001 2000 1999
-------- -------- --------
Cost and expenses, reported $ 14,627 $ 20,635 $ 20,057
Adjustments:
MIP investment performance bonuses -- (2,626) (3,446)
Non-cash compensation charges (1,688) (2,250) (2,250)
SVP account charges -- (1,125) (1,500)
-------- -------- --------
Operating expenses, adjusted $ 12,939 $ 14,634 $ 12,861
======== ======== ========
- --------------------------------------------------------------------------------
Reported costs and expenses totaled $14.6 million in 2001, compared with
$20.6 million in 2000 and $20.1 million in 1999. The 2001 amount reflects $1.7
million in non-operating charges detailed above. Before this item, operating
expenses totaled $12.9 million in 2001. The 2000 amount reflects $6.0 million in
non-operating charges. Before these items, operating expenses totaled $14.6
million in 2000. The 1999 amount reflects $7.2 million in non-operating charges.
Before these charges, operating expenses totaled $12.9 million in 1999.
After these non-operating adjustments, 2001 operating expenses decreased
12% compared with 2000, after a 14% increase in 2000 compared with 1999.
Adjusted operating expenses were 84% of operating revenues and .59% of average
managed assets in 2001, compared with 69% and .55% in 2000, and 70% and .53% in
1999.
15
The following table depicts compensation expenses, as adjusted, for the years
ended December 31:
- --------------------------------------------------------------------------------
COMPENSATION EXPENSES ($000)
- --------------------- ------
2001 2000 1999
-------- -------- --------
Compensation expenses, reported $ 10,300 $ 16,017 $ 15,318
Adjustments:
MIP investment performance bonuses -- (2,626) (3,446)
Non-cash compensation charges (1,688) (2,250) (2,250)
SVP account charges -- (1,125) (1,500)
-------- -------- --------
Compensation expenses, adjusted $ 8,612 $ 10,016 $ 8,122
======== ======== ========
- --------------------------------------------------------------------------------
Reported compensation expenses decreased 36% to $10.3 million in 2001,
compared with $16.0 million in 2000 and $15.3 million in 1999. Compensation
expenses adjusted for the non-operating charges noted above decreased 14% in
2001 to total $8.6 million, compared with $10.0 million in 2000 and $8.1 million
in 1999. The 2001 decrease is primarily due to decreases in bonuses to
employees, a decrease in sales payouts related to the decrease in advisory fee
revenue and a decrease in the Company's discretionary contribution to the
employee Profit Sharing Plan. Adjusted compensation expenses were 44% of
operating revenues and .39% of average managed assets in 2001, compared with 47%
and .38% in 2000, and 44% and .34% in 1999.
The Company has a Management Incentive Plan ("MIP") (see Note 7 to the
audited financial statements) which covers bonus payments to certain executives.
Under the MIP, the payment of operating bonuses to these executives is based on
the annual growth in operating income, after adjusting for certain charges. A
MIP operating bonus of $541,000 was earned in 2000, compared with none in 2001
and 1999.
Under a second component of the MIP, an annual investment performance bonus
is earned by the Chief Executive Officer ("CEO") based upon the performance of
proprietary accounts of the Company in excess of a base index return, as
defined. Included in compensation expense related to this component of the MIP
is an investment performance bonus to the CEO of none in 2001, $2,216,000 in
2000 and $3,446,000 in 1999.
In addition, under a third component of the MIP, the President earns an
operating bonus based upon the pretax operating profits earned by the Company as
General Partner of the partnership managed by the President. Included in
compensation expense are operating bonuses earned under the MIP by the President
of $64,000, $1,273,000 and $532,000 in 2001, 2000 and 1999, respectively. The
President also earns an annual investment bonus under this component of the MIP
based upon the performance of the Company's investment
16
in the partnership managed by the President in excess of a base index return.
Included in compensation expense are investment bonuses earned by the President
of $410,000 in 2000, and none in 2001 and 1999.
The Company recorded $1.69 million, $2.25 million and $2.25 million in
2001, 2000 and 1999, respectively, for non-cash compensation charges ("NCCC")
related to awards of restricted stock in 1997 (see Note 8 to the audited
financial statements). In 2000 and 1999, the Company also recorded $1,125,000
and $1,500,000, respectively, of compensation expense related to a Senior Vice
President's relinquishment of the exclusive right to receive the net operating
earnings attributable to certain managed accounts to the Company (the "SVP
Accounts" - see Note 4 to the audited financial statements).
- --------------------------------------------------------------------------------
NON-COMPENSATION EXPENSES ($000)
- ------------------------- ------
2001 2000 1999
---- ---- ----
Non-compensation expenses, reported $4,327 $4,618 $4,739
- --------------------------------------------------------------------------------
Non-compensation expenses decreased by 6% to $4.3 million in 2001, compared
with $4.6 million in 2000 and $4.7 million in 1999. The 2001 decrease is due to
a decrease in brokerage execution costs, and in selling and promotional
expenses. Non-compensation expenses totaled 28% of operating revenues and .20%
of average managed assets in 2001, compared with 22% and .18% in 2000, and 26%
and .20% in 1999.
o o o
Net investment income (loss), which comprises interest, dividends, and net
realized and unrealized gains/losses from principal securities transactions
(primarily large-cap equities), totaled ($368,000) in 2001, compared with $19.4
million in 2000 and $32.8 million in 1999. Net interest and dividend income was
$1.0 million in 2001, compared with $1.2 million in 2000 and $0.7 million in
1999. Net losses on investments totaled $1.4 million ($1.7 million realized
gains) in 2001, compared with a net gain of $18.2 million ($12.5 million
realized gains) in 2000 and $32.1 million ($19.8 million realized gains) in
1999, reflecting the strengths and weaknesses of the domestic equity markets in
those years.
LIQUIDITY AND CAPITAL RESOURCES
Net investments in marketable securities aggregated $73.4 million at
December 31, 2001, compared with $82.7 million at the end of 2000. During 2001,
the Company made a contribution and reinvested dividends of $2.1 million in the
Company sponsored mutual funds (the "Funds"). During 2000, the Company
reinvested dividends of $3.1 million in the Funds and invested an additional
$2.4 million in one of the Partnerships. Shareholders' equity totaled $102.4
million at December 31, 2001, compared with $107.1 million at the end of 2000.
This decrease is primarily from net realized losses of $3.5 million on the
investment portfolio, partially offset by net income of $283,000 recorded in
2001. The Company has adopted SFAS No. 115, requiring it to reflect a net
unrealized gain of $1.3 million after taxes in shareholders' equity at December
31, 2001, compared with $4.8 million at the end of 2000.
17
At December 31, 2001, the Company's net investment portfolio at market
totaled $99.6 million (cost basis $83.1 million), comprised of cash and cash
equivalents, corporate debt, large-cap equity securities, investments in limited
partnerships and the Funds (see Note 3 to the audited financial statements). On
the equity side, at year-end, the Company was invested in 20 separate large-cap
securities, in a more concentrated fashion of what it does for its managed
client accounts.
If the equity market (defined as the S&P 500 index) were to decline by 10%,
the Company might experience unrealized losses of approximately $10 million; if
the market were to decline by 20%, the Company might experience unrealized
losses of $20 million. However, incurring unrealized losses of this magnitude is
unlikely with active management of the portfolio. Since the equity positions are
all 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.
At December 31, 2001 the Company had cash and cash equivalents totaling
$1.9 million, compared with $989,000 at the end of 2000. Net cash used in
operating activities was $2.5 million in 2001, compared with $8.6 million in
2000. This reflects the changing levels of operating income and changes in
operating assets and liabilities over those periods. Net cash provided by
investing activities totaled $8.8 million in 2001, compared with $7.7 million
provided in 2000. Net cash used in financing activities was $5.4 million in
2001, compared with $0.7 million in 2000. As a result, there was a net increase
in cash and cash equivalents of $952,000 in 2001, compared to a decrease of $1.6
million in 2000.
o o o
In 2001, the Company declared a special dividend of $.20 per share,
compared with $.25 per share in 2000.
During 2000, the Company purchased 69,900 shares of its common stock at an
average price of $9.82 per share. During 2001, the Company purchased 119,520
shares of its Common stock at an average price of $11.21 per share. On December
12, 2001, the Company retired 189,420 shares of treasury stock and restored the
common stock to authorized and unissued status. In February and March, 2002, the
Company repurchased a total of 10,000 shares of its common stock at an average
market price of $10.41 per share.
At December 31, 2001 and 2000, the Company had no liabilities for
borrowed money.
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 Long Term Incentive Plan ("LTIP"). Craig B. Steinberg, President, received
600,000 shares and Anthony G. Miller, Executive Vice President and Chief
Operating Officer, received 175,000 shares. Such awards vested over four years.
The difference of $9.0 million between the market value ($11.625 per share) of
the shares awarded on the date of grant and the purchase price of $.01 per share
was recorded as unearned compensation in shareholders' equity and was amortized
over a four-year
18
period commencing with the fourth quarter of 1997 (approximately $563,000 per
quarter and $2.25 million annually) and ending with the third quarter of 2001.
The Company believes that the foreseeable capital and liquidity
requirements of its existing businesses will continue to be met with funds
generated from operations.
PROSPECTIVE CHANGE OF ACCOUNTANTS
The Board of Directors of the Company, upon recommendation of the Audit
Committee, has appointed the firm of Rothstein, Kass & Company, P.C. independent
auditors for the Company for 2002, subject to ratification by the stockholders.
Arthur Andersen LLP had served as independent auditors of the Company since
1989. The Audit Committee determined not to recommend the reappointment of
Arthur Andersen LLP based upon the Committee's concern about Arthur Andersen
LLP's exposure to civil and criminal liabilities. Arthur Andersen LLP's reports
on the Company's financial statements during this period have not contained any
adverse opinion or disclaimer of opinion or any qualification or modification of
any kind, nor have there been any disagreements with Arthur Andersen LLP on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure.
The engagement of Rothstein, Kass & Company is expected to commence as of
the beginning of the Company's 2002 fiscal year.
Item 8. Financial Statements and Supplementary Data
See Index to Consolidated Financial Statements, and Consolidated
Financial Statement Schedules on page F-1 in Item 14.
Item 9. Changes in or Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
19
PART III
Item 10. Directors and Executive Officers of the Registrant.
(a) Directors -
Information concerning directors of the Company is contained under the
caption "Election of Directors" in the Proxy Statement for the 2002 Annual
Meeting of Stockholders to be filed with the Securities and Exchange
Commission and is incorporated herein by reference.
(b) Executive Officers of the Registrant -
MARTIN T. SOSNOFF*, 70, was a founder of the Company and has been Chairman
of the Board, Chief Executive Officer and Chief Investment Officer of
the Company, Capital and ASCC Corp. since their inceptions. He was a
co-founder of Atalanta Capital Corporation (investment management) and
served as its Chairman and Chief Executive Officer until 1983.
CRAIG B. STEINBERG**, 40, has been President, Director of Research, and
held other offices, with the Company, Capital and ASCC Corp. since
1985. Mr. Steinberg is a Portfolio Manager, and he was a securities
analyst at Prudential Equity Management from 1983 to 1985.
ANTHONY G. MILLER, 43, has been Executive Vice President, Chief Operating
Officer, and Secretary, and held other offices, with the Company and
its subsidiaries since 1986. Mr. Miller is the President and Chief
Executive Officer of Management. From 1983 to 1986 he was Manager,
Foreign Exchange and Money Market Operations, and held other positions,
with the Royal Bank of Canada and, from 1980 to 1983 was a Senior
Accountant, and held other positions, with Arthur Andersen & Co.
- -------------------------------
* Also a director and member of the Executive, Compensation and Stock
Option Committees.
** Also a director and member of the Executive Committee.
20
WILLIAM M. KNOBLER, 68, has been Senior Vice President of Management since
1985. Mr. Knobler is a Portfolio Manager, and he was a securities
analyst and voting shareholder of Sanford C. Bernstein & Co. from 1979
to 1985.
JAMES D. STAUB, 69, has been Senior Vice President, and held other offices,
with Capital and Management since 1984. Mr. Staub is responsible for
West Coast Marketing, and he was a corporate officer of Alexander &
Baldwin, Inc. from 1961 to 1984.
KEVIN S. KELLY, 37, has been Senior Vice President, Finance, Chief
Financial Officer, and held other offices with the Company and its
subsidiaries since joining the Company in 1999. Mr. Kelly is a CPA and
was a Senior Manager for Grant Thornton prior to joining the Company.
Officers of the Registrant are elected at the meeting of the Board of
Directors held each year immediately after the Annual Meeting of Stockholders
and serve for the ensuing year and until their successors are elected and
qualified.
Item 11. Executive Compensation.
Information concerning executive compensation is contained under the
captions "Election of Directors", "Executive Compensation", "Stock Option and
Long Term Incentive Plans", "Profit-Sharing Plan" and "Management Incentive
Plan" in the Proxy Statement for the 2002 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission and is incorporated herein by
reference.
Item 12. Beneficial Ownership of the Company's Securities.
Information concerning security ownership of certain beneficial owners and
management is contained under the caption "Beneficial Ownership of Securities of
the Company" in the Proxy Statement for the 2002 Annual Meeting of Stockholders
to be filed with Securities and Exchange Commission and is incorporated herein
by reference.
Item 13. Certain Relationships and Related Transactions.
Information concerning certain relationships and related transactions is
contained under the caption "Agreements and Transactions with Directors and
Executive Officers" in the Proxy Statement for the 2002 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission and is
incorporated herein by reference.
21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. FINANCIAL STATEMENTS
See Index to Consolidated Financial Statements and Consolidated
Financial Statement Schedules on Page F-1 of Item 14.
2. FINANCIAL STATEMENT SCHEDULES
See Index to Consolidated Financial Statements and Consolidated
Financial Statement Schedules on Page F-1 of Item 14.
(b) Current Report on Form 8-K filed March 28, 2002.
22
INDEX
Page(s)
-------
FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION:
Report of Independent Public Accountants F-2
Consolidated Statements of Financial Condition - December 31, 2001 and 2000 F-3
Consolidated Statements of Income and Comprehensive Income (Loss) for the Years
Ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2001,
2000 and 1999 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 to F-14
SUPPLEMENTARY FINANCIAL INFORMATION:
Selected Quarterly Financial Data (Unaudited) F-15
Computations of Earnings Per Share S-1
Financial statement schedules not included in this report have been omitted
because they are not applicable or the required information is given in the
consolidated financial statements or the notes thereto.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Atalanta/Sosnoff Capital Corporation and Subsidiaries:
We have audited the accompanying consolidated statements of financial condition
of Atalanta/Sosnoff Capital Corporation (a Delaware corporation) and
subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of income and comprehensive income (loss), changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Atalanta/Sosnoff Capital
Corporation and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
ARTHUR ANDERSEN LLP
New York, New York
March 15, 2002
F-2
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2001 AND 2000
ASSETS 2001 2000
------ ---- ----
ASSETS:
Cash and cash equivalents $ 1,940,653 $ 988,689
Accounts receivable 3,071,180 6,270,846
Due from broker 748,263 5,586,553
Investments, at market 73,583,683 83,597,861
Investments in limited partnerships 24,320,671 25,295,627
Fixed assets, net of accumulated depreciation and amortization of $1,697,800
and $1,168,016, respectively 1,272,504 1,694,353
Exchange memberships, at cost (market value $2,570,000 and $2,060,000,
respectively) 402,000 402,000
Other assets 4,155,943 3,078,246
------------- -------------
Total assets $ 109,494,897 $ 126,914,175
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Income taxes payable $ 4,951,233 $ 10,623,550
Due to broker 1,015,533 -
Accrued compensation payable 450,540 5,415,419
Dividends payable - 2,268,781
Securities sold but not yet purchased, at market 203,000 866,469
Accounts payable and other liabilities 471,761 674,335
------------- -------------
Total liabilities 7,092,067 19,848,554
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Preferred stock, par value $1.00 per share; 5,000,000 shares authorized; none
issued - -
Common stock, par value $.01 per share; 30,000,000 shares authorized;
8,885,707 and 9,075,127 shares issued at December 31, 2001 and 2000,
respectively 88,857 90,751
Additional paid-in capital 17,336,028 19,360,259
Retained earnings 83,716,965 85,210,852
Accumulated other comprehensive income - unrealized gains
from investments, net of deferred tax liabilities of $846,277
and $3,190,021, at December 31, 2001 and 2000, respectively 1,260,980 4,777,820
Unearned compensation - (1,687,799)
Treasury stock, at cost, 0 and 69,900 shares at December 31, 2001 and 2000,
respectively - (686,262)
------------- -------------
Total shareholders' equity 102,402,830 107,065,621
------------- -------------
Total liabilities and shareholders' equity $ 109,494,897 $ 126,914,175
============= =============
The accompanying notes are an integral part of these statements.
F-3
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) FOR THE YEARS
ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ ------------
REVENUES:
Advisory fees $ 13,786,068 $ 19,373,430 $ 16,349,083
Commissions and other operating revenues 1,671,942 1,805,238 1,921,016
Realized and unrealized gains (losses) from principal
securities transactions, net (1,415,127) 18,175,984 32,097,041
Interest and dividend income, net 1,047,124 1,233,640 708,205
------------ ------------ ------------
Total revenues 15,090,007 40,588,292 51,075,345
------------ ------------ ------------
COSTS AND EXPENSES:
Employees' compensation and benefits 10,299,598 16,016,813 15,317,520
Clearing and execution costs 726,728 919,083 788,334
Selling expenses 432,085 601,563 536,920
General and administrative expenses 3,168,342 3,096,993 3,414,339
------------ ------------ ------------
Total costs and expenses 14,626,753 20,634,452 20,057,113
------------ ------------ ------------
Income before provision for income taxes 463,254 19,953,840 31,018,232
PROVISION FOR INCOME TAXES 180,000 8,451,000 13,454,000
------------ ------------ ------------
Net income $ 283,254 $ 11,502,840 $ 17,564,232
============ ============ ============
EARNINGS PER COMMON SHARE - BASIC $ 0.03 $ 1.27 $ 1.91
============ ============ ============
EARNINGS PER COMMON SHARE - DILUTED $ 0.03 $ 1.27 $ 1.91
============ ============ ============
NET INCOME, as presented above $ 283,254 $ 11,502,840 $ 17,564,232
COMPREHENSIVE INCOME (LOSS):
Net unrealized gains (losses) from investments,
net of deferred income taxes (credit) of ($2,343,744),
($3,608,815), and $1,826,368, respectively (3,516,840) (5,413,222) 2,696,701
------------ ------------ ------------
Comprehensive income (loss) $ (3,233,586) $ 6,089,618 $ 20,260,933
============ ============ ============
The accompanying notes are an integral part of these statements.
F-4
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
Accumulated
Other
Comprehensive
Income -
Unrealized
Gains (Losses)
Additional From
Common Paid-in Retained Investments, Unearned Treasury
Stock Capital Earnings 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
Purchases of treasury stock (2,611,094) (2,611,094)
Retirement of treasury stock (5,123) (4,787,236) 4,792,359 -
Amortization of unearned
compensation (147,004) 2,250,408 2,103,404
Unrealized gains from
investments, net of
deferred taxes 2,696,701 2,696,701
Net income 17,564,232 17,564,232
-------- ----------- ----------- ---------- ----------- ----------- ------------
BALANCE, December 31, 1999 90,751 19,455,259 75,976,793 10,191,042 (3,938,207) - 101,775,638
Purchases of treasury stock (686,262) (686,262)
Amortization of unearned
compensation (95,000) 2,250,408 2,155,408
Unrealized losses from
investments, net of
deferred tax credits (5,413,222) (5,413,222)
Net income 11,502,840 11,502,840
Dividend, ($.25 per share) (2,268,781) (2,268,781)
-------- ----------- ----------- ---------- ----------- ----------- ------------
BALANCE, December 31, 2000 19,360,259 85,210,852 4,777,820 (1,687,799) (686,262) 107,065,621
Purchases of treasury stock (1,339,863) (1,339,863)
Retirement of treasury stock (1,894) (2,024,231) 2,026,125 -
Amortization of unearned
compensation 1,687,799 1,687,799
Unrealized losses from
investments, net of
deferred tax credits (3,516,840) (3,516,840)
Net income 283,254 283,254
Dividend, ($.20 per share) (1,777,141) (1,777,141)
-------- ----------- ----------- ---------- ----------- ----------- ------------
BALANCE, December 31, 2001 $88,857 $ 17,336,028 $83,716,965 $1,260,980 $ - $ - $102,402,830
======= ============ =========== ========== ========== ========= ============
The accompanying notes are an integral part of these statements.
F-5
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001,
2000 AND 1999
2001 2000 1999
---------------- ---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 283,254 $ 11,502,840 $ 17,564,232
Adjustments to reconcile net income to net cash
(used in) operating activities-
Depreciation and amortization 529,784 467,893 273,199
Amortization of unearned compensation 1,687,799 2,250,408 2,250,408
Realized and unrealized gains (losses) from
investments, net 1,415,127 (18,175,984) (32,097,041)
Deferred taxes (818,000) (4,430,000) 5,976,066
(Increase) decrease in operating assets-
Accounts receivable 3,199,666 (1,956,589) (995,072)
Other assets (1,077,697) (1,074,021) (1,060,355)
Increase (decrease) in operating liabilities-
Income taxes payable (2,511,796) 2,520,379 1,555,834
Accrued compensation payable (4,964,879) 602,638 4,164,170
Accounts payable and other liabilities (202,574) (314,013) 216,156
Separation costs payable - - (700,000)
-------------- --------------- ---------------
Net cash (used in) operating activities (2,459,316) (8,606,449) (2,852,403)
---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from clearing broker, net 5,853,823 (3,815,936) (1,770,560)
Purchases of fixed assets (107,935) (732,678) (1,043,457)
Purchases of investments (175,719,652) (351,760,285) (142,967,088)
Proceeds from sales of investments 178,770,829 363,972,872 149,868,066
--------------- --------------- ---------------
Net cash provided by investing activities 8,797,065 7,663,973 4,086,961
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock (1,339,863) (686,262) (2,611,094)
Dividends paid (4,045,922) - -
----------------- --------------- --------------
Net cash used in financing activities (5,385,785) (686,262) (2,611,094)
---------------- ---------------- ---------------
Net increase (decrease) in cash and
cash equivalents 951,964 (1,628,738) (1,376,531)
CASH AND CASH EQUIVALENTS, beginning of year 988,689 2,617,427 3,993,963
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, end of year $ 1,940,653 $ 988,689 $ 2,617,427
=============== =============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 178,304 $ 140,922 $ 83,961
Income taxes $ 3,509,796 $ 10,360,425 $ 5,922,100
Noncash financing activity-
Decrease in additional paid-in capital related to
restricted shares $ - $ (95,000) $ (147,004)
Retirement of treasury stock $ (2,026,125) $ - $ (4,792,359)
Accrued dividends payable $ - $ (2,268,781) $ -
The accompanying notes are an integral part of these statements.
F-6
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
1. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Atalanta/Sosnoff Capital Corporation (the "Holding Company") and its direct and
indirect wholly owned subsidiaries, Atalanta/Sosnoff Capital Corporation
(Delaware) ("Capital"), Atalanta/Sosnoff Management Corporation ("Management")
and ASCC Corp. ("ASCC"). Capital is a registered investment advisor that
provides investment advisory and management services to institutional clients
and is the general partner and investment advisor of certain investment
partnerships and mutual funds (see note 4). Management is a registered
investment advisor and a broker-dealer in securities and owns a seat on the New
York Stock Exchange, Inc. and owns a seat and is a member of the Chicago Board
Options Exchange, Inc. Management provides investment advisory and management
services to individual and smaller institutional clients and brokerage services
to its clients and some of the clients of Capital. ASCC was formed in December
1998 for proprietary investment-related activities which were previously
performed by the Holding Company.
Certain prior year balances have been reclassified in the accompanying
consolidated financial statements to conform to the 2001 presentation.
The Holding Company and its subsidiaries are referred to collectively herein as
the "Company." All intercompany accounts and transactions have been eliminated
in consolidation.
Reportable Operating Segments
The Company considers its operations to be one reportable segment for purposes
of presenting financial information and for evaluating its performance. As such,
the financial information presented in the accompanying financial statements is
consistent with the financial information prepared for internal use by
management.
Revenue Recognition
Advisory fee revenue is recognized in the period in which services are performed
based on a percentage of assets under management. Commission revenue and related
clearing and execution costs arising from customers' securities transactions are
recognized on a settlement date basis. The effect of using the settlement date
instead of the trade date for revenue recognition is immaterial.
Investments, at Market
The Company records its investments in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115. The Company has
designated certain 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. ASCC holds
certain equity and debt securities designated as "trading" securities which are
recorded at market value, with the related unrealized gains and losses reflected
in the consolidated statements of income and comprehensive income (loss).
Investments held by Management are recorded at market value, with the related
unrealized gains and losses reflected in the consolidated statements of income
and comprehensive income (loss).
F-7
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
Investment transactions are recorded on trade date. The cost of investments sold
is determined on the high-cost method. 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 year. Investments in mutual funds
are valued based upon the net asset value of the shares held as reported by the
fund. Securities with no reported sales on such date are valued at their last
closing bid price. Dividends and interest are accrued as earned.
Investments in Limited Partnerships
Capital serves as a general partner for three Company-sponsored investment
partnerships (the "Partnerships") and as the investment advisor for a
Company-sponsored offshore investment fund (the "Offshore Fund"). Investments in
limited partnerships are carried in the accompanying consolidated financial
statements at the Company's share of the net asset values as reported by the
respective Partnerships with the unrealized gain or loss recorded in the
consolidated statements of income and comprehensive income (loss). Limited
partners whose capital accounts in the aggregate are two-thirds of the total
capital accounts of all limited partners in each Partnership may, at any time,
require Capital to withdraw as the general partner of such Partnership.
Therefore, the Company is not deemed to have control of the Partnerships and,
accordingly, the accounts of the Partnerships are accounted for as an investment
in partnership in the accompanying consolidated statement of financial
condition.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with a maturity of
three months or less and money market accounts to be cash equivalents.
Depreciation and Amortization
Furniture, equipment, computer software and leasehold improvements are stated at
cost, net of accumulated depreciation and amortization computed using the
straight-line method. Depreciation of furniture, equipment and computer software
is provided over estimated useful lives ranging from five to seven years.
Leasehold improvements are amortized over the shorter of their useful lives or
the remainder of the term of the related lease. Accumulated depreciation for
fully depreciated fixed assets is removed from the related accounts for those
assets which have been retired.
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.
Estimates by Management
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the reported amounts of revenues and expenses. Actual results could differ from
those estimates.
2. EARNINGS PER COMMON SHARE
Basic earnings per common share amounts were computed based on 8,939,105;
9,045,819 and 9,192,066 weighted average common shares outstanding in 2001, 2000
and 1999, respectively. For purposes of determining weighted average common
shares outstanding, the Company considers all shares legally issued and
outstanding in determining basic and diluted net income per share.
F-8
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
In accordance with the provisions of SFAS No. 128, dilutive earnings per share
for the three years ended December 31, 2001 were computed based on the weighted
average common shares outstanding provided in the table below. Antidilutive
options were not included in the computation of dilutive earnings per share as
the options' exercise prices were greater than the average market price of the
common shares for each of those respective years.
2001 2000 1999
------------ ------------ ------------
Weighted average common shares outstanding 8,939,105 9,045,819 9,192,066
Common stock equivalents-options
25,133 15,683 8,406
------------ ------------ ------------
Dilutive weighted average common
shares outstanding 8,964,238 9,061,502 9,200,472
============ ============ ============
Antidilutive options
- - 200,000
============ ============ ============
3. INVESTMENTS
Investments at December 31, 2001 and 2000, consisted of the following:
Unrealized
Cost Market Value Gain (Loss)
------------ ------------ ------------
2001:
Available for sale:
Common stocks $ 46,628,442 $ 49,194,891 $ 2,566,449
Corporate bonds 3,530,550 2,479,971 (1,050,579)
Atalanta/Sosnoff Mutual Funds 8,928,494 9,416,525 488,031
------------ ------------ ------------
59,087,486 61,091,387 2,003,901
------------ ------------ ------------
Trading:
Atalanta/Sosnoff Mutual Funds 11,334,357 12,492,296 1,157,939
Common stocks, short
(314,789) (203,000) 111,789
------------ ------------ ------------
11,019,568 12,289,296 1,269,728
------------ ------------ ------------
Other:
Investments in limited partnerships 11,100,848 24,320,671 13,219,823
------------ ------------ ------------
$ 81,207,902 $ 97,701,354 $ 16,493,452
============ ============ ============
Unrealized
Cost Market Value Gain (Loss)
------------ ------------ ------------
2000:
Available for sale:
Common stocks $ 47,551,100 $ 54,519,262 $ 6,968,162
Corporate and government bonds 2,736,903 2,447,237 (289,666)
Atalanta/Sosnoff Mutual Funds 6,877,405 8,173,960 1,296,555
------------ ------------ ------------
57,165,408 65,140,459 7,975,051
------------ ------------ ------------
Trading:
Common Stocks, long 4,151,668 4,281,822 130,154
Common Stocks, short
(885,055) (866,469) 18,586
Atalanta/Sosnoff Mutual Funds 11,334,357 14,175,580 2,841,223
------------ ------------ ------------
14,600,970 17,590,933 2,989,963
------------ ------------ ------------
Other:
Investments in Partnerships 10,743,609 25,295,627 14,552,018
------------ ------------ ------------
$ 82,509,987 $108,027,019 $ 25,517,032
============ ============ ============
F-9
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
4. RELATED PARTY TRANSACTIONS
As the General Partner for the Partnerships and the investment advisor of the
Offshore Fund, Capital earned approximately, $2,442,000, $5,029,000 and
$2,876,000 in 2001, 2000 and 1999, respectively, for advisory and management
services (charged at 1% - 3% of net assets) and incentive fees charged at 20% of
performance, as defined, in the case of one partnership. Balances receivable
from the Partnerships were approximately $615,000, $2,033,000 and $1,524,000 at
December 31, 2001, 2000 and 1999 respectively, including approximately $747,000
and $1,239,000 of incentive fees which are included in advisory fee revenue in
2000 and 1999, respectively. There were no incentive fees receivable at December
31, 2001.
Investments include shares held of the Atalanta/Sosnoff Fund, Atalanta/Sosnoff
Value Fund, Atalanta/Sosnoff Focus Fund, Atalanta/Sosnoff Balanced Fund and the
Atalanta/Sosnoff Mid Cap Fund (the "Funds"). Management acts as Distributor to
the Funds and Capital acts as Investment Advisor. Management has agreed to
reimburse each mutual fund's expenses to the extent necessary to limit each
mutual fund's total operating expenses to 1.5% per annum (as defined) until at
least October 1, 2006. General and administrative expenses include approximately
$201,000, $140,000 and $91,000 of operating expenses which were reimbursed by
Management in 2001, 2000 and 1999, respectively. Capital earned an advisory fee
of approximately $134,000, $103,000, and $37,000 in 2001, 2000 and 1999,
respectively.
The Company has loaned approximately $3,900,000 to two senior officers of the
Company for taxes attributable to the compensation element of the restricted
stock award (see Note 8). The loans accrue interest at the applicable federal
rate, are recourse and are due in future principal payments as follows: $767,000
in 2002, $1,100,000 in 2003, $998,000 in 2004 and $996,000 in 2005. Interest
earned and received by the Company on these loans was $165,000, $108,000 and
$59,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
Employment Agreement
In May 1985, Management entered into an employment agreement with an individual
portfolio manager to provide investment related services to both Management and
Capital. Under the terms of the agreement, the employee was paid the net profits
relating to the accounts he managed (the "Net Profits") which represent advisory
fees and commissions for all trades executed for his managed accounts, net of
clearance and floor brokerage charges, allocated payroll, overhead and
out-of-pocket expenses incurred on his behalf by Management. Effective October
1, 1998, Management entered into a new agreement with the employee for the
period ended December 31, 2000, under which the employee relinquished the
revenue from investment management and brokerage services provided to the
managed accounts to Management.
Pursuant to this agreement, Management has made payments to the employee in
three annual installments in January 1999, 2000 and 2001, based upon a multiple
of annualized revenues from the employee's managed accounts. Based upon the
managed accounts asset value over the period, the Company recognized
approximately $2.9 million ratably as compensation expense over the term of the
arrangement. In addition, Management and the employee agreed to change the split
of Net Profits paid to the employee from 100% during the twelve-month period
ended September 30, 1998 to 50% for the twelve-month period ended September 30,
1999, 25% for the twelve-month period ending September 30, 2000, and 0%
thereafter. The employee has continued his employment with the Company.
F-10
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
5. PROVISION FOR INCOME TAXES
The provision for income taxes consists of:
2001 2000 1999
--------------- --------------- --------------
Current income taxes:
Federal $ 800,000 $ 8,373,000 $ 6,141,000
State and local 198,000 4,508,000 1,337,000
--------------- --------------- --------------
Total current 998,000 12,881,000 7,478,000
--------------- --------------- --------------
Deferred income taxes (credit) provision:
Federal (656,000) (2,885,000) 4,907,000
State and local (162,000) (1,545,000) 1,069,000
--------------- --------------- --------------
Total deferred (818,000) (4,430,000) 5,976,000
--------------- --------------- --------------
Total provision $ 180,000 $ 8,451,000 $ 13,454,000
=============== =============== ==============
A reconciliation of the statutory federal income tax rate and the effective rate
based on consolidated income before income taxes in 2001, 2000 and 1999, is set
forth below:
2001 2000 1999
------- ------ ------
Statutory federal income tax rate 34.9% 34.9% 34.9%
Increase resulting from:
State and local income taxes, net of federal tax
benefit 4.0 7.5 7.5
Other - - 0.1
------- ------ ------
Effective rate 38.9% 42.4% 42.5%
====== ====== ======
Deferred taxes payable are comprised of the following components as of December
31, 2001 and 2000:
2001 2000
---------- ----------
Unrealized gain on investments $3,656,000 $6,850,000
6. NET CAPITAL REQUIREMENTS
Management is subject to the Securities and Exchange Commission Uniform Net
Capital Rule 15c3-1, which requires the maintenance of minimum net capital and
requires that the ratio of aggregate indebtedness to net capital, both as
defined, not exceed 15 to 1. At December 31, 2001, Management had net capital of
approximately $10,722,000 which was $10,472,000 in excess of its required net
capital of $250,000, and had a ratio of aggregate indebtedness to net capital of
0.20 to 1.
7. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain office space and equipment under noncancelable
operating leases expiring in 2002. In October, 1999, the Company entered into a
new 15-year lease on its existing office space in New
F-11
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
York that commences on September 1, 2002, resulting in approximate future
minimum annual rent under this lease of $919,000, $1,011,000 and $1,103,000 per
annum for each of the five-year periods ending August 2007, 2012, and 2017,
respectively. Rent expense pursuant to these lease arrangements was
approximately $672,000, $653,000 and $671,000 in 2001, 2000 and 1999,
respectively.
Clearance of Securities
Management has an agreement with a broker-dealer to clear securities
transactions, carry customers' accounts on a fully disclosed basis and perform
certain record-keeping functions. The agreement can be cancelled by either party
upon 90 days' written notice. The agreement states that Management will assume
customer obligations should a customer of Management default. The clearing
broker-dealer controls credit risk of customers by requiring maintenance margin
collateral in compliance with various regulatory and internal guidelines. At
December 31, 2001, there were no significant customer receivables.
Compensation Agreements
Effective January 1, 1993, the Company adopted the Management Incentive Plan
(the "MIP") for senior executives. Under the MIP, each participant is entitled
to receive their assigned share of the annual award pool, which is computed
based on operating income performance goals, as defined in the MIP. An operating
bonus of $541,000 was earned and accrued in 2000. No operating bonuses were
earned under the operating MIP for 2001 and 1999.
The Company adopted an amendment to the MIP in 1999 whereby an annual investment
performance bonus is earned by the Chief Executive Officer (CEO) based upon
pre-tax earnings of certain managed assets of the Company in excess of a base
index return, as defined. Included in compensation expense is an accrued
investment performance bonus to the CEO of $2,216,000 and $3,446,000 in 2000 and
1999, respectively. No investment performance bonus was earned by the CEO in
2001.
In addition, under the amended MIP 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 Partnership managed by the President and an annual bonus
based upon the pre-tax earnings of the Company's investment in the Partnership
managed by the President. Included in compensation expense related to this bonus
is approximately $64,000, $1,683,000 and $532,000 for 2001, 2000 and 1999,
respectively.
8. STOCK OPTION, STOCK PURCHASE,
INCENTIVE AND PROFIT-SHARING PLANS
In 1996, the Company adopted the Long-Term Incentive Plan ("LTIP") under which
awards of stock, restricted stock, options and other stock-based awards totaling
880,000 shares of common stock may be granted to all full-time employees,
officers and directors of the Company and its subsidiaries.
In 1997, the Company awarded 775,000 shares of restricted stock at the issue
price of $.01 per share to two officers of the Company under the terms of the
LTIP. Such awards vested over the four years ended September 2001. The
difference of $9,001,625 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 was amortized over the four-year period commencing with
the fourth quarter of 1997 and ended with the third quarter of 2001.
Options may be granted as either "Qualified Options," "Nonqualified Options" or
"Incentive Options." Generally, Qualified Options and Incentive Options may not
be granted at a per share price that is less than 100% of fair market value on
the date of grant. Nonqualified Options may be granted at prices determined by a
committee comprised of certain members of the Board of Directors.
F-12
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
The Company's previous stock option plan, as amended (the "SOP") was terminated
by the Company in connection with the approval by stockholders of the LTIP. The
SOP provided for options to purchase 900,000 shares of common stock. The
termination of the SOP did not affect options then outstanding.
A summary of option transactions for the three years ended December 31, 2001, is
presented below. Each option becomes exercisable as to 20% of the total number
of shares subject to the option six months after the date of grant, and as to an
additional 20% each year thereafter. Generally, options may not be exercised
more than ten years from the date of grant. Incentive Stock Options were granted
at an exercise price of $9.00 in 1998. Nonqualified options were granted at
exercise prices equal to the market price per share at the date of grant. Only
the LTIP has options available for grant at the end of 2001.
Incentive Qualified Nonqualified
Stock Stock Stock
Options Options Options Total
---------- ---------- ------------- -------
Outstanding, end of 1999, 2000 and 2001 100,000 - 150,000 250,000
========== ========== ============= =======
Exercisable, end of 1999 190,000
=======
Exercisable, end of 2000 230,000
=======
Exercisable, end of 2001 240,000
=======
Available for grant, end of 2001 55,000
========
The Company accounts for these options under Accounting Procedures Board Opinion
No. 25, under which no compensation cost has been recognized in the accompanying
consolidated statements of income and comprehensive income. Had compensation
cost for these options been determined consistent with the fair value method
required by Financial Accounting Standards Board Statement No. 123 ("FASB No.
123"), the Company's net income and earnings per share would have been the
following pro forma amounts in each of the three years ended December 31, 2001:
2001 2000 1999
-------- ----------- -----------
Net income:
As reported $283,254 $11,502,840 $17,564,232
Pro forma $261,054 11,393,489 17,454,834
Basic EPS:
As reported 0.03 1.27 1.91
Pro forma 0.03 1.26 1.90
Dilutive EPS:
As reported 0.03 1.27 1.91
Pro forma 0.03 1.26 1.90
In January 1998, the Company granted 50,000 Incentive Options at an exercise
price of $9.00 per share under the LTIP to an executive officer of the Company.
For the purposes of FASB No. 123 calculations, the fair value of these options
was $3.27 per share, and was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 5.5%; expected dividend yield of 2.9%; expected option life of
10 years and expected volatility of 33%. The fair value of the options to
purchase 800,000 shares granted in 1995 with an exercise price of $9.50 per
share (of which 650,000 were canceled in 1997) was $4.71 per share, and was
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions used: risk-free interest rate of 5.7%, expected
dividend yield of 1.6%, expected option life of 10 years and expected volatility
of 40%.
F-13
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
Because the Statement 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost and
related impact on net income and earnings per share may not be representative of
that to be expected in future years.
The Company also has a profit-sharing plan covering substantially all full-time
employees. Contributions to this plan, which in any fiscal year are at the
discretion of the Board of Directors, were approximately $209,000, $366,000 and
$265,000 in 2001, 2000 and 1999, respectively.
9. TREASURY STOCK TRANSACTIONS
In January and February 2000, the Company purchased 6,500 and 5,000 shares of
its common stock, respectively, at an average price of $8.98 per share. In
August and September 2000, the Company purchased 19,000 and 39,400 shares of its
common stock, respectively, at an average price of $9.98 per share. In May and
September 2001, the Company purchased 94,920 and 24,600 shares of its common
stock, respectively, at an average price of $11.21 per share. On December 12,
2001, the Company retired 189,420 shares of treasury stock and restored the
common stock to authorized and unissued status.
10. FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK AND
CONCENTRATION OF CREDIT RISK
In the normal course of business, the Company enters into various security
transactions as principal. The execution, settlement and financing of these
transactions may result in off-balance sheet risk or concentration of credit
risk.
From time to time, the Company sells securities that it does not currently own
and is therefore obligated to purchase such securities at a future date. The
Company will incur a loss if the market price of the securities increases before
such time that the Company purchases the securities.
The Company is engaged in trading activities with various counterparties. In the
event counterparties do not fulfill their obligations, the Company may be
exposed to risk. The risk of default depends on the creditworthiness of the
counterparty or issuer of the instrument. It is the Company's policy to review,
as necessary, the credit standing of each counterparty with which it conducts
business.
Cash and securities positions owned or sold by the Company are carried by its
prime broker. To the extent the Company purchases or sells securities on margin,
a specified level of collateral in the form of securities or cash is held by the
prime broker to satisfy its margin requirements. This subjects the Company to
counterparty credit risk with respect to the prime broker, to the extent cash
and securities held by the prime broker on behalf exceed the margin balance.
F-14
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Quarter
-------------------------------------------------
First Second Third Fourth
------- ------- ------- -------
(000's omitted, except per share amounts)
2001:
Operating revenues* $ 4,169 $ 3,880 $ 3,871 $ 3,538
Operating expenses** 4,117 4,155 3,553 2,803
Income before income taxes (2,968) 2,784 (4,971) 5,618
Net income (1,622) 1,554 (2,796) 3,147
Per common share-
Basic (.18) .17 (.31) .36
Diluted (.18) .17 (.31) .35
2000:
Operating revenues* $ 6,070 $ 5,103 $ 6,524 $ 3,482
Operating expenses** 4,627 4,714 5,336 3,331
Income (loss) before income taxes 12,818 707 11,249 (4,820)
Net income (loss) 7,407 397 6,501 (2,802)
Per common share-
Basic .82 .04 .72 (.31)
Diluted .82 .04 .72 (.31)
1999:
Operating revenues* $ 4,223 $ 4,497 $ 4,197 $ 5,353
Operating expenses** 3,793 3,795 3,710 4,780
Income before income taxes 5,119 9,143 2,447 14,309
Net income 2,897 5,186 1,383 8,098
Per common share-
Basic .31 .56 .15 .89
Diluted
* Operating revenue includes advisory fees, commissions and other operating
revenue.
** Operating expenses include total costs and expenses less an accrued
investment bonuses payable to the CEO and the President pursuant to the
amended MIP plan of $2,626,000 and $3,446,000 in 2000 and 1999,
respectively. There were no investment bonuses in 2001. (See Note 9 to the
audited financial statements.)
F-15
(c) Exhibits -
3.1 Certificate of Incorporation (Exhibit 3.1) (1)
3.2 Amendment, dated September 11, 1987 to Certificate of
Incorporation (2)
3.3 By-Laws (Exhibit 3.2) (3)
4. Indenture, dated as of June 15, 1986, between Atalanta/Sosnoff
Capital Corporation and Morgan Guaranty Trust Company of New York
relating to $33,000,000 of 7 1/8% Convertible Senior Debentures
due June 15, 2001. (4)
10.1 Termination and Purchase Agreement, dated as of December 21, 1987,
among Martin T. Sosnoff, Shepard D. Osherow, the Company and its
subsidiaries (Exhibit 10.1)(6).
10.2 Lease Agreement dated as of July 15, 1980 between Martin T.
Sosnoff and Park Tower Associates. (Exhibit 10.2) (1)
10.3 First Lease Modification Agreement dated as of May 20, 1982
between Martin T. Sosnoff and Park Tower Associates. (Exhibit
10.3)(1)
10.4 Second Lease Modification Agreement dated as of January 1985
between Martin T. Sosnoff and Park Tower Associates. (Exhibit
10.4)(1)
10.5 Form of Sublease between Martin T. Sosnoff and the Company.
(Exhibit 10.5) (3)
10.6 Assignment of Lease between the Company and North American
Consortium, Inc. (Exhibit 10.7)(7)
10.7 Sublease dated October 18, 1988 between the Company and First City
Capital Corporation (8)
10.8 Employment Agreement between Martin T. Sosnoff and the Company
dated as of March 31, 1986 (Exhibit 10.6.) (1), (16)
10.9 Consulting Agreement between Shepard D. Osherow and the Company
dated December 21, 1987. (Exhibit 10.2) (6), (16)
10.10 Form of Employment Agreement, as executed May 19, 1988 by each of
Robert J. Kobel, Eric A. Stiefel and Brian P. Hull (8), (16)
10.11 Letter Agreement between Martin T. Sosnoff and L. Mark Newman
dated February 14, 1985 and exhibits thereto. (Exhibit 10.20) (1)
23
10.12 Agreement between Martin T. Sosnoff and Shepard D. Osherow
dated February 25, 1985 regarding the Letter Agreement between
Martin T. Sosnoff and L. Mark Newman. (Exhibit 10.21) (1)
10.13 1987 Stock Option Plan. (Exhibit 4.1) (5), (16)
10.14 1987 Incentive Stock Purchase Plan. (Exhibit 4.4) (5), (16)
10.15 Restricted Stock Bonus Plan (8), (54)
10.16 Form of Stock Bonus Award Agreements, as executed May 19, 1988 by
each of Robert J. Kobel, Eric A. Stiefel and Brian P. Hull (8),
(16)
10.17 Profit Sharing Trust Agreement and Plan dated May 21, 1985 between
Atalanta/Sosnoff Capital Corporation and the plan trustees.
(Exhibit 10.24) (1), (16)
10.18 Sub-sublease dated June 23, 1989 between the Company and Ehrlich
Bober & Co., Inc. (9)
10.19 Management Incentive Plan as adopted by the Board of Directors of
the Company on December 9, 1992 (10), (16)
10.20 Executive Employment Agreement dated as of December 9, 1992
between Robert J. Kobel and the Company (10), (16)
10.21 Employment Agreement dated January 1, 1986 between Henry E. Parker
and the Company (10), (16)
10.22 Amended and Restated Management Incentive Plan as adopted by the
Board of Directors of the Company on December 9, 1993 and March 8,
1994 (11), (16)
10.23 Executive Employment Agreement dated July 8, 1993 between Craig B.
Steinberg and the Company (11), (16)
10.24 Executive Employment Agreement dated December 7, 1995 between
Robert J. Kobel and the Company (12), (16)
10.25 Employment Agreement dated July 1, 1986 between James D. Staub and
the Company (12), (16)
10.26 Modification Agreement of Sub-Lease dated February 27, 1996
between the Company and Foote, Cone & Belding Advertising, Inc.
(12), (16)
10.27 1996 Long-Term Incentive Plan (13), (16)
10.28 Restricted Stock Award Agreements dated as of September 17, 1997
executed by each of Craig B. Steinberg and Anthony G. Miller (13),
(16)
24
10.29 Employment Agreement dated December 22, 1997 between James D.
Staub and the Company (13), (16)
10.30 Agreement dated October 29, 1998 between William M. Knobler and
the Company (14), (16)
10.31 Amended and Restated Management Incentive Plan as adopted by the
Board of Directors of the Company on March 10, 1999 (14), (16)
10.32 Lease agreement dated October 26, 1999 between the Company and 101
Park Avenue Associates. - (15), (16)
10.33 Amended and Restated Management Incentive Plan as adopted by the
Board of Directors of the Company on February 29, 2000 - (15),
(16)
10.34 First Amendment to the Amended and Restated Management Incentive
Plan as adopted by the Board of Directors of the Company on March
22, 2002. - FILED HEREWITH
11. Computation of Earnings per Share - FILED HEREWITH
22. Subsidiaries of the Registrant. (Exhibit 22) (1)
25. Power of Attorney (included as part of the "Signatures" page).
99.1 Letter of Registrant to the Securities and Exchange Commission
dated March 22, 2002- FILED HEREWITH
99.2 Letter from Arthur Andersen LLP dated March 26, 2002 - FILED
HEREWITH
- ------------------------
(1) Incorporated by reference to the exhibit number indicated to the
Company's Registration Statement on Form S-1 filed April 21, 1986
(Registration No. 33-5028) (the "S-1")
(2) Incorporated by reference to Exhibit 3.2 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1987.
(3) Incorporated by reference to the exhibit number indicated to Amendment
No. 2 to the S-1 filed June 10, 1986.
(4) Incorporated by reference to Exhibit 4 to the Company's Form 10-Q for the
quarter ended June 30, 1986.
25
(5) Incorporated by reference to the exhibit number indicated to the
Company's Registration Statement on Form S-8 filed March 31, 1987
(Registration No.33-13063)
(6) Incorporated by reference to the exhibit numbers indicated to the
Company's Form 8-K filed December 22, 1987.
(7) Incorporated by reference to the exhibit numbers indicated to the
Company's Form 10-K for the year ended December 31, 1986.
(8) Incorporated by reference to the exhibit numbers indicated to the
Company's Form 10-K for the year ended December 31, 1988.
(9) Incorporated by reference to the exhibit numbers indicated to the
Company's Form 10-K for the year ended December 31, 1989.
(10) Incorporated by reference to the exhibit numbers indicated to the
Company's Form 10-K for the year ended December 31, 1992.
(11) Incorporated by reference to the exhibit numbers indicated to the
Company's Form 10-K for the year ended December 31, 1993.
(12) Incorporated by reference to the exhibit numbers indicated to the
Company's Form 10-K for the year ended December 31, 1995.
(13) Incorporated by reference to the exhibit numbers indicated to the
Company's Form 10-K for the year ended December 31, 1997.
(14) Incorporated by reference to the exhibit numbers indicated to the
Company's Form 10-K for the year ended December 31, 1998.
(15) Incorporated by reference to the exhibit numbers indicated to the
Company's Form 10-K for the year ended December 31, 1999.
(16) Required to be filed pursuant to the instructions to Item 14(c) of Form
10-K.
26
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned whose
signature appears below constitutes and appoints Martin T. Sosnoff, Craig B.
Steinberg, and Anthony G. Miller, and each of them (with full power of each of
them to act alone), his true and lawful attorneys-in-fact and agents, for him
and on his behalf, and in his name, place and stead, to execute and sign all
amendments or supplements to this Annual Report on Form 10-K, and to file the
same with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do himself, and the registrant hereby confers like authority on its
behalf.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
issuer has duly caused this Annual Report on Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York, on this 22rd day of March, 2002.
ATALANTA/SOSNOFF CAPITAL CORPORATION
By: s/ Martin T. Sosnoff
------------------------------
Martin T. Sosnoff
Chairman of the Board and
Chief Executive Officer
27
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
S/ Jay Goldsmith March 22, 2002
------------------------------
Jay Goldsmith Director
s/ Kevin S. Kelly March 22, 2002
--------------------------------
Kevin S. Kelly Senior Vice President,
Chief Financial Officer
(Principal Financial
and Accounting Officer)
s/ Ronald H. Menaker
--------------------------------
Ronald H. Menaker Director March 22, 2002
s/ Anthony G. Miller
--------------------------------
Anthony G. Miller Executive Vice President, March 22, 2002
Chief Operating Officer,
Secretary
s/ Martin T. Sosnoff
--------------------------------
Martin T. Sosnoff Chairman, Chief March 22, 2002
Executive Officer,
Director (Principal
Executive Officer)
s/ Craig B. Steinberg
--------------------------------
Craig B. Steinberg President and March 22, 2002
Director of Research,
Director
s/ Thurston Twigg-Smith
--------------------------------
Thurston Twigg-Smith Director March 22, 2002
28
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE
10.34 First Amendment to the Amended and 30 - 31
Restated Management Incentive Plan as adopted
by the Board of Directors of the Company on
March 22, 2002.
11 Computation of Earnings per Share S-1
99.1 Letter of Registrant to the Securities and Exchange 32 - 33
Commission dated March 22, 2002
99.2 Letter from Arthur Andersen LLP 34
dated March 26, 2002
29