FORM 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, 2000
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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
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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
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(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)
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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
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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 19, 2001: 9,005,227
* (voting; only class outstanding)
Aggregate market value of voting and
non-voting common equity held by non-
affiliates, as of March 19, 2001: $13,025,999
Documents incorporated by reference: Proxy Statement for the 2001 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 management, 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 management clients include corporate and public
retirement plans, endowments, charitable and religious organizations, and
individuals in both taxable and tax-exempt accounts. The Company manages
accounts of 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. Many of the Company's individual and smaller
institutional account clients use Management as broker.
The largest single client generated approximately 4.2% of the Company's
operating revenues for the year ended December 31, 2000. The Company's ten
largest clients, as of December 31, 2000, accounted for approximately 20.0% of
total operating revenues for the year then ended.
Assets under management increased 1% in 2000, from $2.69 billion at
December 31, 1999 to $2.71 billion at December 31, 2000. This net increase is
primarily the result of $251 million of new assets raised in 2000 and positive
performance of $15 million, partially offset by net cash outflows in client
accounts and closed accounts of $245 million in 2000. (See the following pages
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for further discussion)
The following table depicts assets under management at the last three
year-ends by type of client:
($ millions)
2000 1999 1998
---- ---- ----
Institutional $1,905 $2,086 $1,963
High Net Worth 393 376 315
Investment Partnerships 200 126 81
Wrap 179 72 41
Mutual Funds 30 26 10
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Totals $2,707 $2,686 $2,410
====== ====== ======
4
Institutional Clients. Capital manages accounts of institutional clients
with assets under management of approximately $1.9 billion as of December 31,
2000, compared with $2.1 billion at the end of 1999, and $2.0 billion at the end
of 1998. 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, 2000:
Dollars in
Type of Account Millions % of Total
--------------- -------- ----------
Corporate employee
benefit plans $ 377 20%
Not-for-profit
organizations 306 16
Jointly-trusteed
collective bargaining
employee plans 684 36
Governmental employee
benefit plans 355 19
Taxable 183 9
------ ---
Total $1,905 100%
====== ===
Investment performance in 2000 was again strong on a relative basis for
equity and balanced accounts. Net outflows in client accounts slowed
significantly over the two years ended December 31, 2000, and the Company
believes its managed asset base has stabilized.
High Net Worth ("HNW") Clients. Since 1984, Management has managed assets of
individual and smaller institutional accounts. Assets under management in this
HNW business increased 5% during 2000 to $393 million at December 31, 2000, from
$376 million at December 31, 1999 and $315 million at December 31, 1998. New
assets raised in 2000 and strong performance results in 1998 and 1999 account
for the increase over the last three years. Certain of these accounts were
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 manager of an
offshore investment fund, all with different investment objectives and client
profiles, with total aggregate assets of $200 million at December 31, 2000,
compared with $126 million at the end of 1999 and $81 million at the end of
1998. 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 Accounts. The Company manages $179 million of accounts custodied at and
sponsored by various financial services firms (i.e. "Wrap" accounts) at
December 31, 2000, compared with $72 million at the end of 1999 and $41 million
at the end of 1998. 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 $88 million in assets
in this program in 2000.
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 (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 and an additional $3.1 million in reinvested dividends in 2000. The
market value of the Funds totaled $30 million at December 31, 2000 and $26
million at the end of 1999. 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 $2.71 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 70% of total managed assets at the end of 2000. The Company's
subsidiaries have been registered as investment advisors since 1982 (Capital)
and 1984 (Management). Institutional clients are managed by Capital. Management
also provides brokerage services to 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 a 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, Craig B. Steinberg and Paul P. Tanico, 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
managements with meaningful equity participation.
The two principals, Martin T. Sosnoff and Craig B. Steinberg, have worked
together in the investment arena for more than 15 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
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.
6
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. Due to performance results
for clients significantly below relevant benchmarks in 1996, the Company's three
and five year peer group rankings were low. Strong absolute and relative
performance results in the three years ended December 31, 2000, 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 $174 million in
2000, compared with net withdrawals of $347 million in 1999, and net withdrawals
of $909 million in 1998. The Company believes that the net withdrawals in 1998
and 1999 are primarily the result of performance concerns from 1996. The net
withdrawals in 2000 are primarily the result of clients reallocating assets away
from the Company in an effort to preserve their desired investment style
allocations.
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 additions to HNW
client accounts totaled $15 million in 2000, compared with net withdrawals of $8
million in 1999 and net additions of $70 million in 1998. The 1998 net increase
is primarily due to $110 million of SVP accounts included in the client asset
base of the Company, partially offset by net withdrawals in existing accounts
totaling $40 million. The Company continues to devote additional resources to
the HNW market.
Investment Partnerships. At December 31, 2000 the Company was the general
partner of and managed $200 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. Martin T. Sosnoff since the late 1960's. The other
limited partnership, Sabre Partners, L.P., which began in 1997, is primarily
managed by Mr. Craig B. Steinberg. The Company received net contributions to the
Partnerships totaling $57 million in 2000 compared with $12 million in 1999.
Wrap. The Company began to focus some of its marketing efforts in 1993 on
the managed account ("Wrap") programs offered by certain large financial
services firms. As of December 31, 2000, $179 million was under management from
such programs, compared with $72 million at the end of 1999 and $41 million at
the end of 1998. The growth in 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.
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 (collectively the "Funds"). The Company invested
$9.1 million in 1998,
7
an additional $6.0 million during 1999 and an additional $3.1 million of
reinvested dividends during 2000 in the Funds. The Company is marketing the
Funds directly to certain of its current clients and prospects, 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.
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 12 to 18 months from the time of the initial contact.
The Company's performance results since inception rank above the median
among peer group money managers. Because of excellent performance results for
each of the three years ended December 31, 2000, 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.
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 and monitoring 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, 2000, some of Capital's
institutional clients, accounting for approximately $469 million (25%) in
institutional assets under management, have consented to the use of Management
as broker. 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.
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 2000 and 1999 totaled approximately $330,000 and
$270,000, respectively.
8
Employees
At December 31, 2000, the Company employed 46 persons on a full-time basis,
comprised of 3 senior executives, 6 research, 8 sales and marketing, 10 client
service, 10 operations, accounting and systems, 3 trading and 6 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 certain
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. As of December 31, 1999, Management resigned as a
member firm of the NYSE. 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 78% 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, 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.
9
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,
2000 was $250,000; it had net capital at such date of $10.7 million, and a ratio
of aggregate indebtedness to net capital of 0.21 to 1.
Item 2. Properties.
The Company occupies office space at 101 Park Avenue, New York, New York
under a lease which 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 8 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 2000.
10
PART II
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.
2000 1999 1998
Quarter Ended High Low High Low High Low
------------- ---- --- ---- --- ---- ---
March 31 $10.50 $7.88 $10.56 $6.75 $11.81 $8.56
June 30 10.63 9.00 10.00 7.50 10.88 9.50
September 30 10.75 9.50 10.13 7.13 9.88 7.63
December 31 11.63 10.25 8.88 7.63 9.00 7.00
Special Dividends
Declared $.25 None $.25
The approximate number of record holders of common stock was 35 on
December 31, 2000.
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 2000,
see "Executive Compensation" and "Stock Option and Long Term Incentive Plans" in
the Company's Proxy Statement for its 2001 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) 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Summary of Operations:
Net income $ 11,503 $ 17,564 $ 7,784 $ 9,849 $ 8,802
Per share - diluted $ 1.27 $ 1.91 $ .81 $ 1.08 $ 1.00
- basic $ 1.27 $ 1.91 $ .81 $ 1.09 $ 1.00
Total Revenues $ 40,588 $ 51,075 $ 27,304 $ 31,680 $ 27,385
Operating revenues (1) $ 21,179 $ 18,270 $ 16,980 $ 18,829 $ 20,759
Operating expenses (2) $ 18,008 $ 16,611 $ 13,609 $ 13,707 $ 12,022
Operating income $ 3,171 $ 1,659 $ 3,371 $ 5,122 $ 8,737
Operating margin 15% 9% 20% 27% 42%
Per employee:
Operating revenues $ 460 $ 406 $ 435 $ 471 $ 472
Operating expenses $ 391 $ 369 $ 349 $ 343 $ 273
Operating income $ 69 $ 37 $ 86 $ 128 $ 199
Net interest and dividend income $ 1,234 $ 708 $ 1,557 $ 2,997 $ 1,843
Net realized and unrealized
gains from investments $ 18,176 $ 32,097 $ 8,767 $ 9,854 $ 4,783
Return on average equity 11% 19% 10% 15% 15%
Year-end Position:
Total assets $126,914 $123,623 $ 90,686 $ 75,413 $ 64,696
Shareholders' equity $107,066 $101,776 $ 82,022 $ 70,556 $ 61,628
Book value per share $ 11.89 $ 11.21 $ 8.78 $ 7.36 $ 6.99
Cash dividends declared per share $ .25 None $ .25 $ .20 $ .15
Common stock, shares outstanding 9,005 9,075 9,338 9,587 8,812
Number of employees 46 45 39 40 44
Assets under management (millions) $ 2,707 $ 2,686 $ 2,410 $ 2,682 $ 2,763
Average assets under management
(millions) $ 2,638 $ 2,412 $ 2,402 $ 2,804 $ 3,219
Percentage of average assets:
Operating revenues .80% .76% .71% .67% .64%
Operating expenses .68% .69% .57% .49% .37%
Operating income .12% .07% .14% .18% .27%
(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. (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 third consecutive year investment performance was strong in 2000 for
equity and balanced clients. Net new client assets raised of $251 million and
positive performance of $15 million, partially offset by net client withdrawals
of $245 million, provided an increase of $21 million in assets under management
during 2000. Average assets under management totaled $2.64 billion in 2000,
compared with $2.41 billion in 1999 and $2.40 billion in 1998.
After elimination of non-operating charges, pretax operating income
increased 21% to $6.5 million in 2000, compared with $5.4 million in 1999 and
$6.0 million in 1998. Earnings per share totaled $1.27 in 2000, compared with
$1.91 in 1999 and $.81 in 1998 (all earnings per share amounts represent diluted
earnings per share). Net income was $11.5 million in 2000, compared with $17.6
million in 1999 and $7.8 million in 1998.
Owing to the declining market during 2000 compared with a buoyant 1999,
total revenue for 2000 decreased 21% to $40.6 million, from $51.1 million in
1999 and $27.3 million in 1998. However, revenue from advisory fees and
commissions ("operating revenues") increased 16% to $21.2 million in 2000, from
$18.3 million in 1999 and $17.0 million in 1998. Net investment income decreased
41% to $19.4 million in 2000, from $32.8 million in 1999 and $10.3 million in
1998.
Costs and expenses for 2000 increased 3% to $20.6 million, from $20.1
million in 1999 and $13.6 million in 1998. After eliminating non-operating
charges, operating expenses were $14.6 million, $12.9 million and $11.0 million
for 2000, 1999 and 1998, respectively. The following table depicts operating
income, as adjusted, for the years ended December 31:
- --------------------------------------------------------------------------------
Operating Income ($000)
---------------- ------
2000 1999 1998
-------- -------- --------
Operating revenues, reported $ 21,179 $ 18,270 $ 16,980
Costs and expenses, reported (20,634) (20,057) (13,609)
Add MIP investment performance bonuses 3,446 --
-------- -------- --------
2,626
Operating income before adjustments 3,171 1,659 3,371
Adjustments:
Non-cash compensation charges 2,250 2,250 2,250
SVP account charges 1,125 1,500 375
-------- -------- --------
Operating income, adjusted $ 6,546 $ 5,409 $ 5,996
======== ======== ========
- --------------------------------------------------------------------------------
Assets totaled $127 million at December 31, 2000, compared with $124 million
a year ago. Book value per share grew 6% to $11.89 at December 31, 2000,
compared with $11.21 at the end of 1999.
13
Assets Under Management
Managed assets totaled $2.71 billion at the end of 2000, compared with $2.69
billion at the end of 1999 and $2.41 billion at the end of 1998. A breakdown of
assets under management by client type as of the end of each of the last three
years is as follows:
($ millions)
2000 1999 1998
---- ---- ----
Institutional $1,905 $2,086 $1,963
High Net Worth 393 376 315
Investment Partnerships 200 126 81
Wrap 179 72 41
Mutual Funds 30 26 10
------ ------ ------
Total Managed Assets $2,707 $2,686 $2,410
====== ====== ======
The $21 million net increase in managed assets during 2000 is comprised of
increases of $251 million from new client accounts and $15 million in positive
performance results, reduced by (i) $64 million in closed client accounts; and
(ii) $181 million in net withdrawals from existing accounts.
In the two years ended December 31, 2000, managed assets increased by $297
million, comprised of increases of $309 million in new client accounts and $599
million in positive performance results, reduced by (i) $283 million in closed
client accounts; and (ii) $328 million in net withdrawals from existing
accounts.
Due to significantly improved performance results over the last three years,
net outflows in client accounts have slowed. Barring a sustained market
correction, the Company expects its asset base to continue to grow in 2001.
Earnings
Operating revenues increased 16% in 2000 to $21.2 million, compared with
$18.3 million in 1999 and $17.0 million in 1998. Average assets under management
increased 9% in 2000 and were basically flat in 1999. The increase in operating
revenues in 2000 is due in part to the increase in average assets. In addition,
management and performance based fees earned on one of the investment
partnerships managed by the Company increased to $3.1 million in 2000, compared
with $1.4 million in 1999 and $531,000 in 1998.
In 2000 operating revenues were .80% of average managed assets, compared
with .76% in 1999 and .71% in 1998. This reflects an increase in the weighted
advisory fee yield because the accounts lost over the last three years were
generally larger accounts with lower fee structures. In addition, assets in
Company sponsored investment partnerships, which generate a higher yield than
other managed assets, grew significantly to total $200 million at the end of
2000, compared with $126 million at the end of 1999 and $81 million at the end
of 1998.
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 increased 18% to $19.4 million in 2000, compared with $16.3 million in 1999
and $15.4 million in 1998. Advisory fees were approximately 90% of operating
revenues in each of the three years ended December 31, 2000.
Transaction fees (commissions) earned by Management are the primary source
of the Company's other operating revenues. Commissions are derived from
Management's individual and small institutional accounts, investment
partnerships and specific institutional accounts that have given Management the
authority to execute trades. Commissions increased 1% to $1.45 million in 2000,
compared with $1.44 million in 1999 and $1.15 million in 1998.
o o o
The following table depicts operating expenses, as adjusted, for the years ended
December 31:
- --------------------------------------------------------------------------------
Operating Expenses ($000)
------------------ ------
2000 1999 1998
------- -------- -------
Cost and expenses, reported $20,635 $20,057 $13,609
Adjustments:
MIP investment performance bonuses (2,626) (3,446) ---
Non-cash compensation charges (2,250) (2,250) (2,250)
SVP account charges (1,125) (1,500) (375)
------- ------- -------
Operating expenses, adjusted $14,634 $12,861 $10,984
======= ======= =======
- --------------------------------------------------------------------------------
Reported costs and expenses totaled $20.6 million in 2000, compared with
$20.1 million in 1999 and $13.6 million in 1998. The 2000 amount reflects $6.0
million in non-operating charges detailed above. Before these items, operating
expenses totaled $14.6 million in 2000. The 1999 amount reflects $7.2 million in
non-operating charges. Before these items, operating expenses totaled $12.9
million in 1999. The 1998 amount reflects $2.6 million in non-operating charges.
Before these charges, operating expenses totaled $11.0 million in 1998.
Excluding these non-operating adjustments, 2000 operating expenses increased
14% compared with 1999, after a 17% increase in 1999 compared with 1998.
Adjusted operating expenses were 69% of operating revenues and .55% of average
managed assets in 2000, compared with 70% and .53% in 1999, and 65% and .46% in
1998.
15
The following table depicts compensation expenses, as adjusted, for the years
ended December 31:
- --------------------------------------------------------------------------------
Compensation Expenses ($000)
--------------------- ------
2000 1999 1998
---- ---- ----
Compensation expenses, reported $16,017 $15,318 $10,043
Adjustments:
MIP investment performance bonuses (2,626) (3,446) ---
Non-cash compensation charges (2,250) (2,250) (2,250)
SVP account charges (1,125) (1,500) (375)
------- ------- -------
Compensation expenses, adjusted $10,016 $ 8,122 $ 7,418
======= ======= =======
- --------------------------------------------------------------------------------
Reported compensation expenses increased 5% to $16.0 million in 2000,
compared with $15.3 million in 1999 and $10.0 million in 1998. Compensation
expenses adjusted for the non-operating charges noted above increased 23% in
2000 to total $10.0 million, compared with $8.1 million in 1999 and $7.4 million
in 1998. The 2000 increase is primarily due to increases in bonuses to
employees, an increase in sales payouts related to the increase in operating
revenue and an increase in the Company's annual contribution to the employee
Profit Sharing Plan. Adjusted compensation expenses were 47% of operating
revenues and .38% of average managed assets in 2000, compared with 44% and .34%
in 1999, and 44% and .31% in 1998.
The Company has a Management Incentive Plan ("MIP") (see Note 8 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 1999
and 1998.
The Company adopted an amendment to the MIP in 1999 under which 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, subject to a ceiling of 10% of total pretax
income. Included in compensation expenses related to the MIP is an investment
performance bonus to the CEO of $2,216,000 in 2000, $3,446,000 in 1999 and none
in 1998.
In addition, under the amended 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 amended MIP by the President of
$1,273,000, $532,000 and $129,000 in 2000, 1999, and 1998, respectively. The
President also earns an annual investment bonus under the amended MIP based upon
the performance of the Company's investment in the partnership managed by the
President in excess of base index return. Included in compensation expense are
investment
16
bonuses earned by the President of $410,000 in 2000, and none in 1999 and 1998.
The combined operating and investment bonus earned by the President is subject
to a ceiling of 10% of total pretax income.
In each of 2000, 1999 and 1998, the Company recorded $2.25 million of
non-cash compensation charges ("NCCC") related to awards of restricted stock in
1997 (see Note 9 to the audited financial statements). In 2000, 1999 and 1998,
the Company also recorded $1,125,000, $1,500,000 and $375,000, 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 5 to the audited
financial statements).
- --------------------------------------------------------------------------------
Non-Compensation Expenses ($000)
------------------------- ------
2000 1999 1998
---- ---- ----
Non-compensation expenses, reported $4,618 $4,739 $3,566
- --------------------------------------------------------------------------------
Non-compensation expenses decreased by 3% to $4.6 million in 2000, compared
with $4.7 million in 1999 and $3.6 million in 1998. The 2000 decrease is due to
a decrease in systems expenses related to an upgrade in computer hardware and
software in 1999, partially offset by an increase in clearance and floor
brokerage costs and an increase in selling and promotional expenses related to
the Company's increased marketing efforts. Non-compensation expenses totaled 22%
of operating revenues and .18% of average managed assets in 2000, compared with
26% and .20% in 1999, and 21% and .15% in 1998.
o o o
Net investment income, which comprises interest, dividends, and net realized
and unrealized gains/losses from principal securities transactions (primarily
large-cap equities), totaled $19.4 million in 2000, compared with $32.8 million
in 1999 and $10.3 million in 1998. Net interest and dividend income was $1.2
million in 2000, compared with $0.7 million in 1999 and $1.6 million in 1998.
Net gains from investments totaled $18.2 million ($12.5 million realized) in
2000, compared with $32.1 million ($19.8 million realized) in 1999 and $8.8
million ($1.2 million realized) in 1998, reflecting the strengths and weaknesses
of the domestic equity markets in those years.
Liquidity and Capital Resources
Net investments in marketable securities aggregated $82.7 million at
December 31, 2000, compared with $93.6 million at the end of 1999. During 2000,
the Company reinvested dividends of $3.1 million in the Company sponsored mutual
funds (the "Funds") and invested an additional $2.4 million in one of the
Partnerships. During 1999, the Company invested $6.0 million in the Funds and an
additional $3.0 million in an investment partnership. Shareholders' equity
totaled $107.1 million at December 31, 2000, compared with $101.8 million at the
end of 1999. This increase is primarily from net income of $11.5 million
recorded in 2000, partially offset by net unrealized losses of $5.4 million on
the investment portfolio. The Company has
17
adopted SFAS No. 115, requiring it to reflect a net unrealized gain of $4.8
million after taxes in shareholders' equity at December 31, 2000, compared with
$10.2 million at the end of 1999.
At December 31, 2000, the Company's net investment portfolio at market
totaled $111.5 million (cost basis $86.0 million), comprised of cash and cash
equivalents, corporate debt, large-cap equity securities, investments in limited
partnerships and the Atalanta/Sosnoff Funds (see Note 3 to the audited financial
statements). At year-end, the Company was invested in 17 separate large-cap
securities, in a more concentrated fashion of what it does for its managed
client accounts. The largest position was in Wellpoint Health Networks, at 5.8%
of the portfolio, with an unrealized gain of $2.4 million at year-end.
At December 31, 2000 the Company had cash and cash equivalents totaling $3.5
million, compared with $4.4 million at the end of 1999. Net cash used in
operating activities was $8.6 million in 2000 compared with $2.9 million in
1999. 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 $8.4 million in 2000, compared with $5.9 million
provided in 1999. Net cash used in financing activities was $0.7 million in
2000, compared with $2.6 million in 1999. As a result, there was a net decrease
in cash and cash equivalents of $899,000 in 2000, compared to an increase of
$394,000 in 1999.
If the equity market (defined as the S&P 500 index) were to decline by 10%,
the Company might experience unrealized losses of approximately $11 million; if
the market were to decline by 20%, the Company might experience unrealized
losses of $22 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.
o o o
In 2000, the Company declared a special dividend of $.25 per share, compared
with none in 1999.
In December 1998, the Company purchased 249,000 shares of its own stock
at a market price of $8.75 per share. In June 1999, the Company purchased
254,174 shares of its common stock from a former officer at a market price of
$10.00 per share. In October 1999, the Company purchased 9,100 shares of its
common stock at an average market price of $7.62 per share. On December 30,
1999, the Company retired 512,274 shares of treasury stock and restored the
common stock to authorized and unissued status. 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.
At December 31, 2000 and 1999, the Company had no liabilities for
borrowed money.
18
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 vest 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 is being
amortized over a four-year period commencing with the fourth quarter of 1997
(approximately $563,000 per quarter and $2.25 million annually).
The Company believes that the foreseeable capital and liquidity requirements
of its existing businesses will continue to be met with funds generated from
operations.
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 2001 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*, 69, 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**, 39, 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, 42, 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.
PAUL P. TANICO, 45, has been Executive Vice President, Portfolio Manager
with Capital since 1997. Previously, Mr. Tanico was a Portfolio Manager
at Atalanta/Sosnoff from 1983 to 1987, and in 1991. Mr. Tanico began his
investment career with David J. Greene in 1981, and in 1992 was one of
the original partners at Omega Advisors. Since 1994, he has served as
Managing Partner of Castlerock Partners. From 1987 through 1990 Mr.
Tanico was a Portfolio Manager with Neuberger & Berman.
- -------------------------------
* 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, 67, 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, 68, 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, 36, 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 2001 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 2001 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 2001 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) None.
22
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION:
Report of Independent Public Accountants F-2
Consolidated Statements of Financial Condition - December 31, 2000 and 1999 F-3
Consolidated Statements of Income and Comprehensive Income - For the Years
Ended December 31, 2000, 1999 and 1998 F-4 Consolidated Statements of
Changes in Shareholders' Equity - For the Years
Ended December 31, 2000, 1999 and 1998 F-5 Consolidated Statements of Cash
Flows - For the Years Ended December 31, 2000,
1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7
Supplementary Financial Information:
Selected Quarterly Financial Data (Unaudited) F-16
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, 2000 and 1999, and the related consolidated
statements of income and comprehensive income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 consolidated 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, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States
New York, New York
February 28, 2001
F-2
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2000 AND 1999
ASSETS 2000 1999
------ ---- ----
Assets:
Cash and cash equivalents $ 3,488,606 $ 4,387,987
Accounts receivable 6,270,846 4,314,257
Due from brokers 3,086,636 --
Investments, at market value 83,597,861 93,637,682
Investments in limited partnerships 25,295,627 17,447,746
Fixed assets, net of accumulated depreciation and amortization of
$1,168,016 and $700,123, respectively 1,694,353 1,429,569
Exchange memberships, at cost (market value $2,060,000 and
$2,700,000, respectively) 402,000 402,000
Other assets 3,078,246 2,004,225
------------ ------------
Total assets $126,914,175 $123,623,466
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Income taxes payable $ 10,623,550 $ 16,046,699
Accrued compensation payable 5,415,419 4,812,781
Dividends payable 2,268,781 --
Securities sold but not yet purchased, at market value 866,469 --
Accounts payable and other liabilities 674,335 988,348
------------ ------------
Total liabilities 19,848,554 21,847,828
------------ ------------
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; 9,075,127 shares issued 90,751 90,751
Additional paid-in capital 19,360,259 19,455,259
Retained earnings 85,210,852 75,976,793
Accumulated other comprehensive income - net unrealized gains
from investments, net of deferred tax liabilities of $3,190,021
and $6,798,836 at December 31, 2000 and 1999, respectively 4,777,820 10,191,042
Unearned compensation (1,687,799) (3,938,207)
Treasury stock, at cost, 69,900 and 0 shares at December 31, 2000
and 1999, respectively
(686,262) --
------------ ------------
Total shareholders' equity 107,065,621 101,775,638
------------ ------------
Total liabilities and shareholders' equity $126,914,175 $123,623,466
============ ============
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 FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999 and 1998
2000 1999 1998
----------- ----------- -----------
Revenues:
Advisory fees $19,373,430 $16,349,083 $15,406,468
Commissions and other operating revenues 1,805,238 1,921,016 1,573,101
Realized and unrealized gains from principal securities
transactions, net 18,175,984 32,097,041 8,766,778
Interest and dividend income, net 1,233,640 708,205 1,557,492
----------- ----------- -----------
Total revenues 40,588,292 51,075,345 27,303,839
----------- ----------- -----------
Costs and expenses:
Employees' compensation and benefits 16,016,813 15,317,520 10,043,375
Clearing and execution costs 919,083 788,334 562,594
Selling expenses 601,563 536,920 421,052
General and administrative expenses 3,096,993 3,414,339 2,582,300
----------- ----------- -----------
Total costs and expenses 20,634,452 20,057,113 13,609,321
----------- ----------- -----------
Income before provision for income taxes 19,953,840 31,018,232 13,694,518
Provision for income taxes 8,451,000 13,454,000 5,911,000
----------- ----------- -----------
Net income $11,502,840 $17,564,232 $ 7,783,518
=========== =========== ===========
Earnings per common share - basic $ 1.27 $ 1.91 $ .81
=========== =========== ===========
Earnings per common share - diluted $ 1.27 $ 1.91 $ .81
=========== =========== ===========
Net income, as presented above $11,502,840 $17,564,232 $ 7,783,518
comprehensive income:
Netunrealized gains (losses) from investments,
net of deferred income taxes (credit) of
($3,608,815), $1,826,368, and $4,138,071,
respectively (5,413,222) 2,696,701 6,207,547
----------- ----------- -----------
Comprehensive income $ 6,089,618 $20,260,933 $13,991,065
=========== =========== ===========
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, 2000, 1999 and 1998
Accumulated
Other
Comprehensive
Income -
Unrealized
Gains (Losses)
Additional From
Common Paid-in Retained Investments,
Stock Capital Earnings Net
------------- ------------- ------------- ---------------
BALANCE, December 31, 1997 $ 24,648,499 $ 52,963,643 $ 1,286,794
Purchase of treasury stock
Amortization of unearned compensation (259,000)
Unrealized gains from investments, net
of deferred taxes 6,207,547
Net income 7,783,518
Dividends ($.25 per share) (2,334,600)
------------- ------------- ------------- ---------------
BALANCE, December 31, 1998 95,874 24,389,499 58,412,561 7,494,341
Purchases of treasury stock
Retirement of treasury stock (5,123) (4,787,236)
Amortization of unearned compensation (147,004)
Unrealized gains from investments, net
of deferred taxes 2,696,701
Net income 17,564,232
------------- ------------- ------------- ---------------
BALANCE, December 31, 1999 90,751 19,455,259 75,976,793 10,191,042
Purchases of treasury stock
Amortization of unearned
compensation (95,000)
Unrealized losses from
investments, net of
deferred tax credits (5,413,222)
Net income 11,502,840
Dividends ($.25 per share) (2,268,781)
------------- ------------- ------------- ---------------
BALANCE, December 31, 2000 $ 90,751 $ 19,360,259 $ 85,210,852 $ 4,777,820
============= ============= ============= ===============
Unearned Treasury
Compensation Stock Total
-------------- ------------- -------------
BALANCE, December 31, 1997 $ (8,439,023) $ -- $ 70,555,787
Purchase of treasury stock (2,181,265) (2,181,265)
Amortization of unearned compensation 2,250,408 1,991,408
Unrealized gains from investments, net
of deferred taxes 6,207,547
Net income 7,783,518
Dividends ($.25 per share) (2,334,600)
-------------- ------------- -------------
BALANCE, December 31, 1998 (6,188,615) (2,181,265) 82,022,395
Purchases of treasury stock (2,611,094) (2,611,094)
Retirement of treasury stock 4,792,359 --
Amortization of unearned compensation 2,250,408 2,103,404
Unrealized gains from investments, net
of deferred taxes 2,696,701
Net income 17,564,232
-------------- ------------- -------------
BALANCE, December 31, 1999 (3,938,207) -- 101,775,638
Purchases of treasury stock (686,262) (686,262)
Amortization of unearned
compensation 2,250,408 2,155,408
Unrealized losses from
investments, net of
deferred tax credits (5,413,222)
Net income 11,502,840
Dividends ($.25 per share) (2,268,781)
-------------- ------------- -------------
BALANCE, December 31, 2000 $ (1,687,799) $ (686,262) $ 107,065,621
============== ============= =============
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, 2000, 1999 AND 1998
2000 1999 1998
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,502,840 $ 17,564,232 $ 7,783,518
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities-
Depreciation and amortization 467,893 273,199 188,643
Amortization of unearned compensation 2,250,408 2,250,408 2,250,408
Realized and unrealized gains from
investments, net (18,175,984) (32,097,041) (8,766,778)
Deferred taxes (4,430,000) 5,976,066 394,400
(Increase) decrease in operating assets-
Accounts receivable (1,956,589) (995,072) 36,214
Other assets (1,074,021) (1,060,355) (174,589)
Increase (decrease) in operating liabilities-
Income taxes payable 2,520,379 1,555,834 (13,909)
Accrued compensation payable 602,638 4,164,170 (190,813)
Accounts payable and other liabilities (314,013) 216,156 (80,069)
Separation costs payable --- (700,000) (700,000)
------------- ------------- -------------
Net cash (used in) provided by
operating activities (8,606,449) (2,852,403) 727,025
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from clearing broker, net (3,086,579) --- 1,323,473
Purchases of fixed assets (732,678) (1,043,457) (58,596)
Purchases of investments (351,760,285) (142,967,088) (151,336,026)
Proceeds from sales of investments 363,972,872 149,868,066 154,048,709
------------- ------------- -------------
Net cash provided by investing
activities 8,393,330 5,857,521 3,977,560
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock (686,262) (2,611,094) (2,181,265)
Dividends paid --- --- (2,334,600)
------------- ------------- -------------
Net cash used in financing
activities (686,262) (2,611,094) (4,515,865)
------------- ------------- -------------
Net (decrease) increase in cash and
cash equivalents (899,381) 394,024 188,720
CASH AND CASH EQUIVALENTS, beginning of year 4,387,987 3,993,963 3,805,243
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of year $ 3,488,606 $ 4,387,987 $ 3,993,963
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 140,922 $ 83,961 $ 30,788
Income taxes $ 10,360,425 $ 5,922,100 $ 5,530,511
Noncash financing activity-
Decrease in additional paid-in capital
related to restricted shares $ (95,000) $ (147,004) $ (259,000)
Retirement of treasury stock $ --- $ (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, 2000, 1999 AND 1998
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 general partner of certain investment partnerships. 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 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 2000 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. Commissions 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. 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.
F-7
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
Investment transactions are recorded on trade date. The cost of investments sold
is determined on the first-in, first-out 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 manager 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. 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. 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 an original
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.
New Pronouncements
In September of 2000, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities -- a
replacement of FASB Statement No. 125" ("SFAS 140"). SFAS 140 amends the
recognition and reclassification of collateral and disclosures related to
securitization transactions and collateral. These changes are effective for
fiscal years ending after December 15, 2000. SFAS 140 also amends the
F-8
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
accounting for transfers and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001. The impact on the SFAS 140
provisions effective subsequent to March 31, 2001 is not anticipated to have a
material impact on the Company's consolidated financial statements.
2. EARNINGS PER COMMON SHARE
Basic earnings per common share amounts were computed based on 9,045,819;
9,192,066 and 9,571,711 weighted average common shares outstanding in 2000, 1999
and 1998, 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.
In accordance with the provisions of SFAS No. 128, dilutive earnings per share
for the three years ended December 31, 2000 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.
2000 1999 1998
---- ---- ----
Weighted average common shares outstanding 9,045,819 9,192,066 9,571,711
Common stock equivalents-options 15,683 8,406 10,925
----------- ------------ ---------
Dilutive weighted average common
shares outstanding 9,061,502 9,200,472 9,582,636
=========== ============ =========
Antidilutive options - 200,000 150,000
=========== ============ =========
3. INVESTMENTS, CASH AND CASH EQUIVALENTS
Included in cash and cash equivalents, the Company had interest-bearing free
credit balances with its clearing broker of $ 2,500,371 and $1,715,233 at
December 31, 2000 and 1999, respectively.
Investments at December 31, 2000 and 1999, consisted of the following:
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, 2000, 1999 AND 1998
Unrealized
Cost Market Value Gain (Loss)
------------ ------------ ------------
1999:
Available for sale:
Common stocks $ 54,198,652 $ 70,313,820 $ 16,115,168
Corporate bonds 2,308,805 1,932,281 (376,524)
Atalanta/Sosnoff Mutual Funds 6,100,000 7,358,300 1,258,300
------------ ------------ ------------
62,607,457 79,604,401 16,996,944
------------ ------------ ------------
Trading:
Atalanta/Sosnoff Mutual Funds 9,000,000 14,033,281 5,033,281
------------ ------------ ------------
Other:
Investments in limited partnerships 7,613,135 17,447,746 9,834,611
------------ ------------ ------------
$ 79,220,592 $111,085,428 $ 31,864,836
============ ============ ============
4. SEPARATION COSTS PAYABLE
The separation costs relate to the Company's termination without cause of its
former president on August 15, 1997. Such termination is governed by the terms
of the former president's Employment Agreement, whereby he received two years
severance at his base salary level at the time of termination payable over the
two-year period ended November 15, 1999.
5. RELATED PARTY TRANSACTIONS
As the General Partner for the Partnerships and the investment manager of the
Offshore Fund, Capital earned approximately, $5,029,000, $2,876,000 and
$1,821,000 in 2000, 1999 and 1998, 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 $2,033,000, $1,524,000 and $449,000 at
December 31, 2000, 1999 and 1998, respectively, including approximately
$747,000, $1,239,000 and $282,000 of incentive fees which are included in
advisory fee revenue in 2000, 1999 and 1998, respectively.
Investments include shares held of the Atalanta/Sosnoff Fund, Atalanta/Sosnoff
Value Fund, Atalanta/Sosnoff Focus Fund, and the Atalanta/Sosnoff Balanced Fund
(the "Funds"). Management acts as Distributor to the Funds and Capital acts as
Investment Advisor. The Funds' annual operating expenses are limited to 1.50% of
net assets. Approximately $140,000, $91,000 and $3,000 of operating expenses
were borne by Management in 2000, 1999, and 1998, respectively. Capital earned
an advisory fee of approximately $103,000, $37,000 and none in 2000, 1999 and
1998, 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.
F-10
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
Pursuant to this agreement, Management has or will make 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 ended September 30, 2000, and 0%
thereafter.
6. PROVISION FOR INCOME TAXES
The provision for income taxes consists of:
2000 1999 1998
------------ ------------ ------------
Current income taxes:
Federal $ 8,373,000 $ 6,141,000 $ 3,822,000
State and local 4,508,000 1,337,000 1,694,600
------------ ------------ ------------
Total current 12,881,000 7,478,000 5,516,600
------------ ------------ ------------
Deferred income taxes (credit) provision:
Federal (2,885,000) 4,907,000 267,100
State and local (1,545,000) 1,069,000 127,300
------------ ------------ ------------
Total deferred (4,430,000) 5,976,000 394,400
------------ ------------ ------------
$ 8,451,000 $ 13,454,000 $ 5,911,000
============ ============ ============
A reconciliation of the statutory federal income tax rate and the effective rate
based on consolidated income before income taxes in 2000, 1999 and 1998, is set
forth below:
2000 1999 1998
------ ------ ------
Statutory federal income tax rate 34.9% 34.9% 34.5%
Increase resulting from:
State and local income taxes, net
of federal tax benefit 7.5 7.5 8.6
Other - 1.0 0.1
------ ------ ------
Effective rate 42.4% 43.4% 43.2%
====== ====== ======
Deferred taxes payable are comprised of the following components as of December
31, 2000 and 1999:
2000 1999
----------- -----------
Unrealized gain on investments $9,271,000 $12,624,000
F-11
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
7. 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, 2000, Management had net capital of
$10,696,910, which was $10,446,910 in excess of its required net capital of
$250,000, and had a ratio of aggregate indebtedness to net capital of 0.21 to 1.
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office facilities and equipment under various noncancelable
operating leases expiring through 2002. Rent expense was approximately $653,000,
$671,000 and $680,000 in 2000, 1999 and 1998, respectively.
Approximate future minimum rental commitments under noncancelable operating
leases are $626,000 in 2001 and $417,000 for 2002.
In October, 1999, the Company entered into a new 15-year lease on its existing
office space in New York. This lease commences on September 1, 2002 and the
approximate future minimum annual rent under this lease is $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.
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, 2000, 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 his 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 1999 and 1998.
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, subject to a ceiling of 10% of total pre-tax income.
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.
F-12
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
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, subject to a ceiling of 10% of total pre-tax income.
Included in compensation expense related to this bonus is approximately
$1,683,000, $532,000 and $150,000 for 2000, 1999 and 1998, respectively.
9. STOCK OPTION, STOCK PURCHASE,
INCENTIVE AND PROFIT-SHARING PLANS
During 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.
During 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 vest over four years. 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 is being amortized
over a four-year period commencing with the fourth quarter of 1997.
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.
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, 2000, 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 1999.
Incentive Qualified Nonqualified
Stock Stock Stock
Options Options Options Total
-------- --------- ---------- ---------
Outstanding, beginning of 1998 50,000 - 150,000 200,000
Granted during 1998 50,000 - - 50,000
------- --------- ---------- ---------
Outstanding, end of 1998, 1999 and 2000 100,000 - 150,000 250,000
======= ========= ========== =========
Exercisable, end of 1998 150,000
=========
Exercisable, end of 1999 190,000
=========
Exercisable, end of 2000 230,000
=========
Available for grant, end of 2000 55,000
=========
F-13
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
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, 2000:
2000 1999 1998
---------- ---------- ---------
Net income:
As reported $ 11,502,840 $ 17,564,232 $ 7,783,518
Pro forma 11,393,489 17,454,834 7,668,032
Basic EPS:
As reported 1.27 1.91 .81
Pro forma 1.26 1.90 .80
Dilutive EPS:
As reported 1.27 1.91 .81
Pro forma 1.26 1.90 .80
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%.
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 $366,000, $265,000 and
$131,000 in 2000, 1999 and 1998, respectively.
10. TREASURY STOCK TRANSACTIONS
In December 1998, the Company repurchased 249,000 shares of its common stock at
a market price of $8.75 per share. In June 1999, the Company repurchased 254,174
shares of its common stock from a former officer at a market price of $10.00 per
share. In October 1999, the Company repurchased 9,100 shares of its common stock
at an average market price of $7.62 per share. On December 30, 1999, the Company
retired 512,274 shares of treasury stock and restored the common stock to
authorized and unissued status.
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.
F-14
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
11. FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK AND
CONCENTRATION OF CREDIT RISK
In the normal course of business, the Company enters into various equity
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 its behalf exceed the margin balance.
F-15
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)
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** 3,806 3,868 3,731 5,206
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 .31 .56 .15 .89
1998:
Operating revenues* $ 6,570 $ 6,698 $ 7,477 $ 6,558
Operating expenses** 3,372 3,446 3,152 3,639
Income before income taxes 3,198 3,252 4,325 2,919
Net income 1,790 1,884 2,439 1,670
Per common share-
Basic $ .19 $ .20 $ .25 $ .18
Diluted .19 .20 .25 .18
* Operating revenue includes advisory fees, commissions and other operating
revenue.
** Operating expenses include total costs and expenses less investment
performance 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. (See Note 8 to the audited financial statements.)
F-16
(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)
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)
23
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)
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)
24
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)
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).
27. Financial Data Schedule -- 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.
(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.
25
(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 19rd day of March, 2001.
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/ Ronald H. Menaker
-----------------------
Ronald H. Menaker Director March 19, 2001
s/ Anthony G. Miller
-----------------------
Anthony G. Miller Executive Vice President, March 19, 2001
Chief Operating Officer,
(Principal Financial
and Accounting Officer)
s/ Martin T. Sosnoff
-----------------------
Martin T. Sosnoff Chairman, Chief March 19, 2001
Executive Officer,
Director (Principal
Executive Officer)
s/ Craig B. Steinberg
-----------------------
Craig B. Steinberg President and March 19, 2001
Director of Research,
Director
s/ Thurston Twigg-Smith
-----------------------
Thurston Twigg-Smith Director March 19, 2001
28
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE
- -------------- ----------- ----
11 Computation of Earnings per Share S-1
29