<PAGE>
[Atalanta Sosnoff Capital Corporation logo] 1999
ATL
<PAGE>
[Atalanta Sosnoff Capital Corporation logo]
MISSION STATEMENT
- --------------------------------------------------------------------------------
o TO BE A MEANINGFUL AND GROWING PROVIDER OF INVESTMENT MANAGEMENT SERVICES TO
INDIVIDUALS, CORPORATIONS, PUBLIC AND TAFT-HARTLEY FUNDS AND ENDOWMENT
INSTITUTIONS.
o TO MAINTAIN A TOP QUARTILE PERFORMANCE RANKING AMONG PEER GROUP MONEY
MANAGERS, YEAR OVER YEAR, CYCLE OVER CYCLE AND DECADE OVER DECADE.
o TO MAINTAIN THE HIGHEST STANDARDS OF ETHICAL CONDUCT IN ALL PHASES OF OUR
BUSINESS INCLUDING CHARITABLE GIVING AND SOCIAL RESPONSIBILITY.
o TO BE PRO-ACTIVE ON ISSUES OF CORPORATE GOVERNANCE IN THE BEST INTERESTS OF
SHAREHOLDERS.
FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES $ 18,270 $ 16,980 $ 18,829
OPERATING INCOME $ 1,659 $ 3,371 $ 5,123
OTHER INCOME, NET $ 32,805 $ 10,324 $ 12,851
NET INCOME $ 17,564 $ 7,784 $ 9,849
NET INCOME PER SHARE--DILUTED $ 1.91 $ 0.81 $ 1.08
=============================================================================================================
YEAREND POSITION:
BOOK VALUE PER SHARE $ 11.21 $ 8.78 $ 7.36
SHAREHOLDERS' EQUITY $ 101,776 $ 82,022 $ 70,556
RETURN ON AVERAGE EQUITY 19% 10% 15%
ASSETS UNDER MANAGEMENT $2,686,000 $2,410,000 $2,682,000
=============================================================================================================
OPERATING REVENUES TO AVERAGE
ASSETS UNDER MANAGEMENT .76% .71% .67%
</TABLE>
Certain statements in this Annual Report to Shareholders under the captions
"Letter to Shareholders" and "Management's Discussion and Analysis", 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 regards thereto
or any change in events, conditions or circumstances on which any such statement
is based.
<PAGE>
Letter to Shareholders
March 7, 2000
The market performed better than we expected during 1999, but equity
returns in our clients' accounts still outstripped the S&P 500 Index by a wider
margin than in '98 when we were also surprised by the market's exceptional rate
of return. We are off to a reasonably good start this year, too, but again, we
have no illusions about the new Gilded Age raining down gold coins on our heads.
Equities still look pricey in the growth sector and too cheap for financial
services, health care and basic industrials which act forlornly, like
ragamuffins without a roof over their heads. This bi-polar market may continue
for some time. Alan Greenspan has his foot gingerly on the brakes but nobody,
particularly the consumer, seems to care. Home prices, gasoline, air travel and
luxury hotels get pricier, but rising productivity in the heartland keeps
inflation quiescent, and the dollar is buoyant despite a horrendous trade
balance and a banana republic-like deficit in our balance of payments. Again,
the world doesn't care much just so long as our economy hums along.
Everyone, including us, underestimated GDP momentum last year and probably
is underestimating the economy's late foot this year, too. Even the Federal
Reserve Board now thinks normalized growth for the country is no longer 2.7% but
closer to 4%, which is what we should see this year at the least.
For the second year in a row, growth managers outperformed value players by
a wide margin--probably unprecedented in the past 20 years. We are seeing more
of the same today. The market's reasoning, while torturous, could be sound.
Greenspan succeeds to slow things down after several more discount rate bumps.
The industrial sector never regains pricing hegemony and growth stocks, namely
technology, blithely ride through the cycle unscathed just so long as capital
spending holds up.
Since capital spending follows profits, this is a passable call. If we go
too far, like Japan in the late-eighties, and spend like drunken sailors--watch
out. The cycle could top out from excess spending for plant, equipment and real
estate, precipitating a nasty capital goods and inventory recession comparable
with '73-'74. Let's all remember that equity valuation for growthies topped out
in '72 and it took until '98 to exceed those "one decision" days of total belief
in Polaroid, Xerox, et. al.
So far, capacity utilization for the country, while edging up, is hardly
above 81 percent. This is more synonymous with recession than inflation. So much
money has poured into capital goods expansion that under-utilization of plant
and equipment is continuing for most heartland producers like Deere, Caterpillar
Tractor and even Dow Chemical.
We are smack in a second Gilded Age. The original was spawned in the
1870's, to be shattered by the onset of World War I. Those four decades
adumbrated enormous wealth creation for the country and for its entrepreneurs.
The list was long: Rockefeller, Vanderbilt, Carnegie, Harriman, Jay Gould,
Morgan and Leland Stanford. The consolidation of railroads and the steel
industry preoccupied the house of Morgan. New York emerged as the cultural
capital of the world. Pierpont Morgan complained about the lack of brains on
Wall Street which was then as today a hard-boiled meritocracy. Morgan backed
Thomas Edison and his electric light. The telephone and elevator were major
breakthroughs that sparked the country just as much as the Internet today and
jet air travel in the early '60's.
We date the new Gilded Age from the trough of the '90-'91 recession. It's
10 years old, but don't bet that it will last 40 like the first one, or end
tomorrow. The world was idyllic on the eve of World War I. Historians still
can't explain fully why the Europeans threw it all away, but the Kaiser, the
Czar, France and England did just that. Think back on this when you read about
Dow 36,000 forecasts.
1
<PAGE>
o o o
Our managed asset base grew by 11% last year because of very strong account
performance. Large institutional accounts for us as yet remain cash flow
negative despite comparatively good numbers within our peer group of core equity
managers of large capitalization stocks. Marketing emphasis has intensified in
the individual high net worth and brokerage wrap account categories where we are
building these businesses brick by brick. Additionally, our hedge fund and
investment partnerships are growing and performing notably well.
Getting our feet wet in the mutual fund sector should bring results, but it
will take another year or two of strong performance to attain 5-Star Morningstar
ratings and qualify us for representation by the brokerage house community. All
four funds are showing outstanding performance to date inclusive of the
Atalanta/Sosnoff Fund, our large capitalization core equity fund, the Focus
Fund, Balanced Fund and Value Fund. The Atalanta/Sosnoff Fund was ranked among
the top 10 equity funds on a performance basis in 1999 in its category, and this
June will have a two-year record.
The year 2000, if relatively successful for us in terms of client returns,
will further solidify our asset base and provide us with outstanding credentials
to market all sectors of our money management business. We have expanded the
nucleus of money management and senior marketing executives with good results to
date. Our staff is totally united in its goal to grow Atalanta, invigorated by
the challenge and working with maximum intensity and professionalism. The growth
in our corporate base of liquid assets gives us ample flexibility for investment
spending.
Our thanks to all our staff for contributing to our results.
Warm good wishes,
/s/ Martin T. Sosnoff /s/ Craig B. Steinberg
Martin T. Sosnoff Craig B. Steinberg
Chairman and Chief Executive Officer President and Director of Research
2
<PAGE>
INVESTMENT MANAGEMENT STRUCTURE
- --------------------------------------------------------------------------------
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. Capital and Management are both registered investment
advisors. Managed assets of $2.7 billion cover equity, balanced and fixed income
accounts for corporations, public funds, Taft-Hartley clients, foundations,
charitable organizations and individuals. Institutional clients are managed by
Capital and are the source of 77% of total managed assets. Management is also
registered as a broker-dealer and manages high net worth and smaller
institutional accounts. Management provides brokerage services to some of its
advisory clients and to certain of Capital's clients.
Atalanta is primarily known as a large-cap core equity manager. Our 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, Atalanta seeks to identify change at the margin. Major
themes unfold during economic cycles they embrace, geopolitical realignments and
changes in government regulation and Federal Reserve Board policy emphasis. Our
process identifies and overweights "event-driven" companies and sectors with
benevolent product profile cycles and accelerating earnings.
Atalanta seeks to enhance returns by adding two elements beyond the
traditional growth style:
Earnings Acceleration: The Company supplements classic growth stock
holdings by considering event-driven situations and
companies poised to enter or in a cycle of
accelerating earnings growth.
Strategic Growth The Company overlays its stock selection and
Investing: portfolio construction with a macroeconomic view.
The two principals, Messrs. Sosnoff and Steinberg, have worked together in
the investment arena for more than 14 years. The continuity of the team and its
years of experience are critical elements in managing investments. Mr. Sosnoff,
Chief Investment Officer, 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.
[CHART]
Chief Investment Officer
Money Manager/Analyst
------------------------
Martin Sosnoff, C.F.A.
(Tenure = Founder, 24 Years)
|
|
|
Director of Research
Money Manager/Analyst Money Manager/Analyst
- --------------------- Investment ---------------------
Craig Steinberg -------- Policy Committee -------- Paul Tanico
(Tenure = 14 Years) (Tenure = 7 Years)
/ \
/ \
/ \
/ \
/ \
Securities Money Manager/Analyst
Analysts Group ---------------------
(5 analysts) William Knobler
(Tenure = 15 Years)
|
|
|
Systems Group
Financial Screening
3
<PAGE>
Investment performance in 1999 was exceptional on both an absolute and
relative basis, and the Company's peer group rankings continue to improve.
Equity and balanced products performed well in 1999, after a strong year
recorded in 1998. The most important factors affecting the Company's capacity to
compete for new business will be a return to sustained top quartile investment
performance, perceived quality and productivity of investment professionals, and
a continued intensive level of client service.
MARKETING AND CLIENT SERVICES
- --------------------------------------------------------------------------------
Managed assets are sourced from three major markets:
Institutional: o $2.1 billion of assets in over 50 separate relationships.
High Net Worth: o $376 million of assets in over 300 separate relationships.
o $126 million of assets in limited partnership vehicles.
Wrap: o $72 million of assets.
With the addition of our first mutual fund in June, 1998--the
Atalanta/Sosnoff Fund (ticker "ASFGX")--and three additional
funds--Atalanta/Sosnoff Focus Fund, Atalanta/Sosnoff Balanced Fund, and
Atalanta/Sosnoff Value Fund--added in July 1999, we offer investment products
with broad appeal--from the largest institution to the individual just starting
out investing in an IRA.
Total Managed Assets
December 31, 1999
$2.7 billion
[PIE CHART]
Institutional 77%
Investment Partnerships 5%
Wrap 3%
High Net Worth 14%
Mutual Funds 1%
4
<PAGE>
Institutional
Atalanta's core has always been its institutional clients. This market
segment is primarily controlled by gate-keeper consultants, so our ability to
increase managed assets is especially dependent on performance results,
including the three- and five-year performance track records, and related peer
group rankings.
While these measures have all improved dramatically over the last two
years, in our opinion it will take at least another year of good performance
results before we can add meaningful new assets in this market segment.
Total Institutional Managed Assets by Client Type
December 31, 1999
$2.1 billion
[PIE CHART]
Taft-Hartley 32%
Public 20%
Corporate Taxable 9%
ERISA 19%
Endowment/Foundation & Religious 20%
High Net Worth
We Are Targeting Prospective Clients With Over $500,000 In Investable
Assets.
Atalanta has a growing presence in the High Net Worth market and we have
targeted it as a focus of our marketing program. We have committed additional
resources to this area, and believe Atalanta offers a unique investment product
to these clients.
Our conservative investment philosophy and focus on preservation of capital
is particularly well suited to the individual. Now, more than ever, individual
investors are choosing professional money management as the way to superior
results. Assets committed to equity markets require continuous supervision.
During volatile markets, such as the summer/fall of 1998, clients rely on their
investment managers to digest the facts and reaffirm investment goals that are
realistic.
The potential for this sector is enormous. In 1999, our managed assets in
this segment grew 19%, from $315 million on December 31, 1998 to $376 million as
of December 31, 1999.
Wrap
Atalanta has a small presence in this market, and it is the other major
area of focus in our marketing efforts. Assets controlled by broker/consultants
have exploded in recent years and penetrating this market is an efficient way to
leverage the large sales forces in place at the major houses. We have committed
additional resources to this market.
In 1999, our managed assets in this segment grew 76%, from $41 million on
December 31, 1998 to $72 million as of December 31, 1999.
5
<PAGE>
SUMMARY OF INVESTMENT PRODUCTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Large-Cap Core Equity Large capitalization stocks combined with our pragmatic capital
preservation discipline (will raise cash--up to 50%).
Large-Cap Strategic Core Equity Large capitalization stocks in a fully invested (at least 90%)
portfolio.
Balanced Large-cap core equity plus fixed income. The fixed income percentage is
set by the individual plan/sponsor client.
Fixed Income Intermediate Federal, agency and high grade corporate securities where
safety and consistency of income is of primary importance.
Mutual Funds:
Atalanta/Sosnoff Fund A large-cap fund, started in June 1998, employing our core equity
philosophy.
Atalanta/Sosnoff Focus Fund A large-cap fund, started in July 1999, employing our core equity
philosophy in a more concentrated position of 25-30 stocks.
Atalanta/Sosnoff Balanced Fund A large-cap fund, started in July 1999, employing our core equity and
fixed income philosophies by investing in a blend of equity and fixed
income securities.
Atalanta/Sosnoff Value Fund A large-cap fund, started in July 1999, employing a philosophy of
investing in equity securities we believe are fundamentally undervalued.
Investment Partnerships:
Atalanta Partners, L.P. The core equity portfolio, somewhat more concentrated and leveraged to
enhance returns. Includes mid-cap stocks.
Atalanta Variable, L.P. Combines a large-cap equity segment with a fixed income segment so that
a client can create a balanced product.
Sabre Partners, L.P. A long-short hedge fund operating in all market segments and caps.
Employs active hedging strategies to enhance returns and reduce risk.
</TABLE>
6
<PAGE>
SELECTED FINANCIAL DATA
FIVE YEAR REVIEW
<TABLE>
<CAPTION>
(dollars and shares in thousands, except per share amounts) 1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Net income $ 17,564 $ 7,784 $ 9,849 $ 8,802 $10,048
Per share--diluted $ 1.91 $ .81 $ 1.08 $ 1.00 $ 1.14
--basic $ 1.91 $ .81 $ 1.09 $ 1.00 $ 1.14
Total Revenues $ 51,075 $27,304 $31,680 $27,385 $29,915
Operating revenues (1) $ 18,270 $16,980 $18,829 $20,759 $20,049
Operating expenses (2) $ 16,611 $13,609 $13,707 $12,022 $12,381
Operating income $ 1,659 $ 3,371 $ 5,122 $ 8,737 $ 7,668
Operating margin 9% 20% 27% 42% 38%
Per employee:
Operating revenues $ 406 $ 435 $ 471 $ 472 $ 477
Operating expenses $ 369 $ 349 $ 343 $ 273 $ 295
Operating income $ 37 $ 86 $ 128 $ 199 $ 182
Net interest and dividend income $ 708 $ 1,557 $ 2,997 $ 1,843 $ 1,881
Net realized and unrealized gains from investments $ 32,097 $ 8,767 $ 9,854 $ 4,783 $ 7,985
Return on average equity 19% 10% 15% 15% 20%
Yearend Position:
Total assets $123,623 $90,686 $75,413 $64,696 $58,497
Shareholders' equity $101,776 $82,022 $70,556 $61,628 $54,517
Book value per share $ 11.21 $ 8.78 $ 7.36 $ 6.99 $ 6.19
Cash dividends declared per share None $ .25 $ .20 $ .15 $ .15
Common stock, shares outstanding 9,075 9,338 9,587 8,812 8,812
Number of employees 45 39 40 44 42
Assets under management (millions) $ 2,686 $ 2,410 $ 2,682 $ 2,763 $ 3,611
Average assets under management (millions) $ 2,412 $ 2,402 $ 2,804 $ 3,219 $ 3,267
Percentage of average assets:
Operating revenues .76% .71% .67% .64% .61%
Operating expenses .69% .57% .49% .37% .38%
Operating income .07% .14% .18% .27% .23%
</TABLE>
- ------------------
(1) Operating revenues consist of advisory fees, commissions and other operating
revenue.
(2) Operating expenses consist of total costs and expenses less an investment
performance bonus of $3,446,000 in 1999, pursuant to the Management
Incentive Plan, which was paid to the Chief Executive Officer. (See
Management's Discussion and Analysis.)
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Financial Summary
Investment performance, over 39% for equity clients in 1999, was strong on
an absolute and relative basis and continued the improvement since 1996. The
Company's peer group ranking continued to improve--from above the median in
1997, to top quartile in 1998 and 1999. The 1996 and 1997 underperformance
concerns led to net client outflows of $308 million in 1999. However, managed
assets increased by 11% in 1999 because of strong performance results. Income
before taxes increased 127% in 1999, based on a 218% increase in other income,
partially offset by weaker operating results as compared with 1998.
Earnings per share totaled $1.91 in 1999, compared with $.81 in 1998 and
$1.08 in 1997 (all earnings per share amounts represent diluted earnings per
share). Net income was $17.6 million in 1999, compared with $7.8 million in 1998
and $9.8 million in 1997.
Revenues for 1999 increased 87% to $51.1 million, from $27.3 million in 1998
and $31.7 million in 1997. Revenue from advisory fees and commissions
("operating revenues") increased 8% to $18.3 million in 1999, from $17.0 million
in 1998 and $18.8 million in 1997.
Costs and expenses for 1999 increased 47% to $20.1 million, from $13.6
million in 1998 and $13.7 million in 1997. In each of 1999 and 1998, the Company
recorded $2.25 million of non-cash compensation charges ("NCCC") related to
awards of restricted stock in 1997, compared with $563,000 in 1997 (see Note 9
to the audited financial statements). In 1999 and 1998, the Company also
recorded $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).
The Company adopted an amendment to its Management Incentive Plan ("MIP")
(see Note 8 to the audited financial statements) in 1999 whereby an annual bonus
is earned by the Chief Executive Officer (CEO) based upon pre-tax earnings of
proprietary accounts 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 expenses related to this is an accrued investment performance bonus
to the CEO of $3,446,000 in 1999.
During 1997, special charges (classified in both separation costs and
general and administrative expenses) totaling $1.9 million ($.12 per share after
taxes) were charged to operations owing to the termination without cause of the
Company's former president ($1.4 million) and the costs incurred by the Company
associated with an abandoned effort to take the Company private. Net income
before special charges totaled $10.9 million in 1997, or $1.20 per share.
Excluding these charges in 1999, 1998 and 1997 (see table below), operating
income totaled $5.4 million (30% margin) in 1999, $6.0 million (35% margin) in
1998, and $7.6 million (40% margin) in 1997.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($000)
Operating Income 1999 1998 1997
- ---------------- ---- ---- ----
<S> <C> <C> <C>
Operating revenues, reported $18,270 $16,979 $18,829
Costs and expenses, reported (20,057) (13,609) (13,707)
Add MIP accrued investment performance bonus 3,446 -- --
------- ------- -------
Operating income before adjustments 1,659 3,370 5,122
Adjustments:
Non-cash compensation charges 2,250 2,250 563
SVP account charges 1,500 375 --
1997 special charges -- -- 1,892
------- ------- -------
Operating income, adjusted $ 5,409 $ 5,995 $ 7,577
</TABLE>
- --------------------------------------------------------------------------------
The increase in operating revenues in 1999 was primarily due to the increase
in assets under management of $276 million (11%) in 1999, to $2.69 billion at
year-end from $2.41 billion at the end of 1998. Average assets under management
totaled $2.41 billion in 1999, compared with $2.40 billion in 1998, and $2.80
billion in 1997.
Cash, cash equivalents and marketable securities totaled $98 million at
December 31, 1999, compared with $78 million a year ago. Book value per share
grew 28% to total $11.21 at December 31, 1999, compared with $8.78 at the end of
1998.
8
<PAGE>
Assets Under Management
Managed assets totaled $2.69 billion at the end of 1999, compared with
$2.41 billion at the end of 1998 and $2.68 billion at the end of 1997. Assets
under management as of the end of each of the last three years are as follows:
($millions)
1999 1998 1997
------ ------ ------
Institutional $2,086 $1,963 $2,355
High Net Worth 376 315 198
Investment Partnerships 126 81 72
Wrap 72 41 57
Mutual Funds 26 10 N/A
------ ------ ------
Total Managed Assets $2,686 $2,410 $2,682
The $276 million net increase in managed assets during 1999 is comprised of
increases of $58 million from new client accounts and $584 million in positive
performance results, reduced by (i) $219 million in closed client accounts; and
(ii) $147 million in net withdrawals from existing accounts. The closed accounts
are primarily the result of client reallocations and indexing of funds.
In the two years ended December 31, 1999, managed assets increased by
$4 million, comprised of increases in new accounts of $72 million and $1,186
million in positive performance results, reduced by (i) $902 million in closed
client accounts; and (ii) $352 million in net withdrawals from existing
accounts. The Company's second largest account ($311 million) terminated in May,
1998. This account generated 3.8% of the Company's operating revenues in 1997,
and 2.8% in 1998.
Performance in equity and balanced accounts was strong on an absolute and
relative basis in 1999 and 1998, and the Company's peer group rankings continue
to improve. Net outflows in client accounts slowed significantly over the last
six months of 1998 through December 1999, and the Company believes its managed
asset base has stabilized. Barring a market correction, the Company expects its
asset base to continue to grow in 2000.
Earnings
Operating revenues increased 8% in 1999 to $18.3 million, compared with
$17.0 million in 1998 and $18.8 million in 1997. Average assets under management
were basically flat in 1999, after a 14% decrease in 1998.
In 1999 operating revenues were .76% of average managed assets, compared
with .71% in 1998 and .67% in 1997. 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.
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 6% to $16.3 million in 1999, compared with $15.4 million in 1998
and $17.3 million in 1997. Advisory fees were 89%, 91% and 92% of operating
revenues in 1999, 1998 and 1997, respectively.
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 25% to $1.44 million in 1999,
compared with $1.15 million in 1998 and $1.16 million in 1997. The 1999 increase
reflects the increase in managed assets during 1999.
9
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($000)
Operating Expenses 1999 1998 1997
- ------------------ ---- ---- ----
<S> <C> <C> <C>
Operating expenses, reported $20,057 $13,609 $13,707
Adjustments:
MIP accrued investment performance bonus (3,446) -- --
Non-cash compensation charges (2,250) (2,250) (563)
SVP account charges (1,500) (375) --
1997 special charges -- -- (1,892)
------- ------- -------
Operating expenses, adjusted $12,861 $10,984 $11,252
</TABLE>
- --------------------------------------------------------------------------------
Reported costs and expenses totaled $20.1 million in 1999, compared with
$13.6 million in 1998 and $13.7 million in 1997. The 1999 amount reflects
$7.2 million in compensation charges detailed above. Before these 1999 items,
operating expenses totaled $12.9 million in 1999. The 1998 amount reflects $2.6
million in compensation charges detailed above. Before these 1998 items,
operating expenses totaled $11.0 million in 1998. The 1997 amount reflects $1.9
million in special charges and $563,000 in non-cash compensation charges. Before
these 1997 charges, operating expenses totaled $11.3 million in 1997.
Excluding these adjustments, 1999 operating expenses increased 17% compared
with 1998, after a 2% decline in 1998 compared with 1997. Adjusted operating
expenses were 70% of operating revenues and .53% of average managed assets in
1999, compared with 65% and .46% in 1998, and 60% and .40% in 1997.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($000)
Compensation Expenses 1999 1998 1997
- --------------------- ---- ---- ----
<S> <C> <C> <C>
Compensation expenses, reported $15,318 $10,043 $8,070
Adjustments:
MIP accrued investment performance bonus (3,446) -- --
Non-cash compensation charges (2,250) (2,250) (563)
SVP account charges (1,500) (375) --
------- ------- ------
Compensation expenses, adjusted $ 8,122 $ 7,418 $7,507
</TABLE>
- --------------------------------------------------------------------------------
Reported compensation expenses increased 53% to $15.3 million in 1999,
compared with $10.0 million in 1998 and $8.1 million in 1997, because of the
charges noted above. Compensation expenses adjusted for these items increased 9%
in 1999 to total $8.1 million, compared with $7.4 million in 1998 and
$7.5 million in 1997. The 1999 increase is primarily due to increases in bonuses
to employees and an increase in the Company's annual contribution to the
employee Profit Sharing Plan. Adjusted compensation expenses were 44% of
operating revenues and .34% of average managed assets in 1999, compared with 44%
and .31% in 1998, and 40% and .27% in 1997.
The Company has a Management Incentive Plan ("MIP") 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. In 1999, 1998 and 1997 participating executives
were awarded no operating bonuses under the MIP. The Company adopted an
amendment to the MIP (see Note 8 to the audited financial statements) in 1999
under which an annual investment performance bonus is earned by the Chief
Executive Officer ("CEO") based upon pre-tax earnings of proprietary accounts 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 expenses related to the
MIP is an accrued investment performance bonus to the CEO of $3,446,000 in 1999.
10
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($000)
Non-Compensation Expenses 1999 1998 1997
- ------------------------- ---- ---- ----
<S> <C> <C> <C>
Non-compensation expenses, reported $4,739 $3,566 $5,637
Adjustment:
1997 special charges -- -- (1,892)
------ ------ ------
Non-compensation expenses, adjusted $4,739 $3,566 $3,745
</TABLE>
- --------------------------------------------------------------------------------
Reported non-compensation expenses increased by 33% to $4.7 million in 1999,
compared with $3.6 million in 1998 and $5.6 million in 1997. Excluding 1997
special charges, non-compensation expenses were $3.7 million in 1997. The 1999
increase is due to an increase in clearance and floor brokerage costs associated
with the 25% increase in commissions earned in 1999; an increase in selling and
promotional expenses related to the Company's increased marketing efforts; and
various other one time professional fees, severance payments and systems
expenses related to an upgrade in computer hardware and software. These expenses
are primarily fixed in nature and, as a result, they are not directly related to
changes in managed asset levels. Adjusted non-compensation expenses totaled 26%
of operating revenues and .20% of average managed assets in 1999, compared with
21% and .15% in 1998, and 20% and .13% in 1997.
* * *
Other income, which comprises interest, dividends, and realized and
unrealized gains/losses from sales of marketable securities (primarily large-cap
equities), totaled $32.8 million in 1999, compared with $10.3 million in 1998
and $12.9 million in 1997. Net interest and dividend income was $0.8 million in
1999, compared with $1.6 million in 1998 and $3.0 million in 1997. The 1997
amount is primarily due to a special dividend received in 1997 from a company
whose securities were held in the Company's investment portfolio. Net gains from
investments totaled $32.1 million ($19.8 million realized) in 1999, compared
with $8.8 million ($1.2 million realized) in 1998 and $9.9 million
($9.0 million realized) in 1997, reflecting the strength of the domestic equity
markets in those years.
Liquidity and Capital Resources
Investments in marketable securities aggregated $93.6 million at
December 31, 1999, compared with $73.8 million at the end of 1998. During 1999,
the Company invested $6.0 million in its new mutual funds, the Atalanta/Sosnoff
Balanced Fund, the Atalanta/Sosnoff Value Fund and the Atalanta/Sosnoff Focus
Fund, and an additional $3 million in an investment partnership. Shareholders'
equity totaled $101.8 million at December 31, 1999, compared with $82.0 million
at the end of 1998. This increase is primarily from net income of $17.6 million
recorded in 1999 and unrealized gains on the investment portfolio. The Company
has adopted SFAS No. 115, requiring it to reflect a net unrealized gain of $10.2
million after taxes in shareholders' equity at December 31, 1999, compared with
$7.5 million at the end of 1998.
At December 31, 1999, the Company's investment portfolio at market totaled
$115.5 million (cost basis $83.6 million), comprised of cash and cash
equivalents, corporate debt, large-cap equity securities, and 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 18 separate
large-cap securities, in a more concentrated fashion of what it does for its
managed client accounts. The largest position was in Apple Computer, at 7.1% of
the portfolio, with an unrealized gain of $3.4 million at year-end.
At December 31, 1999 the Company had cash and cash equivalents totaling
$4.4 million, compared with $4.0 million at the end of 1998. Net cash used in
operating activities was $2.9 million in 1999 compared with net cash inflows of
$727,000 in 1998. 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 $5.9 million in 1999, compared with
$4.0 million provided in 1998. Net cash used in financing activities was $2.6
million in 1999, compared with $4.5 million in 1998. As a result, there was a
net increase in cash and cash equivalents of $394,000 in 1999, compared to an
increase of $189,000 in 1998.
If the equity market (defined as the S&P 500 index) were to decline by 10%,
the Company might experience unrealized losses of approximately $12 million; if
the market were to decline by 20%, the Company might experience unrealized
losses of $24 million. However, incurring unrealized losses of this
11
<PAGE>
magnitude is unlikely with active management of the portfolio. Since the
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.
* * *
In 1998, the Company paid a special dividend of $.25 per share, compared
with $.20 per share in 1997. The Company did not pay a special dividend in 1999.
Additionally, in December 1998, the Company repurchased 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 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. At December 31,
1999 and 1998, the Company had no liabilities for borrowed money.
In September 1997, the Company awarded 775,000 shares of restricted stock at
the issue price of $.01 per share to two senior executives under the terms of
the Long Term Incentive Plan ("LTIP"). Craig B. Steinberg, President, received
600,000 shares and Anthony G. Miller, Executive Vice President and Chief
Operating Officer, received 175,000 shares. Such awards 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.
Year 2000
The Company has conducted a full assessment of its information technology
systems and imbedded technology and has determined that they are Y2K compliant
(i.e., that they recognize and specify dates to properly function in the year
2000 and thereafter). The remediation and testing of all critical systems and
point-to-point testing with the systems of third parties with which our existing
systems interface has been successfully completed. In conjunction with its Y2K
readiness process, the Company replaced its two core critical systems, trading
and portfolio accounting, with off-the-shelf commercial software packages during
1999. To date, all of the Company's systems are operating properly in 2000. The
Company's Y2K costs were not material through December 31, 1999 and it does not
expect to incur any material costs during 2000.
12
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Atalanta/Sosnoff Capital Corporation:
We have audited the accompanying consolidated statements of financial condition
of Atalanta/Sosnoff Capital Corporation (a Delaware corporation) and
subsidiaries as of December 31, 1999 and 1998, 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,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Atalanta/Sosnoff Capital
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
New York, New York
February 21, 2000
13
<PAGE>
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Assets:
Cash and cash equivalents $ 4,387,987 $ 3,993,963
Accounts receivable 4,314,257 3,319,185
Investments, at market 93,637,682 73,802,294
Investments in limited partnerships 17,447,746 7,565,780
Fixed assets, net of accumulated depreciation and amortization of $700,123 and
$426,924, respectively 1,429,569 659,311
Exchange memberships, at cost (market value $2,700,000 and $1,761,100, respectively) 402,000 402,000
Other assets 2,004,225 943,870
------------ -----------
Total assets $123,623,466 $90,686,403
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and other liabilities $ 988,348 $ 773,970
Accrued compensation payable 4,812,781 648,611
Income taxes payable 16,046,699 6,541,427
Separation costs payable -- 700,000
------------ -----------
Total liabilities 21,847,828 8,664,008
------------ -----------
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 and
9,587,401 shares issued and outstanding, respectively 90,751 95,874
Additional paid-in capital 19,455,259 24,389,499
Retained earnings 75,976,793 58,412,561
Accumulated other comprehensive income--unrealized gains from investments, net of
deferred tax liabilities of $6,794,028 and $4,996,227, respectively 10,191,042 7,494,341
Unearned compensation (3,938,207) (6,188,615)
Treasury stock, at cost, 0 and 249,000 shares, respectively -- (2,181,265)
------------ -----------
Total shareholders' equity 101,775,638 82,022,395
------------ -----------
Total liabilities and shareholders' equity $123,623,466 $90,686,403
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
14
<PAGE>
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Advisory fees $16,349,083 $15,406,468 $17,286,815
Commissions and other operating revenues 1,921,016 1,573,101 1,542,657
Realized and unrealized gains from principal securities
transactions, net 32,097,041 8,766,778 9,854,124
Interest and dividend income, net 708,205 1,557,492 2,996,749
----------- ----------- -----------
Total revenues 51,075,345 27,303,839 31,680,345
----------- ----------- -----------
Costs and expenses:
Employees' compensation and benefits 15,317,520 10,043,375 8,069,548
Clearing and execution costs 788,334 562,594 526,964
Selling expenses 536,920 421,052 429,077
General and administrative expenses 3,414,339 2,582,300 4,681,383
----------- ----------- -----------
Total costs and expenses 20,057,113 13,609,321 13,706,972
----------- ----------- -----------
Income before provision for income taxes 31,018,232 13,694,518 17,973,373
Provision for income taxes 13,454,000 5,911,000 8,124,000
----------- ----------- -----------
Net income $17,564,232 $ 7,783,518 $ 9,849,373
=========== =========== ===========
Earnings per common share--basic $ 1.91 $ .81 $ 1.09
=========== =========== ===========
Earnings per common share--diluted $ 1.91 $ .81 $ 1.08
=========== =========== ===========
Net income, as presented above $17,564,232 $ 7,783,518 $ 9,849,373
Other comprehensive income:
Net unrealized gains from investments,
net of income taxes of $1,826,368, $4,138,071 and
$283,747, respectively 2,696,701 6,207,547 425,621
----------- ----------- -----------
Comprehensive income $20,260,933 $13,991,065 $10,274,994
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
15
<PAGE>
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income--
Unrealized
Additional Gains From
Common Paid-in Retained Investments, Unearned Treasury
Stock Capital Earnings Net Compensation Stock Total
------- ----------- ----------- ------------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 $88,124 $15,646,874 $45,031,750 $ 861,173 $ -- $ -- $ 61,627,921
Issuance of 775,000 restricted
shares 7,750 9,001,625 (9,001,625) 7,750
Amortization of unearned
compensation 562,602 562,602
Unrealized gains from
investments, net of deferred
taxes 425,621 425,621
Net income 9,849,373 9,849,373
Dividends ($.20 per share) (1,917,480) (1,917,480)
------- ----------- ----------- ----------- ------------ ---------- ------------
BALANCE, December 31, 1997 95,874 24,648,499 52,963,643 1,286,794 (8,439,023) -- 70,555,787
Purchase of treasury stock (2,181,265) (2,181,265)
Amortization of unearned
compensation (259,000) 2,250,408 1,991,408
Unrealized gains from
investments, net of deferred
taxes 6,207,547 6,207,547
Net income 7,783,518 7,783,518
Dividends ($.25 per share) (2,334,600) (2,334,600)
------- ----------- ----------- ----------- ------------ ---------- ------------
BALANCE, December 31, 1998 95,874 24,389,499 58,412,561 7,494,341 (6,188,615) (2,181,265) 82,022,395
Purchases of treasury stock (2,611,094) (2,611,094)
Retirement of treasury stock (5,123) (4,787,236) 4,792,359 --
Amortization of unearned
compensation (147,004) 2,250,408 2,103,404
Unrealized gains from
investments, net of deferred
taxes 2,696,701 2,696,701
Net income 17,564,232 17,564,232
------- ----------- ----------- ----------- ------------ ---------- ------------
BALANCE, December 31, 1999 $90,751 $19,455,259 $75,976,793 $10,191,042 $ (3,938,207) $ -- $101,775,638
======= =========== =========== =========== ============ ========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE>
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 17,564,232 $ 7,783,518 $ 9,849,373
Adjustments to reconcile net income to net cash (used in)
provided by operating activities--
Depreciation and amortization 273,199 188,643 150,185
Amortization of unearned compensation 2,250,408 2,250,408 562,602
Realized and unrealized gains from investments, net (32,097,041) (8,766,778) (9,854,124)
Deferred taxes 5,976,066 394,400 (522,264)
(Increase) decrease in operating assets--
Accounts receivable (995,072) 36,214 426,699
Other assets (1,060,355) (174,589) (253,243)
Increase (decrease) in operating liabilities--
Accounts payable and other liabilities 216,156 (80,069) 206,943
Accrued compensation payable 4,164,170 (190,813) (557,675)
Income taxes payable 1,555,834 (13,909) 977,880
Separation costs payable (700,000) (700,000) 1,400,000
------------- ------------- -------------
Net cash (used in) provided by operating activities (2,852,403) 727,025 2,386,376
------------- ------------- -------------
Cash flows from investing activities:
Proceeds from clearing broker, net -- 1,323,473 1,114,348
Purchases of fixed assets (1,043,457) (58,596) (329,314)
Purchases of investments (142,967,088) (151,336,026) (117,715,145)
Proceeds from sales of investments 149,868,066 154,048,709 114,672,755
------------- ------------- -------------
Net cash provided by (used in) investing activities 5,857,521 3,977,560 (2,257,356)
------------- ------------- -------------
Cash flows from financing activities:
Purchases of treasury stock (2,611,094) (2,181,265) --
Proceeds received for issuance of restricted shares -- -- 7,750
Dividends paid -- (2,334,600) (1,917,480)
------------- ------------- -------------
Net cash used in financing activities (2,611,094) (4,515,865) (1,909,730)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 394,024 188,720 (1,780,710)
Cash and cash equivalents, beginning of year 3,993,963 3,805,243 5,585,953
------------- ------------- -------------
Cash and cash equivalents, end of year $ 4,387,987 $ 3,993,963 $ 3,805,243
============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for--
Interest $ 83,961 $ 30,788 $ 34,087
Income taxes $ 5,922,100 $ 5,530,511 $ 7,668,384
Noncash financing activity--
Increase (decrease) in additional paid-in capital related to
restricted shares $ (147,004) $ (259,000) $ 9,001,625
Retirement of treasury stock $ (4,792,359) $ -- $ --
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE>
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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. It provides
investment advisory and management services to institutional clients and 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 1999 presentation.
The Holding Company and its subsidiaries are referred to collectively herein
as the "Company." All intercompany accounts and transactions have been
eliminated in consolidation.
Reportable Operating Segments
The Company considers its operations to be one reportable segment for
purposes of presenting financial information and for evaluating its performance.
As such, the financial information presented in the accompanying financial
statements is consistent with the financial information prepared for internal
use by management.
Revenue Recognition
Advisory fee revenue is recognized in the period in which services are
performed based on a percentage of assets under management. Commission income
and expenses 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, with the exception
of investments held by Management. The Company has designated those investments
held by the Holding Company, Capital and ASCC in equity and debt securities as
"available for sale," and, accordingly, recorded at market value with the
related unrealized gains and losses net of deferred taxes reported as a separate
component of shareholders' equity. Investments held by Management are recorded
at market value, with the related unrealized gains and losses reflected in the
consolidated statements of income and comprehensive income.
Investments are recorded on trade date. The cost of investments sold is
determined on the first-in, first-out method. Dividends and interest are accrued
as earned. Securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sales price as of the
last business day of the 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.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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. Therefore, the
Company is not deemed to have control of the Partnerships and, accordingly, the
accounts of the Partnerships are not included in these consolidated financial
statements.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with a maturity of
three months or less 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 generally
accepted accounting principles 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 Accounting Pronouncement
The Financial Accounting Standard Board has issued Statement of Financial
Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities," which is effective for periods beginning
after June 15, 2000. Management does not believe that the impact of the adoption
of SFAS No. 133 on the Company's financial position or results of operations
will be material.
2. EARNINGS PER COMMON SHARE
Basic earnings per common share amounts were computed based on 9,192,066,
9,571,711 and 9,037,469 weighted average common shares outstanding in 1999, 1998
and 1997, 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, 1999 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
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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.
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding 9,192,066 9,571,711 9,037,469
Common stock equivalents-options 8,406 10,925 50,936
--------- --------- ---------
Dilutive weighted average common shares outstanding 9,200,472 9,582,636 9,088,405
========= ========= =========
Antidilutive options 200,000 150,000 --
========= ========= =========
</TABLE>
3. Investments And Cash
Included in cash and cash equivalents, the Company had interest-bearing free
credit balances with its clearing broker of $ 1,715,233 and $230,727 at
December 31, 1999 and 1998, respectively.
Investments at December 31, 1999 and 1998, consisted of the following:
<TABLE>
<CAPTION>
Unrealized
Cost Market Value Gain (Loss)
----------- ------------ -----------
<S> <C> <C> <C>
1999:
Available for sale:
Common stock $54,198,652 $ 70,313,820 $16,115,168
Corporate debt 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
=========== ============ ===========
1998:
Available for sale:
Common stock $51,735,002 $ 62,778,063 $11,043,061
Corporate debt 1,175,964 868,250 (307,714)
Atalanta/Sosnoff Fund 100,000 114,700 14,700
----------- ------------ -----------
53,010,966 63,761,013 10,750,047
----------- ------------ -----------
Trading:
Atalanta/Sosnoff Fund 9,000,000 10,041,281 1,041,281
----------- ------------ -----------
Other:
Investments in limited partnerships 4,279,487 7,565,780 3,286,293
----------- ------------ -----------
$66,290,453 $ 81,368,074 $15,077,621
=========== ============ ===========
</TABLE>
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 $2,876,000, $1,821,000 and
$1,258,000 in 1999, 1998 and 1997, 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. Management earned
commissions of approximately $147,000, $116,000 and $59,000 in 1999, 1998 and
1997, respectively, for brokerage services provided to the Partnerships.
Advisory fees and brokerage commissions are based on terms
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
comparable to those in agreements with unrelated parties. Balances receivable
from the Partnerships were approximately $1,524,000, $449,000 and $110,000 at
December 31, 1999, 1998 and 1997, respectively, including approximately
$1,239,000 and $282,000 of incentive fees which are included in net income in
1999 and 1998, respectively.
Investments consist of 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.
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 ending December 31, 2000, under which the employee is
relinquishing the revenue from investment management and brokerage services
provided to the managed accounts to Management. Pursuant to this agreement,
Management has made (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, which is being recognized ratably
as compensation expense over the term of the arrangement. In addition,
Management and the employee agreed to change the split of Net Profits paid to
the employee from 100% during the twelve-month period ended September 30, 1998
to 50% for the twelve-month period ended September 30, 1999, 25% for the
twelve-month period ending September 30, 2000, and 0% thereafter. Included in
compensation expense is $1,500,000 and $375,000 in 1999 and 1998, respectively,
of which $375,000 is unpaid as of December 31, 1999 and 1998, respectively.
Commissions and advisory fee revenues related to such investment advisory
services for 1999 amounted to $1,466,130 and related compensation expenses
amounted to $1,835,384, which includes approximately $1.5 million paid to the
employee representing 50% of the purchase price associated with the employee
relinquishing the right to receive revenue from the managed accounts.
6. Provision For Income Taxes
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Current income taxes:
Federal $ 6,141,000 $3,822,000 $2,982,961
State and local 1,337,000 1,694,600 5,663,303
----------- ---------- ----------
Total current 7,478,000 5,516,600 8,646,264
----------- ---------- ----------
Deferred income taxes provision:
Federal 4,907,000 267,100 (180,180)
State and local 1,069,000 127,300 (342,084)
----------- ---------- ----------
Total deferred 5,976,000 394,400 (522,264)
----------- ---------- ----------
$13,454,000 $5,911,000 $8,124,000
=========== ========== ==========
</TABLE>
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
A reconciliation of the statutory federal income tax rate and the effective
rate based on consolidated income before income taxes in 1999, 1998 and 1997, is
set forth below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 34.9% 34.5% 34.5%
Increase resulting from:
State and local income taxes, net of federal tax benefit 7.5 8.6 10.6
Other 0.1 0.1 0.1
---- ---- ----
Effective rate 42.5% 43.2% 45.2%
==== ==== ====
</TABLE>
Deferred taxes payable are comprised of the following components as of
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Unrealized gain on investments $12,623,977 $6,483,377
Separation costs payable -- (210,000)
----------- ----------
$12,623,977 $6,273,377
=========== ==========
</TABLE>
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. The net capital rule of the New York Stock Exchange
also provides that equity capital may not be withdrawn or cash dividends paid if
the resulting net capital ratio would exceed 10 to 1. At December 31, 1999,
Management had net capital of $11,429,086, which was $11,179,086 in excess of
its required net capital of $250,000, and had a ratio of aggregate indebtedness
to net capital of .27 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 $671,000, $680,000 and $661,000 in 1999, 1998 and 1997,
respectively.
Approximate future minimum rental commitments under noncancelable operating
leases for the years subsequent to December 31, 1999, are as follows: 2000
through 2001 are equal to $626,000 per year 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
Bear, Stearns Securities Corporation, Inc. ("Bear Stearns") has an agreement
with Management to clear securities transactions and carry customers' accounts
on a fully disclosed basis. The agreement states that Management will assume
customer obligations should a customer of Management default. Bear Stearns
controls credit risk of customers by requiring maintenance margin collateral in
compliance with various regulatory and internal guidelines.
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. No operating
bonuses were earned under the MIP for 1999, 1998 and 1997.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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 $3,446,000 in 1999.
Pursuant to a 1998 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. Included in compensation
expense related to this bonus is approximately $530,000 and $150,000 for 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,
1999, 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 expire
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.
<TABLE>
<CAPTION>
Incentive Qualified Nonqualified
Stock Stock Stock
Options Options Options Total
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Outstanding, beginning of 1997 50,000 -- 835,000 885,000
Canceled during 1997 -- -- (650,000) (650,000)
Expired during 1997 -- -- (35,000) (35,000)
------- ------- -------- --------
Outstanding, end of 1997 50,000 -- 150,000 200,000
Granted during 1998 50,000 -- -- 50,000
------- ------- -------- --------
Outstanding, end of 1998 and 1999 100,000 -- 150,000 250,000
======= ======= ======== ========
Exercisable, end of 1997 110,000
========
Exercisable, end of 1998 150,000
========
Exercisable, end of 1999 190,000
========
Available for grant, end of 1999 55,000
========
</TABLE>
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
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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, 1999:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Net income:
As reported $17,564,232 $7,783,518 $9,849,373
Pro forma 17,454,834 7,668,032 9,626,832
Basic EPS:
As reported $ 1.91 $ .81 $ 1.09
Pro forma 1.90 .80 1.07
Dilutive EPS:
As reported $ 1.91 $ .81 $ 1.08
Pro forma 1.90 .80 1.06
</TABLE>
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 $265,000, $131,000
and $135,000 in 1999, 1998 and 1997, 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.
24
<PAGE>
ATALANTA/SOSNOFF CAPITAL CORPORATION
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
- ----------------------------------------
WILLIAM LANDBERG
Senior Vice President, Marketing
RONALD H. MENAKER
MARTIN T. SOSNOFF
Chairman and Chief Executive Officer
CRAIG B. STEINBERG
President and Director of Research
THURSTON TWIGG-SMITH
Chairman and Chief Executive Officer, Persis Corporation
CORPORATE OFFICERS
- ----------------------------------------
MARTIN T. SOSNOFF(1)
Chairman and Chief Executive Officer
CRAIG B. STEINBERG(1)
President and Director of Research
ANTHONY G. MILLER(2)
Executive Vice President and Chief Operating Officer; Chief Financial
Officer; Secretary
KEVIN S. KELLY(2)
Vice President, Finance
OFFICERS OF SUBSIDIARIES*
- ----------------------------------------
EXECUTIVE VICE PRESIDENT
Paul P. Tanico(3)
MANAGING DIRECTOR
Dennis R. White(4)
SENIOR VICE PRESIDENTS
Donn M. Goodman(5)
William M. Knobler(4)
William Landberg(4)
James D. Staub(5)
VICE PRESIDENTS
Ted Bellis(4)
William E. DiPietro(5)
Alan Kohn(3)
Morton A. Millhauser(4)
Jeanine M. Nadler(4)
Anthony S. Ng(5)
Kin W. Ng(5)
Toni Sosnoff(3)
Marianne C. Tantrum(5)
ASSISTANT VICE PRESIDENTS
Wendy A. Bailey(5)
Julie Gold(5)
- ----------------------------------------
* Atalanta/Sosnoff Capital Corporation (Delaware) and Atalanta/Sosnoff
Management Corporation
EXECUTIVE OFFICES
Atalanta/Sosnoff Capital Corporation
101 Park Avenue
New York, New York 10178
(212) 867-5000
www.atalantasosnoff.com
- ----------------------------------------
TRANSFER AGENT AND REGISTRAR Continental Stock Transfer & Trust Company
- ----------------------------------------
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 11:00 A.M., on Thursday, May
11, 2000 at: 11:00 A.M., on Thursday, May 11, 2000 at: Bear, Stearns & Co., Inc.
245 Park Avenue, 10th Floor New York, New York A formal Notice of Meeting, Proxy
Statement and Proxy has been mailed to all shareholders of record as of March
24, 2000.
- ----------------------------------------
Shareholder Inquiries
All inquiries concerning matters of general interest to shareholders should be
directed to:
Atalanta/Sosnoff Capital Corporation
101 Park Avenue
New York, New York 10178
Attn: Shareholder Relations
- ----------------------------------------
Counsel
Greenberg & Kahr
New York, New York
- ----------------------------------------
Independent Public Accountants
Arthur Andersen
New York, New York
- ----------------------------------------
ANY SHAREHOLDER SOLICITED IN CONNECTION WITH THE 2000 ANNUAL MEETING OF
STOCKHOLDERS UPON WRITTEN REQUEST ADDRESSED TO SHAREHOLDER RELATIONS AT THE
COMPANY SHALL RECEIVE WITHOUT CHARGE A COPY OF THE COMPANY'S 1999 ANNUAL REPORT
ON FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. FORM 10-K AND
OTHER PUBLIC FILINGS ARE ALSO AVAILABLE ON THE INTERNET AT THE COMPANY'S HOME
PAGE, www.atalantasosnoff.com
- ----------------------------------------
The Company's common stock is listed on the New York Stock Exchange under
the trading symbol "ATL." Presented below are the high and low closing quarterly
stock prices for the last three years, as reported on the New York Stock
Exchange Composite Transactions Tape, together with special dividends declared.
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
Quarter Ended: High Low High Low High Low
- -------------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C>
March 31 $10.56 $ 6.75 $11.81 $ 8.56 $ 8.88 $ 8.25
June 30 10.00 7.50 10.88 9.50 11.38 8.75
September 30 10.13 7.13 9.88 7.63 13.13 11.13
December 31 8.88 7.63 9.00 7.00 12.06 11.38
Special Dividends
Declared None $.25 $.20
</TABLE>
(1) Officer of Atalanta/Sosnoff Capital Corporation (a NYSE listed company),
and also an officer of Atalanta/Sosnoff Capital Corporation (Delaware)
(2) Officer of Atalanta/Sosnoff Capital Corporation (a NYSE listed company),
and also an officer of both Atalanta/Sosnoff Capital Corporation
(Delaware) and Atalanta/Sosnoff Management Corporation
(3) Officer of Atalanta/Sosnoff Capital Corporation (Delaware) only
(4) Officer of Atalanta/Sosnoff Management Corporation only
(5) Officer of both Atalanta/Sosnoff Capital Corporation (Delaware) and
Atalanta/Sosnoff Management Corporation
<PAGE>
[Atalanta Sosnoff Capital Corporation logo]
101 Park Avenue, New York, NY 10178
phone: (212) 867-5000 web: www.atalantasosnoff.com
