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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[XX] 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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ___________ to __________
Commission File Number 1-9137
ATALANTA/SOSNOFF CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3339071
(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
101 Park Avenue, New York, New York 10178
(Address of principal executive officers) (zip code)
(Registrant's telephone number, including area code) (212) 867-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
NONE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Number of shares of common stock
outstanding at March 20, 1997: 8,812,401
Aggregate market value of voting
stock held by non-affiliates, as
of March 20, 1997: $10,177,598
Documents incorporated by reference: Proxy Statement for the 1997 Annual
Meeting of Stockholders (incorporated in part in Form 10-K, Part III)
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,
uncertainities 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.
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 registered investment advisors. Management is also
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 are 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. Many institutional account clients have
consented to the use of the Management as broker for certain portfolio
transactions. The Company generally requires that individual and smaller
institutional account clients use Management as broker.
The largest single client generated approximately 3% of the Company's total
revenues for the year ended December 31, 1996. The Company's ten largest
clients, as of December 31, 1996, accounted for approximately 25% of total
revenues for the year then ended.
Assets under management decreased 24%, from $3.61 billion at December 31,
1995 to $2.76 billion at December 31, 1996. This decline is primarily the result
of several large institutional clients closing their investment advisory
accounts with Capital in 1996. See "Institutional Clients" on page 2 for further
discussion. For a discussion of the effects of this development, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The following table depicts assets under management at the last three
yearends by type of client:
($ millions)
1996 1995 1994
---- ---- ----
Institutional $2,421 $3,277 $2,465
Individual and smaller
institutional 292 285 250
Partnerships 50 49 39
------ ------ ------
Totals $2,763 $3,611 $2,754
====== ====== ======
1
Institutional Clients. Capital manages accounts of institutional clients
with assets under management of approximately $2.4 billion as of December 31,
1996, compared with $3.3 billion at the end of 1995, and $2.5 billion at the end
of 1994. Investment performance for equity clients was significantly below the
performance of relevant benchmarks in 1996. Underperformance and style - drift
concerns on the part of consultants that our investment management style does
not clearly fall within recognized industry categories caused six large
institutional clients to close their accounts in 1996. 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, 1996:
Number % of Dollars in % of
Type of Account of Relationships Total Millions Total
- --------------- ---------------- ----- -------- -----
Corporate employee
benefit plans 25 29% $647 27%
Not-for-profit
organizations 22 26 362 15
Jointly-trusteed
collective bargaining
employee plans 9 11 572 24
Governmental employee
benefit plans 13 15 681 28
Other 16 19 159 6
-- -- ---- --
Total 85 100% $2,421 100%
== ==== ====== ===
Individual and Smaller Institutional Clients. Since 1984, Management has
managed assets of individual and smaller institutional accounts. Assets under
management in the individual and smaller account business increased 2% during
1996, from $285 million at December 31, 1995 to $292 million at December 31,
1996. Approximately $118 million represents assets of taxable accounts; the
remaining $174 million represents assets of non-taxable accounts.
The foregoing analysis excludes the accounts serviced by an officer of
Management, Mr. William M. Knobler, who manages the excluded accounts directly.
The officer servicing the excluded accounts receives substantially all the net
revenue therefrom, pursuant to an arrangement with Management. Approximately $82
million in client assets were subject to this arrangement at December 31, 1996.
Company-Sponsored Investment Partnerships. Capital is the general partner
of two investment limited partnerships with different investment objectives and
total aggregate assets of $50 million at December 31, 1996. Capital receives a
basic management fee from each partnership at an annual rate of 1% of total
assets of the partnership. The partnership agreements contain various provisions
regarding bearing of expenses by the partnerships. A third partnership has
recently been formed.
2
Investment Management and Research
The Company currently manages over $2.8 billion in equity, balanced and
fixed income accounts for corporations, public funds, Taft-Hartley clients,
foundations, charitable organizations and individuals. Institutional clients are
the source of 90% of total managed assets. The Company's subsidiaries have been
registered as investment advisors since 1982 (Capital) and 1984 (Management).
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 domestic equity managers to invest in mid to large
capitalization stocks.
The Company's equity methodology focuses on two levels: thematics and stock
selection. It seeks to identify change at the margin. Major themes unfold during
economic cycles, geopolitical realignments and changes in government regulation
and Federal Reserve Board policy emphasis. The process identifies and
overweights "event-driven" companies with benevolent product profile cycles and
accelerating earnings. 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 investment management team at the Company has a total of 71 years of
investment experience. The two principals, Martin T. Sosnoff and Robert J.
Kobel, have worked together in the investment arena for more than 15 years. The
continuity of the team and its familiarity with the system are critical elements
in the success of the Company. 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 and restrictions.
The Company's Investment Policy Committee, headed by Mr. Sosnoff, 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 accounts
managed directly by Mr. Knobler. 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.
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.
Among peer group money managers with assets over $1 billion, the Company's
performance since inception ranks in the top 40%. The Company's mission is to
maintain a top quartile performance ranking year over year, cycle over cycle and
decade over decade. However, due to performance results for clients
significantly below relevant benchmarks over the last fifteen months, the
Company's peer group rankings are very low for time periods up to and including
the last three years.
3
Marketing and Business Development
Institutional Account Marketing. 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. Management believes that the Company is
perceived primarily as an active equity manager by the marketplace.
Net withdrawals from client accounts totaled $1,166 million in 1996,
compared with net withdrawals of $51 million in 1995 and net additions of $141
million in 1994.
Individual and Smaller Institutional Account Marketing. 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 withdrawals from client
accounts totaled $26 million in 1996, compared with net withdrawals of $34
million in 1995 and net additions of $48 million in 1994.
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, 1996, $92 million was under management from such
programs. The Company believes this business represents an efficient means to
gather assets, and is optimistic about its continued growth, subject to
performance considerations.
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 has enhanced the ability of firms offering non-equity products
and passive equity management which the Company does not offer, including much
larger firms with diversified product lines, to compete with the Company.
The Company's performance results since inception ranks in the top 40%
among peer group money managers. However, due to the recent underperformance in
client accounts previously discussed, the Company's peer group rankings are very
low for periods up to and including the last three years. The Company believes
that the most important factors affecting its capacity to compete for new
business will be a return to sustained top quartile investment performance
results, perceived quality and productivity of investment professionals, as well
as a continued commitment to a strong marketing effort and an exemplary level of
client service.
4
Most prospective clients perform a thorough review of the 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
institutional client typically takes from 12 to 18 months from the time of the
initial contact.
The Company believes it has the capacity to continue to increase the number
of client accounts under management without significant increases in fixed costs
or personnel and without adversely affecting the quality of service to existing
clients. The Company has continued to implement enhancements to its proprietary
computerized 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, 1996, 45% of Capital's
institutional clients, accounting for approximately $704 million (29%) in 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
substantially all of Management's individual and smaller institutional account
clients (except for those accounts obtained through Wrap programs). Management
also provides brokerage services to its 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.
As a member firm of both the New York Stock Exchange, Inc. ("NYSE") and
the Chicago Board Options Exchange, Inc. ("CBOE"), Management owns a seat on
each Exchange. These seats are leased at market rates to others, and lease
rentals for 1996 totaled $197,000.
Employees
At December 31, 1996, the Company employed 44 persons on a full-time basis,
comprised of 3 senior executives, 5 research, 5 sales, 12 client service, 13
accounting and operations, 1 trading and 5 administrative or secretarial
positions. The Company considers its employee relations to be good.
Sales personnel receive additional compensation based upon the advisory
fees of clients which they were responsible for successfully soliciting on
behalf of the Company. In addition, the Company has entered into agreements with
various sales personnel which, among other things, limit the extent to which
such personnel may solicit clients of the Company if their employment is
terminated. Some of these agreements provide that, in certain circumstances, an
employee, in the event of termination, may continue to receive a percentage of
fees received by the Company from clients solicited by that employee. The
amounts payable with respect to these salespersons' agreements are not expected
to be material.
5
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., the NYSE, and the CBOE. Securities firms are also subject to
regulation by state securities administrators in the states in which they
conduct business. The Company's subsidiaries are registered as a broker-dealer
and/or 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 79.9%
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 retain its existing client base. The Company's Certificate of
Incorporation contains provisions intended to preclude the possibility that the
accumulation by third parties of a substantial position in the Company's Common
Stock would be deemed an "assignment" of the Company's advisory agreements.
Many of the Company's clients are subject to the Employee Retirement Income
Security Act of 1974 ("ERISA"). The accounts of these clients are subject to a
number of ERISA provisions governing, among other things, fiduciary obligations
and permissible investments and investment methods.
As a member firm of the NYSE, Management is required under the rules of the
NYSE 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,
1996 was $250,000; it had net capital at such date of $7.3 million, and a ratio
of aggregate indebtedness to net capital of 0.08 to 1.
6
Item 2. Properties.
The Company occupies office space at 101 Park Avenue, New York, New York
under a lease which term expires on August 29, 2002.
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 1996.
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 sales prices of the common stock, as reported on the New York Stock Exchange
Composite Transactions Tape, together with special dividends declared.
1996 1995 1994
Quarter Ended High Low High Low High Low
- ------------- ---- --- ---- --- ---- ---
March 31 $13.38 $9.00 $7.25 $5.63 $9.25 $8.00
June 30 10.50 9.38 7.50 6.63 8.63 5.38
September 30 10.00 7.50 8.25 6.50 6.88 5.25
December 31 9.63 8.00 14.88 7.75 7.13 5.38
Special Dividends Declared $.15 $.15 $.15
The approximate number of record holders of common stock was 65 on December
31, 1996.
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.
7
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
FIVE YEAR REVIEW
(dollars and shares in thousands,
except per share amounts) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Summary of Operations:
Net income $ 8,802 $10,048 $ 5,775 $ 8,239 $ 5,968
Per share $ 1.00 $ 1.14 $ .65 $ .91 .65
Operating revenues $20,759 $20,049 $17,433 $16,107 $13,139
Operating expenses $12,022 $12,381 $11,583 $11,618 $11,116
Operating income $ 8,737 $ 7,668 $ 5,850 $ 4,490 $ 2,023
Operating margin 42% 38% 34% 28% 15%
Per employee:
Operating revenues $ 472 $ 477 $ 371 $ 393 $ 346
Operating expenses $ 273 $ 295 $ 247 $ 283 $ 293
Operating income $ 199 $ 183 $ 124 $ 110 $ 53
Net interest and dividend income $ 1,843 $ 1,881 $ 1,330 $ 980 $ 1,276
Net realized gains from
investments $ 4,783 $ 7,985 $ 3,391 $ 7,918 $ 6,567
Return on average assets 14% 19% 13% 20% 16%
Return on average equity 15% 20% 13% 21% 18%
Yearend Position:
Total assets $64,696 $58,497 $47,329 $44,198 $39,567
Shareholders' equity $61,628 $54,517 $44,340 $42,523 $34,527
Book value per share $ 6.99 $ 6.19 $ 5.03 $ 4.75 $ 3.72
Cash dividends declared
per share $ .15 $ .15 $ .15 $ --- $ .40
Common stock, shares outstanding 8,812 8,812 8,812 8,949 9,288
Number of employees 44 42 47 41 38
Assets under management
(millions) $ 2,763 $ 3,611 $ 2,754 $ 2,649 $ 2,066
Average assets under management
(millions) $ 3,219 $ 3,267 $ 2,703 $ 2,339 $ 1,909
Percentage of average assets:
Operating revenues .64% .61% .65% .69% .69%
Operating expenses .37% .38% .43% .50% .58%
Operating income .27% .23% .22% .19% .11%
8
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Financial Summary
Investment performance, over 11% for equity clients, was significantly
below the performance of the S&P 500 in 1996. This has only happened a couple of
times in our twenty-one year performance history. Underperformance and
style-drift concerns on the part of consultants that our investment management
style does not clearly fall within recognized industry categories led to a 24%
decline in managed assets in 1996. However, because 1995 was a strong year in
terms of asset growth, average managed assets declined only 1% in 1996.
Operating income before taxes grew 14% in 1996 on 4% revenue growth and expense
savings of 3%. Atalanta's net other income decreased to $6.6 million from $9.9
million in 1995.
Earnings per share totaled $1.00 in 1996, compared with $1.14 in 1995
and $.65 in 1994. Net income was $8.8 million in 1996, compared with $10.0
million in 1995 and $5.8 million in 1994. Operating income grew to $8.7 million
in 1996, representing the seventh consecutive year of increase. The Company
focuses primarily on its operating results, with the knowledge that other income
from securities investments is unpredictable and volatile.
Operating income was $8.7 million in 1996, compared with $7.7 million
in 1995 and $5.9 million in 1994, owing to growth in managed assets prior to
1996 and continued productivity improvements. The operating margin was 42% in
1996, compared with 38% in 1995 and 34% in 1994. Operating income per employee
and as a percentage of average managed assets reached nine-year highs, at
$199,000 and .27%, respectively.
Assets under management declined $848 million (24%) in 1996 to $2.76
billion at year end. Average assets under management totaled $3.22 billion in
1996, compared with $3.27 billion in 1995.
Operating revenues totaled $20.8 million in 1996, compared with $20.0
million in 1995 and $17.4 million in 1994, reflecting increasing levels of
managed assets over those periods. Operating expenses totaled $12.0 million in
1996, compared with $12.4 million in 1995 and $11.6 million in 1994.
Cash, cash equivalents and marketable securities totaled $57 million at
December 31, 1996, compared with $51 million a year ago. Book value per share
was $6.99 at December 31, 1996, compared with $6.19 at the end of 1995.
Assets Under Management
Managed assets totaled $2.76 billion at the end of 1996, compared with
$3.61 billion at the end of 1995 and $2.75 billion at the end of 1994. Managed
assets aggregated 350 client relationships at the end of 1996, compared with 376
relationships a year ago and 369 relationships at yearend 1994.
The $848 million net decrease in managed assets during 1996 is
comprised of $104 million in new client accounts and $348 million in positive
performance results, reduced by (i) $1,140 million in closed client accounts;
and (ii) $160 million in net withdrawals from existing accounts. The closed
accounts are primarily the result of six large institutional clients that
terminated their accounts due to a combination of performance concerns and/or
consultants' style-drift concerns.
9
In the two years ended December 31, 1996, managed assets increased by
$9 million, comprised of new accounts of $235 million and $1,293 million in
positive performance results, reduced by (i) $1,262 million in closed client
accounts; and (ii) $257 million in net withdrawals from existing accounts.
The Company has posted weak investment performance results over the
last fifteen months and its marketing efforts are not expected to meet with
significant success until performance tracks the relevant benchmarks over an
extended period.
Based on the managed asset level at year end, operating earnings are
expected to be lower in 1997 than 1996.
Earnings
Operating revenues increased 4% in 1996 to $20.8 million, compared with
$20.0 million in 1995 and $17.4 million in 1994. Average assets under management
declined 1% in 1996. Revenues increased in 1996 due to an increase in the
weighted fee yield from managed assets. The six large institutional accounts
lost in 1996 were lower fee yielding accounts.
In 1996 operating revenues were .64% of average managed assets,
compared with .61% in 1995 and .65% in 1994. This trend reflects the growth in
managed assets through 1995, and the subsequent decline offset by the increase
in the weighted fee yield in 1996.
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 5% to $19.2 million in 1996, compared with $18.3 million in 1995
and $15.7 million in 1994. Advisory fees were 92% of operating revenues in 1996,
compared with 91% in 1995 and 90% in 1994.
Transaction fees (commissions) earned by Management are the primary
source of the Company's other operating revenues. They are derived from
Management's individual and smaller institutional accounts, investment
partnerships and specific institutional accounts that have given Management the
authority to execute trades. Commissions decreased 8% to $1.2 million in 1996,
compared with $1.3 million in 1995 and $1.5 million in 1994. The 1996 decline
reflects the decrease in managed assets during 1996.
Operating expenses decreased 3% to $12.0 million in 1996, compared with
$12.4 million in 1995 and $11.6 million in 1994. Operating expenses were 58% of
operating revenues and .37% of average managed assets in 1996, compared with 62%
and .38% in 1995, and 66% and .43% in 1994, reflecting cost containment and
increasing asset levels. The last time the Company recorded such operating
efficiencies was 1987, when expenses were .38% of average assets. However,
average assets were 47% greater in 1987 than in 1996. The Company's cost
containment practices and productivity improvements over the last seven years
continue to result in improved earnings quality.
10
Compensation expense decreased 6% to $8.3 million in 1996, compared
with $8.8 million in 1995 and $8.0 million in 1994. Compensation was 40% of
operating revenues and .26% of average managed assets in 1996, compared with 44%
and .27% in 1995, and 46% and .30% in 1994. The 1996 decline is primarily due to
lower bonuses paid to executives and other employees based on 1996's decline in
managed assets and the decline in the operating earnings growth rate.
The Company has a Management Incentive Plan ("MIP") which covers bonus
payments to certain executives. Under the MIP, the payment of bonuses to these
executives is based on the annual growth in operating income, after adjusting
for non-cash compensation charges. In 1996, participating executives were
awarded bonuses totaling $860,000 under the MIP, or 53% less than the $1.82
million awarded in 1995. The 1994 award totaled $1.17 million.
Excluding MIP charges, compensation expense increased $440,000 (6%)
from a year ago, reflecting more employees and salary increases, partially
offset by a 45% decline in bonuses paid to the general staff in 1996.
Non-compensation expenses edged upward by 4% to $3.73 million in 1996,
compared with $3.57 million in 1995 and $3.59 million in 1994. These expenses
are primarily fixed in nature and, as a result, they are not directly related to
changes in managed asset levels . Non-compensation expenses totaled 18% of
operating revenues and .12% of average managed assets in 1996, compared with 18%
and .11% in 1995, and 21% and .13% in 1994.
Other income, which comprises interest, dividends, and realized
gains/losses from sales of marketable securities, totaled $6.6 million in 1996,
compared with $9.9 million in 1995 and $4.7 million in 1994. Net interest and
dividend income was $1.8 million in 1996, compared with $1.9 million in 1995 and
$1.3 million in 1994. Net gains from sales of marketable securities totaled $4.8
million in 1996, compared with $8.0 million in 1995 and $3.4 million in 1994,
reflecting the varying strength of the domestic financial markets in those
years.
Liquidity and Capital Resources
The Company ended 1996 with $6 million in cash and cash equivalents,
compared with $28 million at the end of 1995. Investments in marketable
securities aggregated $51 million at yearend compared with $23 million a year
ago. This reflects the shift out of U.S. Treasury bills during 1996. The Company
has adopted SFAS No. 115, and it resulted in a net unrealized gain of $861,000
in shareholders' equity at the end of 1996, compared with a net unrealized gain
of $1.2 million at the end of 1995. At December 31, 1996, the Company had no
liabilities for borrowed money.
Special dividends of $.15 per share in each of 1996, 1995 and 1994 were
paid. Foreseeable capital and liquidity requirements of existing businesses will
continue to be met with funds generated from operations.
11
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.
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 1997 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*, 65, was a founder of the Company and has been
Chairman of the Board and Chief Executive Officer of the Company and
its subsidiaries since their inception. He was a co-founder of Atalanta
Capital Corporation (investment management) and served as its Chairman
and Chief Executive Officer until 1983.
ROBERT J. KOBEL**, 47, has been President and Chief Operating Officer,
and held other offices, with the Company and its subsidiaries since
their inception. He was a Vice President of Rotan Mosle (brokerage)
during 1981 and was a senior account manager and held other positions
with Sanford C. Bernstein & Co., Inc. from 1971 to 1981.
CRAIG B. STEINBERG, 35, has been Executive Vice President, Director of
Research, and held other offices, with Capital and Management since
1985. Mr. Steinberg is a Portfolio Manager, and he was a securities
analyst at Prudential Equity Management from 1983 to 1985.
WILLIAM M. KNOBLER, 63, 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.
12
ANTHONY G. MILLER, 38, has been Senior Vice President, Finance, Chief
Financial Officer, and Secretary, and held other offices, with the
Company and its subsidiaries since 1986. 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.
HENRY E. PARKER, 69, has been Senior Vice President of Capital since
1986. Mr. Parker is responsible for Public Fund Marketing, and he was
Treasurer of the State of Connecticut from 1975 to 1986.
JAMES D. STAUB, 64, 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.
JOHN P. O'BRIEN, 58, has been Vice President, and held other offices,
with the Company and its subsidiaries since their inception. Mr.
O'Brien serves as the Controller for the Company and its subsidiaries.
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.
* Also a director and member of the Executive, Compensation and Stock
Option Committees.
** Also a director and member of the Executive Committee.
Item 11. Executive Compensation.
Information concerning executive compensation is contained under the
captions "Election of Directors", "Executive Compensation", "Stock Option,
Purchase, Bonus, and Long Term Incentive Plans", "Profit-Sharing Plan" and
"Management Incentive Plan" in the Proxy Statement for the 1997 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 1997 Annual Meeting of
Stockholders to be filed with Securities and Exchange Commission and
is incorporated herein by reference.
13
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 1997 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission and is
incorporated herein by reference.
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.
(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)
14
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)
10.9 Consulting Agreement between Shepard D. Osherow and the Company dated
December 21, 1987. (Exhibit 10.2) (6)
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), (10)
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), (10)
10.14 1987 Incentive Stock Purchase Plan. (Exhibit 4.4)(5), (10)
10.15 Restricted Stock Bonus Plan (8), (10)
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), (10)
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),(10)
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)
10.20 Executive Employment Agreement dated as of December 9, 1992 between
Robert J. Kobel and the Company (10)
15
10.21 Employment Agreement dated January 1, 1986 between Henry E. Parker
and the Company (10)
10.22 Amended and Restated Management Incentive Plan as adopted by the Board
Directors of the Company on December 9, 1993 and March 8, 1994 (11)
10.23 Executive Employment Agreement dated July 8, 1993 between Craig B.
Steinberg and the Company (11)
10.24 Executive Employment Agreement dated December 7, 1995 between Robert
J. Kobel and the Company (12)
10.25 Employment Agreement dated July 1, 1986 between James D. Staub and
the Company (12)
10.26 Modification Agreement of Sub-Lease dated February 27, 1996 between
the Company and Foote, Cone & Belding Advertising, Inc. (12)
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).
(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.
16
(9) Incorporated by reference to the exhibit numbers indicated to the
Company's Form 10-K for the year ended December 31, 1989.
(10) Incorporated by reference to the exhibit numbers indicated to the
Company's Form 10-K for the year ended December 31, 1992.
(11) Incorporated by reference to the exhibit numbers indicated to the
Company's Form 10-K for the year ended December 31, 1993.
(12) Incorporated by reference to the exhibit numbers indicated to the
Company's Form 10-K for the year ended December 31, 1995.
(13) Required to be filed pursuant to the instructions to Item 14(c) of
Form 10-K.
17
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
I. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION:
Financial Statements
Report of Independent Public Accountants F-2
Consolidated Statements of Financial Condition - December 31, 1996 and 1995 F-3
Consolidated Statements of Income for the Years Ended December 31, 1996,
1995 and 1994 F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31,
1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7/F-13
Supplementary Financial Information
Selected Quarterly Financial Data (Unaudited) F-14
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.
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, 1996 and 1995, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1996. 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 generally accepted auditing
standards. 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, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
New York, New York
January 31, 1997
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
------ ---- ----
Assets:
Cash and cash equivalents $ 5,585,953 $ 27,890,844
Accounts receivable 3,782,098 4,358,970
Receivable from clearing broker 2,437,821 2,324,652
Investments, at market 51,362,185 23,282,531
Fixed assets, net of accumulated
depreciation and amortization of $88,094
and $1,027,275, respectively 610,231 110,201
Exchange memberships, at cost (market value
$1,830,000 and $1,497,000, respectively) 402,000 402,000
Other assets 516,038 127,670
------------ ------------
Total assets $ 64,696,326 $ 58,496,868
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Accounts payable and other liabilities $ 647,096 $ 548,422
Accrued compensation payable 1,397,099 2,332,313
Income taxes payable 1,024,210 1,098,702
------------ ------------
Total liabilities 3,068,405 3,979,437
------------ ------------
Commitments and contingencies (Note 8)
Shareholders' equity:
Preferred stock, par value $1.00 per share;
5,000,000 shares authorized; none issued -- --
Common stock, par value $.01 per share;
30,000,000 shares authorized; 8,812,401
shares issued and outstanding 88,124 88,124
Additional paid-in capital 15,646,874 15,646,874
Retained earnings 45,031,750 37,551,694
Unrealized gains from investments,
net of deferred tax liabilities of
$574,409 and $820,786, respectively 861,173 1,230,739
---------- ----------
Total shareholders' equity 61,627,921 54,517,431
---------- -----------
Total liabilities and
shareholders' equity $64,696,326 $58,496,868
=========== ===========
The accompanying notes are an integral part of these statements.
F-3
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---- ---- ----
Revenues:
Advisory fees $ 19,159,433 $ 18,325,129 $15,689,560
Commissions and other 1,599,735 1,723,847 1,742,958
------------ ------------ -----------
Total revenues 20,759,168 20,048,976 17,432,518
------------ ------------ -----------
Costs and expenses:
Employees' compensation 8,295,815 8,814,487 7,992,206
Clearing and execution costs 541,596 620,605 609,884
Selling expenses 466,484 452,519 459,027
General and administrative
expenses 2,718,038 2,492,899 2,521,721
----------- ----------- -----------
Total costs and expenses 12,021,933 12,380,510 11,582,838
----------- ----------- -----------
Operating income 8,737,235 7,668,466 5,849,680
----------- ----------- -----------
Other income (expense):
Interest and dividend income 1,858,166 1,897,505 1,336,127
Interest expense (15,702) (16,306) (6,167)
Realized gains from
investments, net 4,783,217 7,985,266 3,391,379
----------- ----------- ----------
Other income, net 6,625,681 9,866,465 4,721,339
----------- ----------- ----------
Income before provision for
income taxes 15,362,916 17,534,931 10,571,019
Provision for income taxes 6,561,000 7,487,000 4,796,000
----------- ----------- -----------
Net income $ 8,801,916 $10,047,931 $ 5,775,019
=========== =========== ===========
Earnings per common share-primary $ 1.00 $ 1.14 $ .65
=========== =========== ===========
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, 1996, 1995 AND 1994
Unrealized
Gains
Additional From
Common Paid-in Retained Investments, Treasury
Stock Capital Earnings Net Stock Total
------ ---------- -------- ----------- ------- -----
BALANCE, December 31, 1993 $ 92,884 $ 18,430,614 $24,372,464 $1,635,499 $(2,008,490) $ 42,522,971
Unrealized losses from
investments, net of
deferred taxes (1,856,155) (1,856,155)
Repurchases of common stock (780,010) (780,010)
Retirement of treasury stock (4,760) (2,783,740) 2,788,500 -
Net income 5,775,019 5,775,019
Dividends ($.15 per share) (1,321,860) (1,321,860)
---------- ------------- ----------- ---------- ----------- ------------
BALANCE, December 31, 1994 88,124 15,646,874 28,825,623 (220,656) - 44,339,965
Unrealized gains from
investments, net of
deferred taxes 1,451,395 1,451,395
Net income 10,047,931 10,047,931
Dividends ($.15 per share) (1,321,860) (1,321,860)
---------- ------------- ----------- ---------- ----------- ------------
BALANCE, December 31, 1995 88,124 15,646,874 37,551,694 1,230,739 - 54,517,431
Unrealized losses from
investments, net of
deferred taxes (369,566) (369,566)
Net income 8,801,916 8,801,916
Dividends ($.15 per share) (1,321,860) (1,321,860)
---------- ------------- ----------- ---------- ----------- ------------
BALANCE, December 31, 1996 $ 88,124 $ 15,646,874 $45,031,750 $861,173 $ - $ 61,627,921
========== ============= =========== ======== =========== ============
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, 1996, 1995 AND 1994
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income $ 8,801,916 $ 10,047,931 $ 5,775,019
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization 121,987 138,450 168,692
Realized gains from investments, net (4,783,217) (7,985,266) (3,391,379)
Deferred taxes (103,000) 32,000 58,000
Increase (decrease) from changes in-
Accounts receivable 576,872 (1,032,573) 240,247
Other assets (388,368) 239,558 (8,780)
Accounts payable and other liabilities 98,672 277,691 (18,067)
Accrued compensation payable (935,214) 1,048,621 744,152
Income taxes payable 274,885 (13,401) 444,884
--------------- --------------- ---------------
Net cash provided by operating activities 3,664,533 2,753,011 4,012,768
--------------- --------------- ---------------
Cash flows from investing activities:
Payments to clearing broker, net (113,169) (533,584) (1,266,870)
Purchases of fixed assets (622,017) (13,616) (33,037)
Purchases of investments (128,128,495) (116,007,833) (80,750,119)
Proceeds from sales of investments 104,216,117 140,928,212 79,279,117
--------------- --------------- ---------------
Net cash provided by (used in) investing
activities (24,647,564) 24,373,179 (2,770,909)
--------------- --------------- ---------------
Cash flows from financing activities:
Repurchases of common stock - - (780,010)
Dividends paid (1,321,860) (2,643,720) -
--------------- --------------- --------------
Net cash used in financing activities (1,321,860) (2,643,720) (780,010)
--------------- --------------- ---------------
Net increase (decrease) in cash and cash
equivalents (22,304,891) 24,482,470 461,849
Cash and cash equivalents, beginning of year 27,890,844 3,408,374 2,946,525
--------------- --------------- ---------------
Cash and cash equivalents, end of year $ 5,585,953 $ 27,890,844 $ 3,408,374
=============== =============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the year for-
Interest $ 15,702 $ 16,306 $ 6,167
Income taxes 6,389,115 7,468,401 4,293,116
The accompanying notes are an integral part of these statements.
F-6
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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") and Atalanta/Sosnoff Management Corporation
("Management"). Capital is a registered investment adviser. It provides
investment advisory and management services to institutional clients and certain
investment partnerships. Management is a registered investment adviser and a
broker-dealer in securities, with memberships on the New York Stock Exchange,
Inc. and the Chicago Board Options Exchange, Inc. It 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.
Certain prior year balances have been reclassified in the accompanying
consolidated financial statements to conform to the 1996 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.
Revenue Recognition
Advisory and management fee income 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 recognition has been 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 its investments in equity and debt securities as "available for
sale," for which unrealized gains and losses are reported as a separate
component of shareholders' equity.
Investments in partnerships are carried on the equity method.
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.
F-7
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO 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 are removed from the related accounts for those
assets which have been retired.
Income Taxes
The Company records income taxes in accordance with the provision 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.
2. EARNINGS PER COMMON SHARE
Primary earnings per common share amounts were computed based on 8,850,980,
8,823,128, and 8,900,241 weighted average common and common equivalent shares
outstanding in 1996, 1995 and 1994, respectively.
F-8
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENTS AND CASH
Investments classified as "available for sale" at December 31, 1996 and 1995,
consisted of the following:
Unrealized
Cost Market Value Gain (Loss)
---- ------------ ----------
1996:
Debt $ 18,824,029 $ 18,794,116 $ (29,913)
Equities 31,102,574 32,568,069 1,465,495
---------------- -------------- -------------
$ 49,926,603 $ 51,362,185 $ 1,435,582
============== ============== =============
1995:
Equities $ 21,231,006 $ 23,282,531 $ 2,051,525
============== ============== =============
The Company had interest-bearing free credit balances with its clearing broker
of $2,368,733 and $1,612,804 at December 31, 1996 and 1995, respectively.
4. RECEIVABLE FROM CLEARING BROKER
Receivable from clearing broker represents net amounts due for securities
transactions executed on or prior to year-end but settling thereafter.
5. RELATED PARTY TRANSACTIONS
Capital serves as a general partner for two Company-sponsored investment
partnerships (the "Partnerships"). Pursuant to the partnership agreements,
Capital earned approximately $1,099,000, $989,000, and $869,000 in 1996, 1995
and 1994, respectively, for advisory and management services (charged at 1% and
1% - 2% of net assets, respectively). Management earned commissions of
approximately $12,000, $18,000, and $16,000 in 1996, 1995 and 1994,
respectively, for brokerage services provided to the Partnerships. Advisory fees
and brokerage commissions are based on terms comparable to those in agreements
with unrelated parties. Balances receivable from the Partnerships were
approximately $92,000 and $91,000 at December 31, 1996 and 1995, respectively.
F-9
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PROVISION FOR INCOME TAXES
The provision for income taxes consists of:
1996 1995 1994
---- ---- ----
Current income taxes:
Federal $ 4,197,000 $ 5,308,000 $ 3,187,000
State and local 2,467,000 2,147,000 1,551,000
-------------- -------------- --------------
Total current 6,664,000 7,455,000 4,738,000
-------------- -------------- --------------
Deferred income taxes provision:
Federal (56,000) 30,000 58,000
State and local (47,000) 2,000 -
-------------- -------------- --------------
Total deferred (103,000) 32,000 58,000
-------------- -------------- --------------
$ 6,561,000 $ 7,487,000 $ 4,796,000
============== ============== ==============
A reconciliation of the statutory federal income tax rate and the effective rate
based on consolidated income before income taxes in 1996, 1995 and 1994, is set
forth below:
1996 1995 1994
---- ---- ----
Statutory federal income tax rate 34.5% 34.5% 34.5%
Increase (decrease) resulting from:
State and local income taxes, net of federal
tax benefit 8.0 8.0 9.8
Other 0.2 0.2 1.1
----- ----- -----
Effective rate 42.7% 42.7% 45.4%
==== ====== ======
At December 31, 1996 and 1995, income taxes payable included deferred tax
liabilities of $492,584 and $734,247, respectively. The components of the
deferred tax liabilities include the following:
1996 1995
---- ----
Unrealized gain on investments $ 574,409 $ 820,786
Other (81,825) (86,539)
-------------- ------------
$ 492,584 $ 734,247
============== ============
F-10
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1996,
Management had net capital of $7,261,709, which was $7,011,709 in excess of its
required net capital of $250,000, and had a ratio of aggregate indebtedness to
net capital of .08 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 $475,000,
$537,000, and $545,000 in 1996, 1995 and 1994, respectively.
Approximate minimum rental commitments under noncancelable operating leases in
years subsequent to December 31, 1996, are as follows:
Minimum
Rentals
-------
1997 $ 626,000
1998 626,000
1999 626,000
2000 626,000
2001 626,000
2002 and thereafter 626,000
Employment Agreements
The Company has obligations under employment agreements with three officers of
the Company. The agreements provide for minimum base salaries aggregating
$1,090,000 in 1997.
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.
F-11
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. STOCK OPTION, STOCK PURCHASE,
INCENTIVE AND PROFIT-SHARING PLANS
Pursuant to the Company's stock option plan, as amended (the "SOP"), options to
purchase a total of 900,000 shares of common stock may be granted to officers
and other key employees 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. 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.
During 1996, the Company adopted the Long-Term Incentive Plan ("LTIP") in 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. No such awards under
the LTIP were granted during 1996. The SOP was terminated by the Company in
connection with the approval by stockholders of the LTIP. Such action does not
affect options outstanding.
A summary of SOP and LTIP transactions is presented below. All Incentive Stock
Options were granted at an exercise price of $6.125 per share, all Qualified
Options were granted at an exercise price of $14.50 per share, and all
Nonqualified Options were granted at exercise prices equal to market price per
share at the date of grant. Only the LTIP has options available for grant at
the end of 1996.
SOP
--------------------------------------------
Incentive Qualified Nonqualified
Stock Stock Stock
LTIP Options Options Options Total
---- --------- --------- ------------ -----
Outstanding, beginning of 1995 - 50,000 3,448 35,000 88,448
Canceled during 1995 - - (1,724) - (1,724)
Granted during 1995 - - - 800,000 800,000
---------- ------------ ---------- ------------- -----------
Outstanding, ending of 1995 - 50,000 1,724 835,000 886,724
Expired during 1996 - - (1,724) - (1,724)
---------- ------------ ------ ------------- -----------
Outstanding, ending of 1996 - 50,000 - 835,000 885,000
========== ============ ========== ============= ===========
Exercisable, end of 1994 58,448
===========
Exercisable, end of 1995 66,724
===========
Exercisable, end of 1996 235,000
===========
Available for grant, end of year 880,000
===========
F-12
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized, as all options were granted with exercise
prices equal to the market value of the underlying shares on the date of grant.
Had compensation cost for these plans been determined consistent with the fair
value method required by FASB Statement No. 123, the Company's net income and
earnings per share would have been the following pro forma amounts:
1996 1995
Net income:
As reported $ 8,801,916 $ 10,047,931
Pro forma 8,322,122 10,007,948
Primary EPS:
As reported 1.00 1.14
Pro forma .94 1.14
For purpose of the FASB No. 123 calculations, the fair value of the 800,000
options granted in 1995 was $4.71 and was estimated on the date of grant using
the Block-Scholes option pricing model with the following assumptions used for
the grant in 1995: risk free interest rate of 5.7%; expected dividend yield of
1.6%, expected option life of 10 years and expected volatility of 40.0%.
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.
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 proportionate share of the annual award pool, which is computed
based on operating income performance goals, as defined in the MIP. Included in
employees' compensation on the consolidated statements of income in 1996, 1995
and 1994 is $860,000, $1,818,000, and $1,175,000, respectively, related to the
MIP.
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 $138,000, $151,000, and
$123,000 in 1996, 1995 and 1994, respectively.
F-13
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)
1996:
Operating revenues $ 5,477 $ 5,375 $ 4,983 $ 4,924
Operating expenses 3,308 2,915 2,968 2,829
Operating income 2,169 2,460 2,015 2,095
Other income, net 1,848 1,282 1,440 2,056
Income before income taxes 4,017 3,742 3,445 4,151
Net income 2,300 2,131 1,988 2,385
Per common share - primary .26 .24 .23 .27
1995:
Operating revenues $ 4,546 $ 4,766 $ 5,229 $ 5,508
Operating expenses 2,973 3,173 3,179 3,056
Operating income 1,573 1,593 2,050 2,452
Other income, net 2,068 2,562 3,613 1,624
Income before income taxes 3,641 4,155 5,663 4,076
Net income 2,082 2,382 3,250 2,333
Per common share - primary .24 .27 .37 .26
1994:
Operating revenues $ 4,373 $ 4,253 $ 4,371 $ 4,437
Operating expenses 3,064 2,960 2,884 2,675
Operating income 1,309 1,293 1,487 1,762
Other income, net 1,741 1,292 1,537 151
Income before income taxes 3,050 2,585 3,024 1,913
Net income 1,804 1,532 1,645 794
Per common share - primary .20 .17 .19 .09
F-14
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned whose
signature appears below constitutes and appoints Martin T. Sosnoff, Robert J.
Kobel, 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 11th day of March, 1997.
ATALANTA/SOSNOFF CAPITAL CORPORATION
By: s/ Martin T. Sosnoff
-----------------------------
Martin T. Sosnoff
Chairman of the Board and
Chief Executive Officer
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/ Kenneth H. Iscol
--------------------------
Kenneth H. Iscol Director March 11, 1997
s/ Robert J. Kobel
--------------------------
Robert J. Kobel President, Chief March 11, 1997
Operating Officer,
Director
s/ Anthony G. Miller
--------------------------
Anthony G. Miller Senior Vice President, March 11, 1997
Finance, Chief Financial
Officer (Principal Financial
and Accounting Officer)
s/ Martin T. Sosnoff
---------------------------
Martin T. Sosnoff Chairman, Chief March 11, 1997
Executive Officer,
Director (Principal
Executive Officer)
s/ Thurston Twigg-Smith
---------------------------
Thurston Twigg-Smith Director March 11, 1997