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10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 2002
-----------------
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. [X]
Number of shares of common stock*
outstanding at March 20, 2003: 8,464,715
* (voting; only class outstanding)
Aggregate market value of voting and
non-voting common equity held by non-
affiliates, as of March 20, 2002: $10,720,144
Documents incorporated by reference: None
Exhibit Index is located on page 31.
2
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K under the
captions "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations", and elsewhere in this Report constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward looking statements involve known and
unknown risks, uncertainties and other factors, which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions; the loss of, or the failure
to replace, any significant clients; changes in the relative investment
performance of client or firm accounts and changes in the financial marketplace,
particularly in the securities markets. These forward-looking statements speak
only as of the date of this Annual Report. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
3
PART I
Item 1. Business
GENERAL
Atalanta/Sosnoff Capital Corporation, a New York Stock Exchange listed
company, through its operating subsidiaries, Atalanta/Sosnoff Capital
Corporation (Delaware) ("Capital") and Atalanta/Sosnoff Management Corporation
("Management"), provides discretionary investment advisory, brokerage and other
related services. The term "Company" as used herein refers to Atalanta/Sosnoff
Capital Corporation and its subsidiaries. Capital and Management are both
federally registered investment advisors. Management is also federally
registered as a broker-dealer.
CLIENT RELATIONSHIPS
General. Investment advisory clients include corporate and public
retirement plans, endowments, charitable and religious organizations, and
individuals in both taxable and tax-exempt accounts. The Company provides
investment advisory services to its clients under investment advisory
agreements. These agreements are generally terminable upon short notice and
provide for compensation based on the market value of the client assets under
management. Generally, annual institutional account fees start at 1% of assets
under management, and, for larger accounts, may include performance fees or
reductions in fees on incremental assets to as low as 0.2%. Individual and
smaller institutional account fees are generally 1% of assets under management
and may include reductions in fees on incremental assets to as low as 0.4%. Some
clients of Capital have consented to the use of Management as broker for certain
portfolio transactions. Most of the Company's individual and smaller
institutional account clients use Management as the broker for certain portfolio
transactions.
The largest single client of the Company generated approximately 6% of the
Company's operating revenues for the year ended December 31, 2002. The Company's
ten largest clients, as of December 31, 2002, accounted for approximately 28% of
total operating revenues for the year then ended.
Assets under management decreased 13% in 2002, from $2.36 billion at
December 31, 2001 to $2.04 billion at December 31, 2002. This net decrease is
primarily the result of net cash outflows in client accounts and closed accounts
of $128 million and negative performance of $361 million in 2002 partially
offset by $175 million of new assets raised in 2002. (See the following pages
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Summary" for further discussion)
The following table depicts assets under management at the last three
year-ends by type of client:
($ millions)
2002 2001 2000
------ ------ ------
Institutional $1,305 $1,509 $1,905
High Net Worth 278 368 393
Investment Partnerships 133 203 200
Wrap Programs 304 244 179
Mutual Funds 22 32 30
------ ------ ------
Totals $2,042 $2,356 $2,707
====== ====== ======
4
Institutional Clients. Capital manages accounts of institutional clients
with assets under management of approximately $1.3 billion as of December 31,
2002, compared with $1.5 billion at the end of 2001, and $1.9 billion at the end
of 2000. 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, 2002:
Dollars in
Type of Account Millions % of Total
--------------- -------- ----------
Corporate employee
benefit plans $ 256 20
Not-for-profit
Organizations 259 20
Jointly-trusteed
collective bargaining
employee plans 464 35
Governmental employee
benefit plans 236 18
Taxable 90 7
------ ---
Total $1,305 100%
====== ===
While relative investment performance in 2002 was again strong for managed
accounts, net outflows in institutional client accounts was $16 million and
negative performance was $188 million in 2002 which represents a net decrease of
14% in 2002.
High Net Worth ("HNW") Clients. Management has been managing assets of
individual and smaller institutional accounts since 1984. Assets under
management in this HNW business decreased 24% during 2002 to $278 million at
December 31, 2002, from $368 million at December 31, 2001 and $393 million at
December 31, 2000. Net cash outflows of $18 million and negative performance of
$72 million accounts for the decrease in assets under management in 2002.
Company-Sponsored Investment Partnerships. Capital is the general partner
of three investment limited partnerships and the investment advisor of an
offshore investment fund, all with different investment objectives and client
profiles, with total aggregate assets of $133 million at December 31, 2002,
compared with $203 million at the end of 2001 and $200 million at the end of
2000. Capital earns a management fee from each entity at an annual rate of 1% of
total assets, as defined. The partnership agreements contain various provisions
regarding the bearing of expenses by each of the entities. Capital charges one
of the partnerships and the offshore fund, both formed in 1997, an incentive fee
of 20% of net profits earned, as defined. Net cash outflows of $30 million and
negative performance of $40 million accounted for the 34% decrease in assets
under management in 2002.
Wrap Program Accounts. The Company manages $304 million of accounts
custodied at and sponsored by various financial services firms (i.e. "Wrap"
accounts) at December 31, 2002, compared with $244 million at the end of 2001
and $179 million at the end of 2000. The Company participates in one of the
premier wrap programs in the country, the Salomon Smith Barney Fiduciary
Services program ("SSB FS"). The Company raised $100 million, $67 million and
$88 million in assets, net, in this program in 2002, 2001 and 2000,
respectively.
5
Mutual Funds. In June, 1998 the Company started its first mutual fund, the
Atalanta/Sosnoff Fund. In July 1999, the Company started three additional mutual
funds: the Atalanta/Sosnoff Value Fund, the Atalanta/Sosnoff Balanced Fund, and
the Atalanta/Sosnoff Focus Fund. In July 2001, the Company started a fifth
mutual fund: the Atalanta/Sosnoff Mid Cap Fund (collectively the "Funds").
Capital acts as the investment advisor to the Funds, and Management acts as the
distributor. Capital earns an advisory fee of .75% per annum on each Fund,
subject to certain fee and expense waivers currently in place. The Company
invested $9.1 million in the Funds in 1998, an additional $6 million during
1999, an additional $3.1 million (including reinvested dividends) in 2000, and
an additional $2.1 million in contributions (including reinvested dividends) in
2001. In 2002, the Company closed the Atalanta/Sosnoff Balanced Fund and the
Atalanta/Sosnoff Mid-Cap Fund due to the lack of third party participation. The
aggregate market value of the Funds totaled $22 million at December 31, 2002,
$32 million at December 31, 2001, and $30 million at the end of 2000. Included
in the Mutual Fund assets under management is $13.7 million, $21.9 million and
$22.3 million of Company invested assets in 2002, 2001 and 2000, respectively.
INVESTMENT MANAGEMENT AND RESEARCH
The Company currently manages $2.04 billion in equity, balanced and fixed
income accounts for corporations, public funds, Taft-Hartley clients,
foundations, charitable organizations and individuals. Institutional clients
represent 64% of total managed assets at the end of 2002. The Company's
subsidiaries have been registered as investment advisors since 1982 (Capital)
and 1984 (Management), respectively. Institutional clients are managed by
Capital. Management also provides brokerage services to some of its advisory
clients and to certain of Capital's clients. Clients retain the Company
primarily as a domestic large-cap core equity and/or balanced account manager.
The Company's investment philosophy seeks to identify companies that are
entering into a cycle of accelerating earnings momentum. The Company's equity
methodology focuses on two levels: thematics and stock selection. Through its
Investment Policy Committee, composed of Martin T. Sosnoff and Craig B.
Steinberg, the Company seeks to identify change at the margin. Major themes
unfold during economic cycles they embrace, geopolitical realignments, changes
in government regulation and Federal Reserve Board policy emphasis.
The process seeks to identify "event-driven" companies and sectors with
benevolent product profile cycles and accelerating earnings. The Company
believes that the vision and motivation of management are common critical
variables in outperformance. The Company's methodology is biased toward
management with meaningful equity participation.
The two principals, Martin T. Sosnoff and Craig B. Steinberg, have worked
together in the investment arena for more than 17 years. The continuity of the
team and its years of experience are critical elements in managing investments.
The portfolio managers are all experienced research analysts. Portfolio
decisions are implemented on behalf of all the Company's clients, subject to
individual client guidelines, restrictions and cash flows.
The Company's Investment Policy Committee, headed by Mr. Sosnoff as Chief
Investment Officer, is responsible for managing the portfolios of the Company's
clients. All members of the Committee participate in the management of all
accounts, except the SVP Accounts, which are managed exclusively by a Senior
Vice President of Management, Mr. William M. Knobler. When requested, Mr.
Knobler participates in the Investment Policy Committee process on an ad hoc
basis. Each client portfolio is comprised of securities selected by the
Committee, subject to risk tolerances, concentration limits, leverage policies
and other restrictions determined by each client with, in certain cases, the
assistance of the Company. Mr. Sosnoff has managed money since the late-1960's
through several market cycles. Throughout that time, Mr. Sosnoff has applied a
consistent investment style and philosophy to the management of client accounts.
6
The Company believes that, in addition to performance, client service is
paramount in the money management business. Portfolio managers are particularly
attuned to the needs of the Company's clients. The Company believes that its
consistent investment style since inception and continued emphasis on frequent
communication with clients distinguishes it from other managers.
The Company's mission is to maintain a top quartile performance ranking
year over year, cycle over cycle and decade over decade. Strong absolute and
relative performance results for the five years ended December 31, 2002, have
substantially improved the Company's peer group rankings.
MARKETING AND BUSINESS DEVELOPMENT
Institutional. The Company's institutional clients generally allocate their
assets among several investment managers and may change the allocation from time
to time. In addition, clients allocate their assets among various market sectors
and types of investments, and may change these allocations in response to
prevailing market conditions or changes in the client's investment objectives.
Net withdrawals from institutional client accounts totaled $16 million in
2002, compared with net withdrawals of $212 million in 2001, and net withdrawals
of $174 million in 2000. The Company believes the net cash outflows for the
three years ended 2002 are primarily the result of clients reallocating assets
away from the Company in an effort to preserve their desired asset allocation.
HNW. Individual and smaller institutional client portfolios are managed on
the same basis as the management of the accounts of institutional clients.
Account service representatives assist new clients in determining appropriate
risk tolerances, concentration limits, leverage policies and other restrictions,
and provide ongoing account servicing to existing clients. Net cash
additions/withdrawals in HNW client accounts were flat in 2002, compared with
net withdrawals of $6 million in 2001 and net cash additions of $15 million in
2000. The Company continues to devote additional resources to the HNW market.
Investment Partnerships. At December 31, 2002 the Company managed $133
million in three limited partnerships and one offshore fund, primarily for the
benefit of high net worth individuals as limited partners. Two of the
partnerships, Atalanta Partners, L.P. and Atalanta Variable Fund, L.P., have
been managed by Mr. Sosnoff since the late 1960's. The other limited partnership
and offshore fund, Sabre Partners, L.P. and Sabre Capital International, LTD.,
respectively, which began in 1997, are primarily managed by Mr. Steinberg. The
Company experienced net withdrawals of $30 million in 2002 compared with net
contributions to the Partnerships totaling $21 million in 2001 and $57 million
in 2000. The Company participates in industry specific data base platforms and
pursues inquiries from potential investors with one-on-one meetings. The Company
also participates in industry specific forums on a national basis.
Wrap Programs. The Company continues to increase marketing efforts on the
managed account ("Wrap") programs offered by certain large financial services
firms. As of December 31, 2002, $304 million was under management from such
programs, compared with $244 million at the end of 2001 and $179 million at the
end of 2000. The growth for the three years ended December 31, 2002 is primarily
the result of the Company's efforts in the SSB FS program. The Company believes
this business represents an efficient means for the Company to gather assets,
and is optimistic about its future growth, subject to performance
considerations. The Company has also devoted additional resources to this
market.
7
Mutual Funds. The Company began its first mutual fund in 1998, the
Atlanta/Sosnoff Fund. In July 1999, the Company started three additional mutual
funds: the Atalanta/Sosnoff Value Fund, the Atalanta/Sosnoff Balanced Fund, and
the Atalanta/Sosnoff Focus Fund and in July 2001, the Company started its fifth
mutual fund; the Atalanta/Sosnoff Mid Cap Fund (collectively the "Funds"). In
2002, the Company closed the Atalanta/Sosnoff Balanced Fund and the
Atalanta/Sosnoff Mid-Cap Fund due to the lack of third party participation. The
Company is marketing the Funds through Management directly to certain of its
current clients and prospects, to financial planners and small registered
investment advisors as well as through several no-transaction-fee programs
sponsored by large financial services companies.
COMPETITION
The investment management business is highly competitive. The Company
competes with numerous investment management firms having varying investment
methods and philosophies. In addition to competition from other discretionary
investment managers, the Company, particularly in its individual and smaller
institutional account business, competes with investment alternatives offered by
mutual funds, insurance companies, banks, securities dealers and other financial
institutions. Also, the allocation by many clients of assets away from active
equity investment to index funds and similar products has enhanced the ability
of firms offering non-equity products and passive equity management which the
Company does not offer, including much larger firms with diversified product
lines, to compete with the Company.
The Company's performance results since inception rank above the median
among peer group money managers. Because of the strong relative equity
performance results for each of the five years ended December 31, 2002, the
Company's performance rankings are very good. The Company believes that the most
important factors affecting its capacity to compete for new business are
sustained top quartile investment performance results, the perceived quality and
productivity of investment professionals, a continued commitment to a strong
marketing effort and an exemplary level of client service.
Most prospective clients perform a thorough review of an investment
manager's background, investment policies and performance before committing
assets to that manager. In many cases, prospective clients invite a number of
competing firms to make presentations. The process of obtaining a new client
typically takes from 6 to 18 months from the time of the initial contact.
The Company believes it has the capacity to continue to increase the number
of client accounts under management without significant increases in fixed costs
or personnel and without adversely affecting the quality of service to existing
clients. The Company has continued to implement enhancements to its portfolio
accounting, allocation, monitoring and reporting systems to enable it to more
efficiently manage client accounts.
BROKERAGE
Many of the Company's clients use Management as broker for their account
transactions, to the extent consistent with the client's best interests and as
permitted by applicable law. As of December 31, 2002, some of Capital's
institutional clients have consented to the use of Management as broker. Such
clients generated approximately $20,000 in commission revenue in 2002. The use
of Management as broker is an integral part of the services offered to many of
Management's HNW clients (except for those accounts obtained through Wrap
programs). Management also provides brokerage services to the Company's officers
and employees on a non-discretionary basis.
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.
8
Management owns a seat on the Chicago Board Options Exchange, Inc.
("CBOE"). Management owned a seat on the New York Stock Exchange (NYSE) which it
sold to a third party for $2.3 million in November 2002. These seats are/were
leased at market rates to unrelated third parties and aggregate lease rentals
for 2002, 2001 and 2000 totaled approximately $226,000, $358,000 and $330,000,
respectively.
EMPLOYEES
At December 31, 2002, the Company employed 46 persons on a full-time basis,
comprised of 3 senior executives, 5 research, 8 sales and marketing, 8 client
service, 9 operations, accounting and systems, 3 trading and 10 administrative
or secretarial positions. The Company considers its employee relations to be
good.
Sales personnel receive additional compensation based upon the advisory
fees of clients which they were responsible for successfully soliciting on
behalf of the Company. In addition, the Company has entered into agreements with
various sales personnel which, among other things, limit the extent to which
such personnel may solicit clients of the Company if their employment is
terminated. Some of these agreements provide that, in certain circumstances, an
employee, in the event of termination, may continue to receive a percentage of
fees received by the Company from clients solicited by that employee. The
amounts payable with respect to these salespersons' agreements are not expected
to be material.
REGULATION
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. Management is registered as a
broker-dealer and investment advisor with the Securities and Exchange Commission
("SEC"), and Capital is registered as an investment advisor with the SEC.
Management's brokerage operations are also subject to regulation by
self-regulatory organizations, including the National Association of Securities
Dealers, Inc., and the CBOE. Securities firms are also subject to regulation by
state securities administrators in the states in which they conduct business.
Management is registered as a broker-dealer in all 50 states and Management and
Capital are registered as investment advisors in the jurisdictions in which they
meet state requirements.
Broker-dealers and investment advisors are subject to regulation covering
virtually all aspects of their business. Additional legislation, changes in
rules promulgated by the SEC and self-regulatory organizations, or changes in
the interpretation or enforcement of existing laws and rules, may directly
affect the mode of operation and profitability of the Company. The SEC,
self-regulatory organizations and state securities commissions conduct routine
inspections of the Company's businesses and may conduct administrative
proceedings which can result in censure, fine, suspension or expulsion of a
broker-dealer or an investment advisor, and/or their officers or employees in
the event of violations of the laws and regulations they administer.
The Company's investment advisory agreements with its clients provide that
they may not be assigned without the consent of the client. "Assignment" is
defined in the Investment Advisers Act of 1940 to include the direct or indirect
transfer or hypothecation of a controlling block of the Company's voting
securities. Martin T. Sosnoff, Chairman of the Board of the Company, owns
approximately 82% of the NYSE listed company, Atalanta/Sosnoff Capital
Corporation (the "Holding Company"), which directly or indirectly owns Capital
and Management, both of which are registered investment advisors. Accordingly,
the voluntary transfer (by sale, merger or other disposition) or involuntary
transfer (by death or disability) by him of a controlling block of the Holding
Company's securities would result in such an "assignment" requiring client
consent. Although no assurance can be given in these circumstances, the Company
believes it would be able to substantially retain its existing client base. The
Company's Certificate of Incorporation contains provisions intended to preclude
the possibility that the accumulation by third parties of a substantial position
in the Company's common stock would be deemed an "assignment" of the Company's
advisory agreements.
9
Many of the Company's clients are subject to the Employee Retirement Income
Security Act of 1974 ("ERISA"). The accounts of these clients are subject to a
number of ERISA provisions governing, among other things, fiduciary obligations
and permissible investments and investment methods.
As a registered broker dealer, Management is required under the rules of
the SEC to maintain minimum net capital at all times equal to at least $250,000.
In addition, Management's ratio of aggregate indebtedness to net capital may not
exceed 15 to 1, and equity capital may not be withdrawn, or dividends paid, from
Management if the resulting ratio of aggregate indebtedness to net capital would
exceed 10 to 1. Management's minimum net capital requirement as of December 31,
2002 was $250,000; it had net capital at such date of $7.6 million, and a ratio
of aggregate indebtedness to net capital of 0.25 to 1.
Item 2. Properties.
The Company occupies office space at 101 Park Avenue, New York, New York
under a lease whose term expires in August 2017. (see Note 9 to the Notes to the
Consolidated Financial Statements).
Item 3. Legal Proceedings.
There are no legal proceedings to which the Company or any of its property
is subject which, in the opinion of the Company's management, would have a
material adverse effect upon the Company's business or operations.
On December 6, 2002, the Company announced that it had received a proposal
to acquire the approximately 17% of the Common Stock of the Company that he does
not own in a "going private" transaction at a price of $12.50 per share, subject
to adjustment to reflect changes in the value of the Company's portfolio of
marketable securities from current levels from Martin Sosnoff, Chairman of the
Board and Chief Executive Officer. The Company announced that a Special
Committee of its Board of Directors, composed of independent directors, would be
formed to consider Mr. Sosnoff's proposal. The announcement was contained in a
press release dated December 6, 2002, which was annexed as Exhibit 1 to the
Company's Current Report on Form 8-K annexed hereto as Exhibit 99.3 and hereby
incorporated herein by reference, which sets forth the general terms of the
proposal. As announced, the transaction would also be subject to negotiation of
a definitive agreement and other customary conditions to closing.
Since the Company's announcement of Mr. Sosnoff's preliminary oral
proposal, in December 2002, three plaintiffs in three separate, but virtually
identical, purported class actions, have filed complaints in the Court of
Chancery of the State of Delaware (Berger v. Sosnoff, et al. (C.A. 20068),
Breakwater Partners, LP v. Sosnoff, et al. (C.A. 20073) and Schneider v.
Atalanta/Sosnoff Capital Corp., et al. (C.A. 20088)). These actions have been
consolidated for all purposes under the caption In re Atalanta/Sosnoff Capital
Corp. Shareholder's Litigation, Consolidated C.A. 20063. In each action the
Company and its directors, as well as Mr. Sosnoff, are named as defendants. Each
of the plaintiffs seeks to enjoin a transaction arising out of Mr. Sosnoff's
proposal and alleges in generalized form breaches of fiduciary duty by him and
the directors. The Company believes these actions are without merit and is
vigorously defending them.
On January 31, 2003, Mr. Sosnoff wrote to the Special Committee setting
forth his proposal, briefly describing the structure of the proposed transaction
and the reasons, for his proposal. Annexed hereto as Exhibit 99.4 is Mr.
Sosnoff's letter to the Special Committee which is hereby incorporated herein by
reference.
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 2002.
10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholders
Matters.
The Company's common stock is listed on the NYSE under the trading symbol
"ATL." The following table sets forth for the quarters indicated, the high and
low closing sales prices of the common stock, as reported on the New York Stock
Exchange Composite Transactions Tape, together with special dividends declared
each year.
2002 2001 2000
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
------------- ---- --- ---- --- ---- ---
March 31 $11.90 $9.70 $11.25 $9.90 $10.50 $7.88
June 30 12.35 10.85 11.60 10.00 10.63 9.00
September 30 11.15 8.10 11.45 9.40 10.75 9.50
December 31 12.30 6.80 10.71 9.45 11.63 10.25
Special Dividends
Declared None $.20 $.25
On December 6, 2002, Mr. Sosnoff made a proposal to acquire the shares of
Company stock he does not own for a cash price of $12.50 per share, subject to
adjustment. (See Item 3 - "Legal Proceedings" herein).
The approximate number of record holders of common stock was 35 on December
31, 2002.
The Company's Board of Directors will periodically review the Company's
earnings, liquidity and anticipated cash needs and, subject to these
considerations, it may consider the payment of dividends in the future.
For information with respect to stock and option awards made during 2002,
see "Executive Compensation" in Item 11 "Securities Authorized for Issuance
under Equity Compensation Plans" in Item 12. Shares of common stock awarded in
1997 under the Long Term Incentive Plan were issued to senior executives of the
Company without registration under the Securities Act of 1933 in reliance on the
exemption therefrom in Section 4(2) thereof for transactions not involving a
public offering.
11
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
FIVE YEAR REVIEW
(dollars and shares in thousands,
except per share amounts) 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
SUMMARY OF OPERATIONS:
Net income (loss) $(2,154) $ 283 $11,503 $17,564 $ 7,784
Per share - diluted $ (.25) $ .03 $ 1.27 $ 1.91 $ .81
- basic $ (.25) $ .03 $ 1.27 $ 1.91 $ .81
Total Revenues $ 5,691 $15,090 $40,588 $51,075 $27,304
Operating revenues (1) $14,065 $15,458 $21,179 $18,270 $16,980
Operating expenses (2) $12,980 $14,627 $18,008 $16,611 $13,609
Operating income $ 1,085 $ 831 $ 3,171 $ 1,659 $ 3,371
Operating margin 8% 5% 15% 9% 20%
Per employee:
Operating revenues (1) $ 306 $ 336 $ 460 $ 406 $ 435
Operating expenses (2) $ 282 $ 318 $ 391 $ 369 $ 349
Operating income $ 24 $ 18 $ 69 $ 37 $ 86
Net interest and dividend income $ 1,351 $ 1,047 $ 1,234 $ 708 $ 1,557
Net realized and unrealized
gains (losses) from investments $(9,725) $(1,415) $18,176 $32,097 $ 8,767
Return on average equity (2%) Nil 11% 19% 10%
YEAR-END POSITION:
Total assets $98,626 $109,495 $126,914 $123,623 $90,686
Shareholders' equity $93,546 $102,403 $107,066 $101,776 $82,022
Book value per share $ 11.05 $ 11.52 $ 11.89 $ 11.21 $ 8.78
Cash dividends declared per share None $ .20 $ .25 None $ .25
Common stock, shares outstanding 8,465 8,886 9,005 9,075 9,338
Number of employees 46 46 46 45 39
Assets under management (millions) $ 2,042 $ 2,356 $ 2,707 $ 2,686 $ 2,410
AVERAGE ASSETS UNDER MANAGEMENT
(MILLIONS) $ 2,206 $ 2,202 $ 2,638 $ 2,412 $ 2,402
Percentage of average assets:
Operating revenues (1) .64% .70% .80% .76% .71%
Operating expenses (2) .59% .66% .68% .69% .57%
Operating income .05% .04% .12% .07% .14%
(1) Operating revenues consist of advisory fees, commissions and other
operating revenue.
(2) Operating expenses consist of total costs and expenses less investment
performance bonuses of $2,626,000 and $3,446,000 in 2000 and 1999,
respectively, pursuant to the Management Incentive Plan ("MIP"), which were
paid to the Chief Executive Officer and President. There were no investment
performance bonuses payable for 2002, 2001 or 1998. (See Management's
Discussion and Analysis and Note 9 to the Notes to the Consolidated
Financial Statements.)
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FINANCIAL SUMMARY
For the fifth consecutive year, investment performance was above the
relevant benchmark in 2002 for equity clients. Net new client assets raised of
$175 million in 2002, offset by net client withdrawals of $128 million and
negative performance of $361 million, caused a net decrease of $314 million in
assets under management during 2002. Average assets under management totaled
$2.21 billion in 2002, compared with $2.20 billion in 2001 and $2.64 billion in
2000.
After elimination of non-operating charges, pretax operating income
decreased 43% to $1.1 million in 2002, compared with $2.5 million in 2001 and
$6.5 million in 2000. Earnings (loss) per share totaled $(0.25) in 2002,
compared with $0.03 in 2001 and $1.27 in 2000 (all earnings (loss) per share
amounts represent diluted earnings per share, if applicable). Net income (loss)
was $(2.2) million in 2002, compared with net income of $283,000 in 2001 and
$11.5 million in 2000.
Owing to the continued decline in the market during 2002, total revenue for
2002 decreased 62% to $5.7 million, from $15.1 million in 2001 and $40.6 million
in 2000. Revenue from advisory fees and commissions ("operating revenues")
decreased 9% to $14.1 million in 2002, from $15.5 million in 2001 and $21.2
million in 2000. The Company had a net loss on investments of $8.4 million in
2002, compared with a net loss of $368,000 in 2001 and net investment income of
$19.4 million in 2000.
Costs and expenses for 2002 decreased 11% to $13.0 million, from $14.6
million in 2001 and $20.6 million in 2000. After eliminating non-operating
charges, operating expenses were $13.0 million, $12.9 million and $14.6 million
for 2002, 2001 and 2000, respectively. The following table depicts operating
income, as adjusted, for the years ended December 31:
- --------------------------------------------------------------------------------
OPERATING INCOME ($000)
---------------- ------
2002 2001 2000
------- ------- --------
Operating revenues, reported $14,065 $15,458 $ 21,179
Costs and expenses, reported (12,980) (14,627) (20,634)
Add MIP investment performance bonuses -- -- 2,626
------- ------- --------
Operating income before adjustments 1,085 831 3,171
Adjustments:
Non-cash compensation charges -- 1,688 2,250
SVP account charges -- -- 1,125
------- ------- -------
Operating income, adjusted $ 1,085 $ 2,519 $ 6,546
======= ======= =======
- --------------------------------------------------------------------------------
Balance sheet assets totaled $99 million at December 31, 2002, compared
with $109 million a year ago. Book value per share decreased 4% to $11.05 at
December 31, 2002, compared with $11.52 at the end of 2001.
13
ASSETS UNDER MANAGEMENT
Managed assets totaled $2.04 billion at the end of 2002, compared with
$2.36 billion at the end of 2001 and $2.71 billion at the end of 2000. A
breakdown of assets under management by client type as of the end of each of the
last three years is as follows:
- --------------------------------------------------------------------------------
($ millions)
2002 2001 2000
------ ------ ------
Institutional $1,305 $1,509 $1,905
High Net Worth 278 368 393
Investment Partnerships 133 203 200
Wrap Programs 304 244 179
Mutual Funds 22 32 30
------ ------ ------
Total Managed Assets $2,042 $2,356 $2,707
====== ====== ======
- --------------------------------------------------------------------------------
The $314 million net decrease in managed assets during 2002 is comprised of
increases of $175 million from new client accounts, reduced by (i) $112 million
in closed client accounts; (ii) $16 million in net withdrawals from existing
accounts and; (iii) $361 million in negative performance results.
In the two years ended December 31, 2002, managed assets decreased by $665
million, comprised of increases of $371 million in new client accounts, reduced
by (i) $258 million in closed client accounts; (ii) $175 million in net
withdrawals from existing accounts; and (iii) $603 million in negative
performance results.
EARNINGS
Operating revenues decreased 9% in 2002 to $14.1 million, compared with
$15.5 million in 2001 and $21.2 million in 2000. Average assets under management
increased 1% in 2002 compared with 2001, and decreased 16% compared with 2000.
The decrease in operating revenues in 2002 is due in part to the decrease in
assets under management and a significant move towards wrap accounts which are
lower fee based clients. In addition, performance based fees earned on one of
the investment partnerships managed by the Company totaled $2.4 million in 2000,
compared with none in 2002 or 2001.
In 2002 operating revenues were 0.64% of average managed assets, compared
with 0.70% in 2001 and 0.80% in 2000. This reflects the absence of performance
based fees in 2002 and 2001, and a significant decline in average assets under
management in 2002 and 2001 compared with 2000.
Advisory fees, which are earned based on the value of assets under
management, are the Company's primary source of operating revenues. Advisory
fees decreased 7% to $12.8 million in 2002, compared with $13.8 million in 2001
and $19.4 million in 2000. Advisory fees were approximately 90% of operating
revenues in each of the three years ended December 31, 2002.
Transaction fees (commissions) earned by Management are the primary source
of the Company's other operating revenues. Commissions are derived from some of
Management's individual and small institutional accounts, investment
partnerships and specific institutional accounts that have given Management the
authority to execute
14
trades. Commissions decreased 23% to $966,000 in 2002, compared with $1.25
million in 2001 and $1.45 million in 2000.
The following table depicts operating expenses, as adjusted, for the years ended
December 31:
- --------------------------------------------------------------------------------
OPERATING EXPENSES ($000)
- ------------------ ------
2002 2001 2000
-------- -------- --------
Cost and expenses, reported $ 12,980 $ 14,627 $ 20,635
Adjustments:
MIP investment performance bonuses -- -- (2,626)
Non-cash compensation charges (1,688) (2,250)
SVP account charges -- -- (1,125)
-------- -------- --------
Operating expenses, adjusted $ 12,980 $ 12,939 $ 14,634
======== ======== ========
- --------------------------------------------------------------------------------
Reported costs and expenses totaled $13.0 million in 2002, compared with
$14.6 million in 2001 and $20.6 million in 2000. The 2001 amount reflects $1.7
million in non-operating charges identified above. Before this item, operating
expenses totaled $12.9 million in 2001. The 2000 amount reflects $6.0 million in
non-operating charges. Before these items, operating expenses totaled $14.6
million in 2000.
After these non-operating adjustments, 2002 operating expenses were
approximately the same as 2001, after a 12% decrease in 2001 compared with 2000.
Adjusted operating expenses were 92% of operating revenues and 0.59% of average
managed assets in 2002, compared with 84% and 0.59% in 2001, and 69% and 0.55%
in 2000.
The following table depicts compensation expenses, as adjusted, for the years
ended December 31:
- --------------------------------------------------------------------------------
COMPENSATION EXPENSES ($000)
2002 2001 2000
-------- -------- --------
Compensation expenses, reported $ 8,207 $ 10,300 $ 16,017
Adjustments:
MIP investment performance bonuses -- -- (2,626)
Non-cash compensation charges -- (1,688) (2,250)
SVP account charges -- -- (1,125)
-------- -------- --------
Compensation expenses, adjusted $ 8,207 $ 8,612 $ 10,016
======== ======== ========
- --------------------------------------------------------------------------------
Reported compensation expenses decreased 20% to $8.2 million in 2002,
compared with $10.3 million in 2001 and $16.0 million in 2000. Compensation
expenses adjusted for the non-operating charges noted above decreased 5% in 2002
to total $8.2 million, compared with $8.6 million in 2001 and $10 million in
2000. The 2002 decrease is primarily due to a decrease in sales payouts related
to the decrease in advisory fee revenue. Adjusted compensation expenses were 58%
of operating revenues and 0.37% of average managed assets in 2002, compared with
56% and 0.39% in 2001, and 47% and 0.38% in 2000.
15
The Company has a Management Incentive Plan ("MIP") (see Note 9 to the
Notes to the Consolidated Financial Statements) which covers bonus payments to
certain executives. Under the MIP, the payment of operating bonuses to these
executives is based on the annual growth in operating income, after adjusting
for certain charges. An MIP operating bonus of $541,000 was earned in 2000,
compared with none in 2002 and 2001.
Under a second component of the MIP, an annual investment performance bonus
is earned by the Chief Executive Officer ("CEO") based upon the performance of
proprietary accounts of the Company in excess of a base index return, as
defined. Included in compensation expense related to this component of the MIP
is an investment performance bonus to the CEO of none in 2002 and 2001, and
$2,216,000 in 2000.
In addition, under a third component of the MIP, the President earns an
operating bonus based upon the pretax operating profits earned by the Company as
General Partner of the partnership managed by the President. Included in
compensation expense are operating bonuses earned under the MIP by the President
of approximately $64,000 and $1,273,000 in 2001 and 2000 and none in 2002. The
President also earns an annual investment bonus under this component of the MIP
based upon the performance of the Company's investment in the partnership
managed by the President in excess of a base index return. Included in
compensation expense are investment bonuses earned by the President of $410,000
in 2000, and none in 2002 and 2001.
The Company recorded $1.69 million and $2.25 million in 2001 and 2000,
respectively, for non-cash compensation charges ("NCCC") related to awards of
restricted stock in 1997 (see Note 10 to the Notes to the Consolidated Financial
Statements). In 2000, the Company also recorded $1,125,000, 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 6 to the Notes to the
Consolidated Financial Statements).
- --------------------------------------------------------------------------------
NON-COMPENSATION EXPENSES ($000)
2002 2001 2000
------ ------ ------
Non-compensation expenses, reported $4,773 $4,327 $4,618
- --------------------------------------------------------------------------------
Non-compensation expenses increased by 10% to $4.8 million in 2002,
compared with $4.3 million in 2001 and $4.6 million in 2000. The 2002 increase
is primarily due to a increase in rent expense under a new lease agreement
effective September 2002. Non-compensation expenses totaled 34% of operating
revenues and 0.22% of average managed assets in 2002, compared with 28% and
0.20% in 2001, and 22% and 0.18% in 2000.
o o o
Net investment income (loss) is comprised of interest, dividends, and net
realized and unrealized gains/losses from principal securities transactions
(primarily large-cap equities). The Company reported a net loss on investments
of $8.4 million in 2002, a net loss of $368,000 in 2001, and a net gain of
investments of $19.4 million in 2000. Net interest and dividend income was $1.4
million in 2002, $1.0 million in 2001, and $1.2 million in 2000. Net losses on
investments totaled $9.7 million ($2.6 million realized gains) in 2002, compared
with a net loss of $1.4 million ($1.7 million realized gains) in 2001, and a net
gain of $18.2 million ($12.5 million realized gains) in 2000, reflecting the
strengths and weaknesses of the domestic equity markets in those years.
16
LIQUIDITY AND CAPITAL RESOURCES
Net investments in marketable securities aggregated $70.6 million at
December 31, 2002, compared with $73.4 million at the end of 2001. Shareholders'
equity totaled $93.5 million at December 31, 2002, compared with $102.4 million
at the end of 2001. The decrease in 2002 is primarily from a net loss of $2.2
million and a net unrealized loss of $2.1 million, net of deferred taxes, on the
investment portfolio. The Company has adopted SFAS No. 115, requiring it to
reflect a net unrealized loss of $793,000 after taxes in shareholders' equity at
December 31, 2002, compared with a net gain of $1.3 million at the end of 2001.
At December 31, 2002, the Company's net investment portfolio at market
totaled $78.3 million (cost basis $77.7 million), comprised of cash and cash
equivalents, corporate debt, large-cap equity securities, investments in limited
partnerships and the Funds (see Note 4 to the Notes to the Consolidated
financial statements). On the equity side, at year-end, the Company was invested
in 20 separate large-cap securities, in a more concentrated fashion of what it
does for its managed client accounts.
If the equity market (defined as the S&P 500 index) were to decline by 10%,
the Company might experience unrealized losses of approximately $8 million; if
the market were to decline by 20%, the Company might experience unrealized
losses of $16 million. However, the Company believes that incurring unrealized
losses of this magnitude is less likely with active management of the portfolio.
Since the equity positions are all large-cap holdings, they can be sold easily
on short notice with little market impact. Ultimately, the Company will raise
and hold cash to reduce market risk.
At December 31, 2002 the Company had cash and cash equivalents totaling
$991,000, compared with $1.9 million at the end of 2001. Net cash provided by
operating activities was $5.4 million in 2002 compared with net cash used in
operating activities of $2.5 million in 2001. This reflects the changing levels
of operating income and changes in operating assets and liabilities over those
periods. Net cash used in investing activities was $1.7 million in 2002 compared
with net cash provided by investing activities of $8.8 million in 2001. Net cash
used in financing activities was $4.6 million in 2002, compared with $5.4
million in 2001. As a result, there was a net decrease in cash and cash
equivalents of $950,000 in 2002, compared to a increase of $952,000 in 2001.
o o o
In 2001, the Company declared a special dividend of $.20 per share,
compared with none in 2002.
During 2001, the Company purchased 119,520 shares of its common stock at an
average price of $11.21 per share. On December 12, 2001, the Company retired
189,420 shares of treasury stock and restored the common stock in the open
market to authorized and unissued status. During 2002, the Company purchased
363,000 shares of its common stock at an average market price of $11.25 per
share. In accordance with the terms of his agreements with the Company entered
into in September 1997, the President of the Company sold 57,992 shares of the
Company stock back to the Company at a market price of $9.75 per share in
September of 2002 to satisfy a loan to the President arising from the tax
consequences of the 1997 award to him under the Long Term Incentive Plan
("LTIP"). In December 2002, the Company retired 414,992 shares of treasury stock
and restored the common stock to authorized and unissued status.
At December 31, 2002 and 2001, 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 LTIP. Craig B. Steinberg, President, received 600,000 shares and Anthony G.
Miller, a former Executive Vice President and Chief Operating Officer, received
175,000 shares. Such
17
awards vested over four years. The difference of $9.0 million between the market
value ($11.625 per share) of the shares awarded on the date of grant and the
purchase price of $.01 per share was recorded as unearned compensation in
shareholders' equity and was amortized over a four-year period commencing with
the fourth quarter of 1997 (approximately $563,000 per quarter and $2.25 million
annually) and ended in the third quarter of 2001.
The Company believes that the foreseeable capital and liquidity
requirements of its existing businesses will continue to be met with funds
generated from operations.
Item 8. Financial Statements and Supplementary Data
See Index to Consolidated Financial Statements, and Consolidated
Financial Statement Schedules on page F-1 in Item 15.
Item 9. Changes in or Disagreements with Accountants on Accounting and Financial
Disclosure.
On March 22, 2002 the Board of Directors of the Company, upon recommendation of
the Audit Committee, appointed the firm of Rothstein, Kass & Company, P.C.
independent auditors for the Company for 2002, subject to ratification by the
stockholders which occurred at the 2002 Annual Meeting of Stockholders. Arthur
Andersen LLP had served as independent auditors of the Company since 1989. The
Audit Committee determined not to recommend the reappointment of this firm based
upon the Committee's concern about this firm's exposure to civil and criminal
liabilities. Arthur Andersen LLP's reports on the Company's financial statements
during the two fiscal years in the two year period ended December 31, 2001 and
the interim period subsequent to December 31, 2001 ended March 31, 2002 have not
contained any adverse opinion or disclaimer of opinion or any qualification or
modification of any kind nor have there been any disagreements with Arthur
Andersen LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure.
The engagement of Rothstein, Kass & Company, P.C. commenced as of the beginning
of the Company's 2002 fiscal year.
The Company solicited and received from Arthur Andersen, LLP a statement from
them agreeing with the statements made by the Company in response to Item 304(a)
of Regulation S-K and filed the statement as Exhibit 3 to the Company's Current
Report on Form 8-K/A, filed April 10, 2002,which is hereby incorporated herein
by reference as Exhibit 16.
18
PART III
Item 10. Directors and Executive Officers of the Registrant.
BOARD OF DIRECTORS
The Board of Directors has responsibility for establishing broad corporate
policies and for the overall management and performance of the Company, although
it is not involved in day-to-day operating details. The members of the Board who
are not senior officers of the Company are kept informed of the Company's
business by various reports and documents given to them from time to time, as
well as by operating, financial and other reports made at Board and Committee
meetings.
Regular meetings of the Board of Directors are generally held four times
per year and special meetings are scheduled when required. The Board held four
regular meetings and a special meeting in 2002.
COMPENSATION OF DIRECTORS
Non-employee directors receive an annual retainer of $12,000. They also
receive a fee of $2,000 for each Board meeting attended, plus travel and
incidental expenses. The two full-time employees who serve as directors receive
only reimbursement of expenses, if any, actually incurred in attending meetings.
During fiscal 2002, Mr. Jay S. Goldsmith, Mr. Thurston Twigg-Smith and Mr.
Ronald H. Menaker each received $22,000, in regular compensation for serving as
non-employee directors of the Company.
(a) Directors - The Board is currently comprised of five directors elected
at the last Annual Meeting. Each director so elected holds office for a term of
one year and until the election and qualification of a successor.
Mr. Sosnoff was first elected by the stockholders in 1986, prior to the
Company's initial public offering. Mr. Twigg-Smith was first elected by the
stockholders in 1994. Mr. Steinberg was appointed to the Board in August, 1997
and first elected by the stockholders in 1998. Mr. Menaker was first elected by
the stockholders in 1999. Mr. Goldsmith was first elected by the stockholders in
2001.
Messrs. Sosnoff and Steinberg are executive officers of the Company.
Information about the directors principal occupations, Board Committee
memberships and other information follows. Information about their ownership of
the outstanding common stock of the Company appears hereinafter under the
caption, Item 12 - "Beneficial Ownership of Securities of the Company."
NAME, PRINCIPAL OCCUPATION
AND OTHER INFORMATION
---------------------
JAY S. GOLDSMITH, 59, for more than five years has been President of Balfour
Investors, Inc. (a merchant banking firm) and the Vice Chairman of
PubliCARD, Inc. (a smart-card technology company).
In a judgement in 1998 in the United States District Court, Southern
District of New York, Mr. Goldsmith was held liable pursuant to Section
16(b) of the Securities Exchange Act of 1934 to repay to New Valley Corp.
"short-swing" profits he earned from certain purchases and sales of that
corporation's B Preferred Stock within a six-month period. Mr. Goldsmith
has advised the Company and the Company has concluded after review, that
the decision was based on a technical analysis of the language in Section
16(b). The Appeals Court in affirming the decision mentioned that the
District Court had suggested that "...the defendants, though liable, might
well have acted in good faith."
Mr. Goldsmith serves on the Audit, Compensation and Stock Option
Committees.
RONALD H. MENAKER, 58, since January 1, 2000 has been retired. From July, 1998
through December, 1999 he was an Advisory Director of, and for more than
five years prior thereto he was a Managing
19
Director of, and held other offices with, J.P. Morgan & Co., Inc.
Mr. Menaker serves on the Audit, Compensation and Stock Option Committees.
MARTIN T. SOSNOFF, 71, is the founder of the Company and has been Chairman of
the Board, Chief Executive Officer, and Chief Investment Officer of the
Company and its subsidiaries since their inceptions.
Mr. Sosnoff serves on the Executive, Compensation and Stock Option
Committees
CRAIG B. STEINBERG, 41, has been President and Director of Research, and has
held other offices, with the Company and its subsidiaries since 1985.
Mr. Steinberg serves on the Executive Committee.
THURSTON TWIGG-SMITH, 81, retired as of March, 2002. For more than five years
prior thereto he was Chairman of the Board and Chief Executive Officer of
Persis Corporation (newspaper publishing).
Mr. Twigg-Smith serves on the Audit, Compensation and Stock Option
Committees.
(b) Executive Officers of the Registrant -
MARTIN T. SOSNOFF*, 71, founder of the Company and has been Chairman of the
Board, Chief Executive Officer and Chief Investment Officer of the Company,
Capital and ASCC Corp. since their inceptions. He was a co-founder of
Atalanta Capital Corporation (investment management) and served as its
Chairman and Chief Executive Officer until 1983.
CRAIG B. STEINBERG**, 41, President, Director of Research, and has held other
offices, with the Company, Capital and ASCC Corp. since 1985. Mr. Steinberg
is a Portfolio Manager, and he was a securities analyst at Prudential
Equity Management from 1983 to 1985.
- -------------------------------
* Also a director and member of the Executive, Compensation and Stock
Option Committees.
** Also a director and member of the Executive Committee.
20
KEVIN S. KELLY, 38, Senior Vice President, Finance, Chief Operating Officer,
Chief Financial Officer, Secretary and has held other offices with the
Company and its subsidiaries since joining the Company in 1999. Mr. Kelly
is the President and Chief Executive Officer of Management. Mr. Kelly is a
CPA and was a Senior Manager for Grant Thornton prior to joining the
Company.
WILLIAM M. KNOBLER, 69, Senior Vice President of Management since 1985.
Mr. Knobler is a Portfolio Manager, and he was a securities analyst and
voting shareholder of Sanford C. Bernstein & Co. from 1979 to 1985.
JAMES D. STAUB, 70, Senior Vice President, and has 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.
Officers of the Registrant are elected at the meeting of the Board of
Directors held each year immediately after the Annual Meeting of Stockholders
and serve for the ensuing year and until their successors are elected and
qualified.
Item 11. Executive Compensation.
The following table sets forth certain information regarding compensation
paid during each of the Company's last three fiscal years to the Company's Chief
Executive Officer and to each of the Company's four other most highly
compensated executive officers who were officers during 2002.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
SECURITIES
NAME AND OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION STOCK AWARDS OPTIONS COMPENSATION
------------------ ---- ------ ----- ------------ ------------ ------- ------------
Martin T. Sosnoff 2002 $1,000,000 $0 (1) $10,000 (7)
Chairman of the Board; 2001 1,000,000 0 (1) 8,500 (7)
Chief Executive Officer; 2000 1,000,000 2,405,350 (1) 17,000 (7)
Director
CRAIG B. STEINBERG 2002 700,000 300,000 (2) 10,000 (7)
President and Director 2001 700,000 264,022 (1,2) $1,588,500 (3) 8,500 (7)
of Research; Director 2000 700,000 2,404,744 (1) 1,573,500 (3) 17,000 (7)
KEVIN S. KELLY 2002 177,083 50,000 (4) 10,000 (7)
Senior Vice President, 2001 150,000 35,000 (4) 8,500 (7)
Chief Operating Officer, 2000 133,000 35,000 (4) 16,800 (7)
Chief Financial Officer,
Secretary
JAMES D. STAUB 2002 175,000 $479,255 8,750 (7)
Senior Vice President 2001 175,000 699,914 (5) 8,500 (7)
of subsidiaries 2000 175,000 619,486 (5) 17,000 (7)
WILLIAM M. KNOBLER 2002 75,000 (6) 3,750 (7)
Senior Vice President of 2001 103,125 (6) 558,630 (6) 8,500 (7)
Subsidiary 2000 113,975 (6) 824,189 (6) 17,000 (7)
JAMES P. PAPPAS 2002 141,667 121,007 (8)
Former Chief Operating Officer
- ---------------------
(1) Represents amounts received as bonuses by participants in the Company's
MIP. See "Management Incentive Plan" hereinafter to be included in a
filing with the Securities and Exchange Committee, if required.
(2) Includes discretionary bonuses of $300,000 and $200,000 in 2002 and
2001, respectively.
(3) Represents non-cash compensation required to be reported for tax
purposes. Mr. Steinberg was awarded the right to purchase and purchased
600,000 shares of the Company's common stock for the purchase price of
$0.01 per share as of September 17, 1997 under the Company's LTIP.
21
For tax purposes, the Company and Mr. Steinberg report the compensation
element of the award in the years in which the Company's right to
repurchase equal fractions of the award lapse at the first through the
fourth anniversaries of the date of the award. Under this method, Mr.
Steinberg reported compensation of $1,588,500 in 2001 (based on a market
price of $10.60 per share at the fourth and final anniversary) and
$1,573,500 in 2000 (based on a market price of $10.50 per share at the
third anniversary). The Company recorded unearned compensation in
shareholders' equity of approximately $7.0 million at the time of the award
which was amortized to compensation expense. Approximately $1.7 million was
expensed in each full calendar year as the right to repurchase the award
lapsed in the period ended September 30, 2001. At September 17, 1997, the
stock award value was approximately $7.0 million which is based on the
difference between the purchase price and the market value of the award at
such date, and the stock award value was approximately $6.4 million at
December 31, 2000 and $6.2 million at December 31, 2001. In 1997, the
Company loaned Mr. Steinberg $46,740 with interest at the applicable
federal rate for taxes attributable to dividends paid on the shares
received in his award. In 1998, the Company loaned Mr. Steinberg $539,847
with interest at the applicable federal rate for taxes attributable to the
compensation element of his award and dividends paid on the unvested shares
received in his award. In 1999, the Company loaned Mr. Steinberg $849,338
with interest at the applicable federal rate for taxes attributable to the
compensation element of his award. In 2000, the Company loaned Mr.
Steinberg $762,361 with interest at the applicable federal rate for taxes
attributable to the compensation element of his award. In 2001, the Company
loaned Mr. Steinberg $769,628 with interest at the applicable rate for
taxes attributable to the compensation element of his award and dividends
paid on the unvested shares received in his award. Mr. Steinberg paid
$83,718 of interest to the Company related to these loans in 2000, he paid
$127,673 of interest in 2001, and he paid $142,785 of interest and $586,523
in principal in 2002 in part by application of 57,992 shares of the Company
Common Stock owned by Mr. Steinberg pursuant to the Stock Purchase Plan.
(4) Includes discretionary bonuses of $50,000, $35,000 and $35,000 in 2002,
2001 and 2000, respectively.
(5) Represents additional compensation paid to Mr. Staub in lieu of a bonus
based upon a percentage of investment advisory fees received by the Company
from clients solicited by Mr. Staub under an agreement with the Company.
See "Agreements and Transactions with Directors and Executive Officers"
hereinafter to be included in a filing with the Securities and Exchange
Committee, if required.
(6) The 2000 and 2001 amounts represent the second and third (final)
installment payments, respectively, made to Mr. Knobler by the Company in
January 2000 and 2001 relating to the relinquishment of his right to
receive revenue from SVP clients under a facilities agreement with the
Company. In 2002 and 2001, Mr Knobler's salary was set as a percentage of
the gross revenues received from SVP clients in 2002 and 2001,
respectively, under an arrangement with the Company.
(7) Represents contributions by the Company to the account of such officers
under the Company's Profit Sharing Plan for its employees.
(8) Represents post employment compensation ended December 31, 2002.
Except as noted, none of the individuals listed above received non-cash
compensation during 2002 in excess of the lesser of $50,000 or 10% of his total
annual salary and bonus.
22
BOARD COMPENSATION COMMITTEE REPORT
The Board has requested that the Compensation Committee describe in
this Report (a) its compensation policies generally applicable to the executive
officers of the Company, including the specific relationship of corporate
performance to executive compensation for 2002; and (b) the basis for Mr.
Sosnoff's compensation in 2002, including the factors and criteria on which Mr.
Sosnoff's compensation was based and the relationship of the Company's
performance to such compensation describing the measures of performance on which
such compensation was based.
Compensation Policies Generally Applicable to Executive Officers
In formulating its compensation policies for executive officers, the
Committee considers many factors, including the major factors described below:
Industry Compensation Standards, Salary History, Performance in Position, Tenure
of Employment.
The Committee believes that in order to attract and retain executive
officers of the highest quality the Company must provide a total package of
compensation that is competitive with other companies in the Company's segment
of the financial services industry. The Committee also reviews the salary
histories of current and prospective executive officers in making compensation
recommendations. In addition, the Committee reviews information about the
performance of executive officers. In formulating its compensation policies the
Committee generally places less weight on the qualitative elements of executive
officer performance, and more weight on the economic indices of the officer's
performance measured by the financial performance of the aspect of the Company's
business for which the officer is primarily responsible. The Committee believes
that an officer's employment tenure is entitled to some weight in assessing
appropriate levels of compensation.
Company Performance-General
The Committee believes that in the Company's case in the formulation of
executive officer compensation policy the Committee should not accord
significant weight to the market performance of the Company's common stock. The
Committee notes that the price at which the Company's common stock trades often
bears little relationship to the underlying fundamentals of the Company. Because
of the ownership structure (only approximately 12% of the Company's common stock
is held by the public) and lack of coverage by analysts, there is very little
trading activity in the common stock of the Company. During 2002, aggregate
market transactions in the Company's common stock (excluding shares purchased in
the market by the Company) equaled approximately 2.7% of the common stock
outstanding. As a result of this low turnover, the performance of the common
stock has not reliably reflected the financial results or prospects for the
Company; instead, it generally reflects market forces that result in volatile
stock performance because of the lack of market liquidity. Thus, in the
Committee's view, the investment performance of the Company's common stock has
not offered the Committee reliable guidance in formulating executive officer
compensation policy and in setting appropriate compensation levels for the
Company's executive officers. The Committee notes that the Company's book value
per share totaled $11.05 at the end of 2002, which has not been adequately
reflected in the price of the stock. On December 6, 2002, the Company announced
that Mr. Sosnoff has proposed acquiring the 17% of the Company Common Stock he
does not own at a cash price of $12.50 per share, subject to adjustment (See
Item 3 - "Legal Proceedings" herein).
23
Financial Performance
The Committee has developed a number of financial performance criteria
in formulating its executive compensation policy and a number of specific
criteria assessing the appropriateness of specific executive officer
compensation.
In evaluating the performance of the executive officers of the Company
as a group generally, and in reference to 2002 compensation, the Committee has
reviewed the efficiency and productivity of the Company, and the Company's
employees managed by the executive officers as measured by the following
financial performance criteria: (1) Operating revenues, pre-tax operating income
and pre-tax operating income per employee, (2) pre-tax operating income yield on
assets under management, (3) pre-tax operating margin, (4) investment
performance of managed assets, including the Company's proprietary accounts, and
(5) other financial criteria.
In reviewing the compensation of specific executive officer positions,
the Committee places more weight on criteria relevant to the responsibilities of
that position. Thus, relatively more weight is attributed to revenue criteria in
evaluating the performance of executives engaged primarily in marketing and
investment management and related support activities and relatively more weight
is attributed to income criteria in fixing the compensation of personnel engaged
in cost management and related support activities.
2002 Compensation and the Management Incentive Plan
After posting increases in 2000, operating revenues, operating income,
operating margin and operating income per employee all decreased in 2002 and
2001, reflecting the difficult market environment and a decrease in assets under
management in 2002 and 2001 from negative performance results.
As described below, the changes in 2002 overall compensation as
compared with 2001 and 2000 for executive officers, with the exception of Mr.
Staub who has a separate arrangement with the Company, are attributable to
Awards made under the Management Incentive Plan ("MIP"), as follows:
2002 2001 2000
---------- ---------- ----------
1. Operating Earnings Component $ 0 $ 0 $ 541,000
2. Investment Performance Component 0 0 2,216,000
3. Sabre Performance Component 0 64,022 2,215,394
---------- ---------- ----------
$ 0 $ 64,022 $4,972,394
========== ========== ==========
The MIP is designed to reflect the financial performance criteria which
the Company believes should be applied in determining executive officer
compensation. One component (the "Operating Earnings Component") is based on
pre-tax operating earnings before non-cash charges, which the Committee believes
is an appropriate measure of the performance of executive personnel who function
in the revenue producing and in the cost control areas of the Company. Messrs.
Sosnoff and Steinberg participate in the Operating Earnings Component of the
Award Bonus Pool at 40% each. The remaining portion is not currently allocated.
The MIP is administered by a Sub-Committee of the Compensation Committee, which
is composed entirely of non-employee directors. The Committee believes that the
Operating Earnings Component of the MIP provides a stimulus to a continuing high
level of commitment to further improvement in the financial performance of the
Company. The Committee notes that in the Operating Earnings Component (a) no
awards are payable unless there is an increase in adjusted operating earnings
(as defined in the MIP) over the 1998 base level of adjusted operated earnings,
(b) the annual Award Bonus Pool cannot exceed 50% of incremental adjusted
operating earnings above the threshold, and (c) aggregate annual bonuses under
the Operating Earnings Component of the MIP are capped at 10% of earnings per
share in any one year. The Sub-Committee believes that these limitations strike
an appropriate balance by fulfilling the need to continue to motivate executive
personnel while not unduly impacting the financial results of the Company. No
Operating Earnings Award was made under the MIP in 2002 and 2001, compared with
$541,000 in 2000.
24
The Sub-Committee amended the MIP in 1999 to create an Investment
Performance Component of the MIP to provide incentive compensation to Mr.
Sosnoff in an amount equal to 20% of each year's performance of the Company's
proprietary accounts in excess of an identified benchmark. Under the amendment,
no bonus is paid if such performance is negative, even if it exceeded such
benchmark. The computation is made annually, based on each calendar year's
performance results, and is subject to a separate and independent limitation
that it not exceed 10% of earnings per share in any one year. No award was made
to Mr. Sosnoff in 2002 and 2001 related to this component of the MIP, compared
with $2,216,000 made in 2000.
In 2000, the Sub-Committee amended the MIP to provide annual incentive
compensation to the Company's President based upon the investment performance of
Sabre Partners, L.P., an investment partnership which he manages on behalf of a
Company subsidiary, equal to (i) 50% of the pre-tax operating income (revenues
less direct expenses) that the Company receives from that partnership (the
"Sabre Performance Bonus") and (ii) 20% of the outperformance of the Company's
investment in such partnership as compared to the S&P 500 Index (the
"Outperformance Bonus"), provided, that the Outperformance Bonus is payable if,
and only to the extent that, the performance of the Company's investment in such
partnership is positive, and the closing net asset value of any measurement
period for the computation of the Outperformance Bonus exceeds the highest level
of net assets previously achieved. These computations are made annually, based
on each calendar year's results, and the Outperformance Bonus is subject to a
separate and independent limitation that it not exceed 10% of earnings per share
in any one year. Mr. Steinberg was awarded $64,022 for 2001 related to this
Component of the MIP, compared with $2,215,394 for 2000 and none in 2002.
The MIP does not preclude the Board of Directors of the Company, upon
approval of the Sub-Committee, from making discretionary bonus payments to
participants in the MIP in addition to the amounts determined under the Plan.
The 2002 Compensation of Mr. Sosnoff
Mr. Sosnoff has not participated in this part of the Committee's review
or Report, or in its description of the basis for his compensation generally.
The Committee notes that there are certain qualitative factors in the
analysis of Mr. Sosnoff's compensation generally and in 2002 that, in its view,
should be taken into account in establishing appropriate bases for such
compensation. Mr. Sosnoff is the founder of the Company, which was founded in
1986 to acquire its operating subsidiaries and make a public offering of its
Common Stock. Mr. Sosnoff is the founder of such subsidiaries and is the
Company's principal stockholder. The Company bears his name. He also is a widely
known and respected member of the financial community and has written regularly
in the financial press and is interviewed regularly by the media. The Committee
believes his reputation has enhanced the stature of the Company and has had and
will continue to have a salutary affect on its marketing activities.
In conjunction with the Company's other executive officers, Mr.
Sosnoff's compensation is evaluated under the compensation policies generally
applicable to executive officers, including growth in the Company's book value
per share, and the financial performance criteria considered relevant by the
Committee. Under the Operating Earnings Component of the MIP, Mr. Sosnoff was
awarded $ 0 for 2002 and 2001, compared with $189,350 for 2000.
It is also the policy of the Committee to review Mr. Sosnoff's
compensation in relation to the performance of the Company's client accounts for
which he has primary responsibility in setting investment policy and the
performance of the Company's own proprietary accounts. The Committee notes that
investment performance in client accounts improved markedly in the four years
ended December 31, 2002 (each of the four years generated client performance
returns in excess of relevant benchmarks), exceeding all relevant benchmarks for
the Company's
25
composite equity and balanced products. However, Mr. Sosnoff did not earn an
Investment Performance bonus for 2002 and 2001 under the Investment Performance
Component of the MIP because the performance of the Company's proprietary
accounts in 2002 and 2001 was negative. In 2000, he earned an Investment
Performance Bonus of $2,216,000 based upon the performance of the Company's
proprietary accounts in 2000, which achieved net investment performance totaling
9.2% vs. the benchmark's return of -9.1%. In the Sub-Committee's view, Mr.
Sosnoff's achievement in significantly increasing the Company's proprietary
accounts' net assets was appropriately reflected in Mr. Sosnoff's increased
compensation in that year.
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Audit Committee of the Board of Directors of the Company serves as
the representative of the Board for general oversight of the Company's financial
accounting and reporting process, system of internal control, audit process and
process for monitoring compliance with laws and regulations. The Company's
management has primary responsibility for preparing the Company's financial
statements and the Company's financial reporting process. The Company's
independent accountants are responsible for expressing an opinion on the
conformity of the Company's audited financial statements to generally accepted
accounting principles.
In this context, the Audit Committee hereby reports as follows:
1. The Audit Committee has reviewed and discussed the audited financial
statements with the Company's independent accountants.
2. The Audit Committee has discussed with the independent accountants
the matters required to be discussed by SAS 61 (Codification of
Statements on Auditing Standard, AU 380).
3. The Audit Committee has received the written disclosures and the
letter from the independent accountants required by Independence
Standards Board Standard No. 1 (Independence Standards Board
Standards No. 1, Independence Discussions with Audit Committees) and
has discussed with the independent accountants the independent
accountants' independence.
4. Based on the review and discussion referred to in paragraphs (1)
through (3) above, the Audit Committee has recommended to the Board
of Directors of the Company, and the Board has approved, that the
audited financial statements be included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2002, for
filing with the Securities and Exchange Commission.
Each of the members of the Audit Committee is independent as defined
under the Listing Standards of the New York Stock Exchange.
The undersigned members of the Audit Committee have submitted this
Report to the Board of Directors.
Jay S. Goldsmith
Ronald H. Menaker
Thurston Twigg-Smith
Dated: March 18, 2003
26
COMPARATIVE STOCK PERFORMANCE
The following line graph compares the cumulative total shareholder
return on the Company's common stock with the cumulative total return of the
Russell 2000 Index(1) and the Russell 2000/Financial Services Index(2) over the
five year period ended December 31, 2002 (assuming the investment in the
Company's common stock and such indices of $100 on December 31, 1997, and the
reinvestment of all dividends):
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL STOCKHOLDER RETURN AMONG THE COMPANY,
RUSSELL 2000 INDEX, AND RUSSELL 2000/FINANCIAL SERVICES INDEX
[LINE CHART]
Russell 2000/
YEAR ENDED Russell 2000 Financial
DECEMBER 31 Index Company Services Index
1997 100 100 100
1998 97 69 93
1999 118 72 87
2000 115 90 106
2001 117 86 122
2002 93 101 125
RUSSELL 2000/
COMPANY RUSSELL 2000 FINANCIAL SERVICES
------- ------------ ------------------
Annualized rates of return:
5 years ended 12/31/02 .2% -1.4% 4.5%
(1) The Russell 2000 Index is published by the Frank Russell Company and is
widely recognized as a measure of the performance of small market
capitalization stocks like the Company's common stock.
(2) The Russell 2000/Financial Services Index is an index of the performance of
financial services companies within the Russell 2000 Index.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth information as of December 31, 2002 as
to the beneficial ownership of Company common stock by (1) each person known by
the Company to own 5% or more of the common stock, (2) each director and nominee
for director of the Company, (3) the Company's Chief Executive Officer, (4) each
of the Company's other four most highly compensated executive officers for
fiscal 2002, and (5) the directors and executive officers of the Company as a
group. The persons named in the table have sole voting and investment power with
27
respect to all shares of common stock owned by them and use the Company's
address as their business address, unless otherwise noted.
BENEFICIAL OWNERS SHARES BENEFICIALLY OWNED PERCENT OF CLASS (8)
- ----------------- ------------------------- --------------------
Martin T. Sosnoff 7,000,000 (1) 80.8%
Craig B. Steinberg 642,008 (2) 7.4%
William M. Knobler 1,100 (3) (9)
James D. Staub 100,000 (4) 1.2%
Ronald H. Menaker (5) 2,000 (9)
Thurston Twigg-Smith(6) 1,000 (9)
All executive officers and directors
as a Group (9 persons) 7,746,108 (7) 89.4%
- -----------
(1) includes 84,000 shares owned by a private charitable foundation that Mr.
Sosnoff controls.
(2) includes 542,008 shares issued under the Company's LTIP and 100,000 shares
issuable upon exercise of currently exercisable options issued under the
Company's Stock Option Plan ("SOP") at an exercise price of $9.50 per
share.
(3) includes 600 shares held in his Individual Retirement Account, 100 shares
held by his wife, 200 shares held by her Individual Retirement Account, and
200 shares held by a private charitable foundation controlled by Mr.
Knobler.
(4) includes 50,000 shares issuable upon exercise of currently exercisable
options issued under the Company's SOP at an exercise price of $6.13 per
share and 50,000 shares issuable upon exercise of currently exercisable
options issued under the Company's LTIP at an exercise price of $9.00 per
share.
(5) Mr. Menaker's address is 700 Smoke Hollow Trail, Franklin Lakes, New
Jersey, 07417.
(6) Mr. Twigg-Smith's business address is 4224 Waialae Avenue #389, Honolulu,
Hawaii, 96816.
(7) includes shares owned by executive officers of subsidiaries who have been
designated as executive officers of the Company. Includes 200,000 shares
subject to currently exercisable options under the SOP and LTIP.
(8) Calculated on the basis of 8,464,715 shares outstanding at December 31,
2002 plus 200,000 shares subject to currently exercisable options, or a
total of 8,664,715 shares.
(9) less than .1% of shares outstanding.
28
Securities Authorized for Issuance under Equity Compensation Plans
Set forth below in tabular form as of the fiscal year ended December 31, 2002
are the aggregate number of shares of common stock subject to issuance upon the
exercising of outstanding options under the Company's SOP and LTIP , the
weighted average exercise price of options outstanding under such plans and the
number of shares of common stock remaining available for future issuance for
such plans:
Equity Compensation Plan Information
- ----------------------- --------------------------------- ---------------------------------- ---------------------------------
Plan Category Number of Securities to be Weighted average exercise price Number of securities remaining
issued upon exercise of of outstanding options, warrants available for future issuance
outstanding options, warrants and rights under equity compensation plans
and rights (excluding securities reflected
in column (a))
(a) (b) (c)
- ----------------------- --------------------------------- ---------------------------------- ---------------------------------
Equity Compensation 200,000 $8.53 105,000
plans approved by
security holders
- ----------------------- --------------------------------- ---------------------------------- ---------------------------------
Equity compensation
plans not approved by
security holders -- -- --
- ----------------------- --------------------------------- ---------------------------------- ---------------------------------
Total 200,000 $8.53 105,000
- ----------------------- --------------------------------- ---------------------------------- ---------------------------------
The plans were approved by stockholders. No shares of common stock are
available for issuance under the Stock Option Plan.
Item 13. Certain Relationships and Related Transactions.
AGREEMENTS AND TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
Upon termination of his employment Mr. Steinberg is subject to
non-competition and non-solicitation restrictions under his employment agreement
with the Company.
Mr. Staub and certain other members of the marketing and sales staffs
of the Company and its subsidiaries receive additional compensation based on
varying percentages of the revenues attributable to Company clients they have
solicited. Such compensation under certain conditions may continue after
termination of employment.
In May 1985, Atalanta/Sosnoff Management Corporation ("Management")
entered into an employment agreement with Mr. William M. Knobler, Senior Vice
President, to provide investment related services to both Management and
Atalanta/Sosnoff Capital Corporation (Delaware), the Company's operating
subsidiaries. Under the terms of the agreement, Mr. Knobler was paid the net
profits relating to the client accounts he managed at Management (the "Net
Profits"), which represents the advisory fees and commissions for such 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
Mr. Knobler for the period ending December 31, 2000, under which Mr. Knobler
relinquished the net profits from the investment management and brokerage
services provided to the accounts he manages to Management. Pursuant to this
agreement, Management has made payments to Mr. Knobler in three installments in
January 1999, 2000 and 2001, based upon a multiple of annualized revenues from
such accounts. In addition, Management and Mr. Knobler agreed to change the
split of Net
29
Profits paid to Mr. Knobler 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.
Mr. Knobler has remained an employee of the Company, and in 2001 he earned a
salary based on a percentage of the commissions and advisory fee revenues earned
from the accounts he manages. Additionally, the Company paid Mr. Knobler
$558,630 in January, 2001 representing the third and final installment under
this agreement.
Options issued under the SOP and LTIP, and restricted stock award
shares granted under the LTIP provide for accelerated vesting in the event of a
change in control of the Company, as defined. Certain of the Company's
agreements with employees provide for additional payments to them, or the right
for such employee to terminate his employment and continue to receive payments
from the Company in the event of a change in control, as defined.
The directors, officers and employees of the Company or its operating
subsidiaries are ordinarily required to execute personal securities transactions
through the Company's broker-dealer subsidiary and are allowed a discount from
the commission rates offered to unaffiliated customers. In addition, the Company
provides personal investment management and advisory services to certain
officers of the Company and its operating subsidiaries and their associates
without charge.
Item 14. Controls and Procedures
The Chief Executive Officer and Principal Financial Officer of the
Corporation, based on their evaluation of the Disclosure Controls and Procedures
in place on March 16, 2003, have concluded that they are effective to provide
reasonable assurance that the Corporation is able to collect, process and
disclose the information required by this Annual Report and there were not any
significant changes in the Corporation's internal Controls or in other factors
which could significantly effect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses in such controls and procedures. The
Corporation has initiated a program of regular review of its disclosure controls
and procedures by a committee composed of its General Counsel and Chief
Financial Officer.
30
PART IV
Item 15. 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 15.
2. FINANCIAL STATEMENT SCHEDULES
See Index to Consolidated Financial Statements and Consolidated Financial
Statement Schedules on Page F-1 of Item 15.
(b) 1. Current Report on Form 8-K filed March 28, 2002 and Amendment thereto
filed April 10, 2002 relating to a change in certifying accountant.
2. Current Report on Form 8-K filed December 11, 2002 relating to
Mr. Sosnoff's proposal to acquire the Common Stock of the Company he does
not own.
31
INDEX
Page(s)
-------
FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION:
Report of Independent Public Accountants F-2 to F-3
Consolidated Statements of Financial Condition - December 31, 2002 and 2001 F-4
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years
Ended December 31, 2002, 2001 and 2000 F-5
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 2002, 2001 and 2000 F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8 to F-17
SUPPLEMENTARY FINANCIAL INFORMATION:
Selected Quarterly Financial Data (Unaudited) F-18
Financial statement schedules not included in this report have been omitted
because they are not applicable or the required information is given in the
consolidated financial statements or the notes thereto.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Atalanta/Sosnoff Capital Corporation:
We have audited the accompanying consolidated statement of financial condition
of Atalanta/Sosnoff Capital Corporation (a Delaware corporation) and
subsidiaries as of December 31, 2002, and the related consolidated statements of
operations and comprehensive income (loss), changes in shareholders' equity and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Atalanta/Sosnoff
Capital Corporation and subsidiaries as of December 31, 2002 and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ Rothstein, Kass & Co., P.C.
Roseland, New Jersey
February 19, 2003
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Atalanta/Sosnoff Capital Corporation and Subsidiaries:
We have audited the accompanying consolidated statements of financial condition
of Atalanta/Sosnoff Capital Corporation (a Delaware corporation) and
subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of income and comprehensive income (loss), changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Atalanta/Sosnoff Capital
Corporation and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Arthur Andersen LLP
New York, New York
March 15, 2002
THE FOREGOING REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP (SEE NOTE 1 TO
THE CONSOLIDATED FINANCIAL STATEMENTS)
F-3
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2002 AND 2001
ASSETS 2002 2001
------ ------------ ------------
ASSETS:
Cash and cash equivalents $ 991,107 $ 1,940,653
Accounts receivable 2,169,336 3,071,180
Due from brokers 8,719,524 748,263
Investments, at market 74,262,944 73,583,683
Investments in limited partnerships 6,745,957 24,320,671
Prepaid and refundable income taxes 1,674,133 --
Fixed assets, net of accumulated depreciation and amortization of $2,127,388
and $1,697,800, respectively 858,475 1,272,504
Exchange memberships, at cost (market value $156,000 and $2,750,000,
respectively) 192,000 402,000
Other assets 3,012,502 4,155,943
------------ ------------
Total assets $ 98,625,978 $109,494,897
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Securities sold but not yet purchased, at market $ 3,637,500 $ 203,000
Income taxes payable 4,951,233
Deferred income taxes payable 509,019
Accrued compensation payable 471,821 450,540
Accounts payable and other liabilities 461,518 471,761
Due to broker -- 1,015,533
------------ ------------
Total liabilities 5,079,858 7,092,067
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
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; 84,707 88,857
8,470,715 and 8,885,707 shares issued at December 31, 2002 and 2001,
respectively
Additional paid-in capital 12,753,606 17,336,028
Retained earnings 81,562,707 83,716,965
Accumulated other comprehensive income (loss) - unrealized gains (losses)
from investments, net of deferred tax liabilities (benefit) of ($516,907)
and $846,277, at December 31, 2002 and 2001, respectively (793,400) 1,260,980
Treasury stock, at cost, 6,000 and nil shares at December 31, 2002 and 2001,
respectively (61,500) --
------------ ------------
Total shareholders' equity 93,546,120 102,402,830
------------ ------------
Total liabilities and shareholders' equity $ 98,625,978 $109,494,897
============ ============
The accompanying notes are an integral part of these statements
F-4
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE
YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
2002 2001 2000
------------ ------------ ------------
REVENUES:
Advisory fees $ 12,791,816 $ 13,786,068 $ 19,373,430
Commissions and other operating revenues 1,273,414 1,671,942 1,805,238
Realized and unrealized gains (losses) from investments, net (9,725,122) (1,415,127) 18,175,984
Interest and dividend income, net 1,350,682 1,047,124 1,233,640
------------ ------------ ------------
Total revenues 5,690,790 15,090,007 40,588,292
------------ ------------ ------------
COSTS AND EXPENSES:
Employees' compensation and benefits 8,207,433 10,299,598 16,016,813
Clearing and execution costs 539,538 726,728 919,083
Selling expenses 511,890 432,085 601,563
General and administrative expenses 3,721,383 3,168,342 3,096,993
------------ ------------ ------------
Total costs and expenses 12,980,244 14,626,753 20,634,452
------------ ------------ ------------
Income (loss) before provision for income taxes
(benefit) (7,289,454) 463,254 19,953,840
PROVISION FOR INCOME TAXES (BENEFIT) (5,135,196) 180,000 8,451,000
------------ ------------ ------------
Net income (loss) $ (2,154,258) $ 283,254 $ 11,502,840
============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE - BASIC $ (0.25) $ 0.03 $ 1.27
============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE - DILUTED $ (0.25) $ 0.03 $ 1.27
============ ============ ============
NET INCOME (LOSS), as presented above $ (2,154,258) $ 283,254 $ 11,502,840
COMPREHENSIVE INCOME (LOSS):
Net unrealized losses from investments,
net of deferred income tax credit of ($1,370,400),
($2,343,744) and ($3,608,815), respectively (2,054,380) (3,516,840) (5,413,222)
------------ ------------ ------------
Comprehensive income (loss) $ (4,208,638) $ (3,233,586) $ 6,089,618
============ ============ ============
The accompanying notes are an integral part of these statements.
F-5
ATALANTA/SOSNOFF CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
Accumulated
Other
Comprehensive
Income (Loss)
-
Unrealized
Gains (Losses)
Additional From
Common Paid-in Retained Investments, Unearned Treasury
Stock Capital Earnings Net Compensation Stock Total
-------- ------------ ------------ ------------ ------------ ------------ --------------
BALANCE, January 1, 2000 $90,751 $ 19,455,259 $ 75,976,793 $ 10,191,042 $(3,938,207) $ -- $ 101,775,638
Purchases of treasury stock (686,262) (686,262)
Amortization of unearn