<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------
Commission File Number 0-023183
CONNING CORPORATION
(Exact name of registrant as specified in its charter)
MISSOURI 43-1719355
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
700 Market Street
St. Louis, Missouri 63101
(Address of principal executive offices)
(314) 444-0498
(registrant's telephone number, including area code)
--------------------
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
----- -----
Common stock outstanding ($.01 par value) as of April 30, 1998: 13,250,000
shares
<PAGE> 2
CONNING CORPORATION AND SUBSIDIARIES
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Item Page
- ---- ----
<S> <C>
PART I - FINANCIAL INFORMATION
------------------------------
1 Financial Statements 1
Condensed Consolidated Balance Sheets (Unaudited)
March 31, 1998 and December 31, 1997 1
Condensed Consolidated Statements of Income (Unaudited)
Three months ended March 31, 1998 and March 31, 1997 2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31, 1998 and March 31, 1997 3
Notes to Condensed Consolidated Financial
Statements (Unaudited) 4-5
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 6-8
PART II - OTHER INFORMATION
---------------------------
1 Legal Proceedings 9
6 Exhibits and Reports on Form 8-K 9
Signatures 10
Index to Exhibits 11
</TABLE>
<PAGE> 3
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
CONNING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(Unaudited)
<CAPTION>
ASSETS 1998 1997
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 51,554,688 $43,085,406
Short-term investments 12,847,000 16,337,362
Accounts receivable, net 8,885,042 10,784,236
Marketable equity securities 673,843 600,662
Income taxes receivable - 1,355,973
Prepaid expenses and other current assets 312,799 358,669
------------ -----------
Total current assets 74,273,372 72,522,308
Non-marketable investments at value 2,448,697 2,349,678
Equipment and leasehold improvements, at cost, less
accumulated depreciation of $1,314,772 and $1,127,320 1,465,449 1,525,436
Deferred income taxes 1,815,268 1,736,413
Goodwill 17,559,559 17,812,822
Other assets 3,456,112 3,910,696
------------ -----------
Total assets $101,018,457 $99,857,353
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Compensation payable $ 3,151,268 $11,149,000
Deferred revenue 4,312,050 3,201,336
Due to affiliates 3,262,131 1,379,188
Income taxes payable 889,522 -
Accounts payable and other accrued expenses 9,644,514 6,566,742
------------ -----------
Total current liabilities 21,259,485 22,296,266
Accrued rent liability 3,311,413 3,375,465
Other payables 440,000 480,000
------------ -----------
Total liabilities 25,010,898 26,151,731
------------ -----------
Common stock, $.01 par value: 50,000,000 shares
authorized; 13,250,000 shares issued and outstanding 132,500 132,500
Additional paid-in capital 73,126,002 73,126,002
Retained earnings 2,749,057 447,120
------------ -----------
Total shareholders' equity 76,007,559 73,705,622
------------ -----------
Total liabilities and shareholders' equity $101,018,457 $99,857,353
============ ===========
See accompanying notes to interim condensed consolidated financial statements.
</TABLE>
1
<PAGE> 4
<TABLE>
CONNING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Asset management and related fees $14,685,364 $12,155,113
Research services 4,167,687 2,953,524
Other income 827,402 179,436
----------- -----------
Total revenues 19,680,453 15,288,073
----------- -----------
Expenses:
Employee compensation and benefits 9,631,723 7,792,533
Occupancy and equipment costs 1,145,232 818,054
Marketing and production costs 1,558,151 1,284,032
Professional services 551,588 379,385
Amortization of goodwill and other 707,847 744,076
Other operating expenses 1,067,710 844,390
----------- -----------
Total expenses 14,662,251 11,862,490
----------- -----------
Operating income 5,018,202 3,425,583
Interest expense 65,975 93,295
----------- -----------
Income before provision for income taxes 4,952,227 3,332,288
Provision for income taxes 2,120,290 1,454,938
----------- -----------
Net income $ 2,831,937 $ 1,877,350
=========== ===========
Preferred stock dividends - 254,780
----------- -----------
Net earnings available to common shareholders $ 2,831,937 $ 1,622,570
=========== ===========
Weighted average diluted shares outstanding 14,174,574 11,087,631
Earnings per share:
Basic $ 0.21 $ 0.24
Diluted $ 0.20 $ 0.17
See accompanying notes to interim condensed consolidated financial statements.
</TABLE>
2
<PAGE> 5
<TABLE>
CONNING CORPORATION & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Operating Activities:
Net income $ 2,831,937 $ 1,877,350
Adjustment for items not affecting cash:
Depreciation 187,452 125,307
Amortization of goodwill and other 707,847 744,095
Deferred income tax provision (78,855) 863,975
Net unrealized appreciation on non-marketable
securities (193,952) -
Net change in securities held for market making (73,181) (204,375)
Accretion of discounts on short-term investments (105,405) (44,933)
Changes in:
Accounts receivable 1,899,194 (1,352,384)
Prepaid expenses and other assets 45,870 23,831
Accounts payable and other accrued expenses 3,037,772 1,757,439
Income taxes receivable 2,245,495 620,008
Due to affiliates 1,882,943 (437,227)
Deferred revenue 1,110,714 (873,526)
Accrued rent liability (64,052) (70,981)
Compensation payable (7,997,732) (6,337,609)
------------ -----------
Net cash provided by (used in) operating activities 5,436,047 (3,309,030)
------------ -----------
Investing activities:
Purchases of non-marketable partnership investments - (80,808)
Distribution from non-marketable partnership investments 94,933 -
Purchases of equipment and other assets, net (127,465) (391,398)
Purchases of short-term investments (13,592,148) (9,974,960)
Maturities of short-term investments 17,187,915 14,900,000
------------ -----------
Net cash provided by investing activities 3,563,235 4,452,834
------------ -----------
Financing activities:
Repayment of long term debt - (2,000,000)
Issuance of Series B preferred stock - 79,950
Dividends on common stock (530,000) -
Dividends on preferred stock - (254,780)
------------ -----------
Net cash used in financing activities (530,000) (2,174,830)
------------ -----------
Net change in cash and cash equivalents 8,469,282 (1,031,026)
Cash and cash equivalents, beginning of period 43,085,406 9,816,568
------------ -----------
Cash and cash equivalents, end of period $ 51,554,688 $ 8,785,542
============ ===========
See accompanying notes to interim condensed consolidated financial statements.
</TABLE>
3
<PAGE> 6
CONNING CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited, interim condensed consolidated financial
statements of Conning Corporation and subsidiaries (Conning) have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
the financial information reflects all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of financial position
of the Company and its subsidiaries as of March 31, 1998 and their results of
operations and cash flows for the three-month periods ended March 31, 1998
and 1997. Operating results for the three months ended March 31, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. These unaudited financial statements should be
read in conjunction with the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
Note 2 - Dividend
During February, 1998 the Company declared a $0.04 per share quarterly cash
dividend on the Company's common stock, payable March 20, 1998 to
shareholders of record on March 5, 1998.
Note 3 - Mortgage Servicing Operations
During January, 1998, the Company assumed certain mortgage servicing
functions for its clients which include acting as an agent in the collection
and processing of principal and interest loan payments and escrow items. As
of March 31, 1998, the Company maintained approximately $8.3 million in
escrow balances off-balance sheet as the amounts were not considered to be
owned or operated by the Company.
4
<PAGE> 7
Note 4 - Earnings Per Share
The following table represents a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations:
For the three-month period ended March 31, 1998:
<TABLE>
<CAPTION>
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net income $2,831,937
Less: preferred stock dividends -
----------
Basic EPS:
Net earnings available to common
shareholders 2,831,937 13,250,000 $0.21
---------- =====
Effect of dilutive securities:
Conversion of preferred stock -
Stock options 924,574
----------
Diluted EPS:
Net earnings available to common shareholders
and assumed full conversions $2,831,937 14,174,574 $0.20
========== ========== =====
<CAPTION>
For the three-month period ended March 31, 1997:
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net income $1,877,350
Less: preferred stock dividends (254,780)
----------
Basic EPS:
Net earnings available to common shareholders 1,622,570 6,710,000 $0.24
=====
Effect of dilutive securities:
Preferred stock dividends 254,780
----------
Conversion of preferred stock 3,662,500
Stock options 715,131
----------
Diluted EPS:
Net earnings available to common shareholders
and assumed full conversions $1,877,350 11,087,631 $0.17
========== ========== =====
</TABLE>
5
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Overview
- --------
Conning Corporation revenues consist of asset management and related fees,
research services, and other income.
The Company's asset management and related revenues are derived from three
sources: asset management fees, private equity fund management fees, and fees
related to the Company's mortgage and real estate activities. Asset
management fees primarily reflect fees for discretionary asset management
services provided to insurance company clients, including GenAmerica
Corporation (GenAmerica), its subsidiaries and its affiliates. Asset
management fees are generally a function of the overall fee rate charged to
each account and the level of assets under management. A portion of these
revenues is generated when the Company provides investment advisory services
as well as when the Company provides investment accounting and reporting
services on a stand-alone basis. Assets under management can be affected by
the addition of new client accounts or client contributions to existing
accounts, withdrawals of assets from or terminations of client accounts and
investment performance which may depend on general market conditions.
The Company's private equity fund management fees represent annual management
fees based on a percentage of committed capital and a participation in
specified net gains of the funds. The Company's commercial mortgage fees
primarily reflect fees associated with loan originations, which approximate
.75-1.0% of the loan balance, as well as fees associated with ongoing servicing
and management fees with respect to loans originated in portfolios managed by
the Company. In addition to loans for GenAmerica subsidiaries and affiliates,
the Company originates mortgage loans for securitized offerings by investment
banking firms from time to time.
Conning's assets under discretionary management were $27.5 billion as of
March 31, 1998, an increase of $1.5 billion from $26.0 billion under
management at December 31, 1997. The net increase in assets during the first
quarter is due to an increase in assets from existing clients and net
additions of new clients since year-end. Total assets serviced increased
$5.4 billion since year-end to $85.5 billion at March 31, 1998. New client
activity in investment advisory assets serviced was the key cause of this
increase, accompanied by stable growth in the Company's core assets under
discretionary management.
Results of Operations
- ---------------------
Statement of income for the three months ended March 31, 1998 compared to the
three months ended March 31, 1997
Total revenues increased 29% to $19.7 million for the first three months of
1998 versus $15.3 million for the same period in 1997. This increase was
primarily attributable to the increase in asset management and related fees
resulting from the growth in assets managed for existing clients and net
additions of new clients. Research service revenues increased 40% to
6
<PAGE> 9
$4.2 million for the three months ended March 31, 1998 from $3.0 million for
the same period in 1997 as a result of continued strong core research fees.
Other income for the first three months of 1998 increased over $645,000,
primarily due to investment income earned on the proceeds from the Company's
initial public offering of common stock.
Total expenses increased 24% to $14.7 million for the first three months of
1998 from $11.9 million for the same period in 1997, due to increased
employee compensation and benefits expenses, and increase in occupancy,
marketing and certain other expenses associated with the growth in revenues.
Total compensation and benefits increased 24% to $9.6 million from $7.8
million for the first three months of 1998 and 1997, respectively, primarily
due to additional staffing in line with the Company's growth and additional
incentive compensation accruals as a result of growth in operating income.
The Company's incentive compensation practice continues to be based on the
level of growth in the Company's operating profits.
Interest expense decreased significantly during the first three months of
1998 to $66,000 from $93,000 for the same period in 1997 due to a reduction
in the outstanding principal amount of long-term debt.
Provision for income taxes increased by 46% from $1.5 million for the first
three months of 1998 to $2.1 million for the same period in 1997 as a result
of higher taxable income and the same effective tax rate for both periods.
As a result of all of the above, net income increased 51% to $2.8 million
during the first three months of 1998 compared to $1.9 million for the same
period in 1997.
Liquidity and Capital Resources
- -------------------------------
The Company's business is not capital-intensive. Working capital requirements
for the Company have historically been provided almost exclusively by
operating cash flow. Management believes that the Company's existing
capital, together with operating cash flow, will provide the Company with
sufficient resources to meet its present and foreseeable future cash needs.
In December, 1997, the Company received approximately $34.5 million in net
proceeds from its initial public offering of common stock that will be used
for general corporate purposes, including potential strategic alliances and
acquisitions. As of March 31, 1998, the Company has continued to invest the
net proceeds from the offering in short-term, investment-grade,
interest-bearing securities.
The Company generated approximately $5.4 million in cash flow from operations
during the three months ended March 31, 1998. The Company uses its cash flow
for existing operations, working capital, to pay dividends to shareholders,
and for general corporate purposes. The Company invests excess cash in
deposits with major financial institutions and short-term securities. The
Company had no outstanding debt as of March 31, 1998 or December 31,1997.
The Company's subsidiary, Conning & Company, is subject to the net capital
requirement imposed on registered broker-dealers under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). At March 31, 1998,
Conning & Company had net capital of approximately $7.2 million, which was
approximately $6.6 million in excess of the regulatory minimum.
7
<PAGE> 10
The Company has a revolving subordinated loan agreement with a commercial
bank for $2.0 million that, when utilized, qualifies as capital for purposes
of the Exchange Act's net capital rules. The agreement expires on July 7,
1998. The Company did not utilize the revolving agreement during the
three-months ended March 31, 1998.
The Company or a subsidiary acts as a general partner of certain private
equity funds and maintains a 1% general partner's capital interest in such
funds. The Company may also invest as a limited partner in future funds it
may organize. Interests in such private equity funds are generally illiquid.
Impact of Inflation
- -------------------
The Company does not believe that inflation has had a significant impact on
the Company's consolidated operations.
Cautionary Statement Regarding Forward-Looking Statements
- ---------------------------------------------------------
Certain statements contained in this filing are or may constitute
forward-looking statements, including, without limitation, statements
relating to the Company's financial position, plans to increase revenues,
competitive strengths, business objectives or strategies, insurance industry
trends and expectations regarding GenAmerica's assets or activities. Because
such statements are subject to risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking
statements or from historical results. The Company's business entails a
variety of additional risks, which are set forth in documents the Company has
filled or will file from time to time with the SEC. Investors are cautioned
not to place undue reliance on such statements, which speak only as of the date
hereof. The Company undertakes no obligation to release publicly any
revisions which may be made to any forward-looking statements to reflect
events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.
8
<PAGE> 11
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
On November 14, 1994, the Insurance Commissioner of the Commonwealth of
Pennsylvania, in its capacity as statutory liquidator of Rockwood Insurance
Company ("Rockwood"), initiated an action in the Commonwealth Court of
Pennsylvania against Conning & Company and certain of the officers of Conning
& Company styled Maleski v. Conning & Company, et al., No. 94-7507
(subsequently amended to Linda S. Kaiser v. Conning). The action arises out
of the Commissioner's previous retention of Conning & Company as placement
agent for the sale of one of Rockwood's subsidiaries. The complaint alleges
breach of fiduciary duty, breach of contract, professional negligence, bad
faith and conspiracy, and seeks compensatory damages for approximately $6.5
million and unspecified punitive damages, costs and interest. Conning &
Company is defending the action vigorously and the Company believes that
Conning & Company has meritorious defenses to all claims. Although the
matter is subject to uncertainty, the Company has entered into settlement
discussions and believes that the probable outcome should not have a material
adverse effect upon the Company.
On July 8, 1997, a consolidated amended class-action complaint was
filed against SS&C Technologies, Inc. ("SS&C") in the United States District
Court, District of Connecticut, styled Marc A. Feiner, M.D., et al. v. SS&C
Technologies, Inc., et al. (Civil Action No. 397CV00656(JBA) consolidated
with Civil Action No. 397CV01077). The complaint names SS&C, the directors of
SS&C at the time of SS&C's initial public offering (including John B.
Clinton, an officer of the Company), and lead underwriters Alex. Brown & Sons
Incorporated and Hambrecht & Quist as defendants. The complaint alleges,
among other things, there were material misstatements in the prospectus used
by SS&C in an initial public offering in May 1996 and seeks, among other
things, rescission and/or money damages, equitable relief and costs and
expenses. Conning & Company, a subsidiary of the Company, was a participant
of the underwriting syndicate in connection with SS&C's initial public
offering, and thus may share, to the extent of its participation in the
initial public offering, in any potential liability of the lead underwriters.
General American Life Insurance Company (a GenAmerica Subsidiary) and a private
equity fund of which a Conning & Company affiliate was a general partner were
selling shareholders in SS&C's initial public offering, and the lead
underwriters have demanded of the selling shareholders indemnity against any
losses, claims, damages or liabilities arising out of the action and
reimbursement for legal or other expenses incurred in connection with
investigating or defending the action. Although the matter is subject to
uncertainty as, among other things, the action is in the preliminary stages, the
Company believes that the probable outcome of the pending action should not have
a material adverse effect upon the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) See Index to Exhibits.
(b) No reports on Form 8-K were filed during the three months ended
March 31, 1998.
9
<PAGE> 12
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONNING CORPORATION
By: /s/ Leonard M. Rubenstein
-------------------------
Leonard M. Rubenstein
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Fred M. Schpero
-------------------
Fred M. Schpero
Senior Vice President and Chief
Financial Officer
10
<PAGE> 13
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
Exhibit
Number Description
- ------- -----------
<C> <S>
3.1 Restated Articles of Incorporation of the Company, as amended,
incorporated by reference to Exhibit 3.1 to Form 10-K (File No.
0-023183) for the fiscal year ended December 31, 1997 filed
March 23, 1998
3.2 Bylaws of the Company incorporated by reference to Exhibit 3.3 to
Registration Statement on Form S-1 (No. 333-35993) filed September
19, 1997
27.1 Financial Data Schedule
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated financial statements of the registrant and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 64,401,688
<SECURITIES> 673,843
<RECEIVABLES> 9,055,042
<ALLOWANCES> 170,000
<INVENTORY> 0
<CURRENT-ASSETS> 74,273,372
<PP&E> 2,780,221
<DEPRECIATION> 1,314,772
<TOTAL-ASSETS> 101,018,457
<CURRENT-LIABILITIES> 21,259,485
<BONDS> 0
<COMMON> 132,500
0
0
<OTHER-SE> 75,875,059
<TOTAL-LIABILITY-AND-EQUITY> 101,018,457
<SALES> 18,853,051
<TOTAL-REVENUES> 19,680,453
<CGS> 13,954,404
<TOTAL-COSTS> 14,662,251
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65,975
<INCOME-PRETAX> 4,952,227
<INCOME-TAX> 2,120,290
<INCOME-CONTINUING> 2,831,937
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,831,937
<EPS-PRIMARY> .21
<EPS-DILUTED> .20
</TABLE>
