SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
August 18, 1998
---------------
Conning Corporation
(Exact name of registrant as specified in its charter)
Missouri
(State or other jurisdiction of incorporation)
0-23183 43-1719355
(Commission File Number) (I.R.S. Employer Identification No.)
700 Market Street, St. Louis, Missouri, 63101
(Address of principal executive offices) (zip code)
(314) 444-0498
(Registrant's telephone number, including area code)
(Former name or former address, if changed since last report)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On August 18, 1998, the Registrant's indirect wholly owned subsidiary,
Conning Asset Management Company ("CAM"), completed the acquisition of
substantially all of the assets of Schroder Mortgage Associates, L.P. ("SMA")
from SMA pursuant to an Asset Purchase Agreement by and among CAM, SMA, Schroder
Real Estate Associates, L. P., Norman L. Peck, Mark Peskin, M. Leanne Lachman
and Gregory A. White (the "Purchase Agreement"). The assets acquired consisted
principally of contracts with investment advisory clients and other intangible
assets. SMA is engaged in the business of managing, originating and securitizing
commercial mortgage loans and commercial mortgage-backed securities on behalf of
institutional clients. The purchase price was approximately $21,000,000 in cash
(including acquisition expenses), with additional contingent consideration in
the amount of up to $4,000,000 in cash payable over the three year period after
the closing, based on meeting certain financial targets. The purchase price was
paid from CAM's available cash. The Registrant intends to continue to use the
assets acquired for generally the same purposes as such assets were used by SMA
prior to the acquisition. The purchase price was determined on the basis of
arms-length negotiation between CAM and SMA based on a variety of factors,
including, but not limited to, comparable transactions, historical and projected
operating results, and cash flow valuation models.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial statements of the business acquired.
2
<PAGE>
The following audited financial statements of Schroder Mortgage Associates,
L.P. are submitted herewith:
Page
Report of Independent Accountants 4
Balance Sheet at December 31, 1997 5
Statement of Operations for the Year ended December 31,
1997 6
Statement of Partnership Deficit for the Year ended
December 31, 1997 7
Statement of Cash Flows for the year ended December 31, 1997 8
Notes to Financial Statements 9
The following unaudited financial statements of Schroder
Mortgage Associates, L.P. are submitted herewith:
Condensed Balance Sheet at June 30, 1998 11
Condensed Statement of Operations for the Six Months Ended
June 30, 1998 12
Condensed Statement of Partnership Capital for the Six Months
Ended June 30, 1998 13
Condensed Statement of Cash Flows for the Six Months ended
June 30, 1998 14
Notes to Unaudited Condensed Financial Statements 15
(b) Pro Forma financial information.
Pro Forma Condensed Consolidated Balance Sheet as of June 30,
1998 (unaudited) 16
Pro Forma Condensed Consolidated Statement of Income for the
Year ended December 31, 1997 (unaudited) 17
Pro Forma Condensed Consolidated Statement of Income for the
Six Months ended June 30, 1998 (unaudited) 18
Notes to Pro Forma Condensed Consolidated Financial
Statements 19
(c) Exhibits.
2.1 Asset Purchase Agreement, dated July 1, 1998, by
and among Conning Asset Management Company,
Schroder Mortgage Associates, L. P., Schroder Real
Estate Associates, L. P., Norman L. Peck, Mark
Peskin, M. Leanne Lachman and Gregory A. White
(incorporated by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K dated July
1, 1998).
23.1 Consent of PricewaterhouseCoopers LLP
3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Schroder Mortgage Associates, L.P.:
We have audited the balance sheet of SCHRODER MORTGAGE ASSOCIATES, L.P. as of
December 31, 1997, and the related statements of operations, partnership deficit
and cash flows for the year then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 Schroder Mortgage Associates,
L.P. at December 31, 1997, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND L.L.P.
New York, New York
March 27, 1998
4
<PAGE>
(a) Financial statements of the business acquired.
SCHRODER MORTGAGE ASSOCIATES, L.P.
Balance Sheet
December 31, 1997
ASSETS:
Current Assets:
Cash and cash equivalents $ 19,405
Fees receivable 126,180
Prepaid expenses and other assets 3,898
--------
Total current assets 149,483
Fixed Assets, at cost:
Leasehold improvements 6,225
Less: Accumulated depreciation and amortization (4,088)
--------
Total assets $151,620
========
LIABILITIES and PARTNERSHIP DEFICIT:
Current Liabilities:
Accounts payable and accrued expenses $ 54,154
Accrued taxes payable 19,040
Due to parent 236,172
--------
Total liabilities 309,366
Partnership deficit (157,746)
--------
Total liabilities and partnership deficit $151,620
========
The accompanying notes are an integral part of the
financial statements.
5
<PAGE>
SCHRODER MORTGAGE ASSOCIATES, L.P.
Statement of Operations
For the year ended December 31, 1997
Income:
Fee income $1,679,813
Interest and other income 152,791
--------
1,832,604
--------
Operating expenses:
Salaries 529,750
Employee fringe benefits 128,630
Professional fees 25,485
Marketing expenses 110,465
Other employee expenses 23,561
Interest expense - parent 68,714
General expense 70,235
Office expense 3,883
Amortization 1,115
--------
961,838
--------
Income before income taxes 870,766
Provision for income taxes 77,040
--------
Net income $793,726
========
The accompanying notes are an integral part of the
financial statements.
6
<PAGE>
SCHRODER MORTGAGE ASSOCIATES, L.P.
Statement of Partnership Deficit
For the year ended December 31, 1997
Partnership deficit, beginning of year $(374,472)
Net income for the year 793,726
Distributions (577,000)
--------
Partnership deficit, end of year $(157,746)
========
The accompanying notes are an integral part of the
financial statements.
7
<PAGE>
SCHRODER MORTGAGE ASSOCIATES, L.P.
Statement of Cash Flows
For the year ended December 31, 1997
Cash flows from operating activities:
Net income $793,726
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 1,115
Increase in accounts receivable, net (59,849)
Decrease in prepaid expenses
and other assets 3,535
Increase in accounts payable, accrued expenses
and income taxes payable 29,529
--------
Net cash provided by operating activities 768,056
Cash flows from financing activities:
Decrease in due to parent (173,019)
Partnership distributions (577,000)
--------
Net cash used in financing activities (750,019)
--------
Net increase in cash and cash equivalents 18,037
Cash and cash equivalents, beginning of year 1,368
--------
Cash and cash equivalents, end of year $19,405
========
Supplemental disclosures:
Income taxes paid $67,500
The accompanying notes are an integral part of the
financial statements.
8
<PAGE>
SCHRODER MORTGAGE ASSOCIATES, L.P.
Notes to Financial Statements
1. Business and Organization:
In June 1992, Schroder Real Estate Associates, L.P. ("SREA") formed
Schroder Mortgage Associates, L.P., ("SMA" or the "Partnership"), a limited
partnership, for the purpose of managing real estate mortgages funded by
institutional investors such as pension funds. SREA held a 49% limited
partnership interest in SMA until June 30, 1997 when one of the other
limited partners acquired an additional 10% partnership interest in SMA
from SREA, thus reducing SREA's partnership interest in SMA to 39%. SREA
also holds a 1% general partnership interest through Schroder Mortgage
Company, Inc. ("SMCI"), which is wholly owned by SREA. The remaining 60%
limited partnership interest, (50% until June 30, 1997) is owned by the
managing directors of SMA, some of whom are also managing directors of
SREA. Under the terms of the Partnership Agreement, the limited partners
are not required to make additional capital contributions to the
Partnership.
The term of the Partnership expires on October 1, 2004, or an earlier date
in accordance with the terms of the Partnership Agreement. Upon
liquidation, assets shall be distributed first to satisfy liabilities of
the Partnership, then to each partner with a positive balance, then to each
partner pro rata among those partners with a positive balance, and then the
balance to partners in accordance with their percentage interests.
2. Significant Accounting Policies:
Allocation of Net Income and Cash Flow:
Net profits and losses and distributions of cash flows are allocated to the
partners on the basis of their respective percentage interests.
Cash and Cash Equivalents:
For purposes of the statement of cash flows, the Partnership considers all
investments with original maturities of three months or less from date of
purchase to be cash equivalents. Substantially all cash and cash
equivalents are on deposit with one financial institution. The Partnership
believes it mitigates its risks by investing in or through a major
financial institution.
Revenue Recognition:
SMA records fee income on an accrual basis as earned, computed in
accordance with the terms of its real estate investment advisory contracts.
Fee income consists principally of advisory and loan origination fees.
9
<PAGE>
Accounting Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Amortization:
Amortization of leasehold improvements is computed by the straight-line
method over the lesser of the estimated useful lives or terms of the lease.
Income Taxes:
SMA is a partnership for income tax purposes; accordingly, such entity is
not subject to Federal income taxes, and the partners recognize their
proportionate share of the partnership income or loss in their income tax
returns. However, SMA is subject to unincorporated business tax in New York
City. Principal differences between the effective and statutory tax rates
are due to SMA's being treated as a partnership for federal and state
purposes, but being subject to New York City taxes.
3. Agreements and Transactions with Related Parties:
Certain partners and employees of SREA are limited partners of SMA. SREA
has agreed to fund SMA's start up costs. The funding is treated as an
intercompany loan pursuant to a promissory note with an interest rate of
6%. SMA was indebted to SREA for $236,172 at December 31, 1997.
Certain expenses, including salaries and benefits and office expenses,
totaling approximately $68,714 are allocated from SREA in 1997.
4. Major Clients:
Fees from two clients accounted for approximately 77% of total fee income
for the year ended December 31, 1997.
10
<PAGE>
SCHRODER MORTGAGE ASSOCIATES, L.P.
Condensed Balance Sheet
June 30, 1998
(unaudited)
ASSETS:
Current Assets:
Cash and cash equivalents $ 67,633
Fees receivable 167,545
Prepaid expenses and other assets 30,723
Total current assets 265,901
--------
Fixed Assets, at cost:
Leasehold improvements 14,475
Less: Accumulated depreciation and amortization (6,026)
--------
Total assets $274,350
========
LIABILITIES AND PARTNERSHIP CAPITAL:
Current Liabilities:
Accounts payable and accrued expenses $ 51,887
Accrued taxes payable 37,959
Due to parent 47,758
--------
Total liabilities 137,604
Partnership capital 136,746
--------
Total liabilities and partnership capital $274,350
========
The accompanying notes are an integral part of the condensed
financial statements.
11
<PAGE>
SCHRODER MORTGAGE ASSOCIATES, L.P.
Condensed Statement of Operations
For the Six Months ended June 30, 1998
(unaudited)
Income:
Fee income $2,990,301
Interest and other income 5,772
----------
2,996,073
----------
Operating expenses:
Salaries 278,649
Employee fringe benefits 114,552
Professional fees 8,751
Marketing expenses 126,923
Other employee expenses 11,900
Interest expense - parent 54,874
General expense 42,683
Office expense 2,112
Amortization 1,937
----------
642,381
----------
Income before income taxes 2,353,692
Provision for income taxes 101,700
----------
$2,251,992
==========
The accompanying notes are an integral part of the condensed
financial statements.
12
<PAGE>
SCHRODER MORTGAGE ASSOCIATES, L.P.
Condensed Statement of Partnership Capital
For the Six Months ended June 30, 1998
(unaudited)
Partnership deficit, beginning of period $ (157,746)
Net income for the period 2,251,992
Distributions (1,957,500)
-----------
Partnership capital, end of period $ 136,746
===========
The accompanying notes are an integral part of the condensed
financial statements.
13
<PAGE>
SCHRODER MORTGAGE ASSOCIATES, L.P.
Condensed Statement of Cash Flows
For the Six Months ended June 30, 1998
(unaudited)
Cash flows from operating activities:
Net income $2,251,992
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 1,937
Increase in fees receivable, net (41,365)
Increase in prepaid expenses
and other assets (26,825)
Decrease in accounts payable,
accrued expenses and income taxes payable (16,651)
-----------
Net cash provided by operating activities 2,202,390
-----------
Cash flows from investing activities:
Purchase of equipment and other assets (8,250)
-----------
Net cash used in investing activities (8,250)
-----------
Cash flows from financing activities:
Decrease in due to parent (188,412)
Partnership distributions (1,957,500)
-----------
Net cash used in financing activities (2,145,912)
-----------
Net increase in cash and cash equivalents 48,228
Cash and cash equivalents, beginning of period 19,405
-----------
Cash and cash equivalents, end of period $ 67,633
===========
Supplemental disclosures:
Income taxes paid $ 60,000
The accompanying notes are an integral part of the condensed
financial statements.
14
<PAGE>
Notes to Unaudited Condensed Financial Statements
Note 1 - Basis of Presentation
The accompanying unaudited financial statements should be read in conjunction
with the financial statements and notes for the year ended December 31, 1997. In
the opinion of management, the financial information reflects all adjustments
which are of a normal recurrng nature and are necessary for a fair presentation
of the financial position, results of operations, and cash flows for the interim
period. The results of operations for the interim period are not necessarily
indicative of the results to be expected for the entire year.
Note 2 - Client transactions
During March 1998, the Company securitized mortgage assets which included
certain assets managed from major clients of the Company. Fees earned from the
securitization were approximately 45% of the total fee income for the six month
period ended June 30, 1998.
15
<PAGE>
(b) Pro Forma financial information.
The following unaudited pro forma condensed financial information
gives effect to the purchase of the assets of SMA as if the
transaction took place at the beginning of each of the year ended
December 31, 1997 and the six months ended June 30, 1998 for statement
of income data and on June 30, 1998 for the balance sheet data.
Conning Corporation and Subsidiaries
Pro Forma Condensed Consolidated Balance Sheet
As of June 30, 1998
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Condensed
Adjusting Consolidated
ASSETS Conning SMA Entries Conning
<S> <C> <C> <C> <C>
Current assets:
Cash & cash equivalents $ 43,288,879 $ 67,633 $(21,692,383) [F1,2,3] $ 21,664,129
Short term investments 30,856,185 30,856,185
Accounts receivable, net 8,731,638 167,545 (167,545) [F4] 8,731,638
Marketable equity securities 525,580 525,580
Income taxes receivable 208,404 (208,404) [F1,4] --
Prepaid expenses and other current
assets 322,082 30,723 (30,723) [F1] 322,082
------------ --------- ------------- ------------
Total current assets 83,932,768 265,901 (22,099,055) 62,099,614
Non-marketable investments at value 3,469,241 3,469,241
Equipment and leasehold improvements, net 1,409,138 8,449 (8,449) [F1] 1,409,138
Deferred income taxes 1,913,473 1,913,473
Goodwill 17,306,296 20,475,000 [F2,4] 37,781,296
Other assets 3,108,413 3,108,413
------------ --------- ------------- ------------
Total assets $111,139,329 $ 274,350 $ (1,632,504) $109,781,175
============ ========= ============= ============
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Compensation payable $ 6,671,897 $ $ $ 6,671,897
Deferred revenue 4,788,904 4,788,904
Due to affiliates 5,270,387 47,758 (47,758) [F1] 5,270,387
Income taxes payable -- 37,959 185,959 223,918
Accounts payable and other accrued
expenses 12,061,409 51,887 (51,887) [F1,2] 12,061,409
------------ --------- ------------- ------------
Total current liabilities 28,792,597 137,604 86,314 29,016,515
Accrued rent liability 3,245,814 3,245,814
Other payables 400,000 400,000
------------ --------- ------------- ------------
Total liabilities 32,438,411 137,604 86,314 32,662,329
------------ --------- ------------- ------------
Common Stock, $.01 par value 132,550 132,550
Additional Paid in Capital 73,152,602 73,152,602
Retained earnings 5,415,766 136,746 (1,718,818) [F1,3,4] 3,833,694
------------ --------- ------------- ------------
Total common shareholders' equity 78,700,918 136,746 (1,718,818) 77,118,846
------------ --------- ------------- ------------
Total liabilities and shareholders'
equity $111,139,329 $ 274,350 $ (1,632,504) $109,781,175
============ ========= ============== ============
</TABLE>
See notes to pro forma condensed consolidated financial
statements.
16
<PAGE>
Conning Corporation and Subsidiaries
Pro Forma Condensed Consolidated Statement of Income
For the year ended December 31, 1997
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Condensed
Adjusting Consolidated
Conning SMA Entries Conning
<S> <C> <C> <C> <C>
Revenues:
Asset management and related fees $49,502,655 $ 1,679,813 $ $ 51,182,468
Research services 15,478,709 - 15,478,709
Other income 1,634,143 152,791 (1,249,500) [F3] 537,434
----------- --------- ------------- ------------
Total revenues 66,615,507 1,832,604 (1,249,500) 67,198,611
----------- --------- ------------- ------------
Expenses:
Employee compensation and benefits 33,632,314 681,941 34,314,255
Occupancy and equipment costs 3,552,179 1,115 3,553,294
Marketing and production costs 5,674,545 114,348 5,788,893
Professional services 1,992,032 25,485 2,017,517
Amortization of goodwill and other 2,968,964 - 1,050,000 [F2] 4,018,964
Other operating expenses 3,352,641 70,235 3,422,876
----------- --------- ------------- ------------
Total expenses 51,172,675 893,124 1,050,000 53,115,799
----------- --------- ------------- ------------
Operating income 15,442,832 939,480 (2,299,500) 14,082,812
Interest expense 300,261 68,714 368,975
----------- --------- ------------- ------------
Income before provision for income taxes 15,142,571 870,766 (2,299,500) 13,713,837
Provision for income taxes 6,226,242 77,040 (466,430) [F4] 5,836,852
----------- --------- ------------- ------------
Net income $ 8,916,329 $ 793,726 $ (1,833,070) $ 7,876,985
=========== ========= ============= ============
Preferred stock dividends 963,127 - 963,127
----------- --------- ------------- ------------
Net earnings available to common
shareholders $ 7,953,202 $ 793,726 $ (1,833,070) $ 6,913,858
=========== ========= ============= ============
Earnings per share:
Basic $ 1.13 $ 0.98
============ =============
Fully diluted $ 0.80 $ 0.71
============ =============
</TABLE>
See notes to pro forma condensed consolidated
financial statements.
17
<PAGE>
Conning Corporation and Subsidiaries
Pro Forma Condensed Consolidated Statement of Income
For the six month period ended June 30, 1998
(unaudited)
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Condensed
Adjusting Consolidated
Conning SMA Entries Conning
<S> <C> <C> <C> <C>
Revenues:
Asset management and related fees $30,034,956 $ 2,990,301 $ $ 33,025,257
Research services 8,506,131 8,506,131
Other income 1,697,233 5,772 (624,750) [F3] 1,078,255
------------ --------- ------------- ------------
Total revenues 40,238,320 2,996,073 (624,750) 42,609,643
------------ --------- ------------- ------------
Expenses:
Employee compensation and benefits 19,176,694 405,101 19,581,795
Occupancy and equipment costs 2,265,269 1,937 2,267,206
Marketing and production costs 3,369,173 129,035 3,498,208
Professional services 1,141,302 8,751 1,150,053
Amortization of goodwill & other 1,415,695 525,000 [F2] 1,940,695
Other operating expenses 2,219,142 42,683 2,261,825
------------ --------- ------------- ------------
Total expenses 29,587,275 587,507 525,000 30,699,782
------------ --------- ------------- ------------
Operating income 10,651,045 2,408,566 (1,149,750) 11,909,861
Interest expense 130,391 54,874 185,265
------------ --------- ------------- ------------
Income before provision for income taxes 10,520,654 2,353,692 (1,149,750) 11,724,596
Provision for income taxes 4,492,008 101,700 432,322 [F4] 5,026,030
------------ --------- ------------- ------------
Net income $ 6,028,646 $ 2,251,992 $ (1,582,072) $ 6,698,566
============ ========= ============= ============
Preferred Stock dividends -- -- -- --
------------ --------- ------------- ------------
Net earnings available to common
stockholders $ 6,028,646 $ 2,251,992 $ (1,582,072) $ 6,698,566
============ ========= ============= ============
Earnings per share:
Basic $ 0.45 $ 0.50
============ ============
Fully diluted $ 0.42 $ 0.47
============ ============
</TABLE>
See notes to pro forma condensed consolidated
financial statements.
18
<PAGE>
Conning Corporation and Subsidiaries
Notes to Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
These pro forma condensed consolidated financial statements should be read
in conjunction with Conning Corporation and subsidiaries audited financial
statements filed with the Securities and Exchange Commission (SEC) filed on Form
10-K in March, 1998 and the unaudited condensed consolidated financial
statements for the six month period ended June 30, 1998 filed with the SEC on
Form 10-Q in July 1998.
F1 The acquisition of SMA will be accounted for as a purchase
transaction. As of the date of closing SMA had virtually no balance
sheet assets. Conning primarily acquired the operations, employees,
and investment contracts of the organization. Included herein
represents adjustments for the elimination of various assets and
liabilities not transferred at the date of closing.
F2 As a result of the purchase, the pro forma excess cost over fair value
of net assets acquired was approximately $21.0 million for SMA as of
August 18, 1998. The annual amount of goodwill amortization is $1.05
million, based on a 20-year amortization period. The goodwill is
considered deductible for federal income tax purposes.
F3 Represents the impact of investment income lost related to the cash
consideration paid for SMA for the six month period ended June 30,
1998.
F4 The income tax benefit associated with the net taxable income
statements is computed at an effective rate of 42%. Prior to the
acquisition, SMA's legal structure was a partnership and therefore
incurred no Federal or state income tax. SMA incurred local
unincorporated business taxes at a rate of approximately 4%.
19
<PAGE>
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.
Date: September 2, 1998 CONNING CORPORATION
By: /s/ Leonard M. Rubenstein
Name: Leonard M. Rubenstein
Title: Chairman and Chief
Executive Officer
20
Exhibit 23.1
Consent of Independent Accountants
We consent to the incorporation by reference in the registration statement of
Conning Corporation on Form S-8 (File No. 333-42781) of our report dated March
27, 1998, on our audit of the financial statements of Schroder Mortgage
Associates, L.P. as of December 31, 1997 and for the year then ended, which
report is included in this Current Report on Form 8-K.
New York, New York /s/ PricewaterhouseCoopers LLP
September 2, 1998
