<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-23183
CONNING CORPORATION
(Exact name of registrant as specified in its charter)
Missouri 43-1719355
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 Market Street
St. Louis, MO 63101
(Address and Zip Code of principal executive offices)
(314) 444-0498
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Common Stock,
(Title of Class) par value $.01 per share
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].
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 9, 1998: $93,384,456
Number of shares outstanding as of March 9, 1998: 13,250,000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for its Annual Meeting of
Stockholders presently scheduled for May 12, 1998 are incorporated by
reference into Part III of this report.
<PAGE> 2
<TABLE>
TABLE OF CONTENTS
<S> <C>
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 15
ITEM 3. LEGAL PROCEEDINGS 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 16
ITEM 4A. EXECUTIVE OFFICERS OF REGISTRANT 17
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 19
ITEM 6. SELECTED FINANCIAL DATA 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 56
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT 57
ITEM 11. EXECUTIVE COMPENSATION 57
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 57
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 57
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 57
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
General Overview
Conning Corporation (the "Company" or "Conning") is an asset management
company providing services to the insurance industry and is also a provider
of insurance research. The Company is the successor to the businesses
conducted by Conning, Inc. and its operating subsidiary, Conning & Company
(collectively, "Conning, Inc."), and Conning Asset Management Company,
formerly known as General American Investment Management Company ("GAIMCO"),
pursuant to a merger (the "Strategic Merger") effected in August 1995. Prior
to the Strategic Merger, Conning, Inc. and GAIMCO were unrelated business
entities. Conning, Inc. was an 85-year old Hartford, Connecticut based
insurance specialty asset management firm which provided asset management
services and research to the insurance industry. GAIMCO was a registered
investment adviser which provided investment advisory services primarily to
its parent, General American Life Insurance Company ("General American"), and
its affiliates. The parties effected the Strategic Merger in order to
combine complementary businesses, each with specialties in the insurance
industry, to build a platform from which to leverage additional growth.
Other than historical financial statements and data, information herein
concerning the Company regarding periods prior to the date of the Strategic
Merger, including without limitation with respect to assets under management
and private equity funds, includes the Company and its predecessors unless
the context indicates otherwise. In December 1997, the Company completed an
initial public offering of 2,875,000 shares of the Company's common stock,
par value $.01 per share, all of which were sold by the Company. The Company
received approximately $34.6 million in net proceeds (after deducting
issuance costs) from the stock sale.
The Company is a holding company that conducts its business through
three subsidiaries: (i) Conning, Inc. is a wholly-owned subsidiary of the
Company and serves as an intermediate holding company; (ii) Conning & Company
is a wholly-owned subsidiary of Conning, Inc. and is a registered investment
adviser and broker-dealer; and (iii) Conning Asset Management Company is a
wholly-owned subsidiary of Conning & Company and is a registered investment
adviser. Throughout this report, the terms "Company" and "Conning" refer to
Conning Corporation and its subsidiaries.
The Company's business is asset management for insurance companies,
which is supplemented by its in-depth research focused on the insurance
industry. As of December 31, 1997, the Company had approximately $26.0
billion of assets under discretionary management and, in total, provided
services with respect to approximately $80.1 billion of assets primarily for
insurance company clients. In 1997, the Company had revenues of
approximately $66.6 million and net earnings of approximately $8.9 million.
<PAGE> 4
Asset Management
The Company's asset management services consist of three components: (i)
discretionary asset management services, (ii) investment advisory services
and (iii) investment accounting & reporting services. In connection with its
discretionary asset management services, the Company originates and services
commercial mortgages and manages investments in real estate assets. The
Company also sponsors and manages private equity funds investing in insurance
and insurance-related companies.
As of December 31, 1997, the Company provided services with respect to
approximately $80.1 billion in assets, of which approximately (i) $26.0
billion represented assets under discretionary management, (ii) $21.3 billion
represented assets serviced under investment advisory agreements and (iii)
$32.8 billion represented assets receiving investment accounting and
reporting services on a stand-alone basis. This array of services allows the
Company to provide a fully integrated product offering, with some clients
utilizing all of the asset management services the Company offers, and others
utilizing only selected services. Assets serviced by the Company have
increased at a compound annual rate of approximately 38% from December 31,
1992 to December 31, 1997, as shown in the following table:
<TABLE>
<CAPTION>
ASSETS SERVICED BY THE COMPANY <F1>
(IN BILLIONS)
AS OF DECEMBER 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Assets under discretionary
management
Unaffiliated $11.8 $10.1 $ 8.9 $ 6.6 $ 5.8 $ 4.9
Affiliated 14.2 10.6 8.7 6.9 6.3 5.6
---------------------------------------------------------------------
Total 26.0 20.7 17.6 13.5 12.1 10.5
Investment advisory 21.3 20.8 15.9 14.7 14.7 5.3
Investment accounting and
reporting 32.8 11.7 6.7 2.8 2.5 ---
---------------------------------------------------------------------
Total $80.1 $53.2 $40.2 $31.0 $29.3 $15.8
---------------------------------------------------------------------
<FN>
<F1> Since January 1, 1995, the assets of the general account of General
American have been under contract with GAIMCO (now known as Conning
Asset Management Company). General account assets prior to January
1, 1995 were managed by the investment division of General American,
a predecessor of GAIMCO, and are included in assets under management
for years prior to 1995. Data for 1995 and prior periods are
presented on a pro forma basis to include both Conning and GAIMCO
assets under management.
</TABLE>
Discretionary Asset Management and Investment Advisory Services. The
Company's assets under discretionary management have increased at a compound
annual rate of approximately 20% from December 31, 1992 to December 31, 1997,
with assets of General American-related (affiliated) accounts increasing
approximately 20% and assets of other clients (unaffiliated) increasing
approximately 19% over the period. During 1997, assets under discretionary
management of the Company increased by approximately 26%. The Company's
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insurance asset management services are designed to optimize investment
returns for clients within the constraints imposed by insurance regulatory,
accounting, tax and asset/liability management considerations. The Company
utilizes a team-based, client-oriented approach, drawing upon a variety of
insurance specialists, including researchers, actuaries and investment,
financial and tax professionals, with specific industry expertise, investment
class knowledge, insurance product knowledge, risk analysis, portfolio
management and client relationship skills. The Company supports a variety of
asset classes, as shown in the following table:
<TABLE>
Assets Under Discretionary Management
(in billions)
<CAPTION>
As of
Asset Classes December 31, 1997
<S> <C>
Corporate Bonds $ 7.9
Asset-backed securities 5.6
Mortgage loans 2.3
Municipal bonds 2.4
Government bonds 1.7
Private placements 2.2
Indexed equity 1.4
Short-term obligations 1.1
Equity 1.2
Real estate 0.2
-----
Total $26.0
=====
</TABLE>
The Company works with each client individually to conduct an in-depth
analysis of its insurance operations and investment objectives. This broad
strategic approach is designed to address each client's core needs to model
asset and liability durations and manage risk and maximize returns. In
particular, the Company analyzes the client's strategic objectives,
operational forecasts, business needs, cash flows, regulatory and rating
agency concerns, and accounting and tax issues. The Company utilizes a "top
down" investment methodology, beginning with an analysis of macro-economic
and capital market conditions. Additionally, the Company considers the
client's current portfolio characteristics, management's risk tolerance,
investment guidelines, performance benchmarks and desired asset allocation.
The Company undertakes quantitative analyses, including (i) asset/liability
analyses, (ii) analyses of cash flows, interest rate risk and surplus
adequacy, (iii) peer group comparisons and (iv) asset allocation modeling.
The Company also utilizes its insurance related research products, including
property/casualty and life/health profitability models, a loss ratio and loss
reserve analysis service, and a tax optimization model.
The Company assists its clients in the development of new insurance
products by advising them as to investment strategies required to meet the
profitability goals set for such products. The Company is integral to the
product management, administration and distribution of one of General
American's stable value insurance products.
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The Company also serves as the investment adviser to several registered
investment companies and unit investment trusts sponsored by General
American. Investment advisory agreements with registered investment
companies and unit investment trusts may be terminated at any time by the
entity upon specified notice, terminate automatically in the event of their
assignment, and are subject to annual renewal by the board of the entity.
The Company also provides stand-alone investment advisory services to
clients who are seeking only business analysis and asset allocation or
diversification advice. Such advice typically includes a review of the
portfolio from the standpoint of liability structure, capital adequacy,
return on equity, asset allocation, regulatory and rating agency
implications, and income and cash flow requirements. As of December 31,
1997, the Company had approximately $21.3 billion in assets under investment
advisory contracts on a stand-alone basis.
The Company's asset management accounts are each managed pursuant to a
written investment management agreement with the client. Such agreements are
terminable upon relatively short notice (typically 30 to 90 days) by either
party. In providing discretionary asset management services, the Company
generally is compensated on the basis of fees calculated as a percentage of
assets under management. Fees generally are billed and are payable quarterly
and typically are calculated on the asset value of an account at the
beginning or end of a quarter. The fee schedules typically provide lower
incremental fees above certain levels of managed assets. The Company's
investment advisory accounts are managed pursuant to a written agreement for
a specified term, generally one to three years, pursuant to which the Company
generally receives a fixed periodic fee.
Mortgage Origination and Service of Real Estate. As of December 31,
1997, the Company managed approximately $2.3 billion in commercial mortgage
loans and approximately $200 million in investment real estate. The Company
has originated more than $2.3 billion of mortgage loans for its clients since
January 1, 1994, most of which were on behalf of General American and its
affiliates. During 1997, the Company originated approximately $620 million
of new mortgage loans. In addition, the Company is developing opportunities
for placements for other insurance company clients and pension funds. The
Company believes it has the capacity, under favorable market conditions, to
generate approximately $900 million in commercial mortgage loans annually.
The Company has traditionally focused on originating commercial mortgage
loans generally ranging in size from $2 million to $15 million, with varying
maturities of five to twenty years, secured by office, industrial, retail or
multi-family properties. The Company also provides development, advisory and
management services with respect to real estate investment properties. The
Company originates, actively monitors and manages its commercial mortgage
loan and real estate portfolios through its St. Louis home office location
and eleven field offices located in Arizona, California (2), Colorado (2),
Florida, Georgia, Illinois, Missouri, Texas and Washington, D.C. The Company
performs a full array of mortgage loan origination and portfolio management
services including lease analysis, property valuation, economic and financial
reviews, tenant analysis and oversight of default and bankruptcy proceedings.
All properties are inspected each year and evaluated periodically based on
internal quality ratings for purposes of loan loss reserve and internal
management.
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The Company also provides ongoing servicing, generally as part of an
integrated mortgage loan origination program and in several cases on a
stand-alone basis. As of December 31, 1997, the Company provided mortgage
loan servicing for approximately $2.8 billion of mortgage loans, primarily
for General American and its affiliates. Of this amount, approximately $0.5
billion was serviced on a stand-alone basis. The Company is rated as an
acceptable master servicer and an average special servicer for purposes of
servicing securitized loan portfolios by Fitch Investors Service, L.P. and
has received an average ranking as a commercial loan servicer by Standard &
Poor's. The Company also provides a wide range of mortgage loan and real
estate accounting services, including reconciliation reports, mortgage loan
and real estate reporting for regulatory agencies, management and outside
clients, and tax analysis and support. See "--Investment Accounting and
Reporting." The Company established a relationship with an investment
banking firm to originate mortgage loans. In 1995 the Company originated
loans in the amount of approximately $172 million for a securitized offering
by such investment banking firm, and the Company retained the master
servicing of the entire loan portfolio totaling approximately $278 million.
During 1997, the Company originated approximately $200 million of mortgage
loans for such firm. Additionally, the Company is expanding efforts to
market its mortgage loan origination and servicing and accounting
capabilities to other life insurance companies.
The Company generally receives a fee associated with loan origination,
which is usually approximately 1% of the loan balance. The Company also
receives ongoing servicing fees and management fees with respect to mortgage
loans in portfolios managed by the Company.
Private Placement Investing. As of December 31, 1997, the Company
managed approximately $2.2 billion in private placement securities, most of
which were purchased on behalf of General American and its affiliates.
Private placement securities are acquired pursuant to negotiated transactions
between investors and issuers pursuant to exemptions from registration with
the SEC. While less liquid than public securities, private placements often
contain investment characteristics favorable to investors such as more
stringent financial covenants, prepayment protection, collateral or higher
yields than similar public securities. The Company purchases both fixed and
floating rate, U.S. dollar denominated private securities on behalf of its
client accounts, primarily of investment grade quality and primarily
according to a "buy and hold" strategy. Such an investment in a private
placement is generally between $5 million and $15 million.
The Company conducts in-depth reviews of each private placement
security's credit, structure, terms and proposed pricing prior to making a
commitment to purchase a private placement on behalf of a client. The
Company considers credit analysis to be critical to its success in private
placement investing and such credit analysis consists of an evaluation of all
aspects of a borrowing, including analysis of financial statements and
ratios, cash flow, industry and competitive position, operating trends and
any collateral securing the loan.
Investment Accounting and Reporting. As of December 31, 1997, the
Company's investment accounting and reporting services provided stand-alone
investment accounting for approximately $32.8 billion in assets. All $80.1
billion in assets serviced by the Company are supported by the Company's
investment accounting and reporting system. The Company's investment accounting
and reporting services include management and regulatory reporting on
5
<PAGE> 8
invested assets, operating income and capital gains and losses. These
services have been designed to address the needs of clients for timely and
accurate reporting for management purposes, as well as the increased
information required in filings with state and federal regulatory authorities
regarding assets and liabilities as well as risk-based capital allocations,
including Schedules B and D of the standard insurance industry annual
statutory financial report.
The Company's accounting and reporting system utilizes the Complete
Asset Management, Reporting and Accounting software system (known as
CAMRA(TM)) and the Fully Integrated Loan Management Information Software
System (known as FILMS(TM)) under a software license agreement with SS&C
Technologies, Inc. ("SS&C"), effective as of January 27, 1996 (the "License
Agreement"). SS&C represents that it is the owner of the trademarks
CAMRA(TM) and FILMS(TM). In connection with insurance investment accounting,
the Company obtains pertinent client information through frequent and ongoing
contact with the client, portfolio manager, brokers and custodians, in
addition to standard industry sources. The Company utilizes detailed
portfolio information as the foundation for asset allocation and portfolio
management as well as to support its clients' operational and information
needs. By utilizing CAMRA(TM), the Company is able to provide a number of
services, such as: (i) portfolio management and market analyses, including a
comprehensive securities database supporting on-line daily, monthly,
quarterly and on-demand calculation of a range of information, including book
and market value, yields, duration, average life and various user-selected
scenarios; (ii) comprehensive accounting and reporting capabilities,
including four accounting bases--GAAP, statutory, management and
tax--exporting data directly to spreadsheets, word processors and databases
for ease of delivery and presentation; (iii) multi-currency processing,
calculating transaction and translation values in accordance with applicable
accounting and insurance industry rules; and (iv) regulatory compliance,
providing performance measurement calculations. The Company utilizes
FILMS(TM) to enable its mortgage professionals to process, analyze and report
on a comprehensive basis information regarding their loan portfolios.
CAMRA(TM) and FILMS(TM) allow for detailed and timely reporting to the
Company's clients, providing them with valuable management tools. Such
reporting is an integral component of the Company's focus on client service.
Under the License Agreement, the Company has a perpetual non-exclusive
license to use, maintain and modify its investment accounting and reporting
software, including both CAMRA(TM) and FILMS(TM), in both source code and
object code (the "Software"). The License Agreement permits the Software to
be used by the Company and General American and its subsidiaries for
accounting, reporting and similar purposes in the asset management business
and for outsourcing to customers in the insurance industry.
Investment accounting and reporting services are typically provided in
conjunction with insurance asset management services and are therefore
subject to the terms of an overall management agreement. In a number of
cases, however, clients have retained the Company to provide such services on
a stand-alone basis. In those cases, the services are subject to the terms
of a separate agreement and the Company is generally compensated on the basis
of fees calculated as a percentage of assets serviced.
6
<PAGE> 9
Private Equity Funds. The Company facilitates the provision of private
equity capital to the insurance and insurance-related industries. Since
1985, the Company has organized five funds that have raised approximately
$435 million in committed capital. The private equity funds have invested
more than $200 million of these proceeds in 40 companies which constitute the
investment portfolios of these funds. In most cases, these invested proceeds
serve to provide a portion of additional equity-based financing or to
partially capitalize a new company. The Company or a subsidiary acts as the
general partner of the funds and maintains a 1% general partner capital
interest. The Company may also invest as a limited partner in future funds
it may organize.
Management believes that limited partners invest in the Company's
private equity funds to obtain the opportunity for potential private equity
returns on investments in insurance or insurance-related enterprises.
Investors also receive exposure to new business strategies and
entrepreneurial developments in the insurance industry. More than 70 limited
partners have invested in the Company's private equity funds since 1985,
including financial companies, banks, pension funds and some of the largest
insurance companies in the world. A number of limited partners have invested
in multiple private equity funds over time.
7
<PAGE> 10
The following table shows the average private equity committed capital
over the past six years.
<TABLE>
PRIVATE EQUITY COMMITTED CAPITAL
(IN MILLIONS)
<CAPTION>
AVERAGE COMMITTED CAPITAL
---------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Fund I $ --- $ 7.7 $ 18.9 $ 28.4 $ 42.4 $ 50.5
Fund II 67.6 67.7 67.7 67.7 67.7 67.7
Fund III 56.6 56.6 56.6 50.1 21.8 ---
Fund IV 40.4 39.8 18.7 --- --- ---
Fund V 112.5 --- --- --- --- ---
------ ------ ------ ------ ------ ------
Total $277.1 $170.9 $161.9 $146.2 $131.9 $118.2
------ ------ ------ ------ ------ ------
</TABLE>
These funds have invested in a wide range of insurance, healthcare and
insurance service company segments, including specialty property-casualty,
life, health, managed care, agency, software, and service companies. The
portfolio companies have been in various stages of development, including
start-ups, expansion rounds, buy-outs and recapitalizations.
The Company seeks to develop a working relationship with senior
management of the portfolio companies to jointly maximize shareholder value.
An employee of the Company generally serves as a representative on the board
of directors of the portfolio companies. By providing guidance through board
of director participation, the Company seeks to assist senior management in
developing business strategies, raising capital in the public and private
markets and acquiring new or complementary businesses. Investors in the
funds have become co-investors, joint venture partners, reinsurers or
customers to over half of the funds' portfolio companies.
Subject to the ability to raise capital, the Company currently plans to
maintain several funds at any point in time, reflecting the approximate ten
year life cycle of the funds. The objective of the funds is to liquidate
their investments through public offerings, sale of the portfolio company or
the fund's investment, redemption or otherwise. Since inception,
approximately 16 portfolio companies have emerged as public entities. The
Company receives annual management fees from the private equity funds of
approximately 2% of committed funds and a specified interest in the
cumulative net profit. Certain of the Company's professionals share in the
Company's share of any profit participation.
8
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Insurance Research
The Company publishes in-depth insurance industry research covering
major insurance industry trends, products, markets and business segments.
The Company also publishes stock research on a broad group of publicly-traded
insurance companies for some of the largest U.S. institutional money managers
as well as pension funds, banks, mutual funds, and insurance companies. The
Company's in-depth insurance industry research has been targeted to senior
executives in the insurance industry for more than 20 years, and its
Strategic Studies Series is subscribed to by 44 of the 50 largest U.S.
property-casualty insurance companies and 42 of the 50 largest U.S.
life-health insurance companies (based on 1996 premiums as reported by
OneSource Information Services, Inc. as provided to it by third parties).
Additionally, the Company from time to time participates in the
underwriting of public offerings of equity securities for insurance and
insurance-related companies. Since 1993, the Company has participated in
syndicates for more than 120 insurance-related underwritings for both initial
and follow-on public offerings.
Payment for the Company's research services is primarily in the form of
commissions derived from securities transactions effected by the Company and,
to a lesser extent, subscription fees for research publications. A
negotiated commission is received on each listed equity transaction, and
total commission revenues depend on the value that clients place on the
research services the Company provides. In addition, the research services
revenues received by the Company reflect underwriting fees with participation
in public offerings of insurance and insurance-related companies.
Accounting, Administration and Operations
The Company's accounting, administration and operations personnel are
responsible for financial controls, internal and external financial
reporting, compliance with regulatory and legal requirements, office and
personnel services, the Company's management information and
telecommunications systems, and the processing of the Company's securities
transactions. General American provides certain of these functions pursuant
to an Administrative Services Agreement. The Company contracts with outside
services for securities pricing information in connection with its asset
management and investment accounting and reporting services. See "Risk
Factors and Cautionary Statements - Risk of Systems Failure; Dependence on
Vendors," in Item 7.
Competition
All of the Company's businesses are conducted in highly competitive
markets. The Company competes with a large number of other asset management
firms as well as broker-dealers, insurance companies, commercial banks and
others in the business, many of which are larger and have greater resources
than the Company. Conning Asset Management Company competes for assets under
discretionary management with a large number of specialty and diversified
investment advisory firms and divisions, including internal investment
divisions of
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<PAGE> 12
insurance companies, many of which are larger and have access to greater
resources than the Company. The intensity of competition could increase if
the rate of growth in insurance company assets managed externally were to
decline. The asset management industry is characterized by relatively low
cost of entry, and new investment advisory entities may be formed which may
compete with the Company. The Company's focus on the insurance industry
makes it particularly subject to direct competition from firms or divisions
which specialize in providing services to the insurance industry.
Additionally, other insurance companies may determine to spin out their
investment management divisions, which might then become significant
competitors. The Company believes that the most important factors affecting
competition for investment management clients are the knowledge and
reputations of investment managers, customer service, performance records and
pricing policies.
The Company's mortgage origination and servicing business faces
competition from local and national mortgage brokerage firms, other direct
institutional lenders and services, lending programs from investment banking
firms and other financial institutions, many of whom are larger and have
access to greater resources than the Company. The Company believes that the
most important factors affecting competition for the origination of
commercial mortgage loans are price, loan quality and service. For most
customers, the Company's investment accounting and reporting services face
competition from certain other asset management firms as well as software
companies, including SS&C. The Company believes the most important factors
affecting competition for investment accounting and reporting services are
the quality and performance of the Company's software and service, and to a
lesser extent price. The Company's private equity business faces competition
for raising capital and making equity investments from securities firms,
venture capitalists, commercial banks, investment banks and insurance
companies, many of whom are larger and have access to greater resources than
the Company. The Company believes that the most important factors affecting
competition for the sponsorship and management of such funds are performance
records and the reputations and expertise of sponsors. The Company's
insurance research business faces competition from traditional securities
firms and investment banks in providing research on publicly-traded insurance
industry related companies and research on the insurance industry. The
Company believes that the most important factors affecting competition are
the quality and number of the insurance research professionals, the breadth
of coverage and the number of topics covered.
There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not materially and adversely affect the
Company's business, financial condition, results of operations and business
prospects.
10
<PAGE> 13
Regulation
The Company's business and the investment management industry in general
are subject to extensive regulation in the United States at both the federal
and state level, as well as by self-regulatory organizations ("SROs"), such
as the National Association of Securities Dealers, Inc. (the "NASD"). A
number of federal regulatory agencies are charged with safeguarding the
integrity of the securities and other financial markets and with protecting
the interests of customers participating in those markets. The Securities
and Exchange Commission (the "SEC") is the federal agency that is primarily
responsible for the regulation of investment advisers and broker-dealers
doing business in the United States, and the Board of Governors of the
Federal Reserve System promulgates regulations applicable to securities
credit transactions involving broker-dealers and certain other United States
institutions. Investment advisers and broker-dealers are also subject to
registration and regulation by state securities regulators in states in which
they conduct business. Industry SROs, each of which has authority over the
firms that are its members, include the NASD and national securities
exchanges.
Conning & Company and Conning Asset Management Company are registered as
investment advisers with the SEC. As an investment adviser, each is subject
to the requirements of the Investment Advisers Act of 1940, as amended (the
"Advisers Act") and the SEC's regulations thereunder. They, and their
employees engaged in advisory services, are also subject to certain state
securities laws and regulations, and to certain state laws regarding
fiduciaries. Federal and state regulations provide, among other things,
limitations on the ability of investment advisers to charge performance-based
or non-refundable fees to clients, record-keeping and reporting requirements,
disclosure requirements, limitations on principal transactions between an
adviser or its affiliates and advisory clients, requirements as to fees paid
to solicitors, restrictions on commission and fee arrangements with
broker-dealers, and advertising restrictions, as well as general anti-fraud
prohibitions. The state securities law requirements applicable to employees
of investment advisers include certain qualification requirements as to
advisory employees. In addition, Conning Asset Management Company, as
investment adviser to two mutual funds registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), is subject to
requirements under the Investment Company Act and the SEC's regulations
thereunder. The Company's mortgage origination and servicing activities are
subject to the licensing requirements of certain states. Such requirements
include, among other things, record-keeping and reporting requirements,
procedures for handling funds, and requirements that certain employees obtain
and maintain appropriate licenses.
In connection with the Company's private equity activities, Conning &
Company, its affiliates and the private equity funds which they manage are
relying on exemptions from registration under the Investment Company Act, the
Securities Act of 1933, as amended and state securities laws. Failure to
meet the requirements of any such exemptions could have a material adverse
effect on the Company, its affiliates and the private equity funds they
manage, including, without limitation, with respect to the manner in which
they carry out their investment activities and on the compensation received
by Conning & Company and its affiliates from the private equity funds.
11
<PAGE> 14
Conning & Company is registered as a broker-dealer with the SEC and in
Connecticut, New York and Texas, and is a member of, and subject to
regulation by, the NASD.
As a result of federal and state broker-dealer registration and SRO
memberships, Conning & Company is subject to overlapping schemes of
regulation which cover many aspects of its securities business. Such
regulations cover matters including capital requirements, the use and
safekeeping of customers' funds and securities, record keeping and reporting
requirements, supervisory and organizational procedures intended to assure
compliance with securities laws and to prevent the improper trading on
material nonpublic information, employee-related matters, including
qualification and licensing of supervisory and sales personnel, limitations
on extensions of credit in securities transactions, clearance and settlement
procedures, requirements for the registration, underwriting, sale and
distribution of securities and rules of the SROs designed to promote high
standards of commercial honor and just and equitable principles of trade. A
particular focus of the applicable regulations concerns the relationship
between broker-dealers and their customers. As a result, many aspects of the
broker-dealer customer relationship are subject to regulation, including in
some instances "suitability" determinations as to certain customer
transactions, limitations in the amounts that may be charged to customers,
timing of proprietary trading in relation to customers' trades and
disclosures to customers.
Conning Asset Management Company is a fiduciary under the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") and the Internal
Revenue Code of 1986, as amended (the "Code"), and regulations thereunder
with respect to the investments of its discretionary asset management clients
which are employee benefit plans subject to ERISA and with respect to the
investments of portfolios managed by the Company that contain assets of plans
subject to ERISA. ERISA and the Code impose certain duties on persons who
are fiduciaries of a plan and prohibit certain transactions involving the
assets of a plan and its fiduciaries or other interested parties. Under
ERISA and the Code, any person who exercises any authority or control over
the management or disposition of the assets of a plan is generally considered
to be a fiduciary of the plan. Under ERISA or the Code, in situations where
the Company and its affiliates are providing investment management or other
services to a plan, (i) the Company's actions would be governed by prudence
and other fiduciary responsibility standards and (ii) certain transactions in
which the Company might seek to engage could constitute "prohibited
transactions." If a prohibited transaction occurs for which no exemption is
available, the Company and any other party in interest that has engaged in
the prohibited transaction could be required, among other things, (i) to
restore to the plan any profit realized on the transaction, (ii) to reimburse
the plan for any losses suffered as a result of the transaction, (iii) to pay
an excise tax equal to 15% of the amount involved in the prohibited
transaction for each year the transaction continues and (iv) unless the
transaction is corrected within statutorily required periods, to pay an
additional tax equal to 100% of the amount involved in the transaction. Plan
fiduciaries who participate in transactions with the Company could, under
certain circumstances, be liable for prohibited transactions or other
violations as a result of an investment or as co-fiduciaries for actions
taken by or on behalf of the plan by the Company.
Compliance with many of the regulations applicable to the Company
involves a number of risks, particularly because applicable regulations in a
number of areas, such as those governing affiliated transactions involving
clients, may be subject to varying interpretation. Regulators
12
<PAGE> 15
make periodic examinations and review annual, monthly and other reports on
the Company's operations and financial condition. In the event of a
violation of or non-compliance with any applicable law or regulation,
governmental regulators and SROs may institute administrative or judicial
proceedings that may result in censure, fine, civil penalties (including
treble damages in the case of insider trading violations), criminal
penalties, the issuance of cease-and-desist orders, the deregistration or
suspension of the non-compliant broker-dealer or investment adviser, the
suspension or disqualification of the broker-dealer's or investment adviser's
officers or employees, the removal of the Company from its role as a
fiduciary with respect to the investments of assets subject to ERISA and
other adverse consequences. The Company has not experienced any such
penalties to date. Such violations or non-compliance could also subject the
Company, and/or its employees to civil actions by private persons. As an
underwriter from time to time, Conning & Company is exposed to liability
under federal and state securities laws and court decisions, including
decisions with respect to underwriters' liability and limitations on
indemnification of underwriters by issuers. For example, a firm that acts as
an underwriter may be held liable for material misstatements or omissions of
fact in a prospectus used in connection with the securities being offered or
for statements made by its securities analysts or other personnel. Any
governmental, SRO or private proceeding alleging violation of or
non-compliance with laws or regulations could have a material adverse effect
upon the Company's business, financial condition, results of operations and
business prospects.
The regulatory environment in which the Company operates is subject to
change. The Company may be adversely affected as a result of new or revised
legislation or regulations imposed by the SEC, other United States, state or
foreign governmental regulatory authorities or SROs. The Company also may be
adversely affected by changes in the interpretation or enforcement of
existing laws and rules by these governmental authorities and SROs. The
Company's businesses may be materially affected not only by securities
regulations but also by regulations of general application. For example, the
volume of the Company's principal investment advisory businesses in a given
time period could be affected by, among other things, existing and proposed
tax legislation and other governmental regulations and policies (including
the interest rate policies of the Federal Reserve Board) and changes in the
interpretation or enforcement of existing laws and rules that affect the
business and financial communities. The level of business and financing
activity in the insurance industry can be affected not only by such
legislation or regulations of general applicability, but also by
industry-specific legislation or regulations.
Under the Advisers Act, every investment advisory agreement must
expressly provide that the agreement may not be assigned by the investment
adviser without the consent of the client. Under the Investment Company Act,
every investment adviser's agreement with a registered investment company
must provide for the agreement's automatic termination on the event of its
assignment. Under both Acts, an investment advisory agreement is deemed to
have been assigned when there is a direct or indirect transfer of the
agreement, including a direct assignment or a transfer of a "controlling
block" of the firm's voting securities or, under certain circumstances, upon
the transfer of a "controlling block" of the voting securities of its parent
corporation. A transaction is not, however, an assignment under the Advisers
Act or the Investment Company Act if it does not result in a change of actual
control or management of the investment adviser. Any assignment of the
Company's investment advisory agreements would
13
<PAGE> 16
require, as to any registered investment company client, the prior approval
by a majority of its shareholders, and as to the Company's other clients, the
prior consent of such clients to such assignments. Sales by General American
or other shareholders or issuances of Common Stock by the Company, among
other things, could result in a deemed assignment of the Company's investment
advisory agreements under such statutes. The Company's Restated Articles of
Incorporation provide that no person or group deemed to be a beneficial owner
(as defined therein) of the Common Stock may vote more than 20% of the total
number of shares of Common Stock outstanding. These provisions of the
Articles do not apply to General American Mutual Holding Company, General
American, General American Holding Company or their subsidiaries or
affiliates, direct or indirect subsidiaries of the Company and certain
employee plans established or to be established by the Company. The
Company's Board of Directors may approve the exemption of other persons or
groups from the provisions described above. While this voting limitation is
in place to reduce the likelihood, under certain circumstances, of
inadvertent terminations of the Company's advisory agreements as a result of
"assignments" of such contracts, there can be no guarantee that this
limitation will prevent such a termination from occurring. In addition, such
limitation could be deemed to have an anti-takeover effect and to make
changes in management more difficult.
The officers, directors and employees of the Company's investment
management subsidiaries may from time to time own securities which are also
owned by one or more of their clients. Each subsidiary has internal policies
with respect to individual investments and requires reporting of securities
transactions and restricts certain transactions so as to reduce the
possibility of conflicts of interest.
Net Capital Requirements
As a broker-dealer registered with the SEC and various states and a
member firm of the NASD, Conning & Company is subject to the capital
requirements of the SEC, the states, and the NASD. These capital
requirements specify minimum levels of capital, computed in accordance with
regulatory requirements ("net capital"), that such firm is required to
maintain and also limit the amount of leverage that such firm is able to
obtain in its respective business. A failure of a broker-dealer to maintain
its minimum required capital would require it to cease executing customer
transactions until it returned to capital compliance, and could cause it to
lose its membership on an exchange, or in an SRO, to lose its registration
with the SEC or a state, or require its liquidation. Further, the decline in
a broker-dealer's net capital below certain "early warning levels," even
though above minimum capital requirements, could cause material adverse
consequences to the broker-dealer. For example, the SEC's capital
regulations prohibit payment of dividends, redemption of stock and the
prepayment of subordinated indebtedness if a broker-dealer's net capital
thereafter would be less than 5% of aggregate debit items. These regulations
also prohibit principal payments in respect of subordinated indebtedness if a
broker-dealer's net capital thereafter would be less than 5% of aggregate
debit items.
Compliance with regulatory capital requirements could limit the
operations of Conning & Company or Conning Asset Management Company that
require the intensive use of capital, such as underwriting and trading
activities, and financing of customer account balances, and also
14
<PAGE> 17
could restrict the Company's ability to withdraw capital from Conning &
Company and Conning Asset Management Company, which in turn could limit its
ability to pay dividends, repay debt and redeem or purchase shares of its
outstanding capital stock.
At December 31, 1997, Conning & Company was required to maintain minimum
net capital, in accordance with SEC rules, of approximately $630,000 and had
total net capital of approximately $4.7 million, or approximately $4.1
million in excess of the amount required.
Employees
As of January 31, 1998, the Company employed approximately 280
employees. None of the Company's employees is subject to a collective
bargaining agreement. The Company believes that its relations with its
employees are good.
ITEM 2. PROPERTIES
The Company's headquarters and certain of its executive offices are
located in an approximately 25,000 square foot office space located at 700
Market Street, St. Louis, Missouri 63101 pursuant to a lease from General
American. The Company also maintains executive offices in a 49,500 square
foot office space located at 185 Asylum Street, Hartford, Connecticut
pursuant to a lease expiring in 2005 with annual base rental expense of
approximately $1.0 million until 1999 and a base rental expense of
approximately $1.2 million from 1999 until 2004, subject to increases for
taxes, insurance and operating expenses. The Company also leases from third
parties, or subleases from General American, each of eleven other office
sites for its various mortgage loan and real estate offices located in
Arizona, California (2), Colorado (2), Florida, Georgia, Illinois, Missouri,
Texas and Washington, D.C.
The Company's principal offices in St. Louis and all but one of the
remote office spaces described above are rented pursuant to written leases
and a sublease between the Company and General American. The terms of such
leases and the sublease (collectively, the "Leases"), were designed to
approximate the cost to General American of owning or leasing such spaces.
ITEM 3. 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,
15
<PAGE> 18
as it remains in the preliminary stages and discovery has not been completed,
the Company 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 and Fund I 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1997.
16
<PAGE> 19
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company currently are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Leonard M. Rubenstein 52 Chairman and Chief Executive Officer
Maurice W. Slayton 59 President
Mark E. Hansen 48 Executive Vice President
Fred M. Schpero 44 Senior Vice President and Chief Financial Officer
</TABLE>
Following is certain additional information concerning each executive
officer of the Company. Each such individual has served in his present
capacity of his principal occupation for the last five years, unless
otherwise indicated.
LEONARD M. RUBENSTEIN, C.F.A., has been Chairman of the Board and Chief
Executive Officer of the Company since 1995 and also serves as Chairman,
Chief Executive Officer and Chief Investment Officer of Conning Asset
Management Company. Mr. Rubenstein has 25 years of investment experience.
Prior to his position with Conning, Mr. Rubenstein spent 23 years in the
investment operations of General American, where he held various positions,
including Executive Vice President of Investments. Mr. Rubenstein is a
director of a number of General American subsidiaries, none of which is
registered with the SEC except Reinsurance Group of America, Incorporated.
From 1984 to 1991, he served as Vice President of General American. He is a
past president of the St. Louis Society of Financial Analysts.
MAURICE W. SLAYTON has been the President of the Company since 1995 and
also serves as President and Chief Executive Officer of Conning & Company.
Mr. Slayton joined Conning in 1973. Prior thereto, he had 12 years of
experience with Hartford Steam Boiler Inspection and Insurance Company and
National Life of Vermont in a number of insurance and investment positions.
He is currently a director of several insurance related entities, none of
which is registered with the SEC except PennCorp Financial Group, Inc. Mr.
Slayton is a member and past president of The Hartford Society of Financial
Analysts.
MARK E. HANSEN, C.F.A., has been the Executive Vice President of the
Company since 1995, Executive Vice President of Conning & Company since 1993
and Executive Vice President of Conning Asset Management Company since August
1996. Mr. Hansen also served as a director of the Company from August 1995
until March 1997. Mr. Hansen has over 25 years of investment experience,
having joined Conning in 1984 from the Bank of Boston-Connecticut.
17
<PAGE> 20
FRED M. SCHPERO, C.P.A., has been a Senior Vice President and Chief
Financial Officer of the Company since January 1997. Prior to that time, Mr.
Schpero was Vice President and Chief Financial Officer of Conning & Company
from 1985 through 1996 and at Conning Asset Management Company from August
1996 through December 1996. Prior to joining Conning, he was 2nd Vice
President--Finance with Security Connecticut Life Insurance Company and a
senior accountant at the public accounting firm of Coopers & Lybrand LLP.
Mr. Hansen has informed the Company of his desire to reduce his work
schedule. As a result, the Company and Mr. Hansen have agreed that, effective
May 1, 1998, Mr. Hansen will work for the Company on a part-time basis for
reduced compensation. In connection with this change, Mr. Hansen will no
longer be an executive officer of the registrant, but will continue to serve
as Executive Vice President of Conning Asset Management Company. Effective
April 1, 1998, Mr. Hansen's responsibilities will be assumed by Donald L.
McDonald and Christopher J. Swift. Mr. McDonald will head the Company's asset
management business, while Mr. Swift will be responsible for sales and
marketing. Both of these functions were previously under Mr. Hansen's
supervision. The Company's other areas will continue under their current
leadership. Specifically, Thomas D. Sargent will be responsible for the
research group, John B. Clinton will head the private equity group and
Michael D. McLellan will be in charge of mortgage loans and real estate.
Effective April 1, 1998, each of these five unit heads will report directly
to the CEO and will serve as executive officers of the Company. Following is
additional information about these officers.
JOHN B. CLINTON, C.P.C.U., C.P.A., has been a Senior Vice President in
the private equity area since 1992. Prior to joining Conning & Company, Mr.
Clinton was with KCP Holding Company and its subsidiary, National American
Insurance Company of California, where he was CFO and Director. Prior to
this, he was a Vice President of Dillon Read & Co., Inc. and a founding
partner of Concord Partners, a private equity fund. He previously worked for
New Court Securities and KPMG Peat Marwick LLP. Mr. Clinton is 42 years of
age.
DONALD L. McDONALD has been a Senior Vice President in the asset
management group since 1993. Mr. McDonald joined Conning & Company in 1992
from Daiwa Securities of America, where he was head of the mortgage-backed
securities area. He has 15 years investment experience, including with
Roosevelt & Cross and Salomon Brothers. Mr. McDonald is 35.
MICHAEL D. McLELLAN is a Senior Vice President and has been with the
Company since its formation in 1995. Prior to his position with the Company,
Mr. McLellan spent 13 years with General American Investment Management
Company and General American Life Insurance Company, where he held various
positions including Vice President of Mortgage Loans and Real Estate. Mr.
McLellan is an M.A.I. candidate (Member Appraisal Institute). Mr. McLellan
also served as a director of the Company from August 1995 until April 1997.
He is 41 years of age.
THOMAS D. SARGENT, C.F.A., has been a Senior Vice President in the
research and publications area since 1993. Prior to joining Conning & Company in
1986, Mr. Sargent was in the commercial lending area at Connecticut Bank & Trust
Company. He is 39.
CHRISTOPHER J. SWIFT, C.P.A., has been a Senior Vice President since
October 1997. Prior to joining the Company, Mr. Swift was an accountant with
KPMG Peat Marwick LLP for approximately 14 years, most recently as a financial
services partner of the St. Louis office specializing in the insurance and
mutual fund industries. Mr. Swift also served as the market leader of the
insurance practice for KPMG's St. Louis office. He is 37.
18
<PAGE> 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Price Range of Common Stock
On December 16, 1997, the Company's Common Stock commenced trading and
is listed on The Nasdaq Stock Market(SM) under the symbol "CNNG." There was no
established public trading market for the Common Stock prior to December 16,
1997.
For the period from December 16, 1997 through December 31, 1997, the
high and low sales price of the Common Stock was $17.25 and $14.25,
respectively.
The registration statement for the Company's initial public offering of
its Common Stock was effective December 15, 1997. The initial public
offering price established on such date was $13.50 per share.
The Company believes that there are approximately 73 holders of record
for the Common Stock at March 9, 1998. The Company believes that there are
in excess of 300 beneficial holders of the Common Stock.
Dividend Policy
On February 12, 1998, the Board of Directors of the Company established
the Company's initial dividend policy and declared a quarterly dividend of
$0.04 per share on the Common Stock to record holders as of March 5, 1998,
payable March 20, 1998. The declaration and payment of dividends to holders
of Common Stock will be at the discretion of the Company's Board of Directors
and will depend upon the Company's capital requirements and operating and
financial condition, as well as the legal and regulatory restrictions from
net capital rules of various regulatory bodies applicable to Conning &
Company and such other factors as the Board of Directors may deem relevant.
Use of Proceeds
In connection with its initial public offering in 1997, the Company
filed a Registration Statement on Form S-1, SEC File No. 333-35993 (the
"Registration Statement"), which was declared effective by the SEC on
December 15, 1997. Pursuant to the Registration Statement, the Company
registered 2,875,000 shares of its Common Stock, $0.01 par value per share,
for its own account. The offering commenced on December 15, 1997 and all
securities were sold in the offering. The aggregate offering price of the
registered shares was $38,812,500. The managing underwriters of the offering
were Donaldson, Lufkin & Jenrette Securities Corporation and A.G. Edwards &
Sons, Inc.
19
<PAGE> 22
From December 15, 1997 to December 31, 1997, the Company incurred the
following expenses in connection with the offering:
<TABLE>
<S> <C>
Underwriting discounts
and commissions $2,716,875
Other expenses 1,500,625
----------
Total Expenses $4,217,500
</TABLE>
All of such expenses were direct or indirect payments to unaffiliated
third parties.
The net offering proceeds to the Company after deducting the total
expenses above were $34,595,000. From December 15, 1997 to December 31,
1997, the Company used such net offering proceeds, in direct or indirect
payments to others, as follows:
<TABLE>
<S> <C>
Temporary investments<F*> $34,595,000
Working capital --
-----------
Total $34,595,000
<FN>
<F*> All temporary investments are cash, cash equivalents and
short-term investments; see notes 3 and 5 of the
consolidated financial statements in Item 8.
</TABLE>
Each of such amounts is a reasonable estimate of the application of the
net offering proceeds. This use of proceeds does not represent a material
change in the use of proceeds described in the prospectus of the Registration
Statement.
Recent Sales of Unregistered Securities
In August 1995, the Company issued certain securities in connection with
the Strategic Merger, as follows: (i) General American Holding Company
contributed all of the issued and outstanding common stock of GAIMCO (now
known as Conning Asset Management Company) to the Company in exchange for
6,710,000 shares of Company Common Stock; and (ii) each of the 21
shareholders and option holders of Conning, Inc., other than three
non-employee directors and two institutional shareholders (the
"Non-Contributing Shareholders"), contributed all of the common stock of
Conning, Inc. then owned by such shareholders to the Company and cancelled
all of their options to purchase Conning, Inc. Common Stock in exchange for
$4,505,002 in cash and 3,190,000 shares of the Company's Series A Convertible
Preferred Stock. The shares of Conning, Inc. owned by the Non-Contributing
Shareholders were acquired in exchange for cash payments. Also in connection
with the Strategic Merger, the Company awarded options exercisable for
1,000,000 shares of Class B Non-Voting Common Stock to 25 employees. In
connection with these transactions, the Company relied on the exemption from
registration contained in Section 4(2) of the Securities Act and Rule 506 of
Regulation D promulgated thereunder.
20
<PAGE> 23
Between November 1996 and January 1997, the Company sold 475,000 shares
of Series B Convertible Preferred Stock and awarded employee stock options
exercisable for 237,500 shares of Class B Non-Voting Common Stock to 29
employees and directors of the Company pursuant to a 1996 employee stock
purchase and option grant program, and amended and restated certain
provisions of a shareholder's agreement. In April 1997, the Company issued
110,000 shares of Class B Non-Voting Common Stock to two executive officers
and a director of the Company upon conversion of an equal number of shares of
Series B Convertible Preferred Stock at $1.67 per share. In connection with
these transactions, the Company relied on exemptions from registration
contained in Section 4(2) and Regulation D promulgated thereunder and Rule
701 of the Securities Act.
Concurrent with the closing of the Company's initial public offering in
December 1997, the 3,190,000 issued and outstanding shares of Series A
Convertible Preferred Stock were automatically converted into an equal number
of shares of Common Stock of the Company and all 1,237,500 outstanding stock
options to purchase Class B Non-Voting Common Stock became options to
purchase Common Stock. In connection with this transaction, the Company
relied on the exemption from registration contained in Section 3(a)(9) of the
Securities Act. Also concurrent with the closing of the initial public
offering, the 365,000 issued and outstanding shares of Series B Convertible
Preferred Stock were converted into an equal number of shares of Common Stock
of the Company at $1.67 per share. In connection with this transaction, the
Company relied on the exemption from registration contained in Section 4(2)
of the Securities Act and Regulation D promulgated thereunder and Rule 701 of
the Securities Act.
21
<PAGE> 24
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
(amounts in 000's, except per share data)
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995 1995 1994 1993
CONNING CORPORATION (Pro forma)
======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:<F1>
REVENUE:
Asset management and related fees $49,503 $40,456 $30,675 $24,050 $3,484 $2,446
Research services 15,479 12,148 9,480 4,090 -- --
Other income 1,634 1,062 996 663 57 36
- ----------------------------------------------------------------------------------------------------------------------
Total revenues 66,616 53,666 41,151 28,803 3,541 2,482
Expenses:
Employee compensation and benefits 33,632 26,002 18,336 12,027 -- --
Amortization of goodwill and other 2,969 3,081 2,911 1,289 -- --
All other expenses 14,572 12,791 12,515 9,195 1,429 1,141
- ----------------------------------------------------------------------------------------------------------------------
Total expenses 51,173 41,874 33,762 22,511 1,429 1,141
Operating income 15,443 11,792 7,389 6,292 2,112 1,341
Interest expense 301 729 1,364 521 -- --
Income before provision for income taxes 15,142 11,063 6,025 5,771 2,112 1,341
Provision for income taxes 6,226 4,851 2,739 2,359 827 507
- ----------------------------------------------------------------------------------------------------------------------
Net income 8,916 6,212 3,286 3,412 1,285 834
Preferred stock dividends 963 906 906 351 -- --
Net earnings available to common shareholders $ 7,953 $ 5,306 $ 2,380 $ 3,061 $1,285 $ 834
Earnings per share:
Basic $ 1.13 $ 0.79
Diluted $ 0.80 $ 0.57
<CAPTION>
As of December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $99,857 $50,020 $46,177 $1,683 $1,386
Long-term debt -- 2,000 9,000 -- --
Total liabilities 26,152 20,870 24,552 356 594
Convertible preferred stock -- 24,782 17,002 -- --
Total common shareholders' equity 73,705 4,368 4,623 1,327 792
Number of share outstanding 13,250 6,710 6,710 0.1 0.1
<CAPTION>
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
Total Assets Serviced
(end of period, in billions)
<S> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:<F2>
Assets under discretionary management:
Unaffiliated $11.8 $10.1 $ 8.9 $ 6.9 $ 6.3
Affiliated 14.2 10.6 8.7 6.6 5.8
- ------------------------------------------------------------------------------------------------------------
Total 26.0 20.7 17.6 13.5 12.1
Investment advisory 21.3 20.8 15.9 14.7 14.7
Investment accounting and reporting 32.8 11.7 6.7 2.8 2.5
- ------------------------------------------------------------------------------------------------------------
Total assets serviced $80.1 $53.2 $40.2 $31.0 $29.3
22
<PAGE> 25
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA (continued)
(amounts in 000's, except per share data)
Six months
ended June 30, Year Ended
-------------------------------------------------------------
CONNING INC. AND SUBSIDIARIES <F3> 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUE:
Asset management and related fees $ 5,662 $ 9,840 $ 8,107
Research services 4,564 8,165 13,473
Other income 275 472 1,282
- ----------------------------------------------------------------------------------------------------------------------
Total revenues 10,501 18,477 22,862
EXPENSES:
Employee compensation and benefits 5,322 10,196 10,616
Amortization of goodwill and other -- -- --
All other expenses 3,087 5,530 7,805
- ----------------------------------------------------------------------------------------------------------------------
Total expenses 8,409 15,726 18,421
Operating income 2,092 2,751 4,441
Interest expense -- -- 85
- ----------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 2,092 2,751 4,356
Provision for income taxes 809 1,244 947
- ----------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 1,283 1,507 3,409
Cumulative effect of accounting change -- -- 131
- ----------------------------------------------------------------------------------------------------------------------
Net income 1,283 1,507 3,540
Preferred stock dividends 160 320 320
- ----------------------------------------------------------------------------------------------------------------------
Net earnings available to common shareholders $ 1,123 $ 1,187 $ 3,220
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
-------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $16,003 $14,228 $11,274
Long-term debt -- -- --
Total liabilities 6,927 6,392 5,072
Cumulative preferred stock 3,650 3,650 3,650
Total common shareholders' equity 5,426 4,186 2,552
Number of shares outstanding (end of period) 108 106 93
<FN>
- ------
<F1> The 1993 and 1994 years reflect results for General American Investment
Management Company (GAIMCO) only. The 1995 year reflects results of
the consolidated activity from August 1, 1995 to December 31, 1995
and the results of GAIMCO only from January 1, 1995 to July 31, 1995.
Pro forma 1995 results reflect the consolidated activity for the year
assuming the Strategic Merger took place on January 1, 1995. The
years subsequent (1996 and 1997) reflect actual consolidated results.
See Notes 1 and 2 to the Company's Consolidated Financial Statements.
<F2> Since January 1, 1995, the assets of the general account of General
American Life Insurance Company (General American) have been under
contract with GAIMCO. Assets prior to January 1, 1995 were managed
by the investment division of General American, a predecessor of
GAIMCO, and are included in assets under management as of December
31, 1993 and 1994. Data for 1995 and prior periods are presented on
a pro forma basis to include both Conning and GAIMCO assets under
management.
(3) The above information represents certain financial data of Conning, Inc.
and its subsidiaries for the years ended December 31, 1993 and 1994
and for the six-month period ended June 30, 1995 representing periods
prior to the Strategic Merger.
</TABLE>
23
<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Corporate Overview
The Company was formed on August 11, 1995 as a holding company to effect
the merger (the "Strategic Merger") of Conning, Inc. and its operating
subsidiary, Conning & Company (collectively, "Conning, Inc.") with Conning
Asset Management Company, formerly known as General American Investment
Management Company ("GAIMCO"). See Note 1 of the Company's Notes to
Consolidated Financial Statements. Conning, Inc. was an 85-year-old Hartford,
Connecticut-based insurance specialty asset management firm that provided
asset management services and research for the insurance industry. GAIMCO was
a registered investment adviser that provided investment advisory services
primarily to its parent, General American Life Insurance Company ("General
American") and its affiliates. The parties effected the Strategic Merger in
order to combine complementary businesses, each with specialties in the
insurance industry, in order to build a platform from which to leverage
additional growth.
The Company's revenues consist of asset management and related fees,
research service fees and other income.
The Company's asset management and related revenues derive 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 General American
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 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 are 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
usually approximate 1% of the loan balance, as well as fees associated with
ongoing servicing and management fees with respect to loans in portfolios
managed by the Company. In addition to loans for General American and its
affiliates, the Company has originated mortgage loans for certain
unaffiliated portfolios and for a securitized offering with an investment
banking firm.
Payment for the Company's research services is primarily in the form of
commissions derived from securities transactions effected by the Company and,
to a lesser extent, subscription fees for research publications. A negotiated
commission is received on each listed equity transaction, and total
commission revenues depend on the value that clients place on the research
24
<PAGE> 27
services the Company provides. In addition, the research services revenues
received by the Company reflect underwriting fees in connection with
participation in public offerings of insurance and insurance-related
companies.
Upon consummation of the Strategic Merger, General American owned 100% of
the outstanding Common Stock of the Company. If all of the outstanding shares
of convertible preferred stock were converted as of the date of the Strategic
Merger, General American would have owned approximately 65% of the
outstanding Common Stock, without giving effect to outstanding stock options.
Under generally accepted accounting principles, the GAIMCO contribution was
recorded at historical book value as a combination of entities under common
control. The Conning & Company contribution was recorded utilizing the
purchase accounting method. The historical financial statements include the
operations of GAIMCO through July 31, 1995, and consolidated operations
thereafter. The excess of purchase price over the fair value of net assets
acquired resulted in goodwill of $20.3 million.
As a result of the required accounting presentation and the inherent
difficulties of analyzing the historical financial statements for periods
prior to 1996 and comparing them to subsequent results, the Company included
financial information for 1995 on a pro forma basis as if the Strategic
Merger occurred on January 1, 1995. The following discussion begins with a
comparison of the historical financial statements and follows with a
discussion of results based on the pro forma financial information which is
found in Note 2 of the Company's Notes to Consolidated Financial Statements.
See also "Selected Consolidated Financial Data."
Results of Operations
Historical Financial Statements
Statement of Income for 1997 compared to 1996
Asset Management and Related Fees. Asset management and related fees
increased 22% from $40.5 million in 1996 to $49.5 million in 1997. The most
significant portion of this $9.0 million increase was attributed to increased
investment management fees resulting from growth in the base of assets under
management for both new and existing clients. Assets under discretionary
management increased approximately 26% from $20.7 billion at December 31,
1996 to $26.0 billion at December 31, 1997. Assets for which Conning
provides investment accounting and reporting services on a stand-alone basis
grew significantly during 1997, from $11.7 billion at the end of 1996 to
$32.8 billion at the end of 1997, primarily as a result of new client
activity. Investment accounting and reporting fees did not contribute
significantly to the overall increase in asset management and related fees in
1997 due to the lower fee structure on this service and the fact that a large
portion of the increased client base occurred in the latter half of 1997.
Private equity fund management fees accounted for approximately 21% of the
total 1997 increase in asset management and related fees as the Company
completed the initial closing for a new fund, Conning Insurance Capital
Limited Partnership V. The final closing of the fund was in January 1998 for
a total of $225 million, all of which was effective as of August 1997.
25
<PAGE> 28
Research Services. Research services revenues increased 27% from $12.1
million in 1996 to $15.5 million in 1997 primarily due to the growth in the
core research business resulting from new accounts and increased penetration
of existing accounts. The Company also benefited from increased underwriting
activity, including co-management of four insurance equity offerings during
1997 compared to two co-managed offerings in 1996. In the aggregate, the
Company generated revenues from underwriting activities of $4.3 million in
1997, as compared to $4.0 million in 1996. In general, underwriting revenues
are highly volatile, depending on a variety of factors, including market
conditions and transaction activity; accordingly, no assurance can be given
as to the amount of such revenues, if any, that may arise in future periods.
Other Income. Other income increased approximately 54%, from $1.06
million in 1996 to $1.63 million in 1997 as a result of an increase in the
value of certain securities owned by the Company.
Expenses. Total expenses increased 22% from $41.9 million for the year
ended December 31, 1996 to $51.2 million for the year ended December 31, 1997
due primarily to increased employee costs. Employee costs increased 29% from
$26.0 million for 1996 to $33.6 million for 1997 due to additional staffing
to keep pace with increased revenue activity and additional incentive
compensation as a result of the significant growth in operating income.
Occupancy and equipment costs increased approximately $1.0 million from $2.6
million in 1996 to $3.6 million in 1997 due to widespread upgrading of the
firm's personal computers during the year as well as the leasing of
additional office space.
Interest Expense. Interest expense decreased by more than half from $0.7
million for 1996 to $0.3 million for 1997 due to the continuing reduction of
principal on long-term debt payable to General American. The final principal
payment was made in February 1997.
Income Taxes. Provision for income taxes increased 29% from $4.8 million
for 1996 to $6.2 million for 1997 as a direct result of the increase in
income before provision for income taxes.
Net Income. As a result of all of the above, net income increased 44%
from $6.2 million for 1996 to $8.9 million for 1997.
Statement of Income for 1996 compared to 1995
All consolidated revenue and expense categories are greater in 1996 than
1995 because each consolidated revenue and expense category includes the full
year's results of Conning, Inc. in 1996 and only five months of Conning, Inc.
results in 1995. The effective federal and state tax rate increased from
40.9% in 1995 to 43.8% in 1996. The higher state tax rate from Conning,
Inc.'s operations is included for the full year in 1996 and for only five
months in 1995.
Goodwill arising from the Strategic Merger in the amount of $20.3
million is being amortized on a straight-line basis over 20 years. This
resulted in amortization expense of $0.4 million in 1995 and $1.0 million in
1996.
26
<PAGE> 29
Pro Forma Financial Information
Statement of Income for 1996 compared to Pro Forma 1995
Asset Management and Related Fees. Asset management and related fees
increased 32% from $30.7 million in 1995 to $40.5 million in 1996 primarily
due to the addition of new clients and growth in assets of existing clients,
and to a lesser extent as a result of a resurgence in the real estate market
and growth in mortgage assets from new and existing clients. Assets under
discretionary management increased 18% from $17.6 billion at December 31,
1995 to $20.7 billion at December 31, 1996, 6% because of additions of new
clients and 12% because of growth of assets of existing clients. Private
equity fund management and related fees increased 21% from $3.9 million in
1995 to $4.7 million in 1996 due primarily to the March 1996 completion of
Conning Insurance Capital Limited Partnership IV with committed capital of
$40 million.
Research Services. Research services revenues increased 28% from $9.5
million in 1995 to $12.1 million in 1996 due primarily to the increased
capital markets activity in the insurance industry and the increase in core
research revenues in 1996. Conning is often a member of underwriting
syndicates of insurance company offerings and twice during 1996 acted as
co-manager of a secondary offering. In the aggregate, the Company generated
revenues from underwriting activities of $4.0 million in 1996, as compared to
$1.2 million in 1995. In general, underwriting revenues are highly volatile,
depending on a variety of factors, including market conditions and
transaction activity; accordingly, no assurance can be given as to the amount
of such revenues, if any, that may arise in future periods.
Other Income. Other income remained virtually unchanged at $1.1 million,
primarily reflecting miscellaneous nonrecurring revenues.
Expenses. Employee compensation and benefits increased 42% from $18.3
million in 1995 to $26.0 million in 1996 primarily due to the higher
incentive compensation as a result of the large increase in operating results
from 1995 to 1996, as well as additions to staff during 1996. The Company's
incentive compensation practice is based on the level of and growth in the
Company's operating profits. Other operating expenses increased 2% from $12.5
million in 1995 to $12.8 million in 1996, reflecting additional ancillary
costs from increased hiring and increased marketing expenses. Goodwill of
$20.3 million resulting from the Strategic Merger is being amortized on a
straight-line basis over 20 years. Amortization of goodwill and other charges
totaling $2.9 million in 1995 and $3.1 million in 1996 are noncash expenses
and do not affect cash available for other operating or capital needs.
Interest Expense. Interest expense decreased 47% from $1.4 million in
1995 to $0.7 million in 1996 due primarily to prepayments of debt during
1996. Debt outstanding was $9.0 million and $2.0 million at December 31, 1995
and 1996, respectively. Such debt arose from the Strategic Merger and was
payable to General American.
Income Taxes. The provision for income taxes increased $2.1 million from
$2.7 million in 1995 to $4.8 million in 1996 due to the increase in pre-tax
earnings of the Company.
27
<PAGE> 30
Net Income. As a result of all of the above, net income increased $2.9
million from $3.3 million in 1995 to $6.2 million in 1996.
Liquidity and Capital Resources
For purposes of this discussion, see Note 1 of Notes to the Company's
Consolidated Financial Statements for the principal operating entities that
are included as part of the Company.
The Company's business is not capital-intensive. Working capital
requirements for the Company have historically been provided almost
exclusively by operating cash flow. It is expected that such cash flows will
continue to serve as the principal source of working capital for the Company
for the near future.
Conning & Company is subject to the net capital requirements imposed on
registered broker-dealers under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). At December 31, 1997, Conning & Company had net
capital (as defined by the Exchange Act) of approximately $4.7 million, which
was approximately $4.1 million in excess of the regulatory minimum. Conning &
Company has in place a revolving subordinated loan facility 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 8,
1998. Any amounts drawn under such facility would bear interest based on a
fixed rate at the then prevailing rate plus a specified amount per annum.
As of December 31, 1997, the Company had no outstanding long-term debt.
The Company had total outstanding long-term debt at December 31, 1996 in the
principal amount of $2.0 million. Such debt arose from the Strategic Merger
and was payable to General American in the initial principal amount of $13.0
million bearing interest at an annual rate of 7.0%. The remaining debt was
paid in full in February 1997.
The Company or a subsidiary acts as the general partner of certain
private equity funds and maintains a 1% general partner 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.
The Company received approximately $34.5 million in net proceeds from
the stock offering that will be used for general corporate purposes. The
Company's business strategy contemplates that it will seek to complement
internal growth with strategic investments and acquisitions. Accordingly, a
portion of the net proceeds may also be used for acquiring related businesses
or investing in strategic or joint venture relationships. The Company has no
present understandings, agreements or commitments with respect to any such
acquisition, and no assurance can be given that any such acquisition will
take place. Pending application to the uses described above, the Company has
invested the net proceeds from the offering in short-term, investment-grade,
interest-bearing securities.
28
<PAGE> 31
New Accounting Pronouncements
During 1997 the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards (SFAS) No. 130 - "Reporting
Comprehensive Income." The Statement establishes standards for reporting and
displaying income and its components (revenues, gains, and losses) in a full
set of general purpose financial statements. The Statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. Although
the Statement is effective for fiscal years beginning after December 15,
1997, the Company does not believe that SFAS No. 130 will have a material
impact to the company's financial statements.
In addition, the FASB issued SFAS No. 131 - "Disclosures about Segments
of an Enterprise and Related Information." The Statement establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. Additionally, the Statement
establishes standards for related disclosures about products and services,
geographic areas, and major customers superseding SFAS No. 14 - Financial
Reporting for Segments of a Business Enterprise. The Company is currently
evaluating the Statement as to whether additional information would be
required to be included in the Company's financial statements beginning in
1998.
Year 2000 Compliance
As the year 2000 approaches, a critical business issue has emerged
regarding how existing application software programs and operating systems
can accommodate this date value. In brief, many existing application software
products in the marketplace were designed to only accommodate a two-digit
date position which represents the year (e.g., '95 is stored on the system
and represents the year 1995). As a result, the year 1999 (i.e., '99) could
be the maximum date value these systems will be able to accurately process.
During the course of its business, the Company utilizes information from
third-party sources, such as security pricing vendors and custodians.
Management is in the process of working with its software vendors to assure
that the Company is prepared for the year 2000, however the Company has no
direct control over the year 2000 compliance positions of such sources. The
Company also is in the process of analyzing its systems and requirements.
Based on information currently available, management does not anticipate that
the Company will incur significant operating expenses or be required to
invest heavily in computer system improvements to be year 2000 compliant. To
the extent the Company's systems are not fully year 2000 compliant, there can
be no assurance that potential systems interruptions or the cost necessary to
update software would not have a material adverse effect on the Company's
business, financial condition, results of operations and business prospects.
29
<PAGE> 32
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 Form 10-K and in future filings by
the Company with the SEC, in the Company's press releases and in oral
statements made with the approval of an authorized executive officer 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 General American'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. Factors that could
cause actual results to differ materially (the "Cautionary Statements")
include, but are not limited to, those discussed under the caption "Risk
Factors and Cautionary Statements." In addition to the "Risk Factors and
Cautionary Statements", the Company's business entails a variety of
additional risks, which are set forth in documents the Company has filed or
will file from time to time with the SEC. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by the Cautionary
Statements. 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.
Risk Factors and Cautionary Statements
Risks Associated with Insurance Industry Focus. Because the Company
focuses on providing asset management services to the insurance industry, its
business may be materially adversely affected by events impacting the
insurance industry. In particular, the insurance industry has been
experiencing consolidation as companies merge or are acquired. In the event
such consolidation activity continues and the Company's current or
prospective clients are acquired, their assets may subsequently be managed by
the combined company's internal staff or by another external manager. In
such event, the Company's business, financial condition, results of
operations and business prospects could be materially adversely affected.
Further, as a greater percentage of insurance company assets have shifted to
external management, additional opportunities to capture externally managed
assets may be limited. In addition, changes affecting the insurance
industry, including any changes in federal or state laws or regulations
relating thereto, including, without limitation, any change adversely
affecting insurance products or insurance company investments, may have a
materially adverse effect on the Company's business, financial condition,
results of operations and business prospects.
Dependence on Principal Shareholder. The Company's business, financial
condition, results of operations and business prospects are significantly
dependent on its relationship with
30
<PAGE> 33
its principal shareholder, General American, a wholly-owned subsidiary of
GenAmerica Corporation. As of December 31, 1997, General American and its
affiliates accounted for approximately $14.1 billion of the approximately
$26.0 billion in assets which the Company had under discretionary management.
The advisory agreements between General American or one of its affiliates and
the Company are subject to termination upon 30 to 90 days' notice without
penalty; General American is a co-licensee with the Company to the Company's
investment accounting and reporting software. There can be no assurance that
General American and its affiliates will maintain or not seek to renegotiate
their existing investment advisory relationships with the Company in the
future, and the renegotiation of such relationships could have, and the
termination of such relationships would have, a material adverse effect on
the Company's business, financial condition, results of operations and
business prospects. Additionally, General American presently leases to the
Company all of the Company's office space in St. Louis and provides to the
Company certain administrative services. There can be no assurance that such
arrangements will continue or that the Company would be able to procure
replacement office space or services on similar or otherwise favorable terms.
Potential Conflicts of Interest. General American beneficially owns
approximately 63% of the Common Stock. The Company's Board of Directors
consists of five directors, three of whom are officers of the Company or
General American, and two of whom are not otherwise affiliated with the
Company or General American (the "Independent Directors"). General American
has the power to elect the Board of Directors and to approve certain actions
requiring shareholder approval, including adopting amendments to the
Company's articles of incorporation, and to control certain other actions
requiring shareholder approval, including mergers or sales of substantially
all of the assets of the Company or its subsidiaries. For financial
reporting purposes, General American will include its share of the Company's
net income or loss in its consolidated financial statements. The Company's
Board of Directors, including members who also are affiliated with General
American, may consider not only the short-term and long-term impact of
operating decisions on the Company but also the impact of such decisions on
General American.
The Company is a party to investment advisory, administrative services,
and other agreements with General American and certain of its affiliates.
Certain officers of the Company were also officers of General American when
such agreements were entered into. Although the Company believes that the
terms of such agreements are at least as favorable to the Company as those it
could negotiate with unrelated parties, these agreements may be modified or
renegotiated in the future and additional agreements or transactions may be
entered into between the Company, on the one hand, and General American or
its affiliates, on the other hand. Conflicts of interest could arise between
General American and its affiliates with respect to any of the foregoing, or
any future agreements or arrangements between them.
Executive officers, directors and employees of the Company from time to
time receive a profit interest in, and in the future may invest in,
investment funds in which the Company, or an affiliate of the Company, is a
sponsor or an investor or for which the Company performs asset management
services, publishes research or acts as a market-maker. In addition, the
Company may in the future organize businesses in which employees of the
Company acquire minority interests. There is a risk that, as a result of any
such profit or investment interest, a
31
<PAGE> 34
director, officer or employee may take actions which could conflict with the
best interests of the Company.
Dependence on Key Personnel. The Company's future performance depends
to a significant degree upon the continued contributions of its officers, key
management and other key personnel. The loss of any key personnel or the
inability to hire additional skilled personnel could materially and adversely
affect the Company's business, financial condition, results of operations and
business prospects.
Significant Industry Competition. All of the Company's businesses are
conducted in highly competitive markets as discussed above. Many of the
Company's current and potential competitors are larger and have access to
greater resources. Such competition could have a material adverse effect on
the Company's business, financial condition, results of operations and
business prospects, as well as its ability to attract and retain highly
skilled individuals as employees.
Risks Associated with Acquisitions. As part of its business strategy,
the Company intends to consider acquisitions of similar or complementary
businesses. No assurance can be given that the Company will be successful in
identifying attractive acquisition candidates, completing acquisitions on
favorable terms or effectively integrating the operations, personnel,
business and products of the acquired companies.
Changes in Economic or Market Conditions Affecting Fee Levels. Changes
in economic and market conditions may adversely affect the profitability and
performance of and demand for the Company's services. A significant portion
of the Company's revenues is derived from asset management fees, which are
generally based on the market value of assets under management.
Consequently, the total value and composition of assets under management and
related cash inflows and outflows, and changes in the investment patterns,
policies, and regulations of the Company's clients may affect materially the
amount of assets under management and thus the Company's revenues and
profitability.
Regulation. The Company's business is also subject to substantial
governmental regulation, and changes in legal, regulatory, accounting, tax,
and compliance requirements could have a material adverse effect on the
Company's business, financial condition, results of operations and business
prospects.
Termination Provisions of Investment Advisory Agreements. A large
portion of the Company's revenues is derived from investment advisory
agreements with insurance companies, particularly General American and its
affiliates, and institutional clients, which agreements are generally
terminable upon 30 to 90 days' notice without penalty. The termination of
any of these agreements representing a material portion of assets under
management could have a material adverse effect on the Company's business,
financial condition, results of operations and business prospects.
Risk of Systems Failure; Dependence on Vendors. The Company's business
is highly dependent on communications and information systems and certain
third-party vendors for
32
<PAGE> 35
securities pricing information and updates on certain software. The
Company's investment accounting and reporting services depend on the
timeliness and accuracy of reports furnished by the Company to its customers.
Any delays or inaccuracies in such information may give rise to potential
claims against the Company and could materially adversely affect the
Company's business, financial condition, results of operations and business
prospects. Further, there can be no assurance that the Company will not
suffer a systems failure or interruption, whether caused by an earthquake,
fire, other natural disaster, power or telecommunications failure, act of
God, act of war or otherwise, or that the Company's back-up procedures and
capabilities in the event of any such failure or interruption will be
adequate.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and 1996 34
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 35
Consolidated Statements of Common Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995 36
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 37
Notes to Consolidated Financial Statements 38
Independent Auditors' Report 55
33
<PAGE> 36
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31,
-----------------------------
1997 1996
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $43,085,406 $ 9,816,568
Short-term investments 16,337,362 7,901,637
Accounts receivable, net (Note 10) 10,784,236 5,297,660
Marketable equity securities 600,662 45,625
Income taxes receivable 1,355,973 11,447
Prepaid expenses and other current assets 358,669 162,622
- ------------------------------------------------------------------------------------------------
Total current assets 72,522,308 23,235,559
Non-marketable investments at value 2,349,678 1,756,931
Equipment and leasehold improvements, at cost,
less accumulated depreciation of $1,127,320 and $562,812 1,525,436 815,112
Deferred income taxes 1,736,413 1,572,859
Goodwill 17,812,822 18,825,870
Other assets 3,910,696 3,813,608
- ------------------------------------------------------------------------------------------------
Total assets $99,857,353 $50,019,939
================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Compensation payable $11,149,000 $ 8,422,199
Deferred revenue 3,201,336 1,533,290
Due to affiliates 1,379,188 1,473,811
Accounts payable and other accrued expenses 6,566,742 2,707,872
Preferred dividends payable -- 235,815
- ------------------------------------------------------------------------------------------------
Total current liabilities 22,296,266 14,372,987
Accrued rent liability 3,375,465 3,643,996
Long-term debt payable to affiliates -- 2,000,000
Other payables 480,000 853,521
- ------------------------------------------------------------------------------------------------
Total liabilities 26,151,731 20,870,504
- ------------------------------------------------------------------------------------------------
Series A convertible preferred stock, $.01 par value,
$5.33 liquidation value: 3,190,000 shares authorized,
issued and outstanding in 1996 -- 22,330,004
Series B convertible preferred stock, $.01 par value,
$5.33 liquidation value: 600,000 shares authorized,
460,000 issued and outstanding in 1996 -- 2,451,800
- ------------------------------------------------------------------------------------------------
Total convertible preferred stock -- 24,781,804
- ------------------------------------------------------------------------------------------------
Common stock, $.01 par value: 50,000,000 and 20,000,000
shares authorized in 1997 and 1996, respectively; 13,250,000
and 6,710,000 shares issued and outstanding in 1997 and 1996,
respectively 132,500 67,100
Additional paid-in capital 73,126,002 2,944,647
Retained earnings 447,120 1,355,884
- ------------------------------------------------------------------------------------------------
Total common shareholders' equity 73,705,622 4,367,631
- ------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $99,857,353 $50,019,939
================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
34
<PAGE> 37
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1997, 1996 and 1995
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Asset management and related fees (Note 10) $49,502,655 $40,456,343 $24,049,683
Research services 15,478,709 12,148,164 4,089,571
Other income 1,634,143 1,061,855 663,767
- ------------------------------------------------------------------------------------------------------------------
Total revenues 66,615,507 53,666,362 28,803,021
- ------------------------------------------------------------------------------------------------------------------
EXPENSES:
Employee compensation and benefits 33,632,314 26,001,771 12,027,224
Occupancy and equipment costs 3,552,179 2,584,544 1,498,641
Marketing and production costs 5,674,545 5,281,667 2,393,281
Professional services 1,992,032 1,537,220 3,555,052
Amortization of goodwill and other 2,968,964 3,081,219 1,288,911
Other operating expenses 3,352,641 3,387,588 1,748,349
- ------------------------------------------------------------------------------------------------------------------
Total expenses 51,172,675 41,874,009 22,511,458
- ------------------------------------------------------------------------------------------------------------------
Operating income 15,442,832 11,792,353 6,291,563
Interest expense 300,261 729,088 520,523
- ------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 15,142,571 11,063,265 5,771,040
Provision for income taxes 6,226,242 4,851,034 2,358,889
- ------------------------------------------------------------------------------------------------------------------
Net income $ 8,916,329 $ 6,212,231 $ 3,412,151
==================================================================================================================
Preferred stock dividends 963,127 905,715 350,900
- ------------------------------------------------------------------------------------------------------------------
Net earnings available to common shareholders $ 7,953,202 $ 5,306,516 $ 3,061,251
==================================================================================================================
Net Income:
Basic earnings per common share $ 1.13 $ 0.79
- ------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 0.80 $ 0.57
- ------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
35
<PAGE> 38
<TABLE>
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
For the years ended December 31, 1997, 1996 and 1995
<CAPTION>
Unrealized
appreciation Total
Common Additional (depreciation) common
stock Non-voting Common paid-in Retained on invest- shareholders'
shares common stock stock capital earnings ments, net equity
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 -- $ -- $ --- $ 55,000 $ 1,272,164 -- $ 1,327,164
Issuance of 6,710,000 shares
of common stock for
contribution of GAIMCO 6,710,000 -- 67,100 2,889,647 (2,956,747) -- --
Change in unrealized
appreciation (depreciation)
of investment, net of
deferred income taxes -- -- -- -- -- 234,300 234,300
Net income -- -- -- -- 3,412,151 -- 3,412,151
Dividends on preferred stock -- -- -- -- (350,900) -- (350,900)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 6,710,000 -- 67,100 2,944,647 1,376,668 234,300 4,622,715
Change in unrealized
appreciation (depreciation)
of investment, net
of deferred income taxes -- -- -- -- -- (234,300) (234,300)
Accretion on Series A preferred
stock -- -- -- -- (5,327,300) -- (5,327,300)
Net income -- -- -- -- 6,212,231 -- 6,212,231
Dividends on preferred stock -- -- -- -- (905,715) -- (905,715)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 6,710,000 -- 67,100 2,944,647 1,355,884 -- 4,367,631
Conversion of 110,000 shares
of Series B preferred stock -- 1,100 -- 768,900 -- -- 770,000
Tax benefit -- employee
compensation (Note 9) -- -- -- 1,134,785 -- -- 1,134,785
Accretion on Series A preferred
stock -- -- -- (4,848,332) (8,861,966) -- (13,710,298)
Issuance of common shares
through initial public
offering 2,875,000 -- 28,750 34,566,250 -- -- 34,595,000
Conversion of 3,555,000 shares
of preferred and 110,000
non-voting stock to common
stock 3,665,000 (1,100) 36,650 38,559,752 -- -- 38,595,302
Net income -- -- -- -- 8,916,329 -- 8,916,329
Dividends on preferred stock -- -- -- -- (963,127) -- (963,127)
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 13,250,000 $ -- $132,500 $73,126,002 $ 447,120 -- $ 73,705,622
===============================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
36
<PAGE> 39
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1996
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 8,916,329 $ 6,212,231 $ 3,412,151
Adjustment for items not affecting cash:
Depreciation 564,508 457,172 170,600
Amortization of goodwill and other 2,915,963 3,081,219 1,288,911
Allowance for doubtful accounts -- (97,750) 50,000
Deferred income tax provision 971,231 (1,457,941) (1,053,875)
Net unrealized appreciation on non-marketable securities -- (125,654) (191,426)
Net sales of securities held for market making (555,037) 35,625 34,537
Gain on sale of marketable securities -- (400,000) --
Accretion of discounts on short-term investments (192,723) (235,711) (70,161)
Changes in:
Accounts receivable (5,486,576) 1,182,662 3,000,376
Prepaid expenses and other assets (2,196,050) 1,569,898 2,194,688
Accounts payable and other accrued expenses 3,485,349 (833,147) 1,065,845
Income taxes receivable (1,344,526) 496,051 734,930
Due to affiliates (94,623) 637,578 (3,180,835)
Deferred revenue 1,668,046 (868,237) 2,093,952
Accrued rent liability (268,531) (270,200) (104,867)
Compensation payable 2,726,801 4,692,228 (2,839,348)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 11,110,161 14,076,024 6,605,478
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Sale of marketable securities -- 1,160,000 --
Purchases of non-marketable securities (592,747) (273,233) (242,415)
Proceeds from non-marketable partnership investments -- 417,568 --
Purchases of equipment and other assets, net (1,274,832) (1,238,050) (44,439)
Purchases of short-term investments (96,336,976) (46,567,333) (7,769,655)
Maturities of short-term investments 88,093,974 42,500,000 6,900,000
Contribution of GAIMCO cash -- -- 5,077,492
Acquisition of Conning, net of cash acquired -- -- (12,207,581)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (10,110,581) (4,001,048) (8,286,598)
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Issuance of common shares through initial public offering 34,595,000 -- --
Borrowings on long-term debt -- -- 13,000,000
Repayments on long-term debt (2,000,000) (7,000,000) (4,000,000)
Repayments on short-term debt -- (500,000) (2,000,000)
Other payments -- (312,268) (163,220)
Issuance of Series B preferred stock 79,950 2,451,800 --
Conversion of Series B preferred stock 793,250 -- --
Dividends on preferred stock (1,198,942) (893,200) (127,600)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 32,269,258 (6,253,668) 6,709,180
- -------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 33,268,838 3,821,308 5,028,060
Cash and cash equivalents, beginning of year 9,816,568 5,995,260 967,200
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 43,085,406 $ 9,816,568 $ 5,995,260
===================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 27,222 $ 446,531 $ 391,921
Income tax $ 6,763,457 $ 4,546,603 $ 1,761,076
Supplemental disclosure of non-cash information:
Preferred stock issued in Conning acquisition $ -- $ -- $ 17,002,704
Common stock issued in GAIMCO contribution $ -- $ -- $ 3,011,747
Accretion on Series A and B preferred stock $ 13,710,298 $ 5,327,300 $ --
Conversion of Series A and B preferred stock to
common stock $ 38,572,052 $ -- $ --
See accompanying notes to consolidated financial statements.
</TABLE>
37
<PAGE> 40
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-ORGANIZATION
Conning Corporation (the "Company"), formed in 1995 as a Missouri
corporation, is a holding company organized to hold the operating
subsidiaries in the Conning group, Conning Asset Management Company ("CAM",
formerly known as General American Investment Management Company, "GAIMCO")
and Conning & Company ("C&C"). The Company provides asset management and
research services focused upon the insurance industry. Both CAM and C&C are
registered investment advisers with the Securities and Exchange Commission
(the "SEC") under the Investment Advisers Act of 1940.
On August 11, 1995, the shareholders of the holding company of C&C
contributed all of their common stock to Conning Corporation in a Section 351
merger transaction (the "Strategic Merger") in exchange for cash and
convertible preferred stock of the Company. General American contributed all
of the outstanding common stock of GAIMCO as part of the Strategic Merger in
exchange for common shares of the Company. The GAIMCO contribution was
recorded at historical book value. The Conning portion of the Strategic
Merger was accounted for using the purchase method. The purchase price
consisting of cash of $12.0 million and $17.0 million of Series A Convertible
Preferred Stock was allocated to assets acquired based on their estimated
fair values. The excess of purchase price over the fair value of net assets
acquired resulted in $20.3 million of goodwill which is being amortized on a
straight line basis over 20 years.
All of the outstanding voting common stock of the Company was held
by a wholly owned holding company subsidiary of General American Life
Insurance Company (together "General American") through December 1997, whose
parent is GenAmerica Corporation ("GenAmerica"). In December 1997, the
Company issued an additional 2,875,000 shares registered through an initial
public offering. After the offering and conversion of all outstanding
convertible preferred stock (see Note 9) to common stock, General American
owns approximately 63% of the outstanding common stock.
The accompanying consolidated financial statements include the
accounts of Conning Corporation, Conning Inc. (the holding company parent of
C&C), Conning & Company and Conning Asset Management Company. The historical
financial statements include the operations of GAIMCO through July 31, 1995,
and consolidated operations thereafter.
NOTE 2-PRO FORMA RESULTS
The table below contains unaudited pro forma summary financial
information for the year ended December 31, 1995. The pro forma 1995
information was derived from the historical financial statements for Conning
Corporation, GAIMCO and Conning Inc. and gives effect to (i) the Strategic
Merger, (ii) the issuance of $13.0 million of debt by the Company at an
interest rate of 7% per annum for the purpose of providing the $12.0 million
cash portion of purchase price and payments of $1.0 million representing
employment bonuses to certain employees, (iii)
38
<PAGE> 41
the issuance of $17.0 million of Series A Convertible Preferred Stock and (iv)
the short-term borrowing of $2.5 million from General American at an interest
rate of 6.75% per annum by Conning Inc. effective prior to, and in anticipation
of, the Strategic Merger for the purpose of redeeming and retiring the 8%
cumulative senior preferred stock. The pro forma information has been prepared
assuming these transactions and arrangements were effected on January 1, 1995.
<TABLE>
<CAPTION>
December 31, 1995
- -----------------------------------------------------------------------------------
Pro Forma
(Unaudited)
- -----------------------------------------------------------------------------------
<S> <C>
Revenues:
Asset management and related fees $30,674,994
Research services 9,480,364
Other income 995,605
- -----------------------------------------------------------------------------------
Total revenues 41,150,963
- -----------------------------------------------------------------------------------
Expenses:
Employee compensation and benefits 18,336,044
Amortization of goodwill and other 2,911,384
Other operating expenses 12,514,187
- -----------------------------------------------------------------------------------
Total expenses 33,761,615
- -----------------------------------------------------------------------------------
Operating income 7,389,348
Interest expense 1,364,547
- -----------------------------------------------------------------------------------
Income before provision for income taxes 6,024,801
Provision for income taxes 2,738,954
- -----------------------------------------------------------------------------------
Net income $ 3,285,847
===================================================================================
Preferred stock dividends 905,715
- -----------------------------------------------------------------------------------
Net earnings available to common shareholder $ 2,380,132
===================================================================================
</TABLE>
NOTE 3-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements of the Company
have been prepared in conformity with generally accepted accounting
principles. For accounting purposes the Strategic Merger was effective at the
close of business July 31, 1995. The contribution of GAIMCO to the Company as
a result of the Strategic Merger is treated as a combination of entities
under common control, using historical cost basis accounting.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its subsidiaries after elimination of
intercompany balances and transactions.
Revenue Recognition - Asset management fees are determined
based on contractual provisions and are earned at varying percentages of
the assets under management. Such fees are accrued into income in the
period in which the service is provided. Research fees, primarily in
39
<PAGE> 42
the form of commissions derived from securities transactions effected by the
Company and, to a lesser extent, subscription fees for research publications,
are recorded in income when services are provided or earned. Mortgage loan fee
income, included in Asset Management and Related Fees, is earned through the
origination of mortgage loans for General American, its affiliates and outside
parties. The fees earned are based on agreements with the borrowers and are
recognized at the closing of the mortgage commitment. Deferred mortgage loan
origination fees represent moneys received for loan commitments that will be
earned upon loan funding and are included in deferred revenue on the
consolidated balance sheet.
Fair Value of Financial Instruments - Fair value estimates are made
at a specific point in time, based on relevant market information and
information about the financial instrument. Substantially all of the
Company's financial assets and liabilities are carried at market value or at
amounts which, because of their short-term nature, approximate current fair
value.
Cash and Cash Equivalents - Cash and cash equivalents represent cash
and highly liquid investments with original maturities of three months or
less. The Company had funds on deposit with General American amounting to
$10,505,557 and $6,449,642 at December 31, 1997 and 1996, which were readily
convertible to cash and earn interest at the short-term money market rates.
For purposes of the financial statements, such funds are considered cash
equivalents.
Short-Term Investments - Short-term investments are comprised of
U.S. Government Securities and investment grade commercial paper having a
maturity of one year or less and are carried at amortized cost, which
approximates fair value.
Investments - Marketable equity securities classified as trading
securities are presented at fair value with corresponding unrealized gains or
losses included in current period income. Marketable equity securities
classified as available-for-sale are presented at fair value with
corresponding unrealized gains or losses included as a separate component of
shareholders' equity, net of deferred income taxes. Non-marketable
investments in various private equity funds are held by the Company's
broker-dealer subsidiary in accordance with generally accepted accounting
principles for broker-dealers. Such investments are recorded using the equity
method basis of accounting (including unrealized gains and losses). The
changes in fair values are included in the consolidated statements of income.
Equipment and Leasehold Improvements - Equipment is stated at cost,
less accumulated depreciation provided on an accelerated method over periods
not exceeding eight years. Leasehold improvements are stated at cost, less
accumulated amortization provided on a straight-line basis over the term of
the lease.
Income Taxes - Income tax expense is based on income reported in the
financial statements. Deferred federal and state income taxes are provided
based on an asset and liability approach which requires the recognition of
deferred income tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial statement
carrying amounts and the tax basis of assets and liabilities. The Company
files consolidated federal income tax returns with its subsidiaries.
40
<PAGE> 43
Goodwill - Goodwill arising from the Strategic Merger is being
amortized on a straight-line basis over a period of 20 years. Accumulated
amortization was $2,448,202 and $1,435,152 as of December 31, 1997 and 1996,
respectively. Goodwill is periodically reviewed to determine recoverability
based on the discounted operating cash flows of the underlying business. At
December 31, 1997 and 1996, no impairment was indicated.
Other Assets - Included in other assets are costs associated with
the purchase of a software license agreement (the "License Agreement")
effective as of January 27, 1996. The total cost of the license is being
amortized over the life of the License Agreement. As of December 31, 1997,
$1,048,333 remains to be amortized over the three remaining years of the
License Agreement. Total amortization of $340,000 and $311,667 is included in
the consolidated statements of income for the years ended December 31, 1997
and 1996, respectively. Other assets include the unamortized cost of
compensation relating to the Strategic Merger that is being amortized over a
three-year period ending August 11, 1998. Amortization of $1,562,915 and
$1,707,918 is included in the consolidated statements of income for the years
ended December 31, 1997 and 1996, respectively. The unamortized amount of
$862,361 and $2,425,276 is included in other assets as of December 31, 1997
and 1996, respectively. Also included in other assets is the cash surrender
value of corporate-owned life insurance policies on key executives purchased
in 1997 in connection with a deferred savings plan for certain employees.
At December 31, 1997, the cash value amounted to $2,000,000.
Compensation Payable - Compensation payable represents amounts
payable to employees as a result of the Company's incentive compensation
programs during the normal course of operations. Amounts are accrued in the
period earned.
Accrued Rent Liability - The Company has recorded as a liability the
present value of the difference between a market rate lease and the contract
rate in the lease for a portion of the Company's office space in Hartford,
Connecticut as part of the fair value adjustments relating to the Strategic
Merger. This difference is being amortized as a reduction of rent expense
over the remaining lease period.
Preferred Stock - The carrying value of the convertible preferred
stock is at original issue price plus accretion relating to any increase in
the redemption value of the stock during the period. During 1997, 1996 and
1995, such accretion was $13,710,298, $5,327,300, and $0, respectively.
Other Income - Other income is comprised of investment income and
other miscellaneous revenues.
Non-Cash Employee Compensation - The Company uses the intrinsic
value method to account for stock option plans as prescribed by the
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Under this method, compensation expense is recognized
for awards of options to purchase shares of stock to employees under
compensatory plans only if the fair market value of the stock at the option
grant date (or other measurement date, if later) is greater than the amount
the employee must pay to acquire the stock. In October 1995, the Financial
Accounting Standards Board (FASB) issued Statement of
41
<PAGE> 44
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). FAS 123 permits companies to adopt a new fair value
based method to account for stock option plans or to continue using the
intrinsic value method. The Company intends to continue using the intrinsic
value method and provides the pro forma disclosures in Note 11, as required by
FAS 123.
Earnings Per Share - The Company adopted SFAS No. 128, "Earnings Per
Share" issued by the FASB in February 1997. SFAS No. 128 specified new
standards designed to improve the earnings per share ("EPS") information
provided in financial statements by simplifying the existing computational
guidelines, reviewing the disclosure requirements and increasing the
comparability of EPS data on an international basis. The 1997 and 1996
earnings per share amounts, calculations and presentations are reflective of
the requirements of the Statement. The weighted average common shares and
equivalents outstanding at December 31, 1997 and 1996 were 7,055,889 and
6,710,000, respectively, for basic earnings per common share and 11,100,732
and 10,871,936, respectively for diluted earnings per common share.
Given that only 1997 and 1996 results include full consolidated
operations (see Note 1), the Company believes that presentation of historical
earnings per share prior to 1996 would not be meaningful.
Use of Estimates - Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
in the preparation of the financial statements. Actual results could differ
from these estimates.
Reclassifications - The Company has reclassified the presentation of
certain prior period information to conform to the 1997 presentation.
NOTE 4-ACCOUNTS RECEIVABLE
Accounts receivable include primarily amounts due for management
fees, selling concessions due from underwriters and amounts due from other
business activities of the Company. At December 31, 1997 and 1996, an
allowance for doubtful accounts of $170,000 and $165,000, respectively, was
applied as a reduction of accounts receivable. The change in the allowance in
the current period was the result of management's assessment of the
collectibility of the underlying receivables.
42
<PAGE> 45
NOTE 5-INVESTMENTS
At December 31, 1997 and 1996, the estimated fair value of
marketable and non-marketable investments were as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Marketable equity securities-trading
(cost $549,025 and $46,260) $ 600,662 $ 45,625
========================================================================================================
Non-marketable equity securities
(cost $16,200 and $5,000) $ 20,556 $ 10,945
Non-marketable partnership investments
(cost $1,960,473 and $1,448,968) 2,329,122 1,745,986
- --------------------------------------------------------------------------------------------------------
Total non-marketable investments $2,349,678 $1,756,931
========================================================================================================
</TABLE>
The Company is a 1% general partner in various private equity funds.
The value of the non-marketable partnership investments is accounted for
using the equity method and updated periodically based upon changes in fair
values and recorded in the consolidated statements of income. Additionally,
the Company had no derivative investments during 1997 and 1996.
NOTE 6-EQUIPMENT AND LEASEHOLD IMPROVEMENTS
At December 31, 1997 and 1996, equipment and leasehold improvements
comprised the following:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Office equipment $1,071,080 $ 641,421
Computer equipment 1,235,939 468,950
Leasehold improvements 345,737 267,553
- --------------------------------------------------------------------------------------------------------
2,652,756 1,377,924
Less accumulated depreciation 1,127,320 562,812
- --------------------------------------------------------------------------------------------------------
Total non-marketable investments $1,525,436 $ 815,112
========================================================================================================
</TABLE>
Depreciation expense of $564,508, $447,070 and $170,600 above is
included in the consolidated statements of income for the years ended
December 31, 1997, 1996 and 1995, respectively.
The Company occupies premises and rents certain office equipment
under leases that are accounted for as operating leases and that have
expiration dates through 2005. At December 31, 1997, the minimum net rental
commitments of the Company for the periods indicated under the terms of these
operating leases in excess of one year were approximately $6,988,000 as
follows: $1,183,000 in 1998; $1,094,000 in 1999; $944,000 in 2000; $886,000
per year from 2001 to 2004 and $223,000 in 2005.
43
<PAGE> 46
NOTE 7-INCOME TAXES
Prior to the Strategic Merger, GAIMCO was included in the
consolidated federal income tax returns of General American and its
provisions for income taxes have been computed as if GAIMCO had filed a
separate return. The provision for federal and state income tax for the years
ended December 31, 1997, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income tax provision $6,389,796 $4,651,708 $1,755,497
Deferred income tax provision (benefit) (163,554) 199,326 603,392
- ---------------------------------------------------------------------------------------------------------
Total income tax provision $6,226,242 $4,851,034 $2,358,889
=========================================================================================================
</TABLE>
The Company's net deferred income tax assets represent the estimated
future tax effects attributable to future taxable or deductible temporary
difference between amounts recognized in the financial statements and income
tax returns. At December 31, 1997 and 1996, the net deferred income tax asset
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes $15,142,571 $11,063,265 $5,771,040
- ---------------------------------------------------------------------------------------------------------
Federal income taxes at statutory rate $ 5,299,899 $ 3,872,143 $2,019,864
Increases in income taxes resulting from:
State tax, net of federal 514,625 619,251 219,974
Amortization of goodwill 354,568 354,568 147,737
Other, net 57,150 5,072 (28,686)
- ---------------------------------------------------------------------------------------------------------
Federal income tax provision $ 6,226,242 $ 4,851,034 $2,358,889
=========================================================================================================
</TABLE>
The Company's net deferred income tax assets represent the estimated
future tax effects attributable to future taxable or deductible temporary
difference between amounts recognized in the financial statements and income
tax returns. At December 31, 1997 and 1996, the net deferred income tax
assets is as follows:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Accrued rent liability $1,404,627 $1,538,884
Employee costs 500,157 70,807
Other, net 456,946 389,135
- ---------------------------------------------------------------------------------------
Gross deferred income tax assets 2,361,730 1,998,826
- ---------------------------------------------------------------------------------------
Depreciation (224,628) (192,324)
Partnership investments (400,689) (233,643)
- ---------------------------------------------------------------------------------------
Gross deferred income tax liabilities (625,317) (425,967)
- ---------------------------------------------------------------------------------------
Net deferred income tax assets $1,736,413 $1,572,859
=======================================================================================
</TABLE>
44
<PAGE> 47
A valuation allowance is provided when it is more likely than not
that some portion of the deferred tax assets will not be realized. Management
believes the deferred tax assets will be fully realized in the future based
upon consideration of the reversal of existing temporary differences,
anticipated future earnings, and all other available evidence. Accordingly,
no valuation allowance is established.
NOTE 8-DEBT
Long term:
On August 11, 1995, the Company borrowed $13,000,000 from General
American to fund certain payments made in connection with the Strategic
Merger. Interest was payable on January 1 and September 1 at an annual rate
of 7.0%. Principal payments were due in three equal annual installments of
$4,333,333 commencing September 1, 2003. The Company prepaid $2,000,000,
$7,000,000 and $4,0000,000 of principal plus accrued interest of $27,222,
$412,805 and $323,750 in 1997, 1996 and 1995, respectively.
Short term:
On August 11, 1995, the Company borrowed $2,500,000 from General
American to fund certain payments made in connection with the Strategic
Merger. Interest was payable on January 1 and August 1 at an annual rate of
6.75%. Principal was due on August 11, 1996. The Company prepaid $500,000 and
$2,000,000 of principal plus accrued interest of $14,250 and $58,688 during
1996 and 1995, respectively, which is included in the consolidated statements
of income. The Company had no short-term debt during 1997.
Lines of credit:
At December 31, 1997 and 1996, the Company had a Revolving
Subordinated Loan Agreement (the "Agreement") with a commercial bank for
$2,000,000. The interest rate is agreed upon by the lender and the Company at
the time of an advance. The Agreement expires on July 7, 1998. During 1996,
the Company borrowed $2,000,000 for less than one week. There were no
borrowings during 1997.
NOTE 9-PREFERRED STOCK AND SHAREHOLDERS' EQUITY
The preferred stock of the Company outstanding prior to the initial
public offering was subject to a shareholders agreement and consisted of (i)
Series A Convertible Preferred Stock, par value $.01 per share and (ii)
Series B Convertible Preferred Stock, par value $.01 per share.
At December 31, 1996 and 1995, 3,190,000 shares of Series A
Convertible Preferred Stock (the "Series A Preferred Stock") were authorized,
issued and outstanding. The Series A Preferred Stock paid dividends quarterly
based on the 90-day United States Treasury Bill rate in effect on the
previous payment date. Such dividends were cumulative. The Company declared
dividends on the Series A Preferred Stock of $0.11 and $0.28 for the years
ended December 31,
45
<PAGE> 48
1995 and 1996, respectively. Declared but unpaid dividends totaling $223,300 are
included in Preferred Dividends Payable on the consolidated balance sheet at
December 31, 1996. The Series A Preferred Stock carried no voting rights and was
issued as part of the Strategic Merger. Each share of Series A Preferred Stock
was convertible into one share of Non-Voting Common Stock at the holder's
election, or Voting Common Stock at the initial public offering (IPO) date.
On November 8, 1996, the Company commenced a private offering to
certain employees and directors. This offering was for a new class of
preferred stock designated Series B Convertible Preferred Stock (the "Series
B Preferred Stock"). A total of 460,000 shares were sold at $5.33 per share
adding $2,451,800 to preferred stock. In order to exercise the conversion,
payment to the Company of an additional $1.67 per share was required.
At December 31, 1996, 600,000 shares of Series B Preferred Stock
were authorized and 460,000 shares were issued and outstanding. The Series B
Preferred Stock paid dividends quarterly at a rate of 5% per annum and such
dividends were cumulative. Declared but unpaid dividends totaling $12,515
were included in Preferred Dividends Payable on the consolidated balance
sheet at December 31, 1996. The Series B Preferred Stock carried no voting
rights. Each share of Series B Preferred Stock was convertible into one share
of Non-Voting Common Stock at the holder's election and upon payment of the
additional $1.67 per share to the Company.
During January 1997, the Company issued an additional 15,000 shares
of Series B Preferred Stock at $5.33 per share. In April 1997, certain
shareholders converted 110,000 shares of Series B Preferred Stock to
Non-Voting Common Stock. The resulting transaction increased additional
paid-in capital by $768,900 and increased common equity by $1,100. In June
1997, General American, pursuant to a call right, purchased 1,594,995 shares
of the Company's Series A Preferred Stock from existing shareholders for
$11.25 per share. In connection with such purchase, certain restrictions were
eliminated on the Series A Preferred Stock which generated an additional tax
benefit to the Company of $1,134,785 recorded directly to additional paid-in
capital. In June 1997, the Board of Directors of the Company authorized an
increase in the number of shares of Series A Voting Common Stock from
20,000,000 to 50,000,000.
In December 1997, the Company completed an initial public offering
totaling 2,875,000 shares of Common Stock (including the over-allotment
option) which were sold through underwriters by the Company in an initial
public offering. Net proceeds related to the offering were $34,595,000. As a
result of the offering, all Series A and Series B Preferred Stock converted
to common shares of Company stock on a one-for-one basis and the
shareholders' agreement terminated, resulting in an increase to shareholders'
equity totaling approximately $38,595,000. The Company declared and paid
dividends totaling $963,123 during 1997 related to the Series A and B
Preferred Stock through December 15, 1997, the IPO pricing date.
Additionally, as a result of the offering, all shares of non-voting common
stock converted to common stock on a one-for-one basis.
On February 12, 1998, the Board of Directors of the Company
established the Company's dividend policy and declared a quarterly dividend
of $0.04 per share on the Common Stock to record holders as of March 5, 1998,
payable March 20, 1998. The declaration and
46
<PAGE> 49
payment of dividends to holders of Common Stock will be at the discretion of the
Company's Board of Directors and will depend upon the Company's capital
requirements and operating and financial condition, as well as the legal and
regulatory restrictions from net capital rules of various regulatory bodies
applicable to Conning & Company and such other factors as the Board of Directors
may deem relevant.
NOTE 10-OTHER RELATED PARTY ACTIVITIES
CAM acts as an investment adviser for the general and separate
accounts of General American and its insurance subsidiaries as well as the
General American Capital Company family of funds. Investment management fees
earned from these affiliated entities for the years ended December 31, 1997,
1996 and 1995 amounted to $17,227,994, $14,300,267 and $12,573,489,
respectively. The total investment management fees receivable from these
affiliated entities at December 31, 1997 and 1996 amounted to $1,507,203 and
$1,042,294, respectively. Certain officers and directors of the Company are
also officers of General American and officers and/or directors of other
General American affiliates.
The Company is directly or indirectly, through intermediary
partnerships, the managing general partner of certain private equity funds
with an equity ownership interest of 1% in each fund. In total, the Company
managed seven, six and six funds during 1997, 1996 and 1995, respectively.
Fees for managing these funds were $5,491,704, $4,006,038 and $1,295,330, for
the years ended December 31, 1997, 1996 and 1995, respectively.
The Company received underwriting fees and concessions in connection
with the offering of shares of companies which were partially owned by
certain private equity funds managed by the Company. Such fees and
concessions are included in research services and related fees and amounted
to $760,638, $2,177,269 and $0 for the years ended December 31, 1997, 1996
and 1995.
In connection with the November 1996 private offering of Series B
Preferred Stock, General American holds demand recourse notes from certain
employees totaling $2,185,300 and $2,650,750 as of December 31, 1997 and
1996, respectively. The notes bear interest of 6% which is payable
semiannually beginning July 1997.
General American provides administrative services on request of the
Company including disbursements, tax, facility management and other
administrative support to the Company pursuant to an administrative services
agreement. The following table lists the expenses recorded by the Company for
significant services provided by General American for the years ended
December 31, 1997, 1996 and 1995:
47
<PAGE> 50
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee costs $3,627,901 $ 7,103,724 $ 6,341,164
Administrative accounting fees -- 2,765,129 2,108,624
Marketing and production costs 966,268 1,076,195 753,091
Professional services 1,023,746 1,002,482 802,221
Rent 791,804 612,822 624,414
Computer services 163,337 118,008 50,591
All other operating costs 2,689,940 1,932,861 1,627,998
- ---------------------------------------------------------------------------------------------------------
$9,262,996 $14,611,221 $12,308,103
=========================================================================================================
</TABLE>
The above administrative costs are predominantly based on direct,
identifiable costs incurred by General American on behalf of the Company and
at the Company's request and are charged back to the Company at General
American's cost. Where costs represent the result of allocations, such
allocations are based on customary methodology such as square footage for
rent and number of employees for payroll processing. The Company believes
that such allocation methodologies are reasonable and that the resulting
expenses incurred are not materially different from those that would have
been incurred on a stand-alone basis.
NOTE 11-STOCK OPTIONS
In August 1995, the shareholders approved the Company's 1995
Flexible Stock Plan (1995 Plan) which provides for the grant of options to
purchase up to 2,100,000 shares of the Company's Non-Voting Common Stock to
officers and other key employees of the Company and its affiliates. Terms and
conditions (including price, exercise date and number of shares) are
determined by the Board of Directors, which administers the plan. In the
event of an initial public offering the options become 100% vested. All
options were granted at fair value. Total options issued and outstanding
under the 1995 Plan were 1,000,000 as of December 31, 1996 and 1997, and were
fully vested upon the completion of the Company's initial public offering in
December 1997. No more options will be granted under the 1995 Plan.
On November 8, 1996, the shareholders approved the Company's 1996
Flexible Stock Plan (1996 Plan) which provides for the grant of options to
purchase up to 2,100,000 shares of the Company's Non-Voting Common Stock to
officers and other key employees of the Company and its affiliates. Terms and
conditions (including price, exercise date and number of shares) are
determined by the Board of Directors, which administers the plan. All options
were granted at fair value. Total options issued and outstanding under the
1996 Plan were 237,500 and 230,000 as of December 31, 1997 and 1996,
respectively. No more options will be granted under the 1996 Plan.
In December 1997, the shareholders approved the Company's 1997
Flexible Stock Plan (1997 Plan) which provides for the grant of options to
purchase up to 2,200,000 shares of the Company's Common Stock to officers,
directors and other key employees of the Company and its affiliates. Terms
and conditions (including price, exercise date and number of shares) are
determined by the Board of Directors, which administers the plan. All options
were granted at
48
<PAGE> 51
fair value. Total options issued and outstanding under the 1997 Plan were
1,285,189 as of December 31, 1997.
<TABLE>
<CAPTION>
Number of shares
---------------------------------------------------------------------
Weighted average exercise price
--------------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1997 1996 1995 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 1,230,000 1,000,000 -- $5.64 $5.33 --
Granted 1,292,689 230,000 1,000,000 13.46 7.00 5.33
Exercised -- -- -- -- -- --
Canceled -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Outstanding, end of year 2,522,689 1,230,000 1,000,000 $9.65 $5.64 $5.33
Exercisable, end of year 1,366,189 200,000 -- $7.30 $5.33 --
========================================================================================================================
</TABLE>
The range of exercise prices at December 31, 1997 was $5.33 to
$13.50 and the weighted-average remaining contractual vesting period was
approximately four years.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued
to Employees," ("APB 25"), in accounting for the 1997, 1996 and 1995 Flexible
Stock Plans and, accordingly, no compensation cost has been recognized for
stock options in the financial statements. The weighted-average grant-date
fair value of stock options granted during the year and the weighted-average
significant assumptions used to determine those fair values, using a modified
Black-Scholes option pricing model, and the pro forma effect on earnings of
the fair value accounting for stock options under FAS 123 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Grant-date fair value per share $3.18 $1.13 $0.91
Significant assumptions:
Risk-free interest rate at grant date 5.59% 5.70% 6.05%
Expected dividend payout $ .16 $ 0 $ 0
Expected stock price volatility 30% n/a n/a
Expected life to exercise (years) 2.75 2.5 2.5
Net Income
As reported $8,916,329 $6,212,231 $3,412,151
Pro forma $8,392,758 $5,840,384 $3,260,818
Pro forma earnings per common share
As reported Basic $1.13 $0.79
As reported Diluted 0.80 0.57
Pro forma Basic $1.05 $0.74
Pro forma Diluted 0.76 0.54
=========================================================================================================
</TABLE>
49
<PAGE> 52
NOTE 12-EMPLOYEE BENEFITS
The Company has two retirement savings plans, a 401(k) Savings Plan
(the "401(k) Plan") and the General American Life Insurance Company Progress
Sharing Plan and Trust (the "Progress Sharing Plan"). The 401(k) Plan is
available to substantially all Conning employees who were employed by Conning
prior to the Strategic Merger. The Progress Sharing Plan is available to all
employees employed by GAIMCO prior to the Strategic Merger and all employees
employed by the Company subsequent to the Strategic Merger. The Company
contributed $1,019,327, $547,127 and $286,170 on behalf of eligible employees
for the years ended December 31, 1997, 1996 and 1995, respectively. Direct
charges to the Company from General American for the Progress Sharing Plan
were approximately $407,074, $310,000 and $359,000, for the years ended
December 31, 1997, 1996 and 1995, respectively, which is included in the
charges for administrative services from General American. One of the
investment vehicles offered in the 401(k) Plan is managed by Conning.
Pension Plan-Substantially all personnel who were employees of
GAIMCO prior to the Strategic Merger were eligible for a defined benefit plan
sponsored by General American through December 31, 1996. All costs are borne
and retained by General American. The plan was overfunded as of December 31,
1997 and 1996, therefore, no charges were made by General American to GAIMCO.
NOTE 13-LITIGATION
Two legal claims have arisen against C&C during the normal course of
its businesses. Although the matters are subject to uncertainty, as they
remain in the preliminary stages and discovery has not been completed, the
Company believes that C&C has meritorious defenses to all claims and that the
probable outcomes should not have a material adverse effect upon the Company,
its liquidity or its operations.
NOTE 14-COMMITMENTS AND CONTINGENCIES
The Company through its subsidiary is, directly or through
intermediary partnerships, a 1% general partner in certain private equity
funds that the Company also manages. Capital contributions by the partners
are called as needed for investments by the funds. At December 31, 1997, the
Company's future commitment to fund such required capital contributions was
approximately $2,161,200.
The Company through its subsidiary has committed to Conning
Connecticut Investors, L.L.C. (the "L.L.C."), a limited liability company of
which the Company is the general partner and managing member, up to
approximately $4,040,000 for purposes of capitalizing the general partner.
The amount is payable only in the event of insolvency on the part of the
L.L.C.
50
<PAGE> 53
NOTE 15-NET CAPITAL REQUIREMENTS
C&C is a registered broker-dealer and a member of the National
Association of Securities Dealers, Inc. and therefore is subject to a
requirement of the SEC's Uniform Net Capital Rule, requiring the maintenance
of certain minimal capital levels. At December 31, 1997, C&C had net capital,
as defined by the Uniform Net Capital Rule, of approximately $4,694,000 which
was $4,065,000 in excess of the required net capital. CAM is also subject to
minimum net capital requirements which are determined by state regulations in
certain of the states in which CAM is licensed to do business. As of December
31, 1997 and 1996, CAM was in compliance with all minimum state requirements.
NOTE 16-CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of trade account receivables
and short-term investments. Short-term investments consist of investment
grade commercial paper and approximate fair value because of the short
maturity of these items. With the exception of trade receivables from General
American and its affiliates, credit risk with respect to trade accounts
receivable is limited due to the large number of customers and their
dispersion across geographical areas. Investment management fees receivable
from General American and their affiliated entities at December 31, 1997 and
1996 amounted to $1,507,203 and $1,042,294, respectively.
NOTE 17-INDUSTRY SEGMENT
The Company is primarily engaged in a single line of business as a
provider of investment management services, which comprises several types of
services, such as discretionary asset management, investment accounting and
reporting services, mortgage origination and servicing, private equity
investments and institutional investment research. These activities
constitute a single business segment.
51
<PAGE> 54
NOTE 18-EARNINGS PER SHARE
The following table represents a reconciliation of the numerators
and denominators of the basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $8,916,329
Less: preferred stock dividends (963,127)
BASIC EPS:
Net earnings available to common shareholders 7,953,202 7,055,889 $1.13
Effect of dilutive securities
Preferred stock dividends 963,127
- ------------------------------------------------------------------------------------------------------------
Conversion of preferred stock 3,436,194
Stock options 608,649
- ------------------------------------------------------------------------------------------------------------
Diluted EPS: Net earnings available to common
shareholders and assumed full conversions $8,916,329 11,100,732 $0.80
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
- ------------------------------------------------------------------------------------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $6,212,231
Less: preferred stock dividends (905,715)
- ------------------------------------------------------------------------------------------------------------
BASIC EPS:
Net earnings available to common shareholders 5,306,516 6,710,000 $0.79
Effect of dilutive securities
Preferred stock dividends 905,715
- ------------------------------------------------------------------------------------------------------------
Conversion of preferred stock 3,436,194
Stock options 725,742
- ------------------------------------------------------------------------------------------------------------
Diluted EPS: Net earnings available to common
shareholders and assumed full conversions $6,212,231 10,871,936 $0.57
- ------------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE> 55
NOTE 19-QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes quarterly results of operations for
the two years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Revenues $15,288 $15,633 $16,003 $19,691
Operating income 3,426 3,953 3,593 4,471
Income before taxes 3,333 3,884 3,521 4,404
Net income 1,877 2,220 2,325 2,494
- ------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic earnings per share $0.24 $0.29 $0.30 $0.29
Diluted earnings per share $0.17 $0.20 $0.21 $0.22
- ------------------------------------------------------------------------------------------------------------------
Dividends per share -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Market price per share:
High -- -- -- $17.25
Low -- -- -- $14.25
==================================================================================================================
1996
Revenues $11,918 $14,309 $13,512 $13,927
Operating income 2,606 3,341 3,146 2,692
Income before taxes 2,386 3,148 2,967 2,562
Net income 1,365 1,739 1,635 1,473
</TABLE>
NOTE 20-NEW ACCOUNTING PRONOUNCEMENTS
During 1997 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130 - "Reporting
Comprehensive Income." The Statement establishes standards for reporting and
displaying income and its components (revenues, gains, and losses) in a full
set of general purpose financial statements. The statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. Although
the statement is effective for fiscal years beginning after December 15,
1997, the Company does not believe the SFAS will have a material impact to
the Company's financial statements.
53
<PAGE> 56
In addition, the FASB issued SFAS No. 131 - "Disclosures about
Segments of an Enterprise and Related Information." The statement establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. Additionally, the statement
establishes standards for related disclosures about products and services,
geographic areas, and major customers superseding SFAS No. 14 - "Financial
Reporting for Segments of a Business Enterprise." The Company is currently
evaluating the Statement as to whether additional information would be
required to be included in the Company's financial statements beginning in
1998.
54
<PAGE> 57
Independent Auditors' Report
----------------------------
The Board of Directors and Shareholders
Conning Corporation:
We have audited the accompanying consolidated balance sheets of Conning
Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, common shareholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1997. In connection with our audits of these consolidated financial
statements, we have audited the accompanying financial statement schedule.
These consolidated financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Conning
Corporation and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
St. Louis, Missouri
February 12, 1998
55
<PAGE> 58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
56
<PAGE> 59
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 401 of Regulation S-K with respect
to the executive officers of the Company is included in Item 4A of this Form
10-K. The information required by Item 401 of Regulation S-K with respect to
directors of the Company is incorporated by reference to the Company's
definitive proxy statement (the "Definitive Proxy Statement") which will be
filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K is
incorporated by reference to the Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-K is
incorporated by reference to the Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 404 of Regulation S-K is
incorporated by reference to the Definitive Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
See Item 8 of this Report
2. FINANCIAL STATEMENT SCHEDULES
57
<PAGE> 60
<TABLE>
SCHEDULE I
CONNING CORPORATION
(PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
-----------------------------
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Cash and cash equivalents $24,768,768 $ 424,263
Short-term investments 11,414,751 --
Investment in subsidiaries 38,415,069 31,446,231
Capitalized software, less accumulated amortization
of $651,667 and $311,667 1,048,333 1,388,333
Income tax receivable 1,131,229 --
Prepaid expenses and other assets 4,418 4,418
----------- -----------
Total assets $76,782,568 $33,263,245
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses $ 587,833 $ 241,648
Due to affiliates 1,593,687 1,064,432
Long term debt -- 2,000,000
Other payables 480,000 640,000
Deferred liabilities 415,426 167,730
----------- -----------
Total liabilities 3,076,946 4,113,810
----------- -----------
Series A convertible preferred stock, $.01 par value:
3,190,000 shares authorized, issued and outstanding -- 22,330,004
Series B convertible preferred stock, $.01 par value:
600,000 shares authorized, 460,000 issued and outstanding -- 2,451,800
----------- -----------
Total convertible preferred stock -- 24,781,804
----------- -----------
Common stock, $.01 par value: 50,000,000 and 20,000,000
shares authorized in 1997 and 1996, respectively; 13,250,000
and 6,710,000 shares issued and outstanding in 1997 and 1996,
respectively 132,500 67,100
Additional paid in capital 73,126,002 2,944,647
Retained earnings 447,120 1,355,884
----------- -----------
Total common shareholders' equity 73,705,622 4,367,631
----------- -----------
Total liabilities and shareholders' equity $76,782,568 $33,263,245
=========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED FINANCIAL STATEMENTS.
</TABLE>
58
<PAGE> 61
<TABLE>
CONNING CORPORATION
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
REVENUE
Dividend from subsidiary $2,027,500 $5,925,000
Management advisory fees 300,000 300,000
Other income 76,176 5,644
---------- ----------
Total revenues 2,403,676 6,230,644
---------- ----------
EXPENSES
Amortization of capitalized software 340,000 311,667
Professional services 43,596 10,425
Other expenses 72,147 106,057
Interest expense 21,389 413,389
---------- ----------
Total expenses 477,132 841,538
---------- ----------
Income before benefit for income taxes 1,926,544 5,389,106
Benefit from income taxes 20,948 221,971
---------- ----------
Income before equity in undistributed earnings of
subsidiaries, net of taxes 1,947,492 5,611,077
Equity in undistributed earnings of subsidiaries,
net of taxes of $6,247,190 and $5,073,005 6,968,837 601,154
---------- ----------
Net income 8,916,329 6,212,231
Preferred stock dividends 963,127 905,715
---------- ----------
Net earnings available to common shareholders $7,953,202 $5,306,516
========== ==========
See accompanying notes to condensed financial statements.
</TABLE>
59
<PAGE> 62
<TABLE>
CONNING CORPORATION
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Operating activities:
Net income $ 8,916,329 $ 6,212,231
Adjustment for items not affecting cash:
Amortization of capitalized software 340,000 311,667
Changes in:
Investments in subsidiaries (8,996,338) (6,526,153)
Due to/from affiliates 529,255 1,094,582
Income taxes receivable 3,556 --
Prepaid expenses and other assets -- 89,982
Accrued expenses 582,000 583
Deferred liabilities 87,696 167,730
------------ -----------
Net cash provided by operating activities 1,462,498 1,350,622
------------ -----------
Investing activities:
Purchases of software -- (940,000)
Purchases of short-term investments (11,414,751) --
Dividends received from subsidiaries 2,027,500 5,925,000
------------ -----------
Net cash provided by (used in) investing activities (9,387,251) 4,985,000
------------ -----------
Financing activities:
Repayments on long term debt (2,000,000) (7,000,000)
Repayments on short term debt -- (120,000)
Issuance common stock through initial public offering 34,595,000 --
Issuance of Series B preferred stock 79,950 2,451,800
Conversion of Series B preferred stock 793,250 --
Dividends on preferred stock (1,198,942) (893,200)
------------ -----------
Net cash provided by (used in) financing activities 32,269,258 (5,561,400)
------------ -----------
Net change in cash and cash equivalents 24,344,505 774,222
Cash and cash equivalents (book overdraft), beginning of
year 424,263 (349,959)
------------ -----------
Cash and cash equivalents, end of year $ 24,768,768 $ 424,263
============ ===========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 21,389 $ 412,806
Income taxes -- --
Supplemental disclosure of cash flow information:
Accretion of Series A and B preferred stock $ 13,710,298 $ 5,327,300
Conversion of Series A and B preferred stock to
common stock $ 38,572,052 --
See accompanying notes to condensed financial statements.
</TABLE>
60
<PAGE> 63
CONNING CORPORATION
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
The condensed financial statements of Conning Corporation (the
"Company") should be read in conjunction with the consolidated financial
statements of Conning Corporation and Subsidiaries and the notes thereto.
Investment in subsidiary is accounted for under the equity method.
NOTE 2 - RELATED PARTY TRANSACTIONS
During 1997 and 1996, the Company provided the use of its software
to its subsidiaries through administrative services agreements. Charges were
$393,000 and $312,000 during 1997 and 1996, respectively, which approximated
the amortization of the software during the period.
The amount of cash dividends paid to the Company by consolidated
subsidiaries of the Company amounted to approximately $2,027,500 and
$5,925,000 for the years ended December 31, 1997 and 1996, respectively.
There are not restrictions on the payment of dividends, except for those
stipulated by certain regulatory authorities applicable to Conning & Company.
Conning & Company's ability to pay dividends is limited to capital in excess
of a defined minimum requirement as set forth in Securities and Exchange
Commission Rule 15c3-1.
NOTE 3 - CAPITAL TRANSACTIONS
The preferred stock of the Company is subject to a shareholders
agreement and consists of (i) Series A Convertible Preferred Stock, par value
$.01 per share and (ii) Series B Convertible Preferred Stock, par value $.01
per share.
At December 31, 1996, 3,190,000 shares of Series A Convertible
Preferred Stock (the "Series A Preferred Stock") were authorized, issued and
outstanding. The Series A Preferred Stock paid dividends quarterly based on
the 90-day United States Treasury Bill rate in effect on the previous payment
date. Such dividends were cumulative. The Company declared dividends on the
Series A Preferred Stock of $0.28 for the year ended December 31, 1996.
Declared but unpaid dividends totaling $223,300 are included in Preferred
Dividends Payable on the consolidated balance sheet at December 31, 1996.
The Series A Preferred Stock carried no voting rights and was issued as part
of the Strategic Merger. Each share of Series A Preferred Stock was
convertible into one share of Non-Voting Common Stock at the holder's
election, or Voting Common Stock at the initial public offering (IPO) date.
On November 8, 1996, the Company commenced a private offering to
certain employees and directors. This offering was for a new class of
preferred stock designated Series B Convertible Preferred Stock (the "Series
B Preferred Stock"). A total of 460,000 shares were sold at $5.33 per share
adding $2,451,800 to preferred stock. In order to exercise the conversion,
payment to the Company of an additional $1.67 per share is required.
At December 31, 1996, 600,000 shares of Series B Preferred Stock
were authorized and 460,000 shares were issued and outstanding. The Series B
Preferred Stock paid dividends quarterly at a rate of 5% per annum and such
dividends are cumulative. Declared but unpaid dividends totaling $12,515
were included in Preferred Dividends Payable on the consolidated balance
sheet at December 31, 1996. The Series B Preferred Stock carried no voting
rights. Each share of Series B Preferred Stock was convertible into one
share of Non-Voting Common Stock at the
61
<PAGE> 64
holder's election and upon payment of the additional $1.67 per share to the
Company.
During January 1997, the Company issued an additional 15,000 shares
of Series B Preferred Stock at $5.33 per share. In April 1997, certain
shareholders converted 110,000 shares of Series B Preferred Stock to
Non-Voting Common Stock. The resulting transaction increased additional
paid-in capital by $768,900 and increased common equity by $1,100. In June
1997, General American, pursuant to a call right, purchased 1,594,995 shares
of the Company's Series A Preferred Stock from existing shareholders for
$11.25 per share. In connection with such purchase, certain restrictions
were eliminated on the Series A Preferred Stock which generated an additional
tax benefit to the Company of $1,134,785 recorded directly to additional
paid-in capital. In June 1997, the board of directors of the Company
authorized an increase in the number of shares of Series A Voting Common
Stock from 20,000,000 to 50,000,000.
In December 1997, the Company completed an initial public offering
totaling 2,875,000 shares of Common Stock (including the over-allotment
option) which were sold through underwriters by the Company in an initial
public offering. Net proceeds related to the offering were $34,595,000. As
a result of the offering, all Series A and Series B Preferred Stock converted
to common shares of Company stock on a one-for-one basis and the
shareholders' agreement terminated, resulting in an increase to shareholders'
equity totaling approximately $38,595,000. The Company declared and paid
dividends totaling $963,123 during 1997 related to the Series A and B
Preferred Stock through December 15, 1997, the IPO date. Additionally as a
result of the offering, all shares of non-voting common stock converted to
common stock on a one-for-one basis.
On February 12, 1998, the Board of Directors of the Company
established the Company's dividend policy and declared a quarterly dividend
of $0.04 per share on the Common Stock to record holders as of March 5, 1998,
payable March 20, 1998. The declaration of payment of dividends to holders
of Common Stock will be at the discretion of the Company's Board of Directors
and will depend upon the Company's capital requirements and operating and
financial condition, as well as the legal and regulatory restrictions from
net capital rules of various regulatory bodies applicable to Conning &
Company and such other factors as the Board of Directors may deem relevant.
[FN]
3. EXHIBITS [<F*>denotes filed herewith]
[<F**>denotes a management contract or compensatory
plan or arrangement]
[<F(i)> denotes incorporated by reference
to the Company's Registration Statement on Form S-1,
File Number 333-35993.]
<TABLE>
<CAPTION>
<C> <S>
2.1 Contribution Agreement dated July 24, 1995 by and
among the Company (formerly Conning Asset Management
Company), General American Life Insurance Company
("General American"), General American Holding
Company, Conning Asset Management Company (formerly
General American Investment Management Company)
("CAM"), Conning & Company, Conning, Inc. (formerly
Conning Corporation) and the Shareholders and Option
Holders of the Company.
3.1<F*> Restated Articles of Incorporation of the Company, as
amended.
62
<PAGE> 65
3.2 Bylaws of the Company.<F(i)>
4.1 See Exhibit 3.1.
4.2 See Exhibit 3.2.
10.1 Investment Advisory Agreement dated as of May 1, 1995
between General American and CAM relating to General
American's general account.<F(i)>
10.2 Investment Advisory Agreement dated as of July 2, 1990
between General American and CAM relating to General
American's separate accounts.<F(i)>
10.3 Investment Advisory Agreement dated as of
July 23, 1997 between General American Capital Company
and CAM.<F(i)>
10.4 Lease Agreement dated as of July 31, 1996 between
General American and CAM.<F(i)>
10.5 Sublease effective as of July 19, 1995 between General
American and CAM.<F(i)>
10.6 Administrative Services Agreement effective as of
August 11, 1995 between the Company and General
American (Incorporated by reference to the Company's
Registration Statement on Form S-1, File Number
333-35993, Exhibit 10.6).
10.7 Tax Sharing Agreement effective as of July 24, 1995
between the Company, CAM and General American.<F(i)>
10.8 Amended and Restated Shareholders' Agreement effective
as of November 22, 1996 among the Company, General
American, General American Holding Company, and the
Shareholders and Option Holders of the Company.<F(i)>
10.9 Registration Rights Agreement dated as of
June 12, 1997 among the Company, General American and
General American Holding Company.<F(i)>
10.10 Tax Allocation and Tax Sharing Agreement dated as of
June 12, 1997 between the Company, Conning, Inc.,
Conning & Company and Employee, including Messrs.
Hansen and Schpero.<F(i)>
10.11 Form of Employment Agreement dated August 11, 1995
between the Company (Conning Asset Management
Company), Conning & Company and Employee, including
Messrs. Hansen and Schpero.<F(i)><F**>
10.12 Employment Agreement dated August 11, 1995 between the
Company (as assignee) and Leonard M. Rubenstein.
<F(i)><F**>
63
<PAGE> 66
10.13 Employment Agreement dated August 11, 1995 between the
Company (formerly Conning Asset Management Company),
Conning & Company and Maurice W. Slayton.<F(i)><F**>
10.14 Software License Agreement effective as of
January 27, 1996 among CAM, General American and SS&C
Technologies, Inc. (formerly Securities, Software &
Consulting Inc.).<F(i)>
10.15 1995 Flexible Stock Plan.<F(i)><F**>
10.16 1996 Flexible Stock Plan.<F(i)><F**>
10.17 1997 Flexible Stock Plan.<F(i)><F**>
10.18 Form of Incentive Stock Option Award and Terms and
Conditions under 1995 Flexible Stock Plan.<F(i)><F**>
10.19 Form of Incentive Stock Option Award and Terms and
Conditions under 1996 Flexible Stock Plan.<F(i)><F**>
10.20<F*> Forms of Non-Qualified Stock Option Awards and
Terms and Conditions under 1997 Flexible Stock Plan.
<F**>
10.21 Office Lease dated August 22, 1989 among Hartford
CityPlace L.L.C., Conning, Inc. and Conning & Company,
as amended as of June 30, 1997.<F(i)>
10.22 Venture Carried Interests Allocation Plan, as
amended.<F(i)><F**>
10.23 Amended and Restated Limited Partnership Agreement of
Conning Investment Partners Limited Partnership III,
as amended.<F(i)><F**>
10.24 Limited Liability Company Agreement of Conning
Connecticut Investors, L.L.C.<F(i)><F**>
10.25 Limited Liability Company Agreement of Conning
Partners II, L.L.C.<F(i)><F**>
10.26 Limited Liability Company Agreement of Conning
Investment Partners V, L.L.C., dated as of
October 31, 1997.<F(i)><F**>
21.1 Subsidiaries of the Company.<F(i)>
23.1<F*> Consent of KPMG Peat Marwick LLP.
24.1<F*> Powers of Attorney for John A. Fibiger and
John C. Shaw.
27.1<F*> Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Registrant
during the fourth quarter of the fiscal year covered
by this report.
64
<PAGE> 67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
<S> <C> <C>
/s/ John A. Fibiger<F*> Director March 20, 1998
- ------------------------------------------
John A. Fibiger
/s/ Richard A. Liddy Director March 20, 1998
- ------------------------------------------
Richard A. Liddy
/s/ Leonard M. Rubenstein Chairman and Chief March 20, 1998
- ------------------------------------------ Executive Officer
Leonard M. Rubenstein (Principal Executive
Officer)
/s/ Fred M. Schpero Senior Vice President March 20, 1998
- ------------------------------------------ and Chief Financial Officer
Fred M. Schpero (Principal Financial and
Accounting Officer)
/s/ John C. Shaw<F*> Director March 20, 1998
- ------------------------------------------ and Chief Financial Officer
John C. Shaw
/s/ Maurice W. Slayton President and Director March 20, 1998
- ------------------------------------------ and Chief Financial Officer
Maurice W. Slayton
<FN>
<F*> By: /s/ Fred M. Schpero
------------------------------------ Attorney-in-Fact
</TABLE>
65
<PAGE> 68
<TABLE>
EXHIBIT INDEX
<CAPTION>
<C> <S>
3.1 Restated Articles of Incorporation of the Company as
amended.
10.20 Forms of Non-Qualified Stock Option Awards and Terms
and Conditions under 1997 Flexible Stock Plan.
23.1 Consent of KPMG Peat Marwick LLP.
24.1 Powers of Attorney for John A. Fibiger and
John C. Shaw.
27.1 Financial Data Schedule.
</TABLE>
67
<PAGE> 1
Exhibit 3.1
RESTATED
ARTICLES OF INCORPORATION
OF
CONNING CORPORATION
ARTICLE ONE - NAME
The name of the corporation (hereinafter referred to as the
"Corporation") is: Conning Corporation.
ARTICLE TWO - REGISTERED OFFICE
The address of the Corporation's registered office in the State of
Missouri is 700 Market Street, St. Louis, Missouri 63101 and the name of its
registered agent at such address is Matthew P. McCauley.
ARTICLE THREE - AUTHORIZED SHARES
A. CLASSES AND NUMBER OF SHARES.
The aggregate number of shares of capital stock which the
Corporation is authorized to issue is 70,000,000 shares, consisting of
50,000,000 shares of Common Stock, par value $0.01 per share ("Common
Stock"), and 20,000,000 shares of preferred stock, par value $0.01 per share
("Preferred Stock").
The preferences, qualifications, limitations, restrictions, and
the special or relative rights, including convertible rights, if any, in
respect of the shares of each class are as follows:
B. PREFERRED STOCK.
1. Subject to the requirements of the General and Business
Corporation Law of Missouri (the "GBCL") and the provisions of these Articles
of Incorporation, the Preferred Stock may be issued from time to time by the
Board of Directors as shares of one or more series. The description of
shares of each series of Preferred Stock, including any preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption shall be as
set forth in these Articles of Incorporation or any amendment hereto, or in a
resolution or resolutions adopted by the Board of Directors and, to the
extent set forth in any such resolution or resolutions, such information
shall be certified to the Secretary of State of Missouri filed as required by
law from time to time prior to the issuance of any shares of such series.
2. The Board of Directors is expressly authorized, prior to
issuance, by adopting resolutions providing for the issuance of, or providing
for a change in the number of, shares of any particular series of Preferred
Stock and, if and to the extent from time to time required by law, by filing
certification thereto with the Secretary of State of Missouri, to set or
<PAGE> 2
change the number of shares to be included in each series of Preferred Stock
and to set or change in any one or more respects the designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms and conditions of
redemption relating to the shares of each such series. The authority of the
Board of Directors with respect to each series of Preferred Stock shall
include, but not be limited to, setting or changing the following:
(a) the distinctive serial designation of such series and
the number of shares constituting such series (provided that the
aggregate number of shares constituting all series of Preferred Stock
shall not exceed twenty million (20,000,000) shares).
(b) the annual dividend rate, if any, on shares of such
series, whether and the extent to which dividends shall be cumulative or
non-cumulative, the relative rights of priority, if any, of payment of
any dividends, and the time at which, and the terms and conditions on
which, any dividends shall be paid;
(c) whether the shares of such series shall be redeemable or
purchasable and, if so, the terms and conditions of such redemption or
purchase, including the date or dates upon and after which such shares
shall be redeemable or purchasable, and the amount per share payable in
case of redemption or purchase, which amount may vary under different
conditions and at different redemption or purchase dates;
(d) the obligation, if any, of the Corporation to retire
shares of such series pursuant to a sinking fund and the terms and
conditions of any such sinking fund;
(e) whether shares of such series shall be convertible
into, or exchangeable for, shares of stock of any other class or classes
and, if so, the terms and conditions of such conversion or exchange,
including the price or prices or the rate or rates of conversion or
exchange and the terms of adjustment, if any;
(f) whether the shares of such series shall have voting
rights, in addition to the voting rights provided by law, and, if so,
the terms of such voting rights;
(g) the rights of the holders of shares of such series in
the event of voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, and the relative rights of priority, if
any, of such holders with respect thereto; and
(h) any other relative rights, powers, preferences,
qualifications, limitations or restrictions thereof relating to such
series.
C. COMMON STOCK.
1. Subject to the provisions of Article Four hereof or as
otherwise provided by the GBCL, each holder of the Common Stock shall be
entitled to one vote per share of Common Stock on all matters to be voted on
by the shareholders.
<PAGE> 3
2. All preemptive rights of shareholders are hereby denied, so
that no stock or other security of the Corporation shall carry with it and no
holder or owner of any share or shares of stock or other security or
securities of the Corporation shall have any preferential or preemptive right
to acquire additional shares of stock or of any other security of the
Corporation.
3. All cumulative voting rights are hereby denied, so that no
stock or other security of the Corporation shall carry with it and no holder
or owner of any share or shares of such stock or security shall have any
right to cumulative voting in the election of directors or for any other
purpose.
4. The foregoing provisions are not intended to modify or
prohibit any provisions of any voting trust or agreement between or among
holders or owners of shares of stock or other securities of the Corporation.
ARTICLE FOUR - RESTRICTIONS ON VOTING STOCK
The following restrictions apply to the Voting Stock (as such term
is defined below) of the Corporation:
A. CERTAIN DEFINITIONS.
For purposes of this Section, the following words have the meanings
indicated:
1. "Affiliate" means, with respect to any Person, any other
Person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by or is under common control with, such Person.
The term "control" (including the terms "controlling," "controlled by" and
"under common control with") means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of
a Person, whether through the ownership of voting securities, by contract or
otherwise.
2. "Associate" means, with respect to any Person, (i) any
other Person (other than the Corporation or a Subsidiary of which a majority
of each class of equity securities is owned by the Corporation) of which such
Person is an officer, director, trustee or partner or is directly or
indirectly the beneficial owner of ten percent (10%) or more of any class of
equity securities; (ii) any trust or other estate in which such Person serves
as a trustee or in a similar fiduciary capacity; (iii) any relative or spouse
of such Person, or any relative of such spouse, who has the same home as such
Person; or (iv) any investment company registered under the Investment
Company Act of 1940, as amended, for which such Person or any Affiliate of
such Person serves as investment adviser.
3. A Person shall be deemed to "own" any shares of Voting
Stock:
that such Person beneficially owns directly or indirectly,
whether or not of record; or
<PAGE> 4
that such Person has the right to acquire pursuant to any
agreement, arrangement or understanding or upon exercise of conversion
rights, warrants or options or otherwise, whether or not conditional; or
that are beneficially owned, directly or indirectly
(including shares deemed to be owned through application of clause (ii)
above), whether or not of record, by an Affiliate or Associate of such
Person; or
that are beneficially owned, directly or indirectly, whether
or not of record, by any other Person (including any shares which such
other Person has the right to acquire pursuant to any agreement,
arrangement or understanding or upon exercise of conversion rights,
warrants or options or otherwise, whether or not conditional) with whom
such Person has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of Voting Stock;
provided, however, that (A) directors, officers and employees of the
-------- -------
Corporation shall not be deemed to have any such agreement, arrangement
or understanding solely on the basis of their status, or actions taken
in their capacities, as directors, officers or employees of the
Corporation or any Affiliates of the Corporation, and (B) a Person shall
not be deemed the owner of or to own any shares of Voting Stock solely
because (x) such shares of Voting Stock have been tendered pursuant to a
tender or exchange offer made by such Person or any of such Person's
Affiliates or Associates until such tendered shares of Voting Stock are
accepted for payment or exchange or (y) such Person or any of such
Person's Affiliates or Associates has or shares the power to vote or
direct the voting of such shares of Voting Stock pursuant to a revocable
proxy given in response to a public proxy or consent solicitation made
to more than ten (10) holders of shares of Voting Stock and pursuant to,
and in accordance with, applicable rules and regulations under the
Exchange Act, except if such power (or arrangements relating thereto) is
then reportable under Item 6 of Schedule 13D under the Exchange Act (or
any similar provision of a comparable or successor report).
The outstanding shares of capital stock of the Corporation shall
include those shares deemed owned through the application of clauses (ii) and
(iii) above, but shall not include any other shares that may be issuable
pursuant to any agreement, arrangement or understanding or upon exercise of
conversion rights, warrants, options or otherwise, whether or not
conditional.
For all purposes hereof "beneficial" ownership, with respect to
any securities, shall include, without limitation, (i) the power to vote, or
direct the voting of, such securities or (ii) the power to exercise
investment discretion over such securities, including the power to dispose,
or to direct the disposition, of such securities. Furthermore, a Person
shall be deemed to own "beneficially" any securities that such Person owns
beneficially for purposes of Sections 13(d) of the Exchange Act or any rules
and regulations promulgated thereunder, as in effect from time to time (or
any similar successor provisions of law).
4. "Exchange Act" means the Securities Exchange Act of 1934,
as amended, or any successor statute thereto.
<PAGE> 5
5. "Group", with respect to any Person, shall include:
(i) such Person;
(ii) any Affiliates and Associates of such Person; and
(iii) those additional Persons that, together with such
Person, jointly file a statement of beneficial ownership with
respect to securities of the Corporation pursuant to Section 13(d)
of the Exchange Act or any successor provision, irrespective of
any disclaimers of beneficial ownership.
6. "Person" means any individual, corporation, association,
partnership, joint venture, trust, organization, business, government or any
government agency or political subdivision thereof or any other entity.
7. "Voting Stock" means all outstanding shares of capital
stock of the Corporation entitled to vote in the election of directors; and
each reference to a portion of shares of Voting Stock shall refer to such
proportion of the votes entitled to be cast by such shares.
8. "Subsidiary" means any Person of which a majority of any
class of equity security is owned, directly or indirectly, by the
Corporation; provided, however, that for the purposes of Section D of
-------- -------
this Article Four, the term "Subsidiary" shall mean only a Person of which a
majority of each class of equity security is owned, directly or indirectly,
by the Corporation.
B. LIMITATION ON ENTITLEMENT TO VOTE APPLICABLE TO CERTAIN
SHAREHOLDERS.
With respect to any matter submitted to a vote of the holders of
the Voting Stock at any meeting of such holders or any matter upon which the
holders of Voting Stock propose or purport to take action by written consent
without a meeting: (i) no Person that owns Voting Stock may vote that number
of such shares that constitutes the Excludable Shares, if any, owned by such
Person (provided, however, that if such Person is a member of a Group,
-------- -------
such Person shall be subject to clause (ii) below rather than to this clause
(i)); (ii) no Person that is a member of a Group of Persons owning Voting
Stock may vote that number of shares owned by such Person that constitutes
the Allocable Excludable Shares, if any, owned by such Person; and (iii) that
number of shares having the status of Excludable Shares (adjusted as
necessary to give effect to the provisos to the definition set forth below of
Allocable Excludable Shares) shall be excluded and deducted from the total
number of shares of Voting Stock deemed to be outstanding for purposes of
determining the number of shares of Voting Stock necessary to constitute a
quorum at any such meeting or to approve a matter submitted for shareholder
approval at any such meeting or by means of any such written consent. For
purposes of this Article Four:
the term "Excludable Shares" means, with respect to any
Person or Group, that number of shares of Voting Stock owned by such Person
or Group, as the case may be, that would result in such Person or Group, as
the case may be, owning more than twenty percent (20%) of the combined voting
power of the outstanding shares of Voting Stock (with the determination of
the voting power of each Person and Group owning Voting Stock being
<PAGE> 6
calculated and recalculated for this purpose as often as is necessary to give
effect to the exclusion from voting and the determination of shares deemed to
be outstanding for purposes related thereto of Excludable Shares held by
other Persons or Groups); and
the term "Allocable Excludable Shares" means, with respect
to each Person that is a member of a Group which owns Excludable Shares, a
number of shares owned by such Person equal to such Person's pro rata share
(based upon the number of shares of Voting Stock owned by such Person) within
such Group of the total amount of Excludable Shares owned by such Group;
provided, however, that shares that are deemed owned by two or more
- -------- -------
Persons who are members of such Group as a result of attributions in
accordance with Section A.3. of this Article Four hereof shall for this
purpose be deemed to be owned by such one of such Persons which most directly
owns such shares; and provided, further, that, with respect to any Person
-------- -------
that is a member of more than one such Group, "Allocable Excludable Shares"
means the greatest number of Excludable Shares so allocated with respect to
such Person with respect to any single Group.
C. RIGHT OF INQUIRY OF THE CORPORATION.
The Corporation shall have the right but not the obligation to
inquire of any Person whom the Corporation believes may own Voting Stock or
any other Person who purports to exercise voting rights with respect to any
Voting Stock, and each such Person shall have the obligation to provide such
information to the Corporation as the Corporation may reasonably request,
with respect to any matters pertinent to the operation or implementation of
this Article Four, including, without limitation, (i) the number of shares
owned by such Person, (ii) whether shares owned of record by such Person are
owned by other Persons and the identity of such other Persons and the nature
of their ownership interest, (iii) whether any Affiliates or Associates of
such Person own any Voting Stock, (iv) whether such Person is a member of a
Group of Persons owning Voting Stock, or (v) whether such Person or any of
such Person's Affiliates or Associates has any agreement, arrangement or
understanding with any other Person with respect to any Voting Stock.
D. PERSONS TO WHOM THIS ARTICLE DOES NOT APPLY.
The provisions of Section B of this Article Four shall not apply
to (i) General American Mutual Holding Company, a Missouri mutual company
("GAMHC"), General American Life Insurance Company, a Missouri corporation
("General American"), General American Holding Company, a Missouri
corporation ("Holding Company"), any Affiliate of GAMHC, General American or
Holding Company, or any Subsidiary, (ii) any savings, profit-sharing, stock
bonus or employee stock ownership plan or plans established by the
Corporation or a Subsidiary and qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended, or any successor provision, which
holds shares of Voting Stock on behalf of participating employees and their
beneficiaries with the right to instruct the trustee how to vote such shares
of Voting Stock with respect to all matters submitted to shareholders for
voting, or (iii) participating employees and beneficiaries under the plans
referred to in the immediately preceding clause (ii) because of their
participation in such savings, profit-sharing, stock bonus or employee
ownership plans. In addition, the provisions of Section B of this Article
Four shall not
<PAGE> 7
be applicable with respect to any Person or Group if the conditions specified
in either Section D.1. or D.2 below are met:
1. Approval in Advance by the Board of Directors. The board
of directors of the Corporation (the "Board of Directors") (i) has expressly
approved in advance either (A) the acquisition of outstanding shares of
Voting Stock by such Person or Group that caused such Person or Group to
become the owner of Excludable Shares, or (B) the issue or sale by the
Corporation of shares of Voting Stock to such Person or Group that caused
such effect, and (ii) in advance of such acquisition or issue or sale have
expressly determined that such provisions shall not be applicable to such
Person or Group.
2. Approval by Board of Directors. The Board of Directors has
determined that such provision shall not apply to such Person or Group.
E. POWERS OF THE BOARD OF DIRECTORS.
The Board of Directors shall have the power, but not the
obligation, to determine, for the purposes of this Article Four, on the basis
of information actually known to it or, in its discretion, after reasonable
inquiry, all facts necessary to determine compliance with or implementation
of this Article Four, including, without limitation, (i) the number of shares
of Voting Stock owned by any Person or Group or a member of any Group
(including, without limitation, in accordance with the first proviso to the
definitions of Excludable Shares and Allocable Excludable Shares set forth in
Section B of this Article Four), (ii) whether two or more Persons constitute
a Group, (iii) whether a Person is an Affiliate or Associate of another
Person or a member of any Group, (iv) whether a Person has an agreement,
arrangement or understanding with another Person, (v) the calculation
(including the manner of calculation) of the amount of Excludable Shares held
by any Person or Group or the Allocable Excludable Shares held by any Person
(including, without limitation, in accordance with the first proviso to the
definitions of Excludable Shares and Allocable Excludable Shares set forth in
Section B of this Article Four hereof), and (vi) any other facts which the
Board of Directors determines to be relevant. Any determinations made by the
Board of Directors pursuant to this Article Four in good faith and on the
basis of such information as was actually known by the Board of Directors and
advice as was then actually provided to the Board of Directors for such
purpose shall be conclusive and binding upon the Corporation and its
shareholders.
ARTICLE FIVE - INCORPORATOR
The name and place of residence of the incorporator of the
Corporation is:
Name Address
---- -------
Connie B. Walsh 454 Tree Top Lane
St. Louis, MO 63122
<PAGE> 8
ARTICLE SIX - DIRECTORS
A. NUMBER AND CLASSIFICATION.
The number of Directors to constitute the Board of Directors is
five. Hereafter, the number of Directors shall be fixed by or in the manner
provided in the Bylaws of the Corporation, but in no event shall there be
fewer than three (3) Directors. The Directors shall be divided into three
classes, as nearly equal in number as reasonably possible, with the mode of
such classification to be provided for in the Bylaws of the Corporation.
Directors other than certain Directors constituting the existing Board of
Directors at the time of the adoption of this provision shall be elected to
hold office for a term of three years, with the term of office of one class
expiring each year. Notwithstanding the foregoing, whenever the holders of
any one or more classes or series of stock of the Corporation, other than
shares of Common Stock, shall have the right, voting separately by class or
series, to elect Directors, the election, term of office, filling of
vacancies and other features of such directorship shall be governed by the
terms of the Articles of Incorporation of the Corporation or any Certificate
of Designation thereunder applicable thereto; and such directors so elected
shall not be divided into classes pursuant to this Article Six unless
expressly provided by such terms. As used in these Articles of
Incorporation, the term "entire Board of Directors" or the "entire Board"
means the total number of Directors fixed by, or in accordance with, these
Articles of Incorporation and the Bylaws of the Corporation.
B. REMOVAL OF DIRECTORS.
Subject to the rights, if any, of the holders of any class of
capital stock of the Corporation (other than the Common Stock) then
outstanding or any limitation imposed by law, (1) any Director, or the entire
Board of Directors, may be removed from office at any time prior to the
expiration of his, her or their term of office only for cause and only by the
affirmative vote of the holders of record of outstanding shares representing
at least 85% of all of the then outstanding shares of capital stock of the
Corporation then entitled to vote generally in the election of Directors,
voting together as a single class at a special meeting of shareholders called
expressly for that purpose (such vote being in addition to any required class
or other vote); and (2) any Director may be removed from office by the
affirmative vote of a majority of the entire Board of Directors at any time
prior to the expiration of his or her term of office, as provided by law, in
the event that the Director fails to meet any qualifications stated in the
Bylaws for election as a Director or in the event that the Director is in
breach of any agreement between the Director and the Corporation relating to
the Director's service as a Director or employee of the Corporation.
C. VACANCIES.
Subject to the rights, if any, of the holders of any class of
capital stock of the Corporation (other than the Common Stock) then
outstanding, any vacancies in the Board of Directors which occur for any
reason prior to the expiration of the respective term of office of the class
in which the vacancy occurs, including vacancies which occur by reason of an
increase in the number of Directors or the removal of a Director, shall be
filled only by the Board of
<PAGE> 9
Directors, acting by the affirmative vote of a majority of the remaining
Directors then in office (although less than a quorum).
ARTICLE SEVEN - DURATION
The duration of the Corporation is perpetual.
ARTICLE EIGHT - PURPOSES
The Corporation is formed to engage in any lawful act or activity
for which a corporation now or hereafter may be organized under the laws of
the State of Missouri.
ARTICLE NINE - AMENDMENT OF BYLAWS
The Bylaws of the Corporation may be amended, altered, changed or
repealed, and a provision or provisions inconsistent with the provisions of
the Bylaws as they may exist from time to time may be adopted, only by a
majority of the entire Board of Directors.
ARTICLE TEN - INDEMNIFICATION
A. ACTIONS INVOLVING DIRECTORS AND OFFICERS.
The Corporation shall indemnify each person (other than a party
plaintiff suing on his or her own behalf or in the right of the Corporation)
who at any time is serving or has served as a Director or officer of the
Corporation against any claim, liability or expense incurred as a result of
such service, or as a result of any other service on behalf of the
Corporation, or service at the request of the Corporation as a director,
officer, employee, member, or agent of another corporation, partnership,
joint venture, trust, trade or industry association, or other enterprise
(whether incorporated or unincorporated, for-profit or not-for-profit), to
the maximum extent permitted by law. Without limiting the generality of the
foregoing, the Corporation shall indemnify any such person who was or is a
party (other than a party plaintiff suing on his or her behalf or in the
right of the Corporation), or is threatened to be made a party, to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (including, but not limited to, an
action by or in the right of the Corporation) by reason of such service
against expenses (including, without limitation, attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him
or her in connection with such action, suit or proceeding.
B. ACTIONS INVOLVING EMPLOYEES OR AGENTS.
1. PERMISSIVE INDEMNIFICATION. The Corporation may, if it
deems appropriate and as may be permitted by this Article Ten, indemnify any
person (other than a party plaintiff suing on his or her own behalf or in the
right of the Corporation) who at any time is serving or has served as an
employee or agent of the Corporation against any claim, liability or expense
<PAGE> 10
incurred as a result of such service, or as a result of any other service on
behalf of the Corporation, or service at the request of the Corporation as a
director, officer, employee, member, or agent of another corporation,
partnership, joint venture, trust, trade or industry association, or other
enterprise (whether incorporated or unincorporated, for-profit or
not-for-profit), to the maximum extent permitted by law or to such lesser
extent as the Corporation, in its discretion, may deem appropriate. Without
limiting the generality of the foregoing, the Corporation may indemnify any
such person who was or is a party (other than a party plaintiff suing on his
or her own behalf or in the right of the Corporation), or is threatened to be
made a party, to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative
(including, but not limited to, an action by or in the right of the
Corporation) by reason of such service, against expenses (including, without
limitation, attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such
action, suit or proceeding.
2. Mandatory Indemnification. To the extent that an employee
or agent of the Corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in Section B.1 of this
Article Ten, or in defense of any claim, issue or matter therein, he or she
shall be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by him or her in connection with the action, suit or
preceding.
C. DETERMINATION OF RIGHT TO INDEMNIFICATION IN CERTAIN CIRCUMSTANCES.
Any indemnification required under Section A of this Article Ten
or authorized by the Corporation in a specific case pursuant to Section B of
this Article Ten (unless ordered by a court) shall be made by the Corporation
unless a determination is made reasonably and promptly that indemnification
of the Director, officer, employee or agent is not proper under the
circumstances because he or she has not met the applicable standard of
conduct set forth in or established pursuant to this Article Ten. Such
determination shall be made (1) by the Board of Directors by a majority vote
of a quorum consisting of Directors who were not parties to such action, suit
or proceeding, or (2) if such a quorum is not obtainable, or even if
obtainable a quorum of disinterested Directors so directs, by independent
legal counsel in a written opinion, or (3) by majority vote of the
shareholders; provided that no such determination shall preclude an action
brought in an appropriate court to challenge such determination.
D. ADVANCE PAYMENT OF EXPENSES.
Expenses incurred by a person who is or was a Director or officer
of the Corporation in defending a civil or criminal action, suit or
proceeding shall be paid by the Corporation in advance of the final
disposition of an action, suit or proceeding, and expenses incurred by a
person who is or was an employee or agent of the Corporation in defending a
civil or criminal action, suit or proceeding may be paid by the Corporation
in advance of the final disposition of such action, suit or proceeding as
authorized by the Board of Directors, in either case upon receipt of an
undertaking by or on behalf of the Director, officer, employee or agent to
repay such amount if it shall ultimately be determined that he or she is not
entitled to be indemnified by the Corporation as authorized in or pursuant to
this Article Ten.
<PAGE> 11
E. ARTICLE TEN PROVISIONS NOT EXCLUSIVE RIGHT.
The indemnification provided by this Article Ten shall not be
deemed exclusive of any other rights to which those seeking indemnification
may be entitled, whether under the Bylaws of the Corporation or any statute,
agreement, vote of shareholders or disinterested Directors or otherwise, both
as to action in an official capacity and as to action in another capacity
while holding such office.
F. INDEMNIFICATION AGREEMENTS AUTHORIZED.
Without limiting the other provisions of this Article Ten, the
Corporation is authorized from time to time, without further action by the
shareholders of the Corporation, to enter into agreements with any Director,
officer, employee or agent of the Corporation providing such rights of
indemnification as the Corporation may deem appropriate, up to the maximum
extent permitted by law. Any agreement entered into by the Corporation with
a Director may be authorized by the other Directors, and such authorization
shall not be invalid on the basis that different or similar agreements may
have been or may thereafter be entered into with other Directors.
G. STANDARD OF CONDUCT.
Except as may otherwise be permitted by law, no person shall be
indemnified pursuant to this Article Ten (including without limitation
pursuant to any agreement entered into pursuant to Section F of this Article
Ten) from or on account of such person's conduct which is finally adjudged to
have been knowingly fraudulent, deliberately dishonest or willful misconduct.
The Corporation may (but need not) adopt a more restrictive standard of
conduct with respect to the indemnification of any employee or agent of the
Corporation.
H. INSURANCE.
The Corporation may purchase and maintain insurance on behalf of
any person who is or was a Director, officer, employee or agent of the
Corporation, or who is or was otherwise serving on behalf or at the request
of the Corporation in any capacity against any claim, liability or expense
asserted against him or her and incurred by him or her in any such capacity,
or arising out of his or her status as such, whether or not the Corporation
would have the power to indemnify him or her against such liability under the
provisions of this Article Ten.
I. CERTAIN DEFINITIONS.
For the purposes of this Article Ten:
1. Service in Representative Capacity. Any Director or
officer of the Corporation who shall serve as a director, officer or employee
of any other corporation, partnership, joint venture, trust or other
enterprise of which the Corporation, directly or indirectly, is or was the
owner of 20% or more of either the outstanding equity interests or the
outstanding voting stock (or comparable interests), shall be deemed to be so
serving at the request of the Corporation, unless the Board of Directors of
the Corporation shall determine otherwise. In all other instances where any
person shall serve as a director, officer, employee or
<PAGE> 12
agent of another corporation, partnership, joint venture, trust or other
enterprise of which the Corporation is or was a stockholder or creditor, or in
which it is or was otherwise interested, if it is not otherwise established
that such person is or was serving as a director, officer, employee or agent at
the request of the Corporation, the Board of Directors of the Corporation may
determine whether such service is or was at the request of the Corporation, and
it shall not be necessary to show any actual or prior request for such service.
2. Predecessor Corporations. References to a corporation
include all constituent corporations absorbed in a consolidation or merger as
well as the resulting or surviving corporation so that any person who is or
was a director, officer, employee or agent of a constituent corporation or is
or was serving at the request of a constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise shall stand in the same position under the
provisions of this Article Ten with respect to the resulting or surviving
corporation as he or she would if he or she had served the resulting or
surviving corporation in the same capacity.
3. Service for Employee Benefit Plan. The term "other
enterprise" shall include, without limitation, employee benefit plans and
voting or taking action with respect to stock or other assets therein; the
term "serving at the request of the Corporation" shall include, without
limitation, any service as a director, officer, employee or agent of a
corporation which imposes duties on, or involves services by, a director,
officer, employee or agent with respect to any employee benefit plan, its
participants, or beneficiaries; and a person who acted in good faith and in a
manner he or she reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed to
have satisfied any standard of care required by or pursuant to this Article
Ten in connection with such plan; the term "fines" shall include, without
limitation, any excise taxes assessed on a person with respect to an employee
benefit plan and shall also include any damages (including treble damages)
and any other civil penalties.
J. SURVIVAL.
Any indemnification rights provided pursuant to this Article Ten
shall continue as to a person who has ceased to be a Director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person. Notwithstanding any other provisions in
these Articles of Incorporation, any indemnification rights arising under or
granted pursuant to this Article Ten shall survive amendment or repeal of
this Article Ten with respect to any acts or omissions occurring prior to the
effective time of such amendment or repeal and persons to whom such
indemnification rights are given shall be entitled to rely upon such
indemnification rights with respect to such acts or omissions as a binding
contract with the Corporation.
K. LIABILITY OF THE DIRECTORS.
It is the intention of the Corporation to limit the personal
liability of the Directors of the Corporation, in their capacity as such,
whether to the Corporation, its shareholders or otherwise, to the fullest
extent permitted by law. Consequently, should the GBCL or any other
applicable law be amended or adopted hereafter so as to permit the
elimination or limitation of
<PAGE> 13
such liability, the liability of the Directors of the Corporation shall be so
eliminated or limited without the need for amendment of these Articles or
further action on the part of the shareholders of the Corporation.
ARTICLE ELEVEN - AMENDMENT OF ARTICLES OF INCORPORATION
The Corporation reserves the right to amend, alter, change or
repeal any provision contained in these Articles of Incorporation in the
manner now or hereafter prescribed by law, and all rights and powers
conferred herein on the shareholders, Directors and officers of the
Corporation are subject to this reserved power; provided, that (in addition
to any required class or other vote) the affirmative vote of the holders of
record of outstanding shares representing at least 85% of all of the
outstanding shares of capital stock of the Corporation then entitled to vote
generally in the election of Directors, voting together as a single class,
shall be required to amend, alter, change or repeal, or adopt any provision
or provisions inconsistent with, Articles Four, Six, Nine, Ten, Twelve,
Thirteen or this Article Eleven of these Articles of Incorporation.
ARTICLE TWELVE - BUSINESS COMBINATIONS
The Corporation hereby subjects itself to and accepts the
provisions of Section 351.459 of the GBCL, provided that General American or
Holding Company or any Affiliate of General American or Holding Company or
any Subsidiary (as each of such terms is defined in Article Four hereof)
shall not be deemed to constitute "interested shareholders" for purposes of
Section 351.459.
ARTICLE THIRTEEN - CONTROL SHARE ACQUISITIONS
Section 351.407 of the GBCL shall not apply to control share
acquisitions (as defined therein) of shares of the Corporation.
<PAGE> 1
Exhibit 10.20
CONNING CORPORATION
NON-QUALIFIED STOCK OPTION AWARD
Name of Option Recipient: <<name>>
On December 15, 1997, the Company awarded you a stock option. You were
granted an option to buy <<total>> shares of the Company's Common Stock, par
value $.01 per share, at the price of $13.50 per share.
You may purchase shares under the option as follows:
<TABLE>
<CAPTION>
CUMULATIVE
NUMBER OF MAY BE PURCHASED
SHARES NOT BEFORE NOT AFTER
------ ---------- ---------
<S> <C> <C>
<<one15th>> December 19, 1998 December 19, 2007
<<three15th>> December 19, 1999 December 19, 2007
<<six15th>> December 19, 2000 December 19, 2007
<<ten15th>> December 19, 2001 December 19, 2007
<<total>> December 19, 2002 December 19, 2007
</TABLE>
This option is not, and will not be treated as, an Incentive Stock
Option under Section 422 of the Code.
The award of this Option is subject to the closing of the Company's
initial public offering ("IPO") on or before December 31, 1997. If the IPO
does not close by such date, this Option shall be null and void and the
Participant shall have no rights hereunder effective December 15, 1997.
IMPORTANT: By signing below, you agree to be bound by, and
acknowledge receipt of, the attached Terms and Conditions of this stock
option.
Read and agreed CONNING CORPORATION
to this ------- day of
December 1997.
- ------------------------ By:---------------------------
Name: Leonard M. Rubenstein
Title: Chairman and Chief Executive Officer
1
<PAGE> 2
TERMS AND CONDITIONS
--------------------
NON-QUALIFIED STOCK OPTION AWARD GRANTED UNDER
----------------------------------------------
CONNING CORPORATION
-------------------
1997 FLEXIBLE STOCK PLAN
------------------------
1. Definitions
-----------
(a) Option The option granted by the Option Award
(b) Option Award The Non-Qualified Stock Option Award to which the
Terms and Conditions are attached together with,
except where the context requires otherwise, these
Terms and Conditions.
(c) Plan The Conning Corporation 1997 Flexible Stock Plan, as
amended from time to time.
All capitalized terms not otherwise defined herein shall have the meanings
given to such terms by the Plan.
2. Evidence of Option Grant and Incentive Stock Option
---------------------------------------------------
The Option Award evidences a grant to the Participant of an
Option to purchase that number of shares ("Optioned Shares") of Common Stock,
par value $.01 per share, of the Company ("Stock") set forth on the Option
Award. The Participant may exercise the Option as shown on the Option Award.
In no event shall the Option or any part of the Option be exercisable after
December 19, 2007 (the "Option Expiration Date"). The Option is a
Non-Qualified Stock Option and is not intended to constitute an "Incentive
Stock Option" as defined in Section 422 of the Code.
3. Exercise of Option
------------------
The Option shall be exercised by the Participant delivering a
written notice of exercise to the Company's Secretary or Chief Financial
Officer. This notice shall specify the number of Optioned Shares the
Participant then desires to purchase.
4. Payment of Option Price
-----------------------
Payment for the Shares purchased under the Option shall be made
to the Company either:
(a) in cash (including cashier's check, bank draft or money
order); or
(b) by the tender to the Company of shares owned by the
Participant and registered in his or her name having a Fair
Market Value equal to the amount due to the Company; or
1
<PAGE> 3
(c) in cash, but by means of a so-called "cashless exercise";
or
(d) by any combination of the payment methods specified in
paragraphs (a) through (c) above.
In addition to the foregoing methods of payment, payment of the Option price
may, at the discretion of the Committee, be made in whole or in part in other
property, rights and credits, including, to the extent permitted by
applicable law, the Participant's promissory note.
5. Form of Notice of Exercise
--------------------------
The Participant's notice as required by Section 3 shall be signed
by the Participant and shall be in substantially the following form with
appropriate adjustments depending on how the Option price is paid:
"I hereby exercise my Option to purchase ---------- Shares in
accordance with my Option Award dated ------------, 19--, granted
under the Company's 1997 Flexible Stock Plan.
The aggregate Option price of the Shares I am purchasing is
$---------. I hereby tender in payment of such price the following:
(a) my cashier's check, bank draft or money order made payable to
the Company in the amount of $----------------; and/or
(b) ------- Shares having a Fair Market Value of $----------.
I have forwarded to you under separate cover a stock power (with
signature guaranteed) authorizing you to transfer my ------- Shares as
per the requirements of this letter and my Option Award.
I hereby represent to the Company that I own the --------- Shares
delivered herewith free and clear of all liens and encumbrances and
that I have the full and lawful right to transfer such Shares to the
Company.
If the Shares purchased have not been registered under the
Securities Act of 1933, I hereby further represent to the Company that
I am acquiring the -------- Shares that I am purchasing solely for
investment and solely for my own account and that I have no present
intention of selling or offering for sale any of such Shares to any
other person or persons."
6. Stock Certificates
------------------
Upon the exercise of the Option solely for cash or cash and
property (other than Shares), rights and/or credits specifically permitted by
the Committee, the Participant shall be entitled to one stock certificate
evidencing the Shares acquired upon exercise. However, if the Participant
delivers Shares of the Company when exercising the Option, then the
Participant shall be entitled to two or three certificates.
2
<PAGE> 4
If the number of Shares tendered is less than or equal to the
number required to pay for all of the Shares purchased, then the Participant
shall be entitled to receive two certificates. One certificate shall
represent a number of Shares equal to the number of Shares delivered by the
Participant. The second certificate shall represent the additional Shares
acquired by the Participant upon the exercise of the Option.
If the number of Shares tendered is more than the number required
to pay for all of the Shares purchased, then the Participant shall be
entitled to receive three certificates, one for the portion of the number of
Shares purchased which is equal to the number of tendered Shares applied to
exercise the Option, a second for the remainder of the number of Shares
purchased upon exercise of the Option, and a third for the number of Shares
tendered which were not applied to purchase the Shares pursuant to the
Option.
7. Legends on Certificates
-----------------------
The certificate or certificates to be issued under Section 6
shall be issued as soon as practicable. Such certificate or certificates
shall contain thereon a legend in substantially the following form if the
Shares evidenced by such certificate have not been registered under the
Securities Act of 1933, as amended:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933 or any applicable state
law. They may not be offered for sale, sold, transferred or pledged
without (1) registration under the Securities Act of 1933 and any
applicable state law, or (2) at holder's expense, an opinion
(satisfactory to the Company) that registration is not required."
The certificates shall also contain such other legends as may be appropriate
or required by law.
8. Termination of Employment; Nonassignability
-------------------------------------------
8.1 Termination for Cause or Voluntary Quit. If, on or after
---------------------------------------
the date that the Option shall have first become exercisable, the
Participant's employment shall be terminated for any reason other than as
described in Section 8.3, the Participant shall have the right, within three
months after such termination (but not later than the Option Expiration
Date), to exercise such Option to the extent that such Option or any
installment thereof shall have accrued at the date of such termination and
shall not have been exercised. In the event of the Participant's death
during such three-month (or shorter) period, the provisions of Section 8.4
shall apply. For purposes of this Section, termination of a Participant's
employment shall mean the later of the termination of the Participant's
employment with an Employer or the Participant's ceasing to serve as a
director of the Company.
3
<PAGE> 5
8.2 Disability. If, on or after the date that the Option shall
----------
first have become exercisable, the Participant's employment shall be
terminated for disability (as such term is defined in Section 422(c)(6) of
the Code), the Participant shall have the right, within one year after such
termination (but not later than the Option Expiration Date), to exercise such
Option to the extent that such Option or any installment thereof shall have
accrued at the date of such termination of employment and shall not have been
exercised. In the event of Participant's death during such one-year (or
shorter) period, the provisions of Section 8.4 shall apply. For purposes of
this Section, termination of a Participant's employment shall mean the later
of the termination of the Participant's employment with an Employer or the
Participant's ceasing to serve as a director of the Company.
8.3 Retirement. If the Participant's employment shall be
----------
terminated by the Participant on or after (x) the Participant attains age 65
or (y) the Participant attains age 55 and has at least ten years of service
with an Employer, then all installments of the Option granted hereunder shall
become immediately exercisable (if not already exercisable), and the
Participant shall have the right, within three months after such termination
(but not later than the Option Expiration Date), to exercise such Option to
the extent that such Option or any installment thereof shall not have been
exercised. In the event of the Participant's death during such three-month
(or shorter) period, the provisions of Section 8.4 shall apply. For purposes
of this Section, termination of a Participant's employment shall mean the
later of the termination of the Participant's employment with an Employer or
the Participant's ceasing to serve as a director of the Company.
8.4 Death. If a Participant shall die within the three-month
-----
(or shorter) period referred to in Section 8.1 or Section 8.3, the one-year
(or shorter) period referred to in Section 8.2, or while serving as an
employee of an Employer or a director of the Company on or after the date
that the Option shall have first become exercisable, the beneficiary designed
pursuant to Section 8.6 hereof, or, if no such designation is in effect, the
personal representative of the estate of the decedent or the person or
persons to whom the Option shall have been validly transferred by such
personal representative pursuant to will or the laws of descent and
distribution, shall have the right, within one year from the date of the
Participant's death (but no later than the Option Expiration Date), to
exercise the Participant's Option to the extent that such Option or any
installment thereof shall have accrued at the date of death and shall not
have been exercised. No transfer of the Option shall be effective to bind
the Company unless the Company shall have been furnished with written notice
of such transfer and a copy of the will and/or such other evidence as the
Committee may deem necessary to establish the validity of the transfer. No
transfer shall be effective without the acceptance by the transferee of the
terms and conditions of such Option.
4
<PAGE> 6
8.5 Option Not Vested. Except as provided in Section 8.3, if the
-----------------
Participant's employment shall terminate before the Option shall have first
become exercisable, or before any installment or installments are
exercisable, then the Participant's full interest in the Option or such
installment or installments, as the case may be, shall terminate and all
rights thereunder shall cease. For purposes of this Section, termination of
a Participant's employment shall mean the later of the termination of the
Participant's employment with an Employer or the Participant's ceasing to
serve as a director of the Company.
8.6 Non-Transferability of Rights; Designation of Beneficiaries.
-----------------------------------------------------------
The Option shall not be transferable by the Participant otherwise than by will
or the laws of descent and distribution or as provided in this Section 8.6.
During the lifetime of the Participant the Option shall be exercisable only by
the Participant.
The Participant, however, may file with the Company a written
designation of a beneficiary or beneficiaries to exercise, in the event of
the Participant's death, the Option granted hereunder, subject to all of the
provisions of the Option Award and these Terms and Conditions, including this
Section 8. A Participant may from time to time revoke or change any such
designation of beneficiary and any designation of beneficiary under the Plan
shall be controlling over any other disposition, testamentary or otherwise;
provided, however, that if the Committee shall be in doubt as to the right of
any such beneficiary to exercise the Option, the Committee may determine to
recognize only an exercise by the personal representative of the estate of
the Participant, in which case the Company, the Committee and the members
thereof shall not be under any further liability to anyone.
8.7 Limitation on Extensions. Certain provisions hereof extend
------------------------
the date by which the Option must otherwise be exercised under the provisions
of Section 1 and the Option Award. Notwithstanding those provisions herein
which otherwise extend the time period in which the Option must be exercised,
no extension may extend the Option later than the Option Expiration Date.
9. Withholding
-----------
The Company or any Subsidiary shall have the right to deduct any
sums that federal, state or local tax law requires to be withheld with
respect to the exercise of the Option, or as otherwise may be required by
law. The Company or any such Subsidiary may require as a condition to
issuing Shares upon the exercise of the Option that the Participant or other
person exercising the Option pay any sum that federal, state or local tax law
requires to be withheld with respect to such exercise. In the alternative,
the Participant or other person exercising the Option, may elect to pay such
sums to the Company or the Subsidiary by delivering written notice of that
election to the Company's Secretary or Chief Financial Officer prior to or
concurrently with exercise. There is no obligation that the Participant
5
<PAGE> 7
be advised of the existence of the tax or the amount which the Company or a
Subsidiary will be so required to withhold.
10. Changes in Capital Structure
----------------------------
If there is any change in the Common Stock of the Company by
reason of any stock dividend, spin-off, split-up, spin-out, recapitalization,
merger, consolidation, reorganization, combination or exchange of shares, the
number of SARs and the number, kind and class of shares available for Options
and grants of Restricted Stock, Performance Shares and Other Stock Based
Awards and the number, kind and class of Shares subject to outstanding
Options, SARs, grants of Restricted Stock and Performance Shares, and Other
Stock Based Awards, and the price thereof, as applicable, shall be
appropriately adjusted by the Committee. The issuance of Shares for
consideration and the issuance of Share rights shall not be considered a
change in the Company's capital structure. No adjustment provided for in
this section shall require the issuance of any fractional shares.
11. Plan Controls
-------------
The Option Award and these Terms and Conditions are subject to
all terms and provisions of the Plan, which terms and provisions are
incorporated herein by reference. In the event of any conflict, the Plan
shall control over the Option Award and these Terms and Conditions.
6
<PAGE> 8
CONNING CORPORATION
NON-QUALIFIED STOCK OPTION AWARD
Name of Option Recipient: <<name>>
On December 15, 1997, the Company awarded you a stock option. You were
granted an option to buy <<total>> shares of the Company's Common Stock, par
value $.01 per share, at the price of $13.50 per share.
You may purchase shares under the option as follows:
<TABLE>
<CAPTION>
CUMULATIVE
NUMBER OF MAY BE PURCHASED
SHARES NOT BEFORE NOT AFTER
------ ---------- ---------
<S> <C> <C>
<<total>> December 19, 1997 December 19, 2007
</TABLE>
This option is not, and will not be treated as, an Incentive Stock
Option under Section 422 of the Code.
The award of this Option is subject to the closing of the Company's
initial public offering ("IPO") on or before December 31, 1997. If the IPO
does not close by such date, this Option shall be null and void and the
Participant shall have no rights hereunder effective December 15, 1997.
IMPORTANT: By signing below, you agree to be bound by, and
acknowledge receipt of, the attached Terms and Conditions of this stock
option.
Read and agreed CONNING CORPORATION
to this ------- day of
December 1997.
- ------------------------ By:---------------------------
Name: Leonard M. Rubenstein
Title: Chairman and Chief Executive Officer
1
<PAGE> 9
TERMS AND CONDITIONS
--------------------
NON-QUALIFIED STOCK OPTION AWARD GRANTED UNDER
----------------------------------------------
CONNING CORPORATION
-------------------
1997 FLEXIBLE STOCK PLAN
------------------------
1. Definitions
-----------
(a) Option The option granted by the Option Award
(b) Option Award The Non-Qualified Stock Option Award to which the
Terms and Conditions are attached together with, except
where the context requires otherwise, these Terms and
Conditions.
(c) Plan The Conning Corporation 1997 Flexible Stock Plan, as
amended from time to time.
All capitalized terms not otherwise defined herein shall have the meanings
given to such terms by the Plan.
2. Evidence of Option Grant and Incentive Stock Option
---------------------------------------------------
The Option Award evidences a grant to the Participant of an
Option to purchase that number of shares ("Optioned Shares") of Common Stock,
par value $.01 per share, of the Company ("Stock") set forth on the Option
Award. The Participant may exercise the Option as shown on the Option Award.
In no event shall the Option or any part of the Option be exercisable after
December 19, 2007 (the "Option Expiration Date"). The Option is a
Non-Qualified Stock Option and is not intended to constitute an "Incentive
Stock Option" as defined in Section 422 of the Code.
3. Exercise of Option
------------------
The Option shall be exercised by the Participant delivering a
written notice of exercise to the Company's Secretary or Chief Financial
Officer. This notice shall specify the number of Optioned Shares the
Participant then desires to purchase.
4. Payment of Option Price
-----------------------
Payment for the Shares purchased under the Option shall be made
to the Company either:
(a) in cash (including cashier's check, bank draft or money
order); or
(b) by the tender to the Company of shares owned by the
Participant and registered in his or her name having a Fair
Market Value equal to the amount due to the Company; or
1
<PAGE> 10
(c) in cash, but by means of a so-called "cashless exercise";
or
(d) by any combination of the payment methods specified in
paragraphs (a) through (c) above.
In addition to the foregoing methods of payment, payment of the Option price
may, at the discretion of the Committee, be made in whole or in part in other
property, rights and credits, including, to the extent permitted by
applicable law, the Participant's promissory note.
5. Form of Notice of Exercise
--------------------------
The Participant's notice as required by Section 3 shall be signed
by the Participant and shall be in substantially the following form with
appropriate adjustments depending on how the Option price is paid:
"I hereby exercise my Option to purchase ---------- Shares in
accordance with my Option Award dated ------------, 19--, granted
under the Company's 1997 Flexible Stock Plan.
The aggregate Option price of the Shares I am purchasing is
$---------. I hereby tender in payment of such price the following:
(a) my cashier's check, bank draft or money order made payable
to the Company in the amount of $----------------; and/or
(b) ------- Shares having a Fair Market Value of $----------.
I have forwarded to you under separate cover a stock power (with
signature guaranteed) authorizing you to transfer my ------- Shares as
per the requirements of this letter and my Option Award.
I hereby represent to the Company that I own the --------- Shares
delivered herewith free and clear of all liens and encumbrances and
that I have the full and lawful right to transfer such Shares to the
Company.
If the Shares purchased have not been registered under the
Securities Act of 1933, I hereby further represent to the Company that
I am acquiring the -------- Shares that I am purchasing solely for
investment and solely for my own account and that I have no present
intention of selling or offering for sale any of such Shares to any
other person or persons."
6. Stock Certificates
------------------
Upon the exercise of the Option solely for cash or cash and
property (other than Shares), rights and/or credits specifically permitted by
the Committee, the Participant shall be entitled to one stock certificate
evidencing the Shares acquired upon exercise. However, if the Participant
delivers Shares of the Company when exercising the Option, then the
Participant shall be entitled to two or three certificates.
2
<PAGE> 11
If the number of Shares tendered is less than or equal to the
number required to pay for all of the Shares purchased, then the Participant
shall be entitled to receive two certificates. One certificate shall
represent a number of Shares equal to the number of Shares delivered by the
Participant. The second certificate shall represent the additional Shares
acquired by the Participant upon the exercise of the Option.
If the number of Shares tendered is more than the number required
to pay for all of the Shares purchased, then the Participant shall be
entitled to receive three certificates, one for the portion of the number of
Shares purchased which is equal to the number of tendered Shares applied to
exercise the Option, a second for the remainder of the number of Shares
purchased upon exercise of the Option, and a third for the number of Shares
tendered which were not applied to purchase the Shares pursuant to the
Option.
7. Legends on Certificates
-----------------------
The certificate or certificates to be issued under Section 6
shall be issued as soon as practicable. Such certificate or certificates
shall contain thereon a legend in substantially the following form if the
Shares evidenced by such certificate have not been registered under the
Securities Act of 1933, as amended:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933 or any applicable state
law. They may not be offered for sale, sold, transferred or pledged
without (1) registration under the Securities Act of 1933 and any
applicable state law, or (2) at holder's expense, an opinion
(satisfactory to the Company) that registration is not required."
The certificates shall also contain such other legends as may be appropriate
or required by law.
8. Termination of Employment; Nonassignability
-------------------------------------------
8.1 Termination for Cause or Voluntary Quit. If, on or after
---------------------------------------
the date that the Option shall have first become exercisable, the
Participant's employment shall be terminated for any reason, the Participant
shall have the right, within three months after such termination (but not
later than the Option Expiration Date), to exercise such Option to the extent
that such Option shall not have been exercised. In the event of the
Participant's death during such three-month (or shorter) period, the
provisions of Section 8.4 shall apply. For purposes of this Section,
termination of a Participant's employment shall mean the later of the
termination of the Participant's employment with an Employer or the
Participant's ceasing to serve as a director of the Company.
8.2 Disability. If, on or after the date that the Option shall
----------
first have become exercisable, the Participant's employment shall be
terminated for disability (as such term is defined at
3
<PAGE> 12
Section 422(c)(6) of the Code), the Participant shall have the right, within
one year after such termination (but not later than the Option Expiration
Date), to exercise such Option to the extent that such Option or any
installment thereof shall not have been exercised. In the event of
Participant's death during such one-year (or shorter) period, the provisions
of Section 8.4 shall apply. For purposes of this Section, termination of a
Participant's employment shall mean the later of the termination of the
Participant's employment with an Employer or the Participant's ceasing to
serve as a director of the Company.
8.3 Intentionally Omitted.
---------------------
8.4 Death. If a Participant shall die within the three-month
-----
(or shorter) period referred to in Section 8.1, the one-year (or shorter)
period referred to in Section 8.2, or while serving as an employee of an
Employer or a director of the Company on or after the date that the Option
shall have first become exercisable, the beneficiary designed pursuant to
Section 8.6 hereof, or, if no such designation is in effect, the personal
representative of the estate of the decedent or the person or persons to whom
the Option shall have been validly transferred by such personal
representative pursuant to will or the laws of descent and distribution,
shall have the right, within one year from the date of the Participant's
death (but no later than the Option Expiration Date), to exercise the
Participant's Option to the extent that such Option or any installment
thereof shall not have been exercised. No transfer of the Option shall be
effective to bind the Company unless the Company shall have been furnished
with written notice of such transfer and a copy of the will and/or such other
evidence as the Committee may deem necessary to establish the validity of the
transfer. No transfer shall be effective without the acceptance by the
transferee of the terms and conditions of such Option.
8.5 Option Not Vested. If the Participant's employment shall
-----------------
terminate before the Option shall have first become exercisable, or before
any installment or installments are exercisable, then the Participant's full
interest in the Option or such installment or installments, as the case may
be, shall terminate and all rights thereunder shall cease. For purposes of
this Section, termination of a Participant's employment shall mean the later
of the termination of the Participant's employment with an Employer or the
Participant's ceasing to serve as a director of the Company.
8.6 Non-Transferability of Rights; Designation of Beneficiaries.
-----------------------------------------------------------
The Option shall not be transferable by the Participant otherwise than by will
or the laws of descent and distribution or as provided in this Section 8.6.
During the lifetime of the Participant the Option shall be exercisable only by
the Participant.
The Participant, however, may file with the Company a written
designation of a beneficiary or beneficiaries to exercise, in the event of
the Participant's death, the Option granted hereunder, subject to all of the
provisions of the Option Award and these Terms and Conditions,
4
<PAGE> 13
including this Section 8. A Participant may from time to time revoke or
change any such designation of beneficiary and any designation of beneficiary
under the Plan shall be controlling over any other disposition, testamentary
or otherwise; provided, however, that if the Committee shall be in doubt as
to the right of any such beneficiary to exercise the Option, the Committee
may determine to recognize only an exercise by the personal representative of
the estate of the Participant, in which case the Company, the Committee and
the members thereof shall not be under any further liability to anyone.
8.7 Limitation on Extensions. Certain provisions hereof extend
------------------------
the date by which the Option must otherwise be exercised under the provisions
of Section 1 and the Option Award. Notwithstanding those provisions herein
which otherwise extend the time period in which the Option must be exercised,
no extension may extend the Option later than the Option Expiration Date.
9. Withholding
-----------
The Company or any Subsidiary shall have the right to deduct any
sums that federal, state or local tax law requires to be withheld with
respect to the exercise of the Option, or as otherwise may be required by
law. The Company or any such Subsidiary may require as a condition to
issuing Shares upon the exercise of the Option that the Participant or other
person exercising the Option pay any sum that federal, state or local tax law
requires to be withheld with respect to such exercise. In the alternative,
the Participant or other person exercising the Option, may elect to pay such
sums to the Company or the Subsidiary by delivering written notice of that
election to the Company's Secretary or Chief Financial Officer prior to or
concurrently with exercise. There is no obligation that the Participant be
advised of the existence of the tax or the amount which the Company or a
Subsidiary will be so required to withhold.
10. Changes in Capital Structure
----------------------------
If there is any change in the Common Stock of the Company by
reason of any stock dividend, spin-off, split-up, spin-out, recapitalization,
merger, consolidation, reorganization, combination or exchange of shares, the
number of SARs and number, kind and class of shares available for Options and
grants of Restricted Stock, Performance Shares and Other Stock Based Awards
and the number, kind or class of Shares subject to outstanding Options, SARs,
grants of Restricted Stock and Performance Shares, and Other Stock Based
Awards, and the price thereof, as applicable, shall be appropriately adjusted
by the Committee. The issuance of Shares for consideration and the issuance
of Share rights shall not be considered a change in the Company's capital
structure. No adjustment provided for in this section shall require the
issuance of any fractional shares.
5
<PAGE> 14
11. Plan Controls
-------------
The Option Award and these Terms and Conditions are subject to
all terms and provisions of the Plan, which terms and provisions are
incorporated herein by reference. In the event of any conflict, the Plan
shall control over the Option Award and these Terms and Conditions.
6
<PAGE> 1
Exhibit 23.1
------------
Independent Auditors' Consent
-----------------------------
The Board of Directors and Shareholders
Conning Corporation:
We consent to incorporation by reference in the Registration Statement (No.
333-42781) on Form S-8 of Conning Corporation of our report dated February
12, 1998, relating to the consolidated balance sheets of Conning Corporation
and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, common shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997,
and the related financial statement schedule, which report appears in the
December 31, 1997 annual report on Form 10-K of Conning Corporation.
/s/ KPMG PEAT MARWICK LLP
St. Louis, Missouri
March 20, 1998
<PAGE> 1
Exhibit 24.1
CONNING CORPORATION
POWER OF ATTORNEY
-----------------
I, the undersigned, as a director of Conning Corporation hereby constitute
Leonard M. Rubenstein and Fred M. Schpero, and each of them singly, with full
power to sign for me, in my name and in the capacity checked below, the
annual report of Conning Corporation for the fiscal year ended December 31,
1997 on Form 10-K and any and all amendments to this report with the
Securities and Exchange Commission and I hereby ratify and confirm my
signature as it may be signed by the above-mentioned people to said Form 10-K
and to any and all amendments thereto.
Witness my hand on the date set forth below.
Signature
- ---------
/s/ John A. Fibiger Director / X /
- ------------------------------------------
John A. Fibiger
- -----------------------
Name (typed or printed)
Date February 4, 1998
-----------------------------
<PAGE> 2
CONNING CORPORATION
POWER OF ATTORNEY
-----------------
I, the undersigned, as a director of Conning Corporation hereby constitute
Leonard M. Rubenstein and Fred M. Schpero, and each of them singly, with full
power to sign for me, in my name and in the capacity checked below, the
annual report of Conning Corporation for the fiscal year ended December 31,
1997 on Form 10-K and any and all amendments to this report with the
Securities and Exchange Commission and I hereby ratify and confirm my
signature as it may be signed by the above-mentioned people to said Form 10-K
and to any and all amendments thereto.
Witness my hand on the date set forth below.
Signature
- ---------
/s/ John C. Shaw Director / X /
- -----------------------------------------
John C. Shaw
- --------------------
Name (typed or printed)
Date 2/12/98
-----------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 59,422,768
<SECURITIES> 600,662
<RECEIVABLES> 10,954,236
<ALLOWANCES> 170,000
<INVENTORY> 0
<CURRENT-ASSETS> 72,552,308
<PP&E> 2,652,756
<DEPRECIATION> 1,127,320
<TOTAL-ASSETS> 99,857,353
<CURRENT-LIABILITIES> 22,296,266
<BONDS> 0
<COMMON> 132,500
0
0
<OTHER-SE> 73,573,122
<TOTAL-LIABILITY-AND-EQUITY> 99,857,353
<SALES> 64,981,364
<TOTAL-REVENUES> 66,615,507
<CGS> 48,203,711
<TOTAL-COSTS> 51,172,675
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 300,261
<INCOME-PRETAX> 15,142,571
<INCOME-TAX> 6,226,242
<INCOME-CONTINUING> 8,915,329
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,916,329
<EPS-PRIMARY> 1.13
<EPS-DILUTED> .80
</TABLE>
