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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
----------------
COMMISSION FILE NUMBER 0-023183
CONNING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MISSOURI 43-1719355
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
700 MARKET STREET
ST. LOUIS, MISSOURI 63101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(314) 444-0498
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER
PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2)
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
---- ----
COMMON STOCK OUTSTANDING ($.01 PAR VALUE) AS OF JULY 31, 1999:
13,612,508 SHARES
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CONNING CORPORATION AND SUBSIDIARIES
<TABLE>
TABLE OF CONTENTS
<CAPTION>
ITEM PAGE
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<S> <C>
PART I - FINANCIAL INFORMATION
------------------------------
1 Financial Statements 1
Condensed Consolidated Balance Sheets (Unaudited)
June 30, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Income (Unaudited)
Three month periods ended June 30, 1999 and 1998 2
Condensed Consolidated Statements of Income (Unaudited)
Six month periods ended June 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six month periods ended June 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial
Statements (Unaudited) 5-9
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-15
PART II - OTHER INFORMATION
---------------------------
1 Legal Proceedings 16
4 Submission of Matters to a Vote of Security Holders 16
5 Other Information 16
6 Exhibits and Reports on Form 8-K 17
Signatures 18
Index to Exhibits 19
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
CONNING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(Unaudited)
<CAPTION>
ASSETS 1999 1998
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 33,940,049 $ 31,343,314
Short-term investments 20,549,817 28,288,155
Accounts receivable, net 11,924,959 11,165,200
Marketable equity securities, at fair value 660,793 278,222
Prepaid expenses and other current assets 680,249 481,455
------------- -------------
Total current assets 67,755,867 71,556,346
Non-marketable investments at value 5,336,430 2,737,147
Equipment and leasehold improvements, at cost, net of
accumulated depreciation 1,754,699 1,451,653
Deferred income taxes 2,736,591 3,199,812
Goodwill 42,558,499 40,706,020
Other assets 4,791,504 2,827,145
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Total assets $ 124,933,590 $ 122,478,123
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Compensation payable $ 6,328,250 $ 12,794,850
Deferred revenue 4,206,512 3,792,762
Due to affiliates 4,519,638 2,338,918
income taxes payable 17,081 284,441
Accounts payable and other accrued expenses 17,133,895 19,554,667
------------- -------------
Total current liabilities 32,205,376 38,765,638
Accrued rent 3,057,982 3,215,897
Other payables 240,000 320,000
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Total liabilities 35,503,358 42,301,535
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Common stock 138,536 135,714
Additional paid-in capital 77,881,646 74,975,681
Retained earnings 17,807,538 11,462,681
Treasury stock (6,397,488) (6,397,488)
------------- -------------
Total shareholders' equity 89,430,232 80,176,588
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Total liabilities and shareholders' equity $ 124,933,590 $ 122,478,123
============= =============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
1
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<TABLE>
CONNING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
REVENUES:
Asset management and related fees $ 19,675,436 $ 15,349,592
Research services 3,886,849 4,338,444
Other income 394,271 869,831
------------ ------------
Total revenues 23,956,556 20,557,867
------------ ------------
EXPENSES:
Employee compensation and benefits 11,184,294 9,544,971
Occupancy and equipment costs 1,563,661 1,120,037
Marketing and production costs 1,983,684 1,811,022
Professional services 671,845 589,714
Amortization of goodwill and other 654,454 707,848
Other operating expenses 1,287,781 1,151,432
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Total expenses 17,345,719 14,925,024
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Operating income 6,610,837 5,632,843
Interest expense 57,863 64,416
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Income before provision for income taxes 6,552,974 5,568,427
Provision for income taxes 2,628,659 2,371,718
------------ ------------
Net income $ 3,924,315 $ 3,196,709
============ ============
Weighted average diluted shares outstanding 14,115,803 14,263,873
Earnings per share:
Basic $ 0.29 $ 0.24
Diluted $ 0.28 $ 0.22
See accompanying notes to condensed consolidated financial statements.
</TABLE>
2
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<TABLE>
CONNING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
<CAPTION>
1999 1998
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<S> <C> <C>
REVENUES:
Asset management and related fees $ 37,849,307 $ 30,034,956
Research services 8,288,703 8,506,131
Other income 864,896 1,697,233
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Total revenues 47,002,906 40,238,320
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EXPENSES:
Employee compensation and benefits 21,801,513 19,176,694
Occupancy and equipment costs 3,084,169 2,265,269
Marketing and production costs 3,828,382 3,369,173
Professional services 1,341,940 1,141,302
Amortization of goodwill and other 1,303,342 1,415,695
Other operating expenses 2,632,443 2,219,142
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Total expenses 33,991,789 29,587,275
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Operating income 13,011,117 10,651,045
Interest expense 117,415 130,391
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Income before provision for income taxes 12,893,702 10,520,654
Provision for income taxes 5,203,571 4,492,008
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Net income $ 7,690,131 $ 6,028,646
============ ============
Weighted average diluted shares outstanding 14,074,135 14,209,630
Earnings per share:
Basic $ 0.58 $ 0.45
Diluted $ 0.55 $ 0.42
See accompanying notes to condensed consolidated financial statements.
</TABLE>
3
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<TABLE>
CONNING CORPORATION & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
<CAPTION>
1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 7,690,131 $ 6,028,646
Adjustment for items not affecting cash:
Depreciation 257,455 362,422
Amortization of goodwill and other 1,303,342 1,415,695
Net unrealized appreciation on non-marketable
investments (1,795,050) (335,358)
Net change in marketable equity securities (382,571) 75,082
Accretion of discounts on short-term investments (516,480) (335,849)
Changes in:
Accounts receivable (759,759) 2,052,598
Prepaid expenses and other assets (2,333,155) (70,300)
Accounts payable and other accrued expenses (2,500,770) 5,414,668
Income taxes payable 296,665 1,147,569
Due to affiliates 2,180,720 3,891,199
Deferred tax asset 463,221 (177,060)
Deferred revenue 413,750 1,587,568
Accrued rent (157,915) (129,651)
Compensation payable (6,466,600) (4,477,103)
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Net cash provided by (used in) operating
activities (2,307,016) 16,450,126
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INVESTING ACTIVITIES:
Purchases of non-marketable investments (1,440,520) (879,138)
Distribution from non-marketable investments 636,287 94,933
Purchases of equipment and other assets, net (560,501) (246,124)
Purchases of short-term investments (44,645,344) (49,023,672)
Maturities of short-term investments 52,900,162 34,840,698
Acquisition of TCW insurance operations (2,985,821) -
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Net cash provided by (used in) investing
activities 3,904,263 (15,213,303)
------------- -------------
FINANCING ACTIVITIES:
Issuance of common stock 2,344,762 26,650
Dividends on common stock (1,345,274) (1,060,000)
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Net cash provided by (used in) financing
activities 999,488 (1,033,350)
------------- -------------
Net change in cash and cash equivalents 2,596,735 203,473
Cash and cash equivalents, beginning of period 31,343,314 43,085,406
------------- -------------
Cash and cash equivalents, end of period $ 33,940,049 $ 43,288,879
============= =============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
4
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CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited, condensed consolidated financial statements
of Conning Corporation and subsidiaries (the "Company") have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, the financial information reflects adjustment, consisting
only of normal recurring accruals, necessary for a fair presentation of
the financial position of the Company and its subsidiaries as of June
30, 1999 and their results of operations for the three and six month
periods ended June 30, 1999 and 1998, and their cash flows for the six
month periods ended June 30, 1999 and 1998. Operating results for the
three and six month periods ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 1999. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
NOTE 2 - DIVIDENDS
The Company has paid cash dividends of $0.10 per share totaling
$1,345,274 on its common stock through June 30, 1999 compared to $0.08
per share totaling $1,060,000 for the same period during 1998. During
July, 1999 the Company declared a $0.05 per share quarterly cash
dividend on the Company's common stock, payable on September 10, 1999 to
shareholders of record on August 20, 1999.
NOTE 3 - MORTGAGE SERVICING OPERATIONS
The Company performs certain mortgage servicing functions for its
clients which include acting as an agent in the collection and
processing of principal and interest loan payments and escrow items. As
of June 30, 1999 and December 31, 1998, the Company maintained
approximately $12.3 million and $14.1 million, respectively, in escrow
balances off-balance sheet as the amounts were not considered to be
owned or operated by the Company.
NOTE 4 - INDUSTRY SEGMENT
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and
5
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CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
requires that those enterprises report selected information about
operating segments in interim financial statements issued to
shareholders.
Segment information on the Company for the three and six month periods
ended June 30, 1999 and 1998 are as follows, dollars in thousands:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
ASSET MANAGEMENT
Revenues $ 12,731 $ 10,114 $ 24,580 $ 20,046
Pre-tax income $ 3,493 $ 2,774 $ 6,572 $ 5,283
Revenue from Major Customer $ 4,093 $ 3,648 $ 8,060 $ 6,984
MORTGAGE LOAN & REAL ESTATE
Revenues $ 7,051 $ 5,236 $ 13,376 $ 9,989
Pre-tax income $ 2,380 $ 1,613 $ 4,527 $ 2,966
Revenue from Major Customer $ 4,051 $ 3,165 $ 7,596 $ 5,660
RESEARCH
Revenues $ 3,887 $ 4,338 $ 8,289 $ 8,506
Pre-tax income $ 680 $ 1,181 $ 1,795 $ 2,272
Revenue from Major Customer $ - $ 530 $ - $ 530
COMBINED OPERATING SEGMENTS
Revenues $ 23,669 $ 19,688 $ 46,245 $ 38,541
Pre-tax income $ 6,553 $ 5,568 $ 12,894 $ 10,521
Revenue from Major Customer $ 8,144 $ 7,343 $ 15,656 $ 13,174
RECONCILIATION OF COMBINED OPERATING
SEGMENT REVENUES TO CONSOLIDATED REVENUES
Combined operating segment revenue $ 23,669 $ 19,688 $ 46,245 $ 38,541
Other income 288 870 758 1,697
-------- -------- -------- --------
Consolidated revenue $ 23,957 $ 20,558 $ 47,003 $ 40,238
======== ======== ======== ========
</TABLE>
As of June 30, 1999, there are no differences in the basis of measuring
segment profit as compared to the Company's Annual Report for the year
ended December 31, 1998.
In addition to the disclosures above, SFAS 131 requires certain
disclosures pertaining to assets by segments if those measures are used
by management to make operating decisions, assess performance and
allocated resources. Management does not consider these items by
operating segment when making operating decisions, assessing performance
or allocating resources.
6
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CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - EARNINGS PER SHARE
The following table represents a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations:
FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 1999:
<TABLE>
<CAPTION>
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS:
Net income $ 3,924,315 13,485,344 $ 0.29
----------- =======
EFFECT OF DILUTIVE SECURITIES:
Stock options 630,459
----------
DILUTED EPS:
Net income $ 3,924,315 14,115,803 $ 0.28
=========== ========== =======
</TABLE>
FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 1998:
<TABLE>
<CAPTION>
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS:
Net income $ 3,196,709 13,250,722 $ 0.24
----------- =======
EFFECT OF DILUTIVE SECURITIES:
Stock options 1,013,151
----------
DILUTED EPS:
Net income $ 3,196,709 14,263,873 $ 0.22
=========== ========== =======
</TABLE>
7
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CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999:
<TABLE>
<CAPTION>
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS:
Net income $ 7,690,131 13,374,094 $ 0.58
----------- =======
EFFECT OF DILUTIVE SECURITIES:
Stock options 700,041
----------
DILUTED EPS:
Net income $ 7,690,131 14,074,135 $ 0.55
=========== ========== =======
</TABLE>
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1998:
<TABLE>
<CAPTION>
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS:
Net income $ 6,028,646 13,250,342 $ 0.45
----------- =======
EFFECT OF DILUTIVE SECURITIES:
Stock options 959,288
----------
DILUTED EPS:
Net income $ 6,028,646 14,209,630 $ 0.42
=========== ========== =======
</TABLE>
NOTE 6 - SUBSEQUENT EVENT
On August 10, 1999, General American Life Insurance Company ("General
American"), a significant client and the majority shareholder of the
Company, became subject to an order of administrative supervision from
the Missouri Department of Insurance. General American stated in a press
release that it was unable to meet substantial demands for surrenders
associated with its funding agreements business, also known as stable
value products. General American stated that the stable value withdrawal
activity stems from recent developments resulting from a reinsurance and
marketing relationship formed in 1993 between General American and ARM
Financial ("ARM").
General American's press release indicated that in June, 1999, ARM put
itself up for sale, announcing that it was de-emphasizing its involvement
in the stable value business. This led General American to recapture ARM's
portion of the business, approximately $3.4 billion in assets and
related liabilities. Moody's Investors Service reviewed these events
and lowered General American's financial strength rating from A2 to A3.
A significant number of stable value investors reacted to Moody's
downgrade of General American by requesting redemption of their funds.
Moody's further downgraded General American on August 9, 1999, to Ba1,
and, on
8
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CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
August 12, 1999, to B1. General American also has reported that it is
in discussion with several potential strategic partners and continues to
pursue these discussions and other options.
The Company is the asset manager for General American but is not
regulated by the Missouri Department of Insurance. General American
continues to be a significant client of the Company and its direct
ownership of the Company has not changed as a result of these
developments.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
- --------
Conning Corporation revenues consist of asset management and related
fees, research services, and other income.
The Company's asset management and related revenues are derived from
three sources: asset management fees, private equity fund management
fees, and fees related to the Company's mortgage and real estate
activities. Asset management fees primarily reflect fees for
discretionary asset management services provided to insurance company
clients, including GenAmerica Corporation ("GenAmerica"), its
subsidiaries and its affiliates. Asset management fees are generally a
function of the overall fee rate charged to each account and the level
of assets under management. A portion of these revenues is generated
when the Company provides investment advisory services as well as when
the Company provides investment accounting and reporting services on a
stand-alone basis. Assets under management can be affected by the
addition of new client accounts or client contributions to existing
accounts, withdrawals of assets from or terminations of client accounts,
and investment performance which may depend on general market
conditions.
The Company's private equity fund management revenues represent annual
management fees based on a percentage of committed capital and a
participation in certain specified net gains of the funds.
The Company's commercial mortgage fees primarily reflect fees associated
with loan originations, which approximate .75-1.0% of the loan balance,
as well as fees associated with ongoing servicing and management fees
with respect to loans originated in portfolios managed by the Company.
In addition to loans for GenAmerica subsidiaries and affiliates, the
Company originates mortgage loans for unaffiliated insurance and pension
clients and for securitized offerings by investment banking firms from
time to time.
Conning's assets under discretionary management were $32.4 billion as of
June 30, 1999, an increase of $4.2 billion from $28.2 billion under
management at June 30, 1998. The net increase in assets during the
twelve-month period is due to an increase in assets from new and
existing clients. Total assets serviced increased $3.8 billion since
June 30, 1998 to $90.8 billion at June 30, 1999. New client activity in
discretionary assets under management and recent company acquisitions
were the primary sources of this increase.
On August 10, 1999, General American Life Insurance Company ("General
American") a significant client and the majority shareholder of the
Company became subject to an order of administrative supervision from
the Missouri Department of Insurance. General American stated in a press
release that it was unable to meet substantial demands for surrenders
associated with its funding agreements business, also known as stable
value products. General American stated that the stable value withdrawal
activity stems from recent developments resulting from a reinsurance and
marketing relationship formed in 1993 between General American and ARM
Financial ("ARM").
10
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<PAGE>
General American's press release explained that in June, ARM put itself
up for sale, announcing that it was de-emphasizing its involvement in
the stable value business. This led General American to recapture ARM's
portion of the business, approximately $3.4 billion in assets and
related liabilities. Moody's Investors Service reviewed these events
and lowered General American's financial strength rating from A2 to A3.
A significant number of stable value investors reacted to Moody's
downgrade of General American by requesting redemption of their funds.
Moody's further downgraded General American on August 9, 1999, to Ba1,
and, on August 12, 1999, to B1. General American also has reported that
it is in discussion with several potential strategic partners and
continues to pursue these discussions and other options.
The Company is the asset manager for General American but is not
regulated by the Missouri Department of Insurance. These developments
will directly result in the reduction of up to $3.5 billion in
affiliated assets under management for the Company during the third
quarter of 1999. General American continues to be a significant client
of the Company and its direct ownership of the Company has not changed
as a result of these developments.
RESULTS OF OPERATIONS
- ---------------------
Statement of income for the three months ended June 30, 1999 compared to
the three months ended June 30, 1998
Total revenues increased 17% to $24.0 million for the three months ended
June 30, 1999 versus $20.6 million for the same period in 1998. This
increase was primarily attributable to the increase in asset management
and related fees resulting from the growth in assets managed for
existing clients and net additions of new clients. Approximately 30% of
the increase stems from increased mortgage origination activity which is
largely a function of the timing of loan closings. Though core research
service revenues increased 9% to $3.6 million from $3.3 million for the
same period in 1998, continued insurance industry declines in
underwriting offset that increase, producing a 10% decrease in research
service fees for the three months ended June 30, 1999 as compared to the
three months ended June 30, 1998. Other income for the three months
ended June 30, 1999 decreased approximately $476,000, compared to the
same period for 1998 primarily due to utilization of cash positions
identified for acquisitions during the latter portion of 1998.
Total expenses increased 16% to $17.3 million for the three months ended
June 30, 1999 from $14.9 million for the same period in 1998, due
primarily to increased employee compensation and benefits expenses as
well as an increase in occupancy and equipment, marketing and production
and certain other expenses associated with the growth in revenues.
Total compensation and benefits increased 17% to $11.1 million from $9.5
million for the three months ended June 30, 1999 and 1998, respectively,
and represents approximately 68% of the total increase in expenses for
the period. The increase is due primarily to staffing increases for
Company growth. The ratio of employee compensation and benefits to total
revenue remained consistent in the second quarter of 1998 compared to
the second quarter of 1999 reflecting the Company's ability to leverage
its resources as the Company grows. Occupancy and equipment costs
increased 40% from $1.1 million for the three months ended June 30, 1998
to $1.6 million
11
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for the three months ended June 30, 1999 due to the addition of office
space associated with 1999 acquisitions and more technology expenses
associated with the Company's growth.
Provision for income taxes increased by approximately 11% to $2.6
million for the three month period ended June 30, 1999 from $2.4 million
for the three month period ended June 30, 1998 as a result of higher
taxable income. The effective tax rate has decreased from 43% during
1998 to 41% during 1999 reflecting a decrease in certain state income
tax rates.
As a result of all of the above, net income increased 23% to $3.9
million during the three month period ended June 30, 1999 compared to
$3.2 million for the same period in 1998.
Statement of income for the six months ended June 30, 1999 compared to
the six months ended June 30, 1998
Total revenues increased 17% to $47.0 million for the six months ended
June 30, 1999 versus $40.2 million for the same period in 1998. This
increase was primarily attributable to the increase in asset management
and related fees resulting from the growth in assets managed for
existing clients and net additions of new clients. Approximately 29% of
the increase stems from increased mortgage origination activity which is
largely a function of the timing of loan closings. Research service
revenues decreased slightly to $8.3 million for the six months ended
June 30, 1999 from $8.5 million for the same period in 1998 as a result
of continued strong core research fees offset by a decrease in
underwriting fees. Underwriting fees, included in research service
revenues, decreased by approximately 83% from $1.7 million for the six
months ended June 30, 1998 to $289,000 for the same period in 1999,
which was offset by the 17% increase in core research fees for the
comparable periods. Other income for the six months ended June 30, 1999
decreased approximately $832,000, compared to the same period for 1998
primarily due to utilization of cash positions identified for
acquisitions during the latter portion of 1998.
Total expenses increased 15% to $34.0 million for the six months ended
June 30, 1999 from $29.6 million for the same period in 1998, due
primarily to increased employee compensation and benefits expenses as
well as an increase in occupancy and equipment, marketing and production
and certain other expenses associated with the growth in revenues.
Total compensation and benefits increased 14% to $21.8 million from
$19.2 million for the six months ended June 30, 1999 and 1998,
respectively, and represents approximately 60% of the total increase in
expenses for the period. The increase is due primarily to staffing
increases for Company growth. The ratio of employee compensation and
benefits to total revenue decreased from 47.7% in the first six months
of 1998 to 46.4% during the first six months of 1999 reflecting the
Company's ability to leverage its resources as the Company grows.
Occupancy and equipment costs increased 36% from $2.3 million for the
six months ended June 30, 1998 to $3.0 million for the six months ended
June 30, 1999 due to the addition of office space associated with 1998
acquisitions and more technology expenses associated with the Company's
growth.
Provision for income taxes increased by approximately 16% to $5.2
million for the six month period ended June 30, 1999 from $4.5 million
for the six month period ended June 30, 1998 as a
12
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result of higher taxable income. The effective tax rate has decreased
from 43% during 1998 to 40% during 1999 reflecting a decrease in certain
state income tax rates.
As a result of all of the above, net income increased 28% to $7.7
million during the six month period ended June 30, 1999 compared to $6.0
million for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's business is not capital-intensive. Historically, working
capital requirements for the Company have been provided almost
exclusively by operating cash flow. Management believes that the
Company's existing capital, together with operating cash flow, will
provide the Company with sufficient resources to meet its present and
foreseeable future cash needs.
On June 3, 1999, the Company completed the previously announced
acquisition of the insurance company high-grade fixed income management
business from The TCW Group, Inc. The purchase consisted of an initial
cash payment of approximately $3.0 million. Additional contingent
consideration of up to $2.3 million may be payable over the next two
years, subject to the successful retention of acquired client
relationships and meeting certain revenue targets on the acquired
business.
The Company utilized approximately $2.3 million in cash flow from
operations during the six months ended June 30, 1999. The Company uses
its cash flow for existing operations, working capital, to pay dividends
to shareholders, and for general corporate purposes. The Company invests
excess cash in deposits with major financial institutions and short-term
securities. The Company had no outstanding debt as of June 30, 1999 or
December 31, 1998.
The Company's subsidiary, Conning & Company, is subject to the net
capital requirement imposed on registered broker-dealers under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). At
June 30, 1999, Conning & Company had net capital of approximately $12.7
million, which was approximately $11.8 million in excess of the
regulatory minimum.
The Company has a revolving subordinated loan agreement with a
commercial bank for $2.0 million that expires on December 31, 1999.
Subject to certain financial criteria and approval by the National
Association of Securities Dealers regional office, borrowings qualify as
capital for purposes of the Exchange Act's net capital rules. During
the six months ended June 30, 1999, the Company exceeded all the
associated financial criteria, but did not utilize the revolving
agreement.
The Company or a subsidiary acts as a general partner of certain private
equity funds and maintains a 1% general partner's capital interest in
such funds. The Company may also invest as a limited partner in future
funds it may organize. Interests in such private equity funds are
generally illiquid.
13
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<PAGE>
IMPACT OF INFLATION
- -------------------
The Company does not believe that inflation has had a significant impact
on the Company's consolidated operations.
MARKET RISK
- -----------
In the normal course of business, the financial position of the Company
is routinely subjected to a variety of risks, including market risk
associated with interest rate fluctuations. The Company may be exposed
to fluctuations in interest rates primarily in its cash, cash
equivalent, commercial paper and other investment transactions. The
Company does not use derivative financial investments to manage interest
rate risk. Based on the above, the Company does not believe that the
effect of reasonably possible near-term changes in interest rates on the
Company's investing activities would be material to the Company's
financial position, results of operations or cash flow taken as a whole.
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.
YEAR 2000
- ---------
Many of the world's computer systems currently record years in a two-
digit format. If not addressed, such computer systems will be unable to
properly interpret dates beyond the year 1999, which could lead to
business disruptions in the U.S. and internationally (the "Year 2000" or
"Y2K" issue). The potential costs and uncertainties associated with the
Year 2000 issue will depend on a number of factors, including software,
hardware and the nature of the industry in which a company operates.
Additionally, companies must coordinate with other entities with which
they electronically interact. The Company has established a Year 2000
Compliance Team, with a charter to plan and execute a Y2K compliance
effort. The Team is made up of an existing staff of skilled and
experienced associates along with external consultants.
The Company has progressed through its awareness and assessment stages.
In addition to internal systems, the Company relies on external systems
and has included in the assessment and inventory those systems of
significant external parties such as vendors, banks, and broker-dealers.
Once the inventory was complete, the Compliance Team conducted a
thorough risk analysis, which covered both internal and external
systems. This analysis was submitted to Company management and formed
the foundation of the Y2K Compliance Plan.
The Company has completed remediation for internally supported systems,
which primarily involved enhancing software code. In addition to
remediation, compliance strategies include: upgrading hardware and
software to compliant versions, replacing non-compliant systems with
compliant systems, retiring non-compliant systems and securing Y2K
Compliance Statements
14
<PAGE>
<PAGE>
from system vendors and significant external business partners.
Upgraded and replacement systems are being tested along with remediated
systems.
As of March 31, 1999, all compliance testing for mission critical
systems had been completed. The Company is also communicating with most
of its external business partners, suppliers and vendors in an effort to
determine their Y2K readiness. There is no known method to completely
determine compliance of external systems, but every reasonable effort is
being made to assure compliance of these external systems. The Y2K
external readiness evaluation was completed as scheduled by June 30,
1999. There are many companies that produce the products and services
that are supplied to the Company by these external sources. In the event
a particular supplier, vendor or business partner is unable to provide
products or services to the Company due to a Year 2000 failure, the
Company believes it has adequate alternate sources for such products or
services. There can be no guarantee, however, that similar or identical
products or services would be available on the same terms and conditions
or that the Company would not experience some adverse effect as a result
of switching to such alternate sources.
The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, certain normal business activities and
operations. Such failures could adversely affect the Company's results
of operations, liquidity and financial condition, particularly as a
result of the uncertainty of the Y2K readiness of third-party suppliers
and clients. The Company believes that, with the completion of the
compliance effort, the possibility of significant interruptions of
normal operations will be significantly reduced.
The Company has implemented control procedures so that once compliance
is established, non-compliant system changes or the introduction of non-
compliant new systems will not impact the Company's compliance status.
Another important part of the Company's Y2K compliance effort is
contingency planning. Reasonable and appropriate plans have been
formulated so that any disruption caused by the Year 2000 issue does not
materially affect the Company's business or results of operations. The
contingency plans were formulated in conjunction with the compliance
testing process and will continue to be updated throughout 1999.
The Company estimates the total cost to the Company for its Y2K
compliance effort, including external and internal expenditures will be
approximately $400,000. The Company incurred actual costs of
approximately $125,000 in 1998 with the remaining estimated $275,000 to
be incurred in 1999. Based on the activities described above, the
Company does not believe that the Year 2000 issue will have a material
adverse effect on the Company's business or results of operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
- ---------------------------------------------------------
Certain statements contained in this report are or may constitute
forward-looking statements under the Private Securities Litigation
Reform Act of 1995, including, without limitation, statements relating
to the Company's financial position, plans to increase revenues,
competitive strengths, business objectives or strategies, insurance
industry trends, expectations regarding GenAmerica's assets or
activities, and the effect of the administrative supervision to which
General American is subject. Because such statements are subject to
risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements or from
historical results. The Company's business entails a variety of
additional risks, including Year 2000 issues as discussed herein, which
are set forth in documents the Company has filed or will file from time
to time with the SEC. Investors are cautioned not to place undue
reliance on such statements, which speak only as of the date hereof.
The Company undertakes no obligation to release publicly any revisions
which may be made to any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.
15
<PAGE>
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
To the best of management's knowledge, there are no material legal
proceedings pending or threatened against the Company or its related
wholly-owned subsidiary.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Shareholders was held on
May 11, 1999
(b) At the Annual Meeting, the following proposals were voted
upon by the shareholders as indiated below:
1. To elect two directors to serve terms ending in 2002.
Directors Voted For Withheld
------------------- ------------ ----------
Richard A. Liddy 12,285,617 22,154
John C. Shaw 12,281,924 25,847
2. To ratify the appointment of KPMG LLP as the Company's
independent accountants for the fiscal year ended December 31,
1999.
Voted
Voted For Against Abstained No Vote
------------ --------- ----------- ---------
12,299,410 400 0 0
ITEM 5. OTHER INFORMATION.
Shareholder proposals submitted under processes prescribed by the
Securities and Exchange Commission (in Rule 14a-8 of the Securities
Exchange Act) for presentation at the 2000 Annual Meeting must be
received by the Company by December 6, 1999 for inclusion in the
Company's proxy statement and proxy relating to that meeting. Upon
receipt of any such proposal, the Company will determine whether or not
to include such proposal in the proxy statement and proxy in accordance
with regulations governing the solicitation of proxies. Shareholder
proposals submitted outside the process of Rule 14a-8 must be submitted
to the Company by March 10, 2000.
16
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) See Index to Exhibits.
(b) On April 5, 1999, the Company filed a Form 8-K related to
an Asset Purchase Agreement to purchase all the rights, title
and interest in and to certain Investment Advisory Agreements
of TCW Advisors, Inc.
17
<PAGE>
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONNING CORPORATION
By: /s/ Leonard M. Rubenstein
--------------------------
Leonard M. Rubenstein
Chairman, President and Chief Executive
Officer (Principal Executive Officer)
/s/ Fred M. Schpero
-------------------
Fred M. Schpero
Senior Vice President and Chief
Financial Officer
18
<PAGE>
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
3.1 Restated Articles of Incorporation of the Company, as
amended, incorporated by reference to Exhibit 3.1 to Form
10-K (File No. 0-023183) for the fiscal year ended
December 31, 1997 filed March 23, 1998
3.2 Bylaws of the Company incorporated by reference to
Exhibit 3.3 to Registration Statement on Form S-1 (No.
333-35993) filed September 19, 1997
27 Financial Data Schedule
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE REGISTRANT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 54,489,866
<SECURITIES> 660,793
<RECEIVABLES> 12,061,544
<ALLOWANCES> 136,585
<INVENTORY> 0
<CURRENT-ASSETS> 67,755,867
<PP&E> 3,915,447
<DEPRECIATION> 2,160,748
<TOTAL-ASSETS> 124,933,590
<CURRENT-LIABILITIES> 32,205,376
<BONDS> 0
<COMMON> 138,536
0
0
<OTHER-SE> 89,291,696
<TOTAL-LIABILITY-AND-EQUITY> 124,933,590
<SALES> 46,138,010
<TOTAL-REVENUES> 47,002,906
<CGS> 32,688,447
<TOTAL-COSTS> 33,991,789
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 117,415
<INCOME-PRETAX> 12,893,702
<INCOME-TAX> 5,203,571
<INCOME-CONTINUING> 7,690,131
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,690,131
<EPS-BASIC> .58
<EPS-DILUTED> .55
</TABLE>
