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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 SEPTEMBER 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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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 OCTOBER 31, 1999:
13,605,360 SHARES
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CONNING CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I - FINANCIAL INFORMATION
------------------------------
1 Financial Statements 1
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Income (Unaudited)
Three month periods ended September 30, 1999 and 1998 2
Condensed Consolidated Statements of Income (Unaudited)
Nine month periods ended September 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine month periods ended September 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 10-16
PART II - OTHER INFORMATION
---------------------------
1 Legal Proceedings 17
5 Other Information 17
6 Exhibits and Reports on Form 8-K 18
Signatures 19
Index to Exhibits 20
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
CONNING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(Unaudited)
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 38,235,107 $ 31,343,314
Short-term investments 22,249,649 28,288,155
Accounts receivable, net 11,954,656 11,165,200
Marketable equity securities, at fair value 262,314 278,222
Prepaid expenses and other current assets 449,381 481,455
------------ ------------
Total current assets 73,151,107 71,556,346
Non-marketable investments at value 5,965,297 2,737,147
Equipment and leasehold improvements, at cost,
net of accumulated depreciation 2,664,554 1,451,653
Deferred income taxes 3,154,314 3,199,812
Goodwill 41,964,163 40,706,020
Other assets 4,772,225 2,827,145
------------ ------------
Total assets $131,671,660 $122,478,123
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Compensation payable $ 8,536,392 $ 12,794,850
Deferred revenue 4,111,341 3,792,762
Due to affiliates 3,652,673 2,338,918
Income taxes payable 150,748 284,441
Accounts payable and other accrued expenses 19,699,019 19,554,667
------------ ------------
Total current liabilities 36,150,173 38,765,638
Accrued rent 2,976,113 3,215,897
Other payables 200,000 320,000
------------ ------------
Total liabilities 39,326,286 42,301,535
------------ ------------
Common stock 139,307 135,714
Additional paid-in capital 78,912,599 74,975,681
Retained earnings 19,690,956 11,462,681
Treasury stock (6,397,488) (6,397,488)
------------ ------------
Total shareholders' equity 92,345,374 80,176,588
------------ ------------
Total liabilities and shareholders' equity $131,671,660 $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 SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
REVENUES:
Asset management and related fees $18,152,819 $16,207,425
Research services 3,030,685 4,310,369
Other income 299,775 184,985
----------- -----------
Total revenues 21,483,279 20,702,779
----------- -----------
EXPENSES:
Employee compensation and benefits 10,171,607 9,296,434
Occupancy and equipment costs 1,648,286 1,184,370
Marketing and production costs 1,585,647 1,908,063
Professional services 1,869,076 577,798
Amortization of goodwill and other 679,336 592,708
Other operating expenses 1,162,803 1,025,474
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Total expenses 17,116,755 14,584,847
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Operating income 4,366,524 6,117,932
Interest expense 56,143 62,827
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Income before provision for income taxes 4,310,381 6,055,105
Provision for income taxes 1,746,338 2,557,692
----------- -----------
Net income $ 2,564,043 $ 3,497,413
=========== ===========
Weighted average diluted shares outstanding 14,026,803 13,912,815
Earnings per share:
Basic $ 0.19 $ 0.27
Diluted $ 0.18 $ 0.25
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 NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
REVENUES:
Asset management and related fees $56,002,126 $46,242,381
Research services 11,319,388 12,816,500
Other income 1,164,671 1,882,218
----------- -----------
Total revenues 68,486,185 60,941,099
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EXPENSES:
Employee compensation and benefits 31,973,120 28,473,128
Occupancy and equipment costs 4,732,455 3,449,639
Marketing and production costs 5,414,029 5,277,236
Professional services 3,211,016 1,719,100
Amortization of goodwill and other 1,982,678 2,008,403
Other operating expenses 3,795,246 3,244,616
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Total expenses 51,108,544 44,172,122
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Operating income 17,377,641 16,768,977
Interest expense 173,558 193,218
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Income before provision for income taxes 17,204,083 16,575,759
Provision for income taxes 6,949,909 7,049,700
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Net income $10,254,174 $ 9,526,059
=========== ===========
Weighted average diluted shares outstanding 14,059,745 14,124,559
Earnings per share:
Basic $ 0.76 $ 0.72
Diluted $ 0.73 $ 0.67
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 NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 10,254,174 $ 9,526,059
Adjustment for items not affecting cash:
Depreciation 395,662 545,498
Amortization of goodwill and other 1,982,678 2,008,403
Net unrealized appreciation on
non-marketable investments (2,114,317) (527,869)
Net change in marketable equity securities 15,908 349,272
Accretion of discounts on short-term investments (678,889) (733,052)
Changes in:
Accounts receivable (789,456) 1,538,176
Prepaid expenses and other assets (2,168,008) (89,453)
Accounts payable and other accrued expenses 24,354 8,264,340
Income taxes payable 781,783 3,017,224
Due to affiliates 1,313,755 2,771,571
Deferred income taxes 45,498 (1,489,217)
Deferred revenue 318,579 210,625
Accrued rent (239,784) (205,796)
Compensation payable (4,258,458) (1,532,485)
------------ ------------
Net cash provided by operating activities 4,883,479 23,653,296
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INVESTING ACTIVITIES:
Purchases of non-marketable investments (1,750,120) (1,144,245)
Distribution from non-marketable investments 636,287 94,933
Purchases of equipment and other assets, net (1,608,563) (436,394)
Purchases of short-term investments (59,827,767) (65,450,785)
Maturities of short-term investments 66,545,162 59,429,307
Acquisition of Schroder Mortgage Associates - (21,000,000)
Acquisition of TCW Insurance Operations (2,985,821) -
------------ ------------
Net cash provided by (used in) investing
activities 1,009,178 (28,507,184)
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FINANCING ACTIVITIES:
Issuance of common stock 3,025,035 31,901
Purchase of common stock for treasury - (6,397,488)
Dividends on common stock (2,025,899) (1,577,502)
------------ ------------
Net cash provided by (used in) financing
activities 999,136 (7,943,089)
------------ ------------
Net change in cash and cash equivalents 6,891,793 (12,796,977)
Cash and cash equivalents, beginning of period 31,343,314 43,085,406
------------ ------------
Cash and cash equivalents, end of period $ 38,235,107 $ 30,288,429
============ ============
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 adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of
the financial position of the Company and its subsidiaries as of
September 30, 1999 and their results of operations for the three and
nine month periods ended September 30, 1999 and 1998, and their cash
flows for the nine month periods ended September 30, 1999 and 1998.
Operating results for the three and nine month periods ended September
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 $0.15 per share totaling
$2,025,899 on its common stock through September 30, 1999 compared to
$0.12 per share totaling $1,577,502 for the same period during 1998.
During October, 1999 the Company declared a $0.05 per share quarterly
cash dividend on the Company's common stock, payable on December 10,
1999 to shareholders of record on November 19, 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 September 30, 1999 and December 31, 1998, the Company maintained
approximately $16.8 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
The Company report industry segment data in conjunction with Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). Segment
information on the Company for the three and nine month periods ended
September 30, 1999 and 1998 are as follows, dollars in thousands:
5
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CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPT. 30, ENDED SEPT. 30,
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
ASSET MANAGEMENT
Revenues $12,497 $10,387 $37,077 $30,434
Pre-tax income $ 2,783 $ 2,983 $ 9,377 $ 8,269
Revenue from significant client $ 4,197 $ 3,709 $12,257 $10,694
MORTGAGE LOAN & REAL ESTATE
Revenues $ 5,606 $ 5,820 $18,982 $15,809
Pre-tax income $ 1,414 $ 1,806 $ 5,937 $ 4,767
Revenue from significant client $ 2,821 $ 3,155 $10,417 $ 8,815
RESEARCH
Revenues $ 3,031 $ 4,311 $11,319 $12,816
Pre-tax income $ 113 $ 1,266 $ 1,890 $ 3,540
Revenue from significant client $ - $ 530 $ - $ 530
COMBINED OPERATING SEGMENTS
Revenues $21,134 $20,518 $67,378 $59,059
Pre-tax income $ 4,310 $ 6,055 $17,204 $16,576
Revenue from significant client $ 7,018 $ 7,394 $22,674 $20,039
RECONCILIATION OF COMBINED OPERATING
SEGMENT REVENUES TO CONSOLIDATED REVENUES
Combined operating segment revenue $21,134 $20,518 $67,378 $59,059
Other income 349 185 1,108 1,882
------- ------- ------- -------
Consolidated revenue $21,483 $20,703 $68,486 $60,941
======= ======= ======= =======
</TABLE>
As of September 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 SEPTEMBER 30, 1999:
<TABLE>
<CAPTION>
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS:
Net income $2,564,043 13,590,202 $ 0.19
---------- =======
EFFECT OF DILUTIVE SECURITIES:
Stock options 436,601
----------
DILUTED EPS:
Net income $2,564,043 14,026,803 $ 0.18
========== ========== =======
</TABLE>
FOR THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1998:
<TABLE>
<CAPTION>
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS:
Net income $3,497,413 13,036,554 $ 0.27
---------- =======
EFFECT OF DILUTIVE SECURITIES:
Stock options 876,261
----------
DILUTED EPS:
Net income $3,497,413 13,912,815 $ 0.25
========== ========== =======
</TABLE>
7
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CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999:
<TABLE>
<CAPTION>
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS:
Net income $10,254,174 13,469,990 $ 0.76
----------- =======
EFFECT OF DILUTIVE SECURITIES:
Stock options 589,755
----------
DILUTED EPS:
Net income $10,254,174 14,059,745 $ 0.73
=========== ========== =======
</TABLE>
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998:
<TABLE>
<CAPTION>
Income Shares Per Share
(numerator) (denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS:
Net income $9,526,059 13,179,092 $ 0.72
---------- =======
EFFECT OF DILUTIVE SECURITIES:
Stock options 945,467
----------
DILUTED EPS:
Net income $9,526,059 14,124,559 $ 0.67
========== ========== =======
</TABLE>
NOTE 6 - RECENT EVENTS
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 stemmed from 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 August 12, 1999, to B1. These developments
directly resulted in the reduction of approximately $3.5 billion in
affiliated assets under management for the Company during the third
quarter 1999.
8
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CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On August 26, 1999, General American announced that its parent, GenAmerica
Corporation ("GenAmerica") announced a definitive agreement whereby
GenAmerica will be acquired by Metropolitan Life Insurance Company based
in New York City. The announcement indicated the acquisition will include
acquiring General American's ownership in its publicly traded subsidiaries,
including approximately 61% of the outstanding common shares of the Company.
The acquisition is expected to close in the fourth quarter of 1999 or in the
first quarter of 2000 and the impact to the Company's operations, if any, can
not be determined at this time. The Company remains as the asset manager for
General American and General American continues to be a significant client of
the Company.
On September 22, 1999, the Company's Board of Directors elected Arthur
C. (Duke) Reeds, III as Chairman, President and CEO, succeeding Leonard
M. Rubenstein who retired from active service with the Company.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
- --------
The Company's 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 some of the 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 occasional securitized offerings by investment banking
firms.
The Company's assets under discretionary management were $34.0 billion
as of September 30, 1999, an increase of $5.2 billion from $28.8 billion
under management at September 30, 1998. The net increase in assets
during the twelve-month period is due to a net increase in assets from
new and existing clients. Total assets serviced decreased $8.8 billion
since September 30, 1998 to $80.0 billion at September 30, 1999. The
overall change in total assets serviced was primarily the result of the
loss of an investment advisory client and decreases in affiliated assets
under management.
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 stemmed from 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. These developments directly resulted in
the reduction of approximately $3.5 billion in affiliated assets under
management for the company during the third quarter 1999.
On August 26, 1999, General American announced that its parent,
GenAmerica Corporation ("GenAmerica") announced a definitive agreement
whereby GenAmerica will be acquired by Metropolitan Life Insurance
Company ("Metropolitan Life") based in New York City. The announcement
indicated the acquisition will include acquiring General American's
ownership in its publicly traded subsidiaries, including approximately
61% of the outstanding common shares of the Company. The acquisition is
expected to close in the fourth quarter of 1999 or the first quarter of
2000 and the impact to the Conning operations, if any, are not able to
be determined at this time. The Company remains as the asset manager
for General American and General American continues to be a significant
client of the Company.
On September 22, 1999, the Company's Board of Directors elected Arthur
C. (Duke) Reeds, III, as Chairman, President and CEO, succeeding Leonard
M. Rubenstein who retired from active service with the Company.
RESULTS OF OPERATIONS
- ---------------------
Statement of income for the three months ended September 30, 1999
compared to the three months ended September 30, 1998
Total revenues increased almost 4% to $21.5 million for the three months
ended September 30, 1999 versus $20.7 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. The 24% increase
in insurance asset management fees was affected by an approximately 21%
decrease in mortgage origination activity which is largely a function of
the timing delay of certain loan closings. Core research service
revenues decreased 30% to $3.0 million from $4.3 million for the same
period in 1998 due to market volatility, particularly in the financial
sector, and non-recurring revenue impacts resulting from GenAmerica
announcements in the third quarter of 1999. Underwriting fees, included
in research service revenues, decreased by approximately 27% from
approximately $403,000 for the three months ended September 30, 1998 to
approximately $294,000 for the same period in 1999. Other income for
the three months ended September 30, 1999 increased approximately
$115,000, compared to the same period for 1998, primarily due to use of
cash and cash equivalents for acquisitions resulting in lower average
balances during the third quarter of 1998.
Total expenses increased 17% to $17.1 million for the three months ended
September 30, 1999 from $14.6 million for the same period in 1998, due
primarily to increased employee
11
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compensation and benefit expenses and non-recurring charges for
professional and out-of-pocket expenses. The non-recurring charges
resulted from the announced acquisition of GenAmerica by Metropolitan
Life and amounted to approximately $1 million, which represents 50% of
the total increase in expenses for the period. Total compensation and
benefits increased 9% to $10.2 million from $9.3 million for the three
months ended September 30, 1999 and 1998, respectively, and represents
approximately 35% of the total increase in expenses for the period. The
increase is due primarily to staffing increases for Company growth.
Provision for income taxes decreased by approximately 32% to $1.7
million for the three month period ended September 30, 1999, from $2.6
million for the three month period ended September 30, 1998, as a result
of lower taxable income. The Company's effective tax rate has decreased
from 42% 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 decreased 27% to $2.6
million during the three month period ended September 30, 1999 compared
to $3.5 million for the same period in 1998.
Statement of income for the nine months ended September 30, 1999
compared to the nine months ended September 30, 1998
Total revenues increased 12% to $68.5 million for the nine months ended
September 30, 1999 versus $60.9 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
12% of the increase stems from increased mortgage origination activity
which is largely a function of the timing of loan closings. Research
service revenues decreased 12% to $11.3 million for the nine months
ended September 30, 1999 from $12.8 million for the same period in 1998
as a result of consistent core research fees offset by a decrease in
underwriting fees. Underwriting fees, included in research service
revenues, decreased by approximately 72% from $2.1 million for the nine
months ended September 30, 1998 to $583,000 for the same period in 1999.
This is reflective of the decreased activity in the equity markets
particularly in the insurance and financial services sector. Other
income for the nine months ended September 30, 1999 decreased
approximately $718,000, compared to the same period for 1998 primarily
due to the use of cash and cash equivalents for acquisitions in the
latter portion of the nine month period of 1998. This resulted in
higher average balances for most of the 1998 period while cash and cash
equivalent balances have been increasing during the same period for
1999.
Total expenses increased 16% to $51.1 million for the nine months ended
September 30, 1999, from $44.2 million for the same period in 1998, due
primarily to increased employee compensation and benefits expenses, an
increase in occupancy and equipment costs, and non-recurring charges for
professional fees and out-of-pocket expenses. Total compensation and
benefits increased 12% to $32.0 million from $28.5 million for the nine
months ended September 30, 1999 and 1998, respectively, and represents
approximately 50% 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 during the first nine months of 1998 compared to the same
period in 1999, reflecting the Company's ability to leverage its
resources as the Company grows. The non-recurring charges resulted from
the
12
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announced acquisition of GenAmerica and amounted to approximately $1.0
million, which represents approximately 14% of the total increase in
expenses for the period. Occupancy and equipment costs increased 37%,
from $3.4 million for the nine months ended September 30, 1998 to $4.7
million for the nine months ended September 30, 1999, due to the
addition of office space associated with 1998 acquisitions and increased
spending on technology associated with the Company's growth.
Provision for income taxes decreased slightly to $6.9 million for the
nine month period ended September 30, 1999 from $7.0 million for the
nine month period ended September 30, 1998. 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 8% to $10.3
million during the nine month period ended September 30, 1999, compared
to $9.5 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.
The Company utilized approximately $6.9 million in cash flow from
operations during the nine months ended September 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 September 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
September 30, 1999, Conning & Company had net capital of approximately
$14.0 million, which was approximately $13.1 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 nine months ended September 30, 1999, the Company exceeded all the
associated financial criteria, but did not use the revolving loan
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.
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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 materially affect 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, assessment,
remediation and testing 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 included: upgrading hardware and
software to compliant versions, replacing non-compliant systems with
14
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compliant systems, retiring non-compliant systems and securing Y2K
Compliance Statements from system vendors and significant external
business partners. Upgraded and replacement systems were 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, the Y2K issue, expectations regarding GenAmerica's
assets or activities, the effect of the administrative supervision to
which General American is subject and the contemplated acquisition of
GenAmerica by Metropolitan Life.
15
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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.
16
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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 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.
17
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) See Index to Exhibits.
(b) On August 18, 1999, the Company filed a Form 8-K related to
an announcement by the Company's significant client and
majority shareholder, General American Life Insurance
Company, that General American had advised the Missouri
Department of Insurance of its inability to meet substantial
demands for surrenders arising from its funding agreement
business.
(c) On September 10, 1999, the Company filed a Form 8-K related
to the change in control resulting from the proposed
acquisition of GenAmerica, the beneficial owner of 61% of
the outstanding common stock of Conning Corporation, by
Metropolitan Life Insurance Company.
(d) On September 30, 1999, the Company filed a Form 8-K related
to the notice of a hearing to approve the Pending
Reorganization that would facilitate the sale of GenAmerica
to Metropolitan Life. Additionally, the Form 8-K included
the Conning announcement of the appointment of Arthur C.
Reeds, III, as Chairman of the Board of Directors, President
and Chief Executive Officer, succeeding Leonard M.
Rubenstein who retired from active service.
18
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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/ Arthur C. Reeds, III
------------------------------------------
Arthur C. Reeds, III
Chairman, President and Chief Executive
Officer (Principal Executive Officer)
/s/ Fred M. Schpero
------------------------------------------
Fred M. Schpero
Senior Vice President and Chief
Financial Officer
19
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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
20
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 60,484,756
<SECURITIES> 262,314
<RECEIVABLES> 12,091,241
<ALLOWANCES> 136,585
<INVENTORY> 0
<CURRENT-ASSETS> 73,151,107
<PP&E> 4,963,511
<DEPRECIATION> 2,298,957
<TOTAL-ASSETS> 131,671,660
<CURRENT-LIABILITIES> 36,150,173
<BONDS> 0
<COMMON> 139,307
0
0
<OTHER-SE> 92,206,067
<TOTAL-LIABILITY-AND-EQUITY> 131,671,660
<SALES> 67,321,514
<TOTAL-REVENUES> 68,486,185
<CGS> 49,125,866
<TOTAL-COSTS> 51,108,544
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 173,558
<INCOME-PRETAX> 17,204,083
<INCOME-TAX> 6,949,909
<INCOME-CONTINUING> 10,254,174
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,254,174
<EPS-BASIC> .76
<EPS-DILUTED> .73
</TABLE>
