<PAGE>
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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, 1998
[ ] 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
[LOGO] 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, MISSOURI 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) OR THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
(TITLE OF CLASS)
COMMON STOCK, 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 17, 1999: $72,116,591
NUMBER OF SHARES OUTSTANDING AS OF MARCH 17, 1999: 13,374,500
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR ITS ANNUAL
MEETING OF STOCKHOLDERS PRESENTLY SCHEDULED FOR MAY 11, 1999 ARE
INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT.
====================================================================
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<TABLE>
TABLE OF CONTENTS
<S> <C> <C>
Item 1. Business.................................................. 1
Item 2. Properties................................................ 10
Item 3. Legal Proceedings......................................... 11
Item 4. Submission of Matters To a Vote of Security Holders....... 12
Item 4A. Executive Officers of the Registrant...................... 12
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..................................... 14
Item 6. Selected Financial Data................................... 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 17
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk.................................................... 24
Item 8. Financial Statements and Supplementary Data............... 24
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 45
Item 10. Directors and Executive Officers of the Registrant........ 45
Item 11. Executive Compensation.................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and
Management.............................................. 45
Item 13. Certain Relationships and Related Transactions............ 45
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................ 45
</TABLE>
<PAGE>
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL OVERVIEW
Conning Corporation (the "Company" or "Conning") is an asset
management company providing various asset management and related
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, collectively known
as GenAmerica Corporation ("GenAmerica"). The parties effected the
Strategic Merger in order to combine complementary businesses, each
with specialties in the insurance industry, and to build a platform
from which to leverage additional growth. Other than historical
financial statements and data, information herein concerning the
Company for periods prior to the date of the Strategic Merger,
including, without limitation, the amount of assets under management
and in 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, 1998, the Company had
approximately $29.6 billion of assets under discretionary management
and, in total, provided services with respect to approximately $90.4
billion of assets primarily for insurance company clients. In 1998,
the Company had revenues of approximately $82.2 million and net
earnings of approximately $13.1 million.
On August 18, 1998, the Company, through C&C and CAM, acquired
substantially all the assets and operations of Schroder Mortgage
Associates L.P. ("SMA") in a transaction accounted for as a purchase
(the "Transaction"). The purchase price was $21.0 million (including
acquisition expenses), with additional contingent consideration that
may be paid in the amount of $4 million over the next three years,
subject to meeting certain financial targets. As a result of the
Transaction, the excess cost over fair value of net assets acquired
was approximately $21.0 million and is being amortized over a
20-year period. The goodwill is considered deductible for federal
income tax purposes.
On December 16, 1998, the Company completed the acquisition of
substantially all of the assets and certain liabilities of Noddings
Investment Group, Inc. ("NIG") and Noddings & Associates, Inc.
("N&A") from NIG and N&A, respectively, in a transaction accounted
for as a purchase (the "Purchase Agreement"). The assets acquired
consisted principally of contracts with investment advisory clients,
working capital of the business and other intangible assets. The
purchase price was $4.3 million in cash (including acquisition
expenses), with additional contingent consideration that may be paid
in the amount of up to $27 million in cash payable over a three year
period after the closing, subject to meeting certain financial
targets. As a result of the Purchase Agreement, the excess cost over
fair value of net assets acquired was approximately $3.3 million and
is being amortized over a 20-year period. The goodwill is considered
deductible for federal income tax purposes.
<PAGE>
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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, 1998, the Company provided services with
respect to approximately $90.4 billion in assets, of which
approximately (i) $29.6 billion represented assets under
discretionary management, (ii) $29.3 billion represented assets
serviced under investment advisory agreements and (iii) $31.5
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 25% from December 31, 1993 to December 31, 1998; as
shown in the following table:
<TABLE>
ASSETS SERVICED BY THE COMPANY<F1>
(IN BILLIONS)
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Asset under discretionary management
Unaffiliated................................... $12.4 $11.8 $10.1 $ 8.9 $ 6.6 $ 5.8
Affiliated..................................... 17.2 14.2 10.6 8.7 6.9 6.3
----- ----- ----- ----- ----- -----
Total...................................... 29.6 26.0 20.7 17.6 13.5 12.1
Investment advisory................................ 29.3 21.3 20.8 15.9 14.7 14.7
Investment accounting and reporting................ 31.5 32.8 11.7 6.7 2.8 2.5
----- ----- ----- ----- ----- -----
Total...................................... $90.4 $80.1 $53.2 $40.2 $31.0 $29.3
===== ===== ===== ===== ===== =====
<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>
2
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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,
1993 to December 31, 1998, with assets of General American-related
(affiliated) accounts increasing approximately 22% and assets of
other clients (unaffiliated) increasing approximately 16% during the
period. During 1998, assets under discretionary management of the
Company increased by approximately 14%. The Company's 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, 1998
<S> <C>
Corporate bonds........................... $ 9.5
Asset-backed securities................... 6.3
Mortgage loans and real estate............ 3.0
Municipal bonds........................... 2.4
Government bonds.......................... 1.6
Private placements........................ 2.5
Indexed equity............................ 1.7
Short-term obligations.................... 1.3
Equity.................................... 0.9
Convertible securities.................... 0.3
Real estate............................... 0.1
-----
Total................................. $29.6
=====
</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.
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.
3
<PAGE>
<PAGE>
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, 1998, the Company had approximately
$29.3 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.
Private Placement Investing. As of December 31, 1998, the
Company managed approximately $2.5 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 Securities
and Exchange Commission (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.
Investment Accounting and Reporting. As of December 31, 1998,
the Company's investment accounting and reporting services provided
stand-alone investment accounting for approximately $31.5 billion in
assets. All $90.4 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 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 and 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.
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.
4
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<PAGE>
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.
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
-----------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Fund I............................... $ -- $ -- $ 7.7 $ 18.9 $ 28.4 $ 42.4
Fund II.............................. 67.6 67.6 67.7 67.7 67.7 67.7
Fund III............................. 56.6 56.6 56.6 56.6 50.1 21.8
Fund IV.............................. 40.4 40.4 39.8 18.7 -- --
Fund V............................... 168.8 56.3 -- -- -- --
------ ------ ------ ------ ------ ------
Total............................ $333.4 $220.9 $171.8 $161.9 $146.2 $131.9
====== ====== ====== ====== ====== ======
</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 15 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.
MORTGAGE LOAN AND REAL ESTATE
Mortgage Origination and Service of Real Estate. As of December
31, 1998, the Company managed approximately $3.5 billion in
commercial mortgage loans and approximately $100 million in
investment real estate. During 1998, the Company originated
approximately $1.0 billion of new mortgage loans, most of which were
on behalf of General American and its affiliates. 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
over $1.0 billion in commercial mortgage loans annually.
5
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<PAGE>
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 twelve field offices located in Arizona, California
(2), Colorado (2), Florida, Georgia, Illinois, Missouri, New York,
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.
The Company generally receives a fee associated with loan
origination, which approximates 1% of the loan balance.
Mortgage Servicing. The Company also provides ongoing commercial
mortgage servicing, generally as part of an integrated mortgage loan
origination program and in several cases on a stand-alone basis. As
of December 31, 1998, the Company provided mortgage loan servicing
for approximately $3.7 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 1998, 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 also receives ongoing servicing fees and management
fees with respect to mortgage loans in portfolios managed by the
Company.
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 many of the largest U.S.
property-casualty insurance companies and largest U.S. life-health
insurance companies.
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 125 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.
6
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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 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
certain software companies. 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.
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
7
<PAGE>
<PAGE>
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, recordkeeping 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.
Conning & Company is registered as a broker-dealer with the SEC
and in various states in the United States 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 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
8
<PAGE>
<PAGE>
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 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
9
<PAGE>
<PAGE>
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 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 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, 1998, Conning & Company was required to maintain
minimum net capital, in accordance with SEC rules, of approximately
$1.0 million and had total net capital of approximately $16.0
million, or approximately $15.0 million in excess of the amount
required.
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
10
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<PAGE>
2004, subject to increases for taxes, insurance and operating
expenses. The Company assumed an office lease in Chicago, Illinois
in conjunction with the acquisition of the Noddings Group, having an
annual rental expense of approximately $176,000 expiring in 2006,
pursuant to a lease agreement. The Company also leases from third
parties, or subleases from General American, each of twelve other
office sites for its various mortgage loan and real estate offices
located in Arizona, California (2), Colorado (2), Florida, Georgia,
Illinois, Missouri, New York, 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 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 because, 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.
The Company does not believe the outcome of the above legal
proceeding would have any material effect on the Company's current
or future use of the SS&C developed CAMRA software.
11
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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 1998.
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.................... 53 Chairman, President and Chief Executive Officer
Maurice W. Slayton....................... 60 Retired President
John B. Clinton.......................... 43 Executive Vice President
Donald L. McDonald....................... 36 Executive Vice President
Michael D. McLellan...................... 42 Executive Vice President
Thomas D. Sargent........................ 40 Executive Vice President
Fred M. Schpero.......................... 45 Senior Vice President and Chief Financial Officer
Christopher J. Swift..................... 38 Executive Vice President
</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., is Chairman, President and Chief
Executive Officer of the Company and also serves as Chairman,
President and Chief Executive of Conning Asset Management Company.
Mr. Rubenstein assumed the title as President effective February 12,
1999 coinciding with the retirement of Maurice W. Slayton, Conning's
former President. 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. From 1984 to 1991, he served as Vice President of
General American. 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. He is a past
president of the St. Louis Society of Financial Analysts.
MAURICE W. SLAYTON was President of the Company since 1995,
until his retirement effective February 1999. He continues to serve
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.
JOHN B. CLINTON, C.P.C.U., C.P.A., is Executive Vice
President--Private Equity and previously served as 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 LLP.
DONALD L. MCDONALD is Executive Vice President--Insurance Asset
Management and previously served as a Senior Vice President in the
asset management group since 1993. He is also Chief Investment
Officer of Conning Asset Management Company. 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.
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<PAGE>
MICHAEL D. MCLELLAN is Executive Vice President--Mortgage Loans
and Real Estate and previously served as a Senior Vice President in
the mortgage loan and real estate area 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.
THOMAS D. SARGENT, C.F.A., is Executive Vice President--Research
and previously served as 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.
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, 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 PriceWaterhouse Coopers LLP.
CHRISTOPHER J. SWIFT, C.P.A., is Executive Vice
President--Sales, Marketing and Technology and previously served as
a Senior Vice President of the Company since October 1997. Prior to
joining the Company, Mr. Swift was an accountant with KPMG 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 LLP's St. Louis office.
13
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<PAGE>
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(R) under the symbol
"CNNG." There was no established public trading market for the
Common Stock prior to December 16, 1997.
For the period from January 1 through December 31, 1998, the
high and low sales price of the Common Stock was $22.25 and $11.00,
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 123 holders of
record for the Common Stock at March 17, 1999. 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
outstanding. The Company declared and paid four quarterly dividends
during 1998 totaling $0.16 per share. On January 20, 1999, the Board
of Directors declared a quarterly dividend of $0.05 per share on the
Common Stock to record holders as of February 19, 1999, payable
March 12, 1999. 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 the Company's initial public offering in
December 1997, the net offering proceeds from the 2,875,000 shares
registered was $34,595,000. The proceeds were identified by the
Company as temporary investments. During 1998, the Company used
approximately $24 million of the temporary investments for business
acquisitions, and the remaining initial proceeds and related
investment income remain as temporary investments. See notes 3 and 5
of the consolidated financial statements in Item 8.
14
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997 1996 1995 1995 1994
(PRO FORMA)
<S> <C> <C> <C> <C> <C> <C>
CONNING CORPORATION
INCOME STATEMENT DATA<F1>:
REVENUE:
Asset management and related fees.............. $62,755 $49,503 $40,456 $30,675 $24,050 $3,484
Research services.............................. 16,924 15,479 12,148 9,480 4,090 --
Other income................................... 2,553 1,634 1,062 996 663 57
------- ------- ------- ------- ------- ------
Total revenues............................. 82,232 66,616 53,666 41,151 28,803 3,541
EXPENSES:
Employee compensation and benefits............. 38,206 33,632 26,002 18,336 12,027 --
Amortization of goodwill and other............. 2,609 2,969 3,081 2,911 1,289 --
All other expenses............................. 18,416 14,572 12,791 12,515 9,195 1,429
------- ------- ------- ------- ------- ------
Total expenses............................. 59,231 51,173 41,874 33,762 22,511 1,429
Operating income................................... 23,001 15,443 11,792 7,389 6,292 2,112
Interest expenses.................................. 254 301 729 1,364 521 --
Income before provision for income taxes........... 22,747 15,142 11,063 6,025 5,771 2,112
Provision for income taxes......................... 9,634 6,226 4,851 2,739 2,359 827
------- ------- ------- ------- ------- ------
Net income................................. 13,113 8,916 6,212 3,286 3,412 1,285
Preferred stock dividends.......................... -- 963 906 906 351 --
Net earnings available to common shareholders...... $13,113 $ 7,953 $ 5,306 $ 2,380 $ 3,061 $1,285
Earnings per share:
Basic.......................................... $ 1.00 $ 1.13 $ 0.79
Diluted........................................ $ 0.93 $ 0.80 $ 0.57
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets....................................... $122,478 $99,857 $50,020 $46,177 $ 1,683
Long-term debt..................................... -- -- 2,000 9,000 --
Total liabilities.................................. 42,301 26,152 20,870 24,552 356
Convertible preferred stock........................ -- -- 24,782 17,002 --
Total common shareholders' equity.................. 80,177 73,705 4,368 4,623 1,327
Number of shares outstanding....................... 13,571 13,250 6,710 6,710 0.1
Number of shares in treasury....................... 318 -- -- -- --
<CAPTION>
--------------------------------------------
1998 1997 1996 1995 1994
TOTAL ASSETS SERVICED
(END OF PERIOD, IN BILLIONS)
<S> <C> <C> <C> <C> <C>
OTHER OPERATING DATA<F2>:
Assets under discretionary management:
Unaffiliated................................... $ 12.4 $ 11.8 $ 10.1 $ 8.9 $ 6.6
Affiliated..................................... 17.2 14.2 10.6 8.7 6.9
-------- ------- ------- ------- -------
Total...................................... 29.6 26.0 20.7 17.6 13.5
Investment advisory................................ 29.3 21.3 20.8 15.9 14.7
Investment accounting and reporting................ 31.5 32.8 11.7 6.7 2.8
-------- ------- ------- ------- -------
Total assets serviced.............................. $ 90.4 $ 80.1 $ 53.2 $ 40.2 $ 31.0
</TABLE>
15
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<PAGE>
<TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
(AMOUNTS IN THOUSANDS)
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED
-------------- ----------
1995 1994
<S> <C> <C>
CONNING INC. AND SUBSIDIARIES<F3>
INCOME STATEMENT DATA:
REVENUE:
Asset management and related fees....................... $ 5,662 $ 9,840
Research services....................................... 4,564 8,165
Other income............................................ 275 472
------- -------
Total revenues...................................... 10,501 18,477
EXPENSES:
Employee compensation and benefits...................... 5,322 10,196
Amortization of goodwill and other...................... -- --
All other expenses...................................... 3,087 5,530
------- -------
Total expenses...................................... 8,409 15,726
Operating income............................................ 2,092 2,751
Interest expense............................................ -- --
------- -------
Income before provision for income taxes.................... 2,092 2,751
Provision for income taxes.................................. 809 1,244
------- -------
Net income.......................................... 1,283 1,507
Preferred stock dividends................................... 160 320
------- -------
Net earnings available to common shareholders............... $ 1,123 $ 1,187
======= =======
<CAPTION>
AS OF
AS OF JUNE 30, DECEMBER 31,
-------------- ------------
1995 1994
<S> <C> <C>
BALANCE SHEET DATA:
Total assets................................................ $16,003 $14,228
Long-term debt.............................................. -- --
Total liabilities........................................... 6,927 6,392
Cumulative preferred stock.................................. 3,650 3,650
Total common shareholders' equity........................... 5,426 4,186
Number of shares outstanding (end of period)................ 108 106
<FN>
- -------
<F1> 1994 reflects 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. 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) 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. 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, 1997 and 1998)
reflect actual consolidated results. See Note 1 to the Company's
Consolidated Financial Statements.
16
<PAGE>
<PAGE>
<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, 1994. Data for 1995
and prior periods are presented on a pro forma basis to include both
Conning and GAIMCO assets under management.
<F3> The above information represents certain financial data of Conning, Inc.
and its subsidiaries for the years ended December 31, 1994 and for the
six-month period ended June 30, 1995 representing periods prior to the
Strategic Merger.
</TABLE>
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 securitized offerings 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 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, the excess of
purchase price over the fair value of net assets acquired resulted
in goodwill of $20.3 million. Additionally, two acquisitions during
1998 resulted in additional goodwill of $24.3 million (See Note 3 of
the Company's Notes to Consolidated Financial Statements). Goodwill
is being amortized straight line over a 20 year period.
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RESULTS OF OPERATIONS
Statement of Income for 1998 compared to 1997
Asset Management and Related Fees. Asset management and related
fees increased 27% to $62.8 million in 1998 from $49.5 million in
1997. The majority of this $13.3 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,
and growth in commercial mortgage origination fees. Assets under
discretionary management increased approximately 14% to $29.6
billion at December 31, 1998 from $26.0 billion at December 31,
1997. Assets for which Conning provides investment advisory services
grew significantly during 1998, from $21.3 billion at the end of
1997 to $29.3 billion at the end of 1998, primarily as a result of
new client activity. Investment advisory and investment accounting
and reporting fees did not contribute significantly to the overall
increase in asset management and related fees from 1997 due to the
lower fee structure on these services. Private equity fund
management fees accounted for approximately 15% of the total 1998
increase in asset management and related fees as the Company
completed the closing for a new fund, Conning Insurance Capital
Limited Partnership V in January 1998, having an effective date of
August 1997. Mortgage originations increased from approximately $620
milllion in 1997 to approximately $1.0 billion in 1998.
Research Services. Revenues from research services increased 9%
to $16.9 million in 1998 from $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 was
involved in underwriting activity, including co-management of two
insurance equity offerings during 1998 compared to four co-managed
offerings in 1997. In the aggregate, the Company generated revenues
from underwriting activities of $2.1 million in 1998, as compared to
$4.3 million in 1997. 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. Core research revenues, exclusive of underwriting
revenues, increased 32% from $11.2 million in 1997 to $14.8 million
in 1998.
Other Income. Other income increased approximately 56%, to $2.55
million in 1998 from $1.63 million in 1997, primarily as a result of
investment income on the remaining proceeds from the initial public
offering.
Expenses. Total expenses increased 15.7% to $59.2 million for
the year ended December 31, 1998 from $51.2 million for the year
ended December 31, 1997 due primarily to increased employee costs.
Employee costs increased approximately $4.6 million from $33.6
million in 1997 to $38.2 million for 1998 due to some additional
staffing to keep pace with increased revenue activity and additional
incentive compensation as a result of the significant growth in
operating income. Marketing and production costs increased
approximately $1.6 million due to increased sales and marketing
activities during the year and additional production costs resulting
from the Company being a publicly-traded entity. Occupancy and
equipment costs increased approximately $1.1 million from $3.6
million in 1997 to $4.7 million in 1998 due to additional upgrading
and enhancements of technology during the year as well as the
leasing of additional office space. Amortization of goodwill and
other slightly decreased to $2.6 million in 1998 compared to $2.9
million in 1997 primarily due to the amortization of certain
employee agreements related to the Strategic Merger becoming fully
amortized by August 1998.
Interest Expense. Interest expense remained relatively constant
during 1998 of approximately $300,000 resulting from a present value
lease liability established at the date of the Strategic Merger.
Income Taxes. Provision for income taxes increased approximately
55% to $9.6 million for 1998 from $6.2 million for 1997, as a direct
result of the increase in income before provision for income taxes.
The Company's effective tax rate remained relatively constant
between 1997 and 1998 with the current effective tax rate at 43%.
Net Income. As a result of all of the above, net income
increased 47% to $13.1 million for 1998 from $8.9 million for 1997
and diluted earnings per share increased 16% from $0.80 for 1997 to
$0.93 for 1998.
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
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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.
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.
Diluted earnings per share increased 40% from $0.57 in 1996 to $0.80
in 1997, based on the above.
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, 1998,
Conning & Company had net capital (as defined by the Exchange Act)
of approximately $16.0 million, which was approximately $15.0
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 December 31, 1999. 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.
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As of December 31, 1998 and 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%. 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. Approximately $24.0 million was used in
1998 for business acquisitions and the balance will be used for
future acquisitions and 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 balance of the net proceeds from the offering in
short-term, investment-grade, interest-bearing securities.
NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Company adopted the Financial Accounting
Standards Board (FASB) issued Statement on Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No.
130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial
statements. Comprehensive income consists of net income and net
unrealized gains (losses) on securities and is presented in the
consolidated statements of shareholders' equity and comprehensive
income. The Statement requires only additional disclosures in the
consolidated financial statements; it does not affect the Company's
financial position or results of operations. Prior year financial
statements have been reclassified to conform to the requirements of
SFAS No. 130.
During 1997 the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Statement
establishes standards for the way that public 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. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers.
The Statement is effective for fiscal years beginning after December
15, 1997. The Company has implemented the disclosures recommended by
SFAS No. 131 in the Company's notes to consolidated financial
statements.
YEAR 2000 COMPLIANCE
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
augmented with outside contact resources. 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 substantially completed remediation for
internally supported systems, which primarily involved enhancing
software code. The Company has completed this phase in December
1998. In addition to
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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 from system vendors and significant external
business partners. Upgraded and replacement systems are being tested
along with remediated systems.
Compliance testing is well under way and currently on target.
The plan for testing is scheduled to be completed by March 31, 1999.
The Compliance Test Team is testing each system in order of risk, as
established in the risk assessment. 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 is progressing on target and is scheduled to be complete
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, almost all of which the Company believes
will be incurred during 1998 and 1999. 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.
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" and "Year 2000 Compliance." In addition to
the "Risk Factors and Cautionary Statements" and "Year 2000
Compliance", 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
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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 its principal
shareholder, General American, a wholly owned subsidiary of
GenAmerica Corporation. As of December 31, 1998, General American
and its affiliates accounted for approximately $15.9 billion of the
approximately $29.6 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 renegotiations
of such relationship 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 Company's Common Stock. The Company's
Board of Directors consists of six directors, three of whom are
officers of the Company or General American, and three 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.
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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 assets 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 director, officer or employee may take
actions which could conflict with the best interest 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.
Market Risk--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 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.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 330
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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 would be material to the
Company's financial position, results of operations or cash flow
taken as a whole.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
PAGE
<S> <C>
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and
1997................................................... 25
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996....................... 26
Consolidated Statements of Common Shareholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996... 27
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998, 1997 and 1996................. 28
Notes to Consolidated Financial Statements.............. 29
Independent Auditors' Report................................ 44
</TABLE>
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<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 31,343,314 $43,085,406
Short-term investments.................................. 28,288,155 16,337,362
Accounts receivable, net (Note 4 and Note 10)........... 11,165,200 10,784,236
Marketable equity securities............................ 278,222 600,662
Income taxes receivable................................. -- 1,355,973
Prepaid expenses and other current assets............... 481,455 358,669
------------ -----------
Total current assets................................ 71,556,346 72,522,308
Non-marketable investments at value......................... 2,737,147 2,349,678
Equipment and leasehold improvements, at cost, less
accumulated depreciation of $1,903,293 and $1,127,320..... 1,451,653 1,525,436
Deferred income taxes....................................... 3,199,812 1,736,413
Goodwill.................................................... 40,706,020 17,812,822
Other assets................................................ 2,827,145 3,910,696
------------ -----------
Total assets........................................ $122,478,123 $99,857,353
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Compensation payable.................................... $ 12,794,850 $11,149,000
Deferred revenue........................................ 3,792,762 3,201,336
Due to affiliates....................................... 2,338,918 1,379,188
Income taxes payable.................................... 284,441 --
Accounts payable and other accrued expenses............. 19,554,667 6,566,742
------------ -----------
Total current liabilities........................... 38,765,638 22,296,266
Accrued rent liability...................................... 3,215,897 3,375,465
Other payables.............................................. 320,000 480,000
------------ -----------
Total liabilities................................... 42,301,535 26,151,731
Common stock, $0.01 par value, 50,000,000 shares authorized
in 1998 and 1997; 13,571,403 and 13,250,000 shares issued
and outstanding in 1998 and 1997, respectively
(Note 11)................................................. 135,714 132,500
Additional paid-in capital.................................. 74,975,681 73,126,002
Retained earnings........................................... 11,462,681 447,120
Treasury stock.............................................. (6,397,488) --
------------ -----------
Total common shareholders' equity................... 80,176,588 73,705,622
------------ -----------
Total liabilities and shareholders' equity.......... $122,478,123 $99,857,353
============ ===========
See accompanying notes to consolidated financial statements.
</TABLE>
25
<PAGE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
REVENUES:
Asset management and related fees (Note 10)....... $62,754,631 $49,502,655 $40,456,343
Research services................................. 16,924,231 15,478,709 12,148,164
Other income...................................... 2,553,473 1,634,143 1,061,855
----------- ----------- -----------
Total revenues................................ 82,232,335 66,615,507 53,666,362
----------- ----------- -----------
EXPENSES:
Employee compensation and benefits................ 38,206,080 33,632,314 26,001,771
Occupancy and equipment costs..................... 4,680,032 3,552,179 2,584,544
Marketing and production costs.................... 7,252,654 5,674,545 5,281,667
Professional services............................. 2,360,196 1,992,032 1,537,220
Amortization of goodwill and other................ 2,609,166 2,968,964 3,081,219
Other operating expenses.......................... 4,123,225 3,352,641 3,387,588
----------- ----------- -----------
Total expenses................................ 59,231,353 51,172,675 41,874,009
----------- ----------- -----------
Operating income.................................. 23,000,982 15,442,832 11,792,353
Interest expense.................................. 254,424 300,261 729,088
----------- ----------- -----------
Income before provision for income taxes...... 22,746,558 15,142,571 11,063,265
Provision for income taxes........................ 9,633,952 6,226,242 4,851,034
----------- ----------- -----------
Net income........................................ $13,112,606 $ 8,916,329 $ 6,212,231
=========== =========== ===========
Preferred stock dividends......................... -- 963,127 905,715
----------- ----------- -----------
Net earnings available to common shareholders..... $13,112,606 $ 7,953,202 $ 5,306,516
=========== =========== ===========
Net income:
Basic earnings per common share............... $ 1.00 $ 1.13 $ 0.79
Diluted earnings per common share............. $ 0.93 $ 0.80 $ 0.57
See accompanying notes to consolidated financial statements.
</TABLE>
26
<PAGE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<CAPTION>
NON- ACCUMULATED
COMMON VOTING ADDITIONAL COMPRE-
STOCK COMMON COMMON PAID-IN RETAINED HENSIVE TREASURY
SHARES STOCK STOCK CAPITAL EARNINGS INCOME STOCK
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995...................... 6,710,000 $ -- $ 67,100 $ 2,944,647 $ 1,376,668 $ 234,300 $ --
Change in unrealized
appreciation
(depreciation) of
investments, net of
deferred income taxes..... -- -- -- -- -- (234,300) --
Accretion on Series A
preferred stock........... -- -- -- -- (5,327,300) -- --
Net income.................. -- -- -- -- 6,212,231 -- --
Dividends on preferred
stock..................... -- -- -- -- (905,715) -- --
---------- ------- -------- ----------- ----------- --------- -----------
Balance, December 31,
1996...................... 6,710,000 -- 67,100 2,944,647 1,355,884 -- --
Conversion of 110,000 shares
of Series B preferred
stock..................... -- 1,100 -- 768,900 -- -- --
Tax benefit--employee
compensation (Note 9)..... -- -- -- 1,134,785 -- -- --
Accretion on Series A
preferred stock........... -- -- -- (4,848,332) (8,861,966) -- --
Issuance of common shares
through initial public
offering.................. 2,875,000 -- 28,750 34,566,250 -- -- --
Conversion of 3,555,000
shares of preferred and
110,000 non-voting common
stock to common stock..... 3,665,000 (1,100) 36,650 38,559,752 -- -- --
Net income.................. -- -- -- -- 8,916,329 -- --
Dividends on preferred
stock..................... -- -- -- -- (963,127) -- --
---------- ------- -------- ----------- ----------- --------- -----------
Balance, December 31,
1997...................... 13,250,000 -- 132,500 73,126,002 447,120 -- --
Exercise of stock options... 186,750 -- 1,867 1,076,464 -- -- --
Issuance of incentive
shares.................... 134,653 -- 1,347 -- -- -- --
Tax benefit--employee
compensation (Note 9)..... -- -- -- 773,215 -- -- --
Purchase of 318,188 shares
for treasury.............. -- -- -- -- -- -- (6,397,488)
Net income.................. -- -- -- -- 13,112,606 -- --
Dividends on common stock--
$0.16 per share........... -- -- -- -- (2,097,045) -- --
---------- ------- -------- ----------- ----------- --------- -----------
Balance, December 31,
1998...................... 13,571,403 $ -- $135,714 $74,975,681 $11,462,681 $ -- $(6,397,488)
========== ======= ======== =========== =========== ========= ===========
<PAGE>
<CAPTION>
TOTAL
COMMON
SHAREHOLDERS'
EQUITY
<S> <C>
Balance, December 31,
1995...................... $ 4,622,715
Change in unrealized
appreciation
(depreciation) of
investments, net of
deferred income taxes..... (234,300)
Accretion on Series A
preferred stock........... (5,327,300)
Net income.................. 6,212,231
Dividends on preferred
stock..................... (905,715)
------------
Balance, December 31,
1996...................... 4,367,631
Conversion of 110,000 shares
of Series B preferred
stock..................... 770,000
Tax benefit--employee
compensation (Note 9)..... 1,134,785
Accretion on Series A
preferred stock........... (13,710,298)
Issuance of common shares
through initial public
offering.................. 34,595,000
Conversion of 3,555,000
shares of preferred and
110,000 non-voting common
stock to common stock..... 38,595,302
Net income.................. 8,916,329
Dividends on preferred
stock..................... (963,127)
------------
Balance, December 31,
1997...................... 73,705,622
Exercise of stock options... 1,078,331
Issuance of incentive
shares.................... 1,347
Tax benefit--employee
compensation (Note 9)..... 773,215
Purchase of 318,188 shares
for treasury.............. (6,397,488)
Net income.................. 13,112,606
Dividends on common stock--
$0.16 per share........... (2,097,045)
------------
Balance, December 31,
1998...................... $ 80,176,588
============
See accompanying notes to consolidated financial statements.
</TABLE>
27
<PAGE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.............................................. $ 13,112,606 $ 8,916,329 $ 6,212,231
Adjustments for items not affecting cash:
Depreciation........................................ 757,578 564,508 457,172
Amortization of goodwill and other.................. 2,609,166 2,915,963 3,081,219
Net unrealized appreciation on non-marketable
securities........................................ (134,294) -- (125,654)
Net sales of securities held for market making...... 322,440 (555,037) 35,625
Gain on sale of marketable securities............... -- -- (400,000)
Accretion of discounts on short-term investments.... (1,105,587) (192,723) (235,711)
Changes in:
Accounts receivable............................. 795,807 (5,486,576) 1,182,662
Allowance for doubtful accounts................. (29,437) -- (97,750)
Prepaid expenses and other assets............... (235,417) (2,196,050) 1,569,898
Accounts payable and other accrued expenses..... 11,284,417 3,485,349 (833,147)
Income taxes receivable......................... 2,413,629 (1,344,526) 496,051
Due to affiliates............................... 970,360 (94,623) 637,578
Deferred tax asset.............................. (1,463,399) 971,231 (1,457,941)
Deferred revenue................................ 591,426 1,668,046 (868,237)
Accrued rent liability.......................... (283,551) (268,531) (270,200)
Compensation payable............................ 1,645,850 2,726,801 4,692,228
------------ ------------ ------------
Net cash provided by operating activities... 31,251,594 11,110,161 14,076,024
------------ ------------ ------------
INVESTING ACTIVITIES:
Sale of marketable securities........................... -- -- 1,160,000
Purchases of non-marketable securities.................. (1,192,245) (592,747) (273,233)
Proceeds from non-marketable partnership investments.... 939,070 -- 417,568
Purchases of equipment and other assets, net............ (572,123) (1,274,832) (1,238,050)
Purchases of short-term investments..................... (94,349,567) (96,336,976) (46,567,333)
Maturities of short-term investments.................... 83,504,361 88,093,974 42,500,000
Acquisition of Schroder Mortgage Associates............. (21,000,000) -- --
Acquisition of Noddings................................. (2,908,327) -- --
------------ ------------ ------------
Net cash used in investing activities....... (35,578,831) (10,110,581) (4,001,048)
------------ ------------ ------------
FINANCING ACTIVITIES:
Issuance of common shares through initial public
offering.............................................. -- 34,595,000 --
Repayments on long-term debt............................ -- (2,000,000) (7,000,000)
Repayments on short-term debt........................... -- -- (500,000)
Other payments.......................................... -- -- (312,268)
Issuance of Series B preferred stock.................... -- 79,950 2,451,800
Conversion of Series B preferred stock.................. -- 793,250 --
Issuance of common stock................................ 1,079,678 -- --
Purchase of common stock for treasury................... (6,397,488) -- --
Dividends on preferred stock............................ -- (1,198,942) (893,200)
Dividends on common stock............................... (2,097,045) -- --
------------ ------------ ------------
Net cash provided by (used in) financing
activities................................ (7,414,855) 32,269,258 (6,253,668)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents........ (11,742,092) 33,268,838 3,821,308
Cash and cash equivalents, beginning of year................ 43,085,406 9,816,568 5,995,260
------------ ------------ ------------
Cash and cash equivalents, end of year...................... $ 31,343,314 $ 43,085,406 $ 9,816,568
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for:
Interest............................................ $ -- $ 27,222 $ 446,531
Income tax.......................................... $ 8,703,302 $ 6,763,457 $ 4,546,603
Supplemental disclosure of non-cash information:
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...................................... -- $ 38,595,302 --
See accompanying notes to consolidated financial statements.
</TABLE>
28
<PAGE>
<PAGE>
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.
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 to common stock in 1997, additional shares issued
from the exercise of options and purchase of treasury shares in 1998
(note 9), 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.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements of the
Company have been prepared in conformity with generally accepted
accounting principles.
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 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 $2,833,439 and $10,505,557 at December 31,
1998 and 1997, 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.
29
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Investments--All marketable equity securities held are
classified as trading securities and are presented at fair value
with corresponding unrealized gains or losses included in current
period income. Non-marketable investments in various private equity
funds are held by the Company's broker-dealer subsidiary and are
accounted for 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.
Goodwill--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.
Goodwill arising from the Strategic Merger and the 1998
acquisitions (note 3) is being amortized on a straight-line basis
over a period of 20 years. Accumulated amortization was $3,855,003
and $2,448,202 as of December 31, 1998 and 1997, respectively.
Goodwill is periodically reviewed to determine recoverability based
on the undiscounted operating cash flows of the underlying business.
At December 31, 1998 and 1997, no impairment was indicated.
Other Assets--Included in other assets are costs associated with
the purchase for $1.7 million 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, 1998, $708,333 remains to be amortized
over the two remaining years of the License Agreement. Total
amortization of $340,000, $340,000 and $311,667 is included in the
consolidated statements of income for the years ended December 31,
1998, 1997 and 1996, respectively. Other assets include the
unamortized cost of compensation relating to the Strategic Merger
that was amortized over a three-year period ending August 11, 1998.
Amortization of $862,361, $1,562,915 and $1,707,918 is included in
the consolidated statements of income for the years ended December
31, 1998, 1997 and 1996, respectively. The unamortized amount
$862,361 is included in other assets as of December 31, 1997. 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, 1998 and 1997, the cash value amounted to
approximately $2,100,000 and $2,000,000, respectively.
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
30
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 was recorded at original issue price plus accretion relating
to any increase in the redemption value of the stock during each
period. During 1997 and 1996, such accretion was $13,710,298, and
$5,327,300, 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 Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). SFAS 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 SFAS 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. 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, 1998, 1997 and 1996 were 13,146,558, 7,055,889 and
6,710,000, respectively, for basic earnings per common share and
14,036,973, 11,100,732 and 10,871,936, respectively, for diluted
earnings per common share.
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 1998
presentation.
NOTE 3--ACQUISITIONS
On August 18, 1998, the Company, through C&C and CAM, acquired
substantially all the assets and operations of Schroder Mortgage
Associates L.P. ("SMA") in a transaction accounted for as a purchase
(the "Transaction"). The purchase price was $21.0 million (including
acquisition expenses), with additional contingent consideration that
may be paid in the amount of $4 million over the next three years,
subject to meeting certain financial targets. As a result of the
Transaction, the excess cost over fair value of net assets acquired
was approximately $21.0 million and is being amortized over a
20-year period. The goodwill is considered deductible for federal
income tax purposes.
On December 16, 1998, the Company completed the acquisition of
substantially all of the assets and certain liabilities of Noddings
Investment Group, Inc. ("NIG") and Noddings & Associates, Inc.
("N&A") from NIG and N&A, respectively, in a transaction accounted
for as a purchase (the "Purchase Agreement"). The assets acquired
consisted principally of contracts with investment advisory clients,
working capital of the business and other intangible assets. The
purchase price was $4.3 million in cash (including acquisition
expenses), with additional contingent consideration that may be paid
in the amount of up to $27 million in cash payable over a three-year
period after the closing, subject to meeting certain financial
targets. As a result of the Purchase Agreement, the excess cost over
fair value of net assets acquired was approximately $3.3 million and
is being amortized over a 20-year period. The goodwill is considered
deductible for federal income tax purposes.
31
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following unaudited pro forma combined consolidated
financial information gives effect to the acquisitions of SMA on
August 18, 1998 and the Noddings Group on December 16, 1998, as if
each acquisition had been consummated at January 1, 1997:
<TABLE>
<CAPTION>
1998 1997
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues............................................ $96,240 $81,078
Net income.......................................... $13,243 $ 8,329
Diluted earnings per share.......................... $ 0.94 $ 0.75
</TABLE>
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, 1998 and
1997, an allowance for doubtful accounts of $140,563 and $170,000,
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.
NOTE 5--LNVESTMENTS
At December 31, 1998 and 1997, the estimated fair value of
marketable and non-marketable investments were as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Marketable equity securities--trading
(cost $549,025).............................. $ 278,222 $ 600,662
========== ==========
Non-marketable equity securities (cost
$16,200)..................................... $ 20,410 $ 20,556
Non-marketable partnership investments
(cost $2,526,716 and $1,960,473)............. 2,716,737 2,329,122
---------- ----------
Total non-marketable investments........... $2,737,147 $2,349,678
========== ==========
</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 1998 and 1997.
NOTE 6--EQUIPMENT AND LEASEHOLD IMPROVEMENTS
At December 31, 1998 and 1997, equipment and leasehold
improvements comprised the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Office equipment............................... $1,492,058 $1,071,080
Computer equipment............................. 1,174,371 1,235,939
Leasehold improvements......................... 688,517 345,737
---------- ----------
3,354,946 2,652,756
Less accumulated depreciation.................. 1,903,293 1,127,320
---------- ----------
Total equipment and leasehold
improvements............................. $1,451,653 $1,525,436
========== ==========
</TABLE>
Depreciation expense of $757,578, $564,508 and $457,172 above is
included in the consolidated statements of income for the years
ended December 31, 1998, 1997 and 1996, respectively.
32
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. Total rental expense during
1998, 1997 and 1996 was $1,603,500, $1,219,069 and $836,212,
respectively. At December 31, 1998, 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
$8,443,000 as follows: $1,569,000 in 1999; $1,421,000 in 2000;
$1,248,000 in 2001; $1,218,000 in 2002; $1,215,000 in 2003 and
$1,772,000 thereafter.
NOTE 7--INCOME TAXES
The provision for federal and state income tax for the years
ended December 31, 1998, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current income tax provision.......................... $11,116,931 $6,389,796 $4,651,708
Deferred income tax provision (benefit)............... (1,482,979) (163,554) 199,326
----------- ---------- ----------
Total income tax provision........................ $ 9,633,952 $6,226,242 $4,851,034
=========== ========== ==========
</TABLE>
The difference between the expected federal income tax provision
at the statutory rate of 35% for 1998, 1997 and 1996 and the
Company's actual federal income tax rate are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Income before income taxes............................ $22,746,558 $15,142,571 $11,063,265
----------- ----------- -----------
Federal income taxes at statutory rate................ $ 7,961,295 $ 5,299,899 $ 3,872,143
Increases in income taxes resulting from:
State income taxes, net of federal................ 1,164,480 514,625 619,251
Amortization of goodwill.......................... 354,566 354,568 354,568
Other, net........................................ 153,611 57,150 5,072
----------- ----------- -----------
Total income tax provision.................... $ 9,633,952 $ 6,226,242 $ 4,851,034
=========== =========== ===========
</TABLE>
Total income taxes were allocated as follows:
<TABLE>
<S> <C> <C> <C>
Income tax from continuing operations:................ $ 9,633,952 $ 6,226,242 $ 4,851,034
Income tax from stockholders' equity:
Tax benefit from exercise of stock options........ (773,215) (1,134,785) --
Foreign currency translation...................... -- -- --
----------- ----------- -----------
Total income tax...................................... $ 8,860,737 $ 5,091,457 $ 4,851,034
=========== =========== ===========
</TABLE>
33
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1998
and 1997, the net deferred income tax assets is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Accrued rent liability..................... $1,272,076 $1,404,627
Employee costs............................. 861,096 500,157
Partnership investments.................... 1,013,925 --
Other, net................................. 501,000 456,946
---------- ----------
Gross deferred income tax assets....... 3,648,097 2,361,730
---------- ----------
Deferred tax liabilities:
Depreciation............................... (448,285) (224,628)
Partnership investments.................... -- (400,689)
---------- ----------
Gross deferred income tax
liabilities.......................... (448,285) (625,317)
---------- ----------
Net deferred income tax assets................. $3,199,812 $1,736,413
========== ==========
</TABLE>
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 has
been established.
NOTE 8--OUTSTANDING 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, and $7,000,000 of
principal plus accrued interest of $27,222, and $412,805 in 1997 and
1996, respectively. There was no debt outstanding as of December 31,
1998 or 1997.
LINES OF CREDIT:
At December 31, 1998 and 1997, 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 current Agreement expires
on December 31, 1999. During 1996, the Company borrowed $2,000,000
for less than one week. There were no borrowings under the line of
credit during 1998 or 1997.
NOTE 9--PREFERRED STOCK AND COMMON 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, 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 years ended December 31, 1996. Declared but unpaid
dividends totaling $223,300 are included in Preferred Dividends
34
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 for a total of $2,451,800. 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. 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, 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. During 1998, the Company paid
approximately $2.1 million in dividends to outstanding shareholders
representing $0.16 per share.
On July 28, 1998, pursuant to the Board of Directors'
authorization, the Company purchased 318,188 shares of common stock
into treasury. These shares were held by a Director of the Company
for total consideration of $6,397,488, based upon the average
closing price per share of the Company's common stock for the five
trading days preceeding the date of purchase. The Company believed
this transaction represented an opportunity to obtain treasury stock
on attractive terms and intends to use the shares for acquisitions,
employee stock plans and other related corporate purposes.
On January 1, 1998, the FASB issued on SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its
components in a full
35
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
set of financial statements. Comprehensive income consists of net
income and net unrealized gains (losses) on securities and is
presented in the consolidated statements of shareholders' equity and
comprehensive income. The Statement requires only additional
disclosures in the consolidated financial statements; it does not
affect the Company's financial position or results of operations.
Prior year financial statements have been reclassified to conform to
the requirements of SFAS No. 130.
On January 21, 1999, the Board of Directors of the Company
declared a quarterly dividend of $0.05 per share on the Common Stock
payable in March 1999.
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, 1998, 1997 and 1996 amounted to $19,802,311,
$17,227,994 and $14,300,267, respectively. The total investment
management fees receivable from these affiliated entities at
December 31, 1998 and 1997 amounted to $2,025,053 and $1,507,206,
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, seven and six funds during 1998,
1997 and 1996, respectively. Fees for managing these funds were
$8,001,836, $5,491,704 and $4,006,038, for the years ended December
31, 1998, 1997 and 1996, respectively.
The Company received underwriting fees and concessions in
connection with the offering of shares of one company during each of
1998 and 1997 which are considered related parties. Such fees and
concessions are included in research services and amount to
$529,739, and $760,638, and $0 for the years ended December 31,
1998, 1997 and 1996, respectively. Fees for 1998 were earned from
the secondary offering of the common stock of a majority-owned
subsidiary of the Parent. Fees for 1997 were earned from the initial
public offering of a company partially owned by certain private
equity funds managed by the Company.
In connection with the November 1996 private offering of Series
B Preferred Stock, General American holds demand recourse notes from
certain employees totaling $1,438,100 and $2,185,300 as of December
31, 1998 and 1997, 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, 1998, 1997 and
1996:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Employee costs...................................... $2,173,092 $3,627,901 $ 7,103,724
Administrative accounting fees...................... -- -- 2,765,129
Marketing and production costs...................... 1,616,719 966,268 1,076,195
Professional services............................... 1,311,433 1,023,746 1,002,482
Rent................................................ 1,170,166 791,804 612,822
Computer services................................... 216,709 163,337 118,008
All other operating costs........................... 2,757,218 2,689,940 1,932,861
---------- ---------- -----------
$9,245,337 $9,262,996 $14,611,221
========== ========== ===========
</TABLE>
36
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
As a servicing agent, the Company processes principal and
interest payments pertaining to certain mortgages originated for
GenAmerica and its affiliates. As of December 31, 1998 and 1997,
$8,976,934 and $692,492, respectively, of escrowed funds pertaining
to these activities is included in accounts payable.
NOTE 11--STOCK AND STOCK OPTION PLANS
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. Upon the initial public
offering the options became 100% vested. All options were granted at
fair value. Total options issued and outstanding under the 1995 Plan
were 824,000 and 1,000,000 as of December 31, 1998 and 1997,
respectively and were fully vested upon the completion of the
Company's initial public offering in December 1997. No additional
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 233,750 and 237,500 as of December 31, 1998 and 1997,
respectively. No additional 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 fair value.
Total options issued and outstanding under the 1997 Plan were
1,892,706 and 1,285,189 as of December 31, 1998 and 1997,
respectively.
The weighted-average remaining contractual vesting period at
December 31, 1998 was approximately four years.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
----------------------------------------- -------------------------------
DECEMBER 31, DECEMBER 31,
1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year.............. 2,522,689 1,230,000 1,000,000 $ 9.65 $ 5.64 $5.33
Granted..................................... 644,517 1,292,689 230,000 16.48 13.46 7.00
Exercised................................... 186,750 -- -- 5.77 -- --
Canceled.................................... 30,000 -- -- 12.85 -- --
--------- --------- --------- ------ ------ -----
Outstanding, end of year.................... 2,950,456 2,522,689 1,230,000 $11.35 $ 9.65 $5.64
========= ========= ========= ====== ====== =====
Exercisable, end of year.................... 1,288,786 1,366,189 200,000 $ 7.81 $ 7.30 $5.33
========= ========= ========= ====== ====== =====
</TABLE>
37
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes stock options outstanding as of
December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING LIFE PRICE
<S> <C> <C> <C>
$ 5.33 - $ 7.00...................... 1,057,750 6.9 $ 5.69
$13.18 - $18.34...................... 1,892,706 9.27 $14.51
- -----------------------------------------------------------------------------------
$ 5.33 - $18.34...................... 2,950,456 7.81 $11.35
</TABLE>
During December 1998, the Company's Compensation Committee
granted 134,653 shares of restricted stock at a price of $16.00 per
share under the 1997 Flexible Stock Plan. The 1998 restricted stock
vest over future periods and will be reflected as compensation
expense in future periods totaling approximately $900,000 per year
for the next five years.
The Company applies 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 SFAS 123 are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Grant-date fair value per share....................... $6.81 $3.18 $1.13
Significant assumptions:
Risk-free interest rate at grant date................. 4.65% 5.59% 5.70%
Expected dividend payout.............................. $0.20 $0.16 $ 0
Expected stock price volatility....................... 47.8% 30% N/A
Expected life to exercise (years)..................... 5.00 2.75 2.50
Net income
As reported....................................... $13,112,606 $8,916,329 $6,212,231
Pro forma......................................... $11,618,147 $8,392,758 $5,840,384
Pro forma earnings per common share
As reported Basic................................. $1.00 $1.13 $0.79
As reported Diluted............................... $0.93 $0.80 $0.57
Pro forma Basic................................... $0.88 $1.05 $0.74
Pro forma Diluted................................. $0.83 $0.76 $0.54
</TABLE>
At December 31, 1998, the Company's closing stock price was
$20.75.
38
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
were employed by the Company subsequent to the Strategic Merger. The
Company contributed $892,618, $1,019,327, and $547,127 on behalf of
eligible employees for the years ended December 31, 1998, 1997 and
1996, respectively. Direct charges to the Company from General
American for the Progress Sharing Plan were approximately $566,251,
$407,074, $310,000, for the years ended December 31, 1998, 1997 and
1996, 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, 1998 and 1997, therefore, no
charges were made by General American to GAIMCO.
NOTE 13--LITIGATION
One legal claim has 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, 1998, the Company's future commitment to fund such
required capital contributions was approximately $1,677,000.
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.
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, 1998,
C&C had net capital, as defined by the Uniform Net Capital Rule, of
approximately $15,980,000 which was $14,960,000 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, 1998 and 1997, 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
39
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
areas. Investment management fees receivable from General American
and their affiliated entities at December 3l, 1998 and 1997 amounted
to approximately $2,025,053 and $1,507,206, respectively.
NOTE 17--INDUSTRY SEGMENT
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131").
SFAS No. 131 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, SFAS 131 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 underlying principle of SFAS 131 is a management approach to
the information disclosed. The management approach is based on the
way management organizes the Company's segments within the
enterprise for making operating decisions and assessing performance.
The FASB believes that information based on this approach will be
more useful to the user since it will be the same information
management uses to make decisions about the enterprise. Further, the
FASB does not think that separate measures of segment performance
should have to be developed solely for the purpose of disclosure.
This approach allows management's decisions on such topics as
allocations to remain unchanged even if they do not conform to
generally accept accounting principles, employing reasonableness as
a sufficient test.
Segment information on the Company for the years ended December
31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
ASSET MANAGEMENT MORTGAGE LOAN RESEARCH
--------------------------- --------------------------- ---------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $40,321 $33,399 $25,479 $22,434 $16,104 $14,977 $16,924 $15,479 $12,148
Pre-tax income....... $10,977 $ 7,613 $ 5,530 $ 6,952 $ 3,614 $ 2,738 $ 4,818 $ 3,916 $ 2,795
Revenue from
Major Customer..... $14,514 $11,444 $ 8,722 $ 5,288 $ 5,784 $ 5,577 $ 530 $ -- $ --
<CAPTION>
COMBINED
OPERATING SEGMENTS
---------------------------
1998 1997 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues............. $79,679 $64,982 $52,604
Pre-tax income....... $22,747 $15,143 $11,063
Revenue from
Major Customer..... $20,332 $17,228 $14,299
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED REVENUES BY
GEOGRAPHIC AREA
-----------------------------------
1998 1997 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Geographic Areas
United States....................... $80,033 $64,953 $52,872
All Other Areas..................... $ 2,199 $ 1,663 $ 794
<CAPTION>
RECONCILIATION OF COMBINED
OPERATING SEGMENT REVENUES
TO CONSOLIDATED REVENUES
-----------------------------------
1998 1997 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Combined operating segment revenue....... $79,679 $64,982 $52,604
Other income............................. 2,553 1,634 1,062
------- ------- -------
Consolidated revenue..................... $82,232 $66,616 $53,666
======= ======= =======
</TABLE>
40
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue--Combined operating segment revenues as reported above
do not include other income which is considered a component of
corporate operations rather than any single segment. For the year
ended December 31, 1998, 1997 and 1996, other income was
approximately $2,553,000, $1,634,000 and $1,062,000, respectively.
Pre-tax income--The Company's segment pre-tax income reflects a
two step allocation of indirect charges net of other income. The
first step is the allocation of indirect charges for corporate
overhead, which includes various support functions such as senior
management, finance, personnel and facilities management. Corporate
overhead is allocated to each operating segment based on the
operating segment's proportionate share of direct expenses to the
combined operating segment direct expenses. The second step is the
allocation of all other indirect charges which includes
depreciation, amortization, interest expense and certain
compensation charges. These other indirect charges are allocated to
the operating segments based on the operating segment's
proportionate share of combined operating segment income from
operations net of corporate overhead allocations. There are no
reconciling items between the combined operating segment pre-tax
income reported above and the pre-tax income reported on the
consolidated statement of income.
Major customer--The Company has one customer, a significant
shareholder of the Company, that provides more than 10% of
consolidated revenue.
In addition to the disclosures above, SFAS 131 requires other
financial disclosures if those measures are used by management to
make operating decisions, assess performance and allocate resources.
Specifically, total assets, interest revenue, interest expense,
depreciation and amortization expense, unusual items, extraordinary
items, equity in net income or loss of investees accounted for by
the equity method, income tax provision or benefit and other
significant non-cash items are required to be disclosed by segment.
Management does not consider these items by operating segment when
making operating decisions, assessing segment performance or when
allocating resources.
41
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1998
-----------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Net income............................................... $13,112,606
-----------
BASIC EPS:
Net earnings available to common shareholders............ 13,112,606 13,146,558 $1.00
EFFECT OF DILUTIVE SECURITIES:
Stock options............................................ 890,415
----------- -----------
DILUTED EPS:
Net earnings available to common shareholders and
assumed full conversions............................... $13,112,606 14,036,973 $0.93
<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 conversion................................ $ 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 conversion................................ $ 6,212,231 10,871,936 $0.57
</TABLE>
During 1998, there were 146,329 shares that were considered
anti-dilutive and were not included in the earnings per share
calculations above.
42
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes quarterly results of operations
for the two years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1998
Revenues.......................................... $19,680 $20,558 $20,703 $21,291
Operating income.................................. 5,018 5,633 6,118 6,232
Income before taxes............................... 4,952 5,569 6,055 6,171
Net income........................................ 2,832 3,197 3,497 3,587
Earnings per share
Basic earnings per share...................... $ 0.21 $ 0.24 $ 0.27 $ 0.28
Diluted earnings per share.................... $ 0.20 $ 0.22 $ 0.25 $ 0.26
Dividends per share............................... $ 0.04 $ 0.04 $ 0.04 $ 0.04
Market price per share:
High.......................................... $ 21.50 $ 22.25 $ 20.88 $ 20.75
Low........................................... $ 16.50 $ 19.50 $ 13.13 $ 11.00
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
</TABLE>
43
<PAGE>
<PAGE>
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, 1998 and
1997, 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, 1998. 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,
1998 and 1997, and the results of their operations and their cash
flows for each of the years in the three-year period ended December
31, 1998, 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.
/s/ KPMG LLP
St. Louis, Missouri
January 21, 1999
44
<PAGE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable
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
45
<PAGE>
<PAGE>
SCHEDULE I
<TABLE>
CONNING CORPORATION
(PARENT COMPANY ONLY)
CONDENSED BALANCE SHEET
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 5,716,696 $24,768,768
Short-term investments...................................... 3,789,437 11,414,751
Investment in subsidiary.................................... 75,343,433 38,415,069
Capitalized software, less accumulated amortization of
$993,383 and $651,667..................................... 722,067 1,048,333
Income tax receivable....................................... 1,983,425 1,131,229
Prepaid expenses and other assets........................... 4,418 4,418
----------- -----------
Total assets............................................ $87,559,476 $76,782,568
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses............................................ $ 315,234 $ 587,833
Due to affiliates........................................... 6,065,224 1,593,687
Other payables.............................................. 320,000 480,000
Deferred liabilities........................................ 682,430 415,426
----------- -----------
Total liabilities....................................... 7,382,888 3,076,946
----------- -----------
Common stock, $.01 par value, 50,000,000 shares authorized;
13,571,403 and 13,250,000 shares issued and outstanding in
1998 and 1997, respectively............................... 135,714 132,500
Additional paid in capital.................................. 74,975,681 73,126,002
Retained earnings........................................... 11,462,681 447,120
Treasury stock.............................................. (6,397,488) --
----------- -----------
Total common shareholders' equity....................... 80,176,588 73,705,622
----------- -----------
Total liabilities and shareholders' equity.............. $87,559,476 $76,782,568
=========== ===========
See accompanying notes to condensed financial statements.
</TABLE>
46
<PAGE>
<PAGE>
<TABLE>
CONNING CORPORATION
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<CAPTION>
1998 1997
<S> <C> <C>
REVENUE
Dividend income............................................. $ 39,634 $ 2,027,500
Management advisory fees.................................... 300,000 300,000
Other income................................................ 1,631,853 76,176
----------- -----------
Total revenues.......................................... 1,971,487 2,403,676
----------- -----------
EXPENSES
Amortization of capitalized software........................ 341,716 340,000
Professional services....................................... 597,717 43,596
Other expenses.............................................. 112,065 72,147
Interest expense............................................ -- 21,389
----------- -----------
Total expenses.......................................... 1,051,498 477,132
----------- -----------
Income before benefit for income taxes...................... 919,989 1,926,544
Benefit for income taxes.................................... 105,678 20,948
----------- -----------
Income before equity in undistributed earnings of
subsidiaries, net of taxes................................ 1,025,667 1,947,492
Equity in undistributed earnings of subsidiaries, net of
taxes of $9,426,654 and $6,247,190........................ 12,086,939 6,968,837
----------- -----------
Net income.................................................. 13,112,606 8,916,329
Preferred stock dividends................................... -- 963,127
----------- -----------
Net earnings available to common shareholders............... $13,112,606 $ 7,953,202
=========== ===========
See accompanying notes to condensed financial statements.
</TABLE>
47
<PAGE>
<PAGE>
<TABLE>
CONNING CORPORATION
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<CAPTION>
1998 1997
<S> <C> <C>
Operating activities:
Net Income.............................................. $ 13,112,606 $ 8,916,329
Adjustment for items not affecting cash:
Amortization of capitalized software................ 341,716 340,000
Changes in:
Investments in subsidiaries..................... (36,328,365) (8,996,338)
Income taxes receivable......................... (78,981) 3,556
Due to/from affiliates.......................... 4,471,537 529,255
Accrued expenses................................ (272,596) 582,000
Deferred liabilities and other payables......... 107,005 87,696
------------ ------------
Net cash provided by (used in) operating
activities................................ (18,647,078) 1,462,498
------------ ------------
Investing activities:
Purchase of software................................ (15,450) --
Investment in subsidiary............................ (600,000) --
Maturities (purchase) of short-term investments,
net............................................... 7,625,314 (11,414,751)
Dividends received from subsidiaries................ -- 2,027,500
------------ ------------
Net cash provided by (used in) investing
activities................................ 7,009,864 (9,387,251)
------------ ------------
Financing activities:
Repayments on long term debt........................ -- (2,000,000)
Issuance of common stock through incentive
programs.......................................... 1,079,675 --
Purchase of common stock for treasury............... (6,397,488) --
Issuance of common stock through initial public
offering.......................................... -- 34,595,000
Issuance of Series B preferred stock................ -- 79,950
Conversion of Series B preferred stock.............. -- 793,250
Dividends on common stock........................... (2,097,045) --
Dividends on preferred stock........................ -- (1,198,942)
------------ ------------
Net cash provided by (used in) financing
activities................................ (7,414,858) 32,269,258
------------ ------------
Net change in cash and cash equivalents..................... (19,052,072) 24,344,505
Cash and cash equivalents, beginning of the year............ 24,768,768 424,263
------------ ------------
Cash and cash equivalents, end of year...................... $ 5,716,696 $ 24,768,768
============ ============
Cash paid for:
Interest............................................ $ -- $ 21,389
Income taxes........................................ $ -- $ --
Supplemental disclosure of cash flow information:
Accretion of Series A and B preferred stock......... $ -- $ 13,710,298
Conversion of Series A and B preferred stock to
common stock...................................... $ -- $ 38,572,052
See accompanying notes to condensed financial statements.
</TABLE>
48
<PAGE>
<PAGE>
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 1998 and 1997, the Company provided the use of its
software to its subsidiaries through administrative services
agreements. Charges were $340,000 and $340,000 during 1998 and 1997,
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 $0 and
$2,027,500 for the years ended December 31, 1998 and 1997,
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
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.
On January 21, 1999, the Board of Directors of the Company
declared a quarterly dividend of $0.05 per share increasing the
dividend rate by 25%.
49
<PAGE>
<PAGE>
3. EXHIBITS [<F*>denotes filed herewith]
[<F*><F*>denotes a management contract or
compensatory plan or arrangement]
[(i) denotes incorporated by reference to the
Company's Registration Statement on Form S-1,
File Number 333-35993.] [(ii) denotes incorporated
by reference to the Company's Form 10-K for the
year ending December 31, 1997, File Number 0-23183]
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 Restated Articles of Incorporation of the Company, as
amended.(ii)
3.2 Bylaws of the Company.(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 accounts.(i)
10.2 Investment Advisory Agreement dated as of July 2, 1990
between General American and CAM relating to General
American's separate accounts.(i)
10.3 Investment Advisory Agreement dated as of July 23, 1997
between General American Capital Company and CAM.(i)
10.4 Lease Agreement dated as of July 31, 1996 between General
American and CAM.(i)
10.5 Sublease effective as of July 19, 1995 between General
American and CAM.(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.(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.(i)
10.9 Registration Rights Agreement dated as of June 12, 1997
among the Company, General American and General American
Holding Company.(i)
10.10 Tax Allocation and Tax Sharing Agreement dated as of June
12, 1997 between the Company, Conning, Inc., Conning &
Company and Mr. Hansen.(i)
10.11 Form of Employment Agreement dated August 11, 1995 between
the Company (Conning Asset Management Company), Conning &
Company and Mr. Hansen. (i)<F*><F*>
10.12 Employment Agreement dated August 11, 1995 between the
Company (as assignee) and Leonard M. Rubenstein.
10.13 Employment Agreement dated August 11, 1995 between the
Company (formerly Conning Asset Management Company), Conning
& Company and Maurice W. Slayton.(i)<F*><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.).(i)
50
<PAGE>
<PAGE>
10.15 1995 Flexible Stock Plan.(i)<F*><F*>
10.16 1996 Flexible Stock Plan.(i)<F*><F*>
10.17 1997 Flexible Stock Plan.(i)<F*><F*>
10.18 Forms of Incentive Stock Option Award and Terms and
Conditions under 1995 Flexible Stock Plan.(i)<F*><F*>
10.19 Forms of Incentive Stock Option Award and Terms and
Conditions under 1996 Flexible Stock Plan.(i)<F*><F*>
10.20 Forms of Non-Qualified Stock Option Awards and Terms and
Conditions under 1997 Flexible Stock Plan.(ii)<F*><F*>
10.24 Office Lease dated August 22, 1989 among Hartford CityPlace
L.L.C., Conning, Inc. and Conning & Company, as amended as
of June 30, 1997.(i)
10.22 Venture Carried Interests Allocation Plan, as
amended.(i)<F*><F*>
10.23 Amended and Restated Limited Partnership Agreement of
Conning Investment Partners Limited Partnership III, as
amended.(i)<F*><F*>
10.24 Limited Liability Company Agreement of Conning Connecticut
Investors, L.L.C.(i)<F*><F*>
10.25 Limited Liability Company Agreement of Conning Partners II,
L.L.C.(i)<F*><F*>
10.26 Limited Liability Company Agreement of Conning Investment
Partners V, L.L.C., dated as of October 31, 1997.(i)<F*><F*>
10.27<F*> Forms of Restricted Stock Award and Terms and Conditions
under 1997 Flexible Stock Plan.
10.28<F*> Agreement with Maurice W. Slayton dated December 22, 1998.
21.1 Subsidiaries of the Company.(i)
23.1<F*> Consent of KPMG LLP.
24.1<F*> Powers of Attorney for John A. Fibiger, Arthur C. Reeds,
III, and John C. Shaw.
27.1<F*> Financial Data Schedule.
(b) REPORTS ON FORM 8-K
On October 16, 1998, the Company filed a Form 8-K
relating to the definitive agreement to acquire all the
assets and certain liabilities of Noddings & Associates,
Inc. and Noddings Investment Group, Inc.
On December 31, 1998, the Company filed a Form 8-K
relating to the filing of the financial statements, pro
forma financial information and exhibits relating to the
acquisition of Noddings & Associates, Inc. and Noddings
Investment Group, Inc.
51
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duty 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
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
<C> <S> <C>
JOHN A. FIBIGER<F*> Director March 26, 1999
---------------------------------
John A. Fibiger
RICHARD A. LIDDY Director March 26, 1999
---------------------------------
Richard A. Liddy
ARTHUR C. REEDS, III<F*> Director March 26, 1999
---------------------------------
Arthur C. Reeds, III
LEONARD M. RUBENSTEIN Chairman, President and Chief Executive March 26, 1999
--------------------------------- Officer (Principal Executive Officer)
Leonard M. Rubenstein
FRED M. SCHPERO Senior Vice President and Chief Financial March 26, 1999
--------------------------------- Officer (Principal Financial and
Fred M. Schpero Accounting Officer)
JOHN C. SHAW<F*> Director March 26, 1999
---------------------------------
John C. Shaw
MAURICE W. SLAYTON Director March 26, 1999
---------------------------------
Maurice W. Slayton
<F*>By: FRED M. SCHPERO Attorney-in-Fact
------------------------------
Fred M. Schpero
</TABLE>
52
<PAGE>
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
10.27 Forms of Restricted Stock Award and Terms and Conditions
under 1997 Flexible Stock Plan.
10.28 Agreement with Maurice W. Slayton dated December 22, 1998.
23.1 Consent of KPMG LLP.
24.1 Powers of Attorney for John A. Fibiger, Arthur C. Reeds,
III, and John C. Shaw.
27.1 Financial Data Schedule.
53
<PAGE>
CONNING CORPORATION
RESTRICTED STOCK AWARD
Name of Award Recipient:
On December 18, 1998, the Company awarded you restricted stock.
You were granted ________ shares of the Company's Common Stock, par
value $.01 per share (the "Restricted Shares"). The Company hereby
acknowledges receipt of $________ [$.01 per share] in cash from you as
payment of the par value of the Restricted Shares as required by the
Conning Corporation 1997 Flexible Stock Plan.
Your Restricted Shares will vest as follows:
CUMULATIVE
NUMBER OF
SHARES DATE
------ ----
25% December 18, 2000
50% December 18, 2001
75% December 18, 2002
100% December 18, 2003
The Restricted Shares are subject to forfeiture and restrictions
on sale as described in the attached Terms and Conditions.
IMPORTANT: By signing below, you agree to be bound by, and
acknowledge receipt of, the attached Terms and Conditions of this
restricted stock award.
Read and agreed CONNING CORPORATION
to this _______ day of
______________, 19____.
________________________ By:___________________________
Name: Leonard M. Rubenstein
Title: Chairman and Chief
Executive Officer
1
<PAGE>
<PAGE>
TERMS AND CONDITIONS
--------------------
RESTRICTED STOCK AWARD GRANTED UNDER
------------------------------------
CONNING CORPORATION
-------------------
1997 FLEXIBLE STOCK PLAN
------------------------
1. Definitions
-----------
(a) Participant The recipient of the Stock Award.
(b) Plan The Conning Corporation 1997 Flexible Stock
Plan, as amended from time to time.
(c) Restricted Shares The shares of Conning Corporation granted by
the Stock Award
(d) Stock Award The Restricted Stock Award to which these
Terms and Conditions are attached.
All capitalized terms not otherwise defined herein shall have the
meanings given to such terms by the Plan.
2. Evidence of Restricted Stock Award
----------------------------------
The Stock Award evidences a grant to the Participant of
Restricted Shares of Common Stock, par value $.01 per share,
of the Company as set forth on the Stock Award.
3. Conditions and Restrictions Affecting Restricted Stock
------------------------------------------------------
(a) Transferability. Subject to Sections 4(d) (Death)
---------------
and 4(f) (Designation of Beneficiaries) of this Agreement, Participant
may not sell, transfer, pledge, donate, hypothecate or otherwise dispose
of any of the Restricted Shares prior to December 18, 2003; provided
that, each year the Participant may sell a sufficient number of
Restricted Shares to pay any income tax liability associated with the
annual incremental vesting of the Restricted Shares. The period from
December 18, 1998 to December 18, 2003 is hereinafter referred to as the
"Restricted Period."
(b) Stock Certificates. The Restricted Shares shall be
------------------
evidenced by one or more stock certificates registered in Participant's
name, which shall bear a restrictive legend referring to the Plan, the
risk of forfeiture of the Restricted Shares, and stating that the
Restricted Shares are nontransferable until all restrictions have been
satisfied and the legend has been removed. The legend shall be in
substantially the following form:
"The sale, transfer or encumbrance of the shares represented by
this certificate is restricted, and some or all of the shares
represented hereby are subject to forfeiture under
2
<PAGE>
<PAGE>
the terms of the Restricted Stock Award by and between the
corporation and the holder hereof."
If the Shares evidenced by such certificate(s) have not been
registered under the Securities Act of 1933, the certificate(s) shall
contain a legend in substantially the following form:
"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."
In addition, certificate(s) representing the Restrictive Shares shall
bear such other restrictive legends, stop-transfer orders, dividend
payment orders and other notations as the Committee, in its discretion,
may determine. The certificate(s) evidencing the Restricted Shares
shall be held in the custody of the Company until the expiration of the
Restricted Period or earlier forfeiture. Except for shares which have
been sold for payment of taxes in accordance with Section 3(a), at the
end of the Restricted Period, all Restricted Shares which have not been
forfeited hereunder shall be delivered to Participant; provided that,
the Company may withhold sufficient Restricted Shares and/or cash in
order to satisfy any federal, state or local tax withholding
obligations.
(c) Voting and Dividend Rights. During the Restricted
--------------------------
Period, Participant shall be entitled to receive all cash and stock
dividends when paid on the Restricted Shares and shall be entitled to
vote the Restricted Shares. Any stock dividends paid during the
Restricted Period shall be considered "Restricted Shares", subject to
all restrictions hereunder, and shall be held by the Company on the same
terms as the Restricted Shares on which they were paid.
4. Effect of Termination, Disability, Retirement or Death.
-------------------------------------------------------
(a) Termination of Employment. If, on or after the date
-------------------------
that the Restricted Shares shall have first become vested, the
Participant's employment shall be terminated for any reason other than
as described in Section 4(c) (Retirement), the Participant shall forfeit
all unvested Restricted Shares. 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.
(b) Disability. If, on or after the date that the
----------
Restricted Shares shall have first become vested, 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 forfeit all
unvested Restricted Shares. 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>
<PAGE>
(c) 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 Stock Awards of Restricted Shares
granted hereunder shall become immediately vested. 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.
(d) Death. If a Participant shall die while serving as
-----
an employee of an Employer or a director of the Company on or after the
date that the Restricted Shares shall have first become vested, the
vested Restricted Shares shall be distributed to the beneficiary
designated pursuant to Section 4(f) 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 Restricted Shares shall have been
validly transferred by such personal representative pursuant to will or
the laws of descent and distribution. No transfer of the Restricted
Shares 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 Restricted Shares.
(e) Shares Not Vested. Except as provided in Section
-----------------
4(c), if the Participant's employment shall terminate before the
Restricted Shares shall have first become vested, or before any
installment or installments become vested, then the Participant's full
interest in the unvested Restricted Shares 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.
(f) Non-Transferability of Rights; Designation of
----------------------------------------------
Beneficiaries. The Restricted Shares shall not be transferable by the
- -------------
Participant except by will or the laws of descent and distribution or as
provided in this Section 4(f).
The Participant, however, may file with the Company a
written designation of a beneficiary or beneficiaries to whom the vested
Restricted Shares shall be distributed, in the event of the
Participant's death, subject to all of the provisions of the Stock Award
and these Terms and Conditions. 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
receive vested Restricted Shares, the Committee may determine to
recognize only the personal representatives of the estate of the
Participant as the lawful recipient of such shares, in which
4
<PAGE>
<PAGE>
case the Company, the Committee and the members thereof shall not be
under any further liability to anyone.
5. 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 Stock Award, or as otherwise may be required by law.
The Company or any such Subsidiary may require as a condition to issuing
Restricted Shares that the Participant or other person pay any sum that
federal, state or local tax law requires to be withheld with respect to
such shares. 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.
6. 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, kind and class of shares available for
grants of Restricted Stock and the number, kind and class of Shares
subject to outstanding grants of Restricted Stock, 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.
7. Effect of Forfeiture
--------------------
In the event of a forfeiture of Restricted Shares, all
rights of Participant under this Agreement shall immediately terminate,
and all such shares shall be available for future grant under the Plan.
8. Plan Controls
-------------
The Stock 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 Stock Award and these Terms and Conditions.
5
<PAGE>
CONNING CORPORATION
700 MARKET STREET
ST. LOUIS, MO 63101
December 22, 1998
Mr. Maurice W. Slayton
178 Riverknolls
Avon, CT 06001
Dear Moe:
The purpose of this letter is to clarify our mutual understanding
of certain matters relating to your retirement from Conning Corporation
and its affiliates (collectively, "Conning"). You have informed me that
the date of your retirement will be February 12, 1999 (the "Retirement
Date").
On the Retirement Date, you will resign from the office of
President of Conning Corporation as well as from all other positions as
a director, officer, member of the investment committee for any private
equity funds, trustee or fiduciary for employee benefit plans or any
similar position with Conning & Company or other Conning subsidiaries;
provided that, you will continue to serve as a director of Conning &
- -------------
Company as requested by Conning until Conning is able to find a
qualified replacement for such position. You will not resign on the
Retirement Date from your position as a director of Conning Corporation
and will continue your service as a Director until the 1999 annual
meeting of shareholders of Conning Corporation or until your earlier
resignation or removal in accordance with the Articles of Incorporation
and Bylaws of Conning Corporation. You will also remain employed on a
part-time basis for so long as you are serving as a Director of Conning
Corporation to work on special projects which may be mutually agreed to
from time to time by you and the chief executive officer of Conning
Corporation. Your compensation for such part-time work will be at a
mutually agreed rate. You or Conning may terminate your part-time
employment at any time.
In connection with your planned retirement, for the purpose of
clarification, I have summarized below how your retirement will affect
your rights under certain benefit plans or insurance programs maintained
by Conning. This summary is not intended to change the terms of the
plans and complete copies of these plans can be made available to you.
(a) The termination of your full-time employment as contemplated
by this letter will be considered normal retirement under all employee
benefit plans of Conning in which you participate, except as otherwise
provided by the terms of the plan.
<PAGE>
<PAGE>
Mr. Maurice W. Slayton
December 22, 1998
Page 2
(b) As provided in your stock option award agreements, your
stock options under the 1997 Flexible Stock Plan will continue in effect
for so long as you remain a director of Conning Corporation. Such
options will be exercisable for a period of three months after your
status as a director ends to the extent that such options were
exercisable at that date. Your stock options under the 1995 Flexible
Stock Plan will continue in effect for so long as you remain an employee
of Conning. Such options will be exercisable for a period of three
months after the date your employment terminates to the extent that such
options were exercisable at that date.
(c) Upon your retirement, you and your spouse will become
eligible for post-retirement health care benefits under the General
American plan at a cost of 100% of the COBRA rates for the retiree plan
in effect from time to time under the group health plan. The
availability of these benefits is subject to the terms of the plan as in
effect from time to time and the plan can be changed or terminated in
the future by General American although we understand that it is not
General American's current intention to change the plan. You would also
qualify for life insurance conversion rights which are available under
the plan at the Retirement Date.
In addition to clarifying the matters described above, I
wanted to set forth our mutual agreement with respect to the specific
items described below.
(i) Your current salary will continue through the
Retirement Date. Your cash bonus for 1998 will be equal to the bonus
for 1998 paid to Leonard M. Rubenstein, less $25,000.
(ii) Your service as a member of the board of directors of
all of the for-profit outside entities listed on Schedule A attached
----------
hereto has been considered to be at the request of Conning Corporation
and will be considered to be at the request of Conning Corporation for
so long as you remain a director of Conning Corporation. For so long as
you are a Director of Conning Corporation, Conning will continue to
include all entities listed on Schedule A in the list of covered For-
----------
Profit Outside Entities submitted to the insurer who provides Conning's
directors and officers liability insurance coverage for purposes of any
for-profit outside directorship liability coverage provided under the
policy.
(iii) Your private equity carried interest allocation for
1998 in the carried interests held by Conning in the Connecticut Fund
and Fund V will be as set forth in the column on the left below. For
purposes of clarification, your total allocations in Fund III, the
Connecticut Fund and Fund V (after giving effect to the 1998 allocation)
will be as set forth in the column on the right below.
<PAGE>
<PAGE>
Mr. Maurice W. Slayton
December 22, 1998
Page 3
<TABLE>
<CAPTION>
1998 Allocation Total Allocations
--------------- -----------------
<S> <C> <C>
Conning Investment Partners N/A 7.274%
Limited Partnership III
(Holds carried interests in Fund III)
Conning Connecticut Investors 0.95% 4.95%
L.L.C.
(Holds carried interests in Connecticut Fund)
Conning Investment Partners V, 0.95% 3.5%
L.L.C.
(Holds carried interests in Fund V)
</TABLE>
Conning will accelerate the vesting of your private
equity carried interest allocations in Conning Investment Partners
Limited Partnership III and Conning Connecticut Investors, L.L.C. so
that all such allocations will become fully vested at the date that your
service as a director of Conning Corporation ends or, if earlier, the
date that you die or become disabled (the "Withdrawal Date"). All of
your allocations in Conning Investment Partners V, L.L.C. will vest
automatically on the Withdrawal Date under the Limited Liability Company
Agreement for that company.
(iv) Conning will make Donna Morgan available to provide
secretarial assistance for three months after the Retirement Date and in
connection with any duties you perform as a part-time employee.
I believe that this letter describes the points that we covered in
our discussion. If you have any questions or objections to any of these
matters, please let me know. If you agree with the foregoing, please
sign two copies of this letter in the space provided below and return
one signed copy to me.
Sincerely,
Leonard M. Rubenstein
<PAGE>
<PAGE>
Mr. Maurice W. Slayton
December 22, 1998
Page 4
ACCEPTED AND AGREED:
/s/ Maurice W. Slayton
- -----------------------------
Maurice W. Slayton
Date: 12/22/98
------------------------
<PAGE>
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
January 21, 1999, relating to the consolidated balance sheets of Conning
Corporation and subsidiaries as of December 31, 1998 and 1997, 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, 1998, and the related financial statement schedule, which
report appears in the December 31, 1998 annual report on Form 10-K of
Conning Corporation.
/s/ KPMG LLP
St. Louis, Missouri
March 26, 1999
<PAGE>
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, 1998 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 2/15/99
----------------------
<PAGE>
<PAGE>
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, 1998 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 2/20/99
-----------------------
<PAGE>
<PAGE>
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, 1998 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/ Arthur C. Reeds, III Director X
- ---------------------------
Arthur C. Reeds, III
- ---------------------------
Name (Typed or printed)
Date 2/23/99
-----------------------
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 59,631,469
<SECURITIES> 278,222
<RECEIVABLES> 11,305,763
<ALLOWANCES> 140,563
<INVENTORY> 0
<CURRENT-ASSETS> 71,556,346
<PP&E> 3,354,946
<DEPRECIATION> 1,903,293
<TOTAL-ASSETS> 122,478,123
<CURRENT-LIABILITIES> 38,765,638
<BONDS> 0
<COMMON> 135,714
0
0
<OTHER-SE> 80,040,874
<TOTAL-LIABILITY-AND-EQUITY> 122,478,123
<SALES> 79,678,862
<TOTAL-REVENUES> 82,232,335
<CGS> 56,622,187
<TOTAL-COSTS> 59,231,353
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 254,424
<INCOME-PRETAX> 22,746,558
<INCOME-TAX> 9,633,952
<INCOME-CONTINUING> 13,112,606
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,112,606
<EPS-PRIMARY> 1.00
<EPS-DILUTED> .93
</TABLE>
