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UNITED STATES
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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-23183
CONNING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MISSOURI 43-1719355
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
700 MARKET STREET
ST. LOUIS, 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 3, 2000: $57,548,345
NUMBER OF SHARES OUTSTANDING AS OF MARCH 3, 2000: 13,753,359
1
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TABLE OF CONTENTS
Item 1. Business 1
Item 2. Properties 18
Item 3. Legal Proceedings 18
Item 4. Submission of Matters To a Vote of Security Holders 19
Item 5. Market for Registrant's Common Equity and Related 19
Stockholder Matters
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial 23
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About 29
Market Risk
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes In and Disagreements with Accountants on 58
Accounting and Financial Disclosure
Item 10. Directors and Executive Officers of the Registrant 58
Item 11. Executive Compensation 61
Item 12. Security Ownership of Certain Beneficial Owners 65
and Management
Item 13. Certain Relationships and Related Transactions 72
Item 14. Exhibits, Financial Statement Schedules and Reports 76
on Form 8-K
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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 primary business is asset management for insurance
company clients, which is supplemented by its in-depth research focused
on the insurance industry. As of December 31, 1999, the Company had
approximately $33.3 billion of assets under discretionary management
and, in total, provided services with respect to approximately $73.1
billion of assets primarily for insurance company clients. In 1999, the
Company had revenues of approximately $90.9 million and net earnings of
approximately $13.3 million.
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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 "SMA 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
subsequent three years, subject to meeting certain financial targets.
As a result of the SMA Transaction, the excess cost over fair value of
net assets acquired (goodwill) was approximately $21.0 million and is
being amortized over a 20-year period. During 1999 the Company paid
approximately $1.3 million as contingent consideration under the terms
of the contract. The goodwill is 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 "N&A 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 N&A 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 Company made no additional contingent
consideration payments during 1999. The goodwill is deductible for
federal income tax purposes.
On May 14, 1999, the Company completed the acquisition of the
insurance company high-grade fixed income management business from the
TCW Group, Inc. ("TCW"), which represents approximately $2.5 billion in
discretionary assets under management and assets serviced. The purchase
(the "TCW Transaction") consisted of an initial cash payment of
approximately $3.0 million and was treated as an asset purchase.
Additional contingent consideration of up to $2.3 million may be payable
over the next two years, subject to the successful retention of acquired
client relationships and meeting certain revenue targets on the acquired
business. As a result of the TCW Transaction, the excess cost over fair
value of net assets acquired was approximately $3.0 million and is being
amortized over a 20-year period. The goodwill is deductible for federal
income tax purposes.
In 1993, General American and ARM Financial ("ARM") formed a reinsurance
and marketing relationship for the funding agreements business, also known
as stable value products. In June, 1999, ARM put itself up for sale, announcing
that it was de-emphasizing its involvement in the stable value business. This
led General American to recapture ARM's portion of the business, approximately
$3.4 billion in assets and related liabilities. Moody's Investors Services
reviewed these events and lowered General American's financial strength rating
from A2 to A3. A significant number of stable value investors reacted to
Moody's downgrade of General American by requesting redemption of their funds.
Moody's further downgraded General American on August 9, 1999, to Ba1, and on
August 12, 1999, to B1. These developments directly resulted in the reduction
of approximately $3.5 billion in affiliated assets under management for the
Company.
On August 10, 1999, General American became subject to an order of
administrative supervision from the Missouri Department of Insurance.
General American was unable to meet substantial demands for surrenders
associated with the stable value products related to the relationship
between General American and ARM.
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On August 26, 1999, General American announced that its parent,
GenAmerica Corporation had announced a definitive agreement whereby
GenAmerica would be acquired by Metropolitan Life Insurance Company
("MetLife") a New York Life Insurance Company. The acquisition included
the acquisition of General American's ownership in its publicly traded
subsidiaries, including approximately 61% of the outstanding common
shares of the Company.
On January 6, 2000, MetLife completed the acquisition of
GenAmerica, thus acquiring beneficial ownership of approximately 61% of
the outstanding common shares of the Company.
On January 18, 2000, MetLife announced that it would acquire all
of the outstanding shares of the Company not already controlled by
MetLife for $10.50 per share in cash. MetLife also announced that it
planned to assume management of the general account assets of General American
that are currently managed by the Company.
On March 9, 2000, MetLife and the Company entered into a
definitive merger agreement providing for the acquisition by MetLife of
all of the outstanding shares of the Company not already controlled by
MetLife for $12.50 per share in cash. The board of directors of each
company approved the merger agreement. The transaction is expected to
close during the second quarter of 2000.
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, financial services,
e-commerce, healthcare and related business.
As of December 31, 1999, the Company provided services with
respect to approximately $73.1 billion in assets, of which approximately
(i) $33.3 billion represented assets under discretionary management,
(ii) $6.5 billion represented assets serviced under investment advisory
agreements and (iii) $33.3 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 19% from December 31, 1994 to
December 31, 1999, as shown in the following table:
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<TABLE>
<CAPTION>
ASSETS SERVICED BY THE COMPANY <F1>
(IN BILLIONS)
AS OF DECEMBER 31,
=================================================================
1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Asset under discretionary management
Unaffiliated $21.7 $12.4 $11.8 $10.1 $ 8.9 $ 6.6
Affiliated 11.6 17.2 14.2 10.6 8.7 6.9
----- ----- ----- ----- ----- -----
TOTAL 33.3 29.6 26.0 20.7 17.6 13.5
Investment advisory 6.5 29.3 21.3 20.8 15.9 14.7
Investment accounting and reporting 33.3 31.5 32.8 11.7 6.7 2.8
----- ----- ----- ----- ----- -----
TOTAL $73.1 $90.4 $80.1 $53.2 $40.2 $31.0
===== ===== ===== ===== ===== =====
<FN>
- ----------
<F1> Since January 1, 1995, the assets of the general account of
General American have been under contract with GAIMCO (now known
as Conning Asset Management Company). General account assets prior
to January 1, 1995 were managed by the investment division of
General American, a predecessor of GAIMCO, and are included in
assets under management for years prior to 1995. Data for 1995 and
prior periods are presented on a pro forma basis to include both
Conning and GAIMCO assets under management.
</TABLE>
Discretionary Asset Management and Investment Advisory Services.
The Company's assets under discretionary management have increased at a
compound annual rate of approximately 20% from December 31, 1994 to
December 31, 1999, with assets of General American-related (affiliated)
accounts increasing approximately 11% and assets of other clients
(unaffiliated) increasing approximately 27% during the period. During
1999, assets under discretionary management of the Company increased by
approximately 13%. In connection with MetLife's January 6, 2000
acquisition of GenAmerica, MetLife also indicated that it will assume
the asset management contract for General American's general account,
which is currently managed by CAM. As of December 31, 1999, CAM managed
approximately $5.8 billion for the General American general account.
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:
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ASSETS UNDER DISCRETIONARY MANAGEMENT
(IN BILLIONS)
AS OF
ASSET CLASSES DECEMBER 31, 1999
Corporate bonds $11.3
MBS/Asset-backed securities 6.7
Government bonds 3.4
Mortgage loans and real estate 3.2
Short-term obligations 2.2
Municipal bonds 1.7
Private placements 1.5
Indexed equity 1.5
Equity 1.4
Convertible Securities 0.3
Real estate 0.1
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Total $33.3
=====
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 also assists 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 currently serves as the investment adviser to several
registered investment companies and unit investment trusts sponsored by
General American. Investment advisory agreements with registered
investment companies and unit investment trusts may be terminated at any
time by the entity upon specified notice, terminate automatically in the
event of their assignment, and are subject to annual renewal by the
board of the entity.
The Company also provides stand-alone investment advisory services
to clients who are seeking only business analysis and asset allocation
or diversification advice. Such advice typically includes a review of
the portfolio from the standpoint of liability structure, capital
adequacy, return on equity, asset allocation, regulatory and rating
agency implications, and
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income and cash flow requirements. As of December 31, 1999, the Company
had approximately $6.5 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, 1999, the Company
managed approximately $1.5 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, 1999, the
Company's investment accounting and reporting services provided stand-
alone investment accounting for approximately $33.3 billion in assets.
All $73.1 billion in assets serviced by the Company are supported by the
Company's investment accounting and reporting system. The Company's
investment accounting and reporting services include management and
regulatory reporting on 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.
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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.
Private Equity Funds. The Company facilitates the provision of
private equity capital to the insurance, financial services, e-commerce,
healthcare and related businesses. 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 $275 million
of these proceeds in more than 45 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 related businesses. Investors
also receive exposure to new business strategies and entrepreneurial
developments in the insurance and other targeted industries. 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
------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Fund I $ - $ - $ - $ 7.7 $ 18.9 $ 28.4
Fund II - 67.7 67.7 67.7 67.7 67.7
Fund III 56.6 56.6 56.6 56.6 56.6 50.1
Fund IV 40.4 40.4 40.4 39.8 18.7 -
Fund V 225.0 168.8 56.3 - - -
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Total $322.0 $333.5 $221.0 $171.8 $161.9 $146.2
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</TABLE>
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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, 1999, the Company managed approximately $4.3 billion in commercial
mortgage loans and approximately $200 million in investment real estate.
During 1999, 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 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.
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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, 1999, the Company provided mortgage loan servicing for
approximately $4.3 billion of mortgage loans, which includes a
significant portion for General American and its affiliates. Of this
amount, approximately $1.1 billion was serviced on a stand-alone basis.
During 1999, the Company has affirmed its rating 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 has also 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 130 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
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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 from participation in public offerings of insurance and
insurance-related companies.
ACCOUNTING, ADMINISTRATION AND OPERATIONS
The Company's accounting, administration and operations personnel
are responsible for financial controls, internal and external financial
reporting, compliance with regulatory and legal requirements, office and
personnel services, the Company's management information and
telecommunications systems, and the processing of the Company's
securities transactions. General American provides certain of these
functions pursuant to an Administrative Services Agreement. The Company
contracts with outside services for securities pricing information in
connection with its asset management and investment accounting and
reporting services. See "Risk Factors and Cautionary Statements-Risk of
Systems Failure; Dependence on Vendors."
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
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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 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
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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 other interested parties. Under ERISA and the Code, any person who
exercises any
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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
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investment advisory businesses in a given time period could be affected
by, among other things, existing and proposed tax legislation and other
governmental regulations and policies (including the interest rate
policies of the Federal Reserve Board) and changes in the interpretation
or enforcement of existing laws and rules that affect the business and
financial communities. The level of business and financing activity in
the insurance industry can be affected not only by such legislation or
regulations of general applicability, but also by industry-specific
legislation or regulations.
Under the Advisers Act, every investment advisory agreement must
expressly provide that the agreement may not be assigned by the
investment adviser without the consent of the client. Under the
Investment Company Act, every investment adviser's agreement with a
registered investment company must provide for the agreement's automatic
termination on the event of its assignment. Under both Acts, an
investment advisory agreement is deemed to have been assigned when there
is a direct or indirect transfer of the agreement, including a direct
assignment or a transfer of a "controlling block" of the firm's voting
securities or, under certain circumstances, upon the transfer of a
"controlling block" of the voting securities of its parent corporation.
A transaction is not, however, an assignment under the Advisers Act or
the Investment Company Act if it does not result in a change of actual
control or management of the investment adviser. Any assignment of the
Company's investment advisory agreements would 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.
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
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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, 1999, 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 $11.1 million, or
approximately $10.1 million in excess of the amount required.
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, 1999, General American and its
affiliates accounted for approximately $11.6 billion of the
approximately $33.3 billion in assets which the Company had under
discretionary management. In connection with MetLife's January 6, 2000,
acquisition of GenAmerica, on January 18, 2000, MetLife announced that it
planned to assume management of the assets in General American's general
account, which is currently managed by CAM. As of December 31, 1999, CAM
managed approximately $5.8 billion for the General American general account.
The advisory agreements between General American and its affiliates and the
Company are subject to termination upon 30 to 90 days notice without
penalty. In addition to the expected loss of the advisory contract for
the General American general account assets, there can be no assurance
that General American and its affiliates will maintain or not seek to
renegotiate their other existing investment advisory relationships with
the Company in the future, and the renegotiations
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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. General American also is a co-licensee with the Company to
the Company's investment accounting and reporting software.
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
software, replacement office space or services on similar or otherwise
favorable terms.
Potential Conflicts of Interest. MetLife beneficially owns
approximately 61% of the Company's Common Stock. The Company's Board of
Directors consists of three directors, two of whom were officers of the
Company or General American, and one of whom is not otherwise affiliated
with the Company or General American (the "Independent Director").
Effective March 9, 2000, Arthur C. Reeds, III resigned as Chairman,
President and Chief Executive Officer of the Company. On the same day,
the Company appointed James L. Lipscomb as President and Chief Executive
Officer. Mr. Lipscomb was formerly the Senior Vice President in charge
of the Corporate Planning Department of MetLife. MetLife 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, MetLife 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 and MetLife, 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 and MetLife.
The Company is a party to investment advisory, administrative
services, and other agreements with General American and certain of its
affiliates. Although the Company believed that the terms of such
agreements are at least as favorable to the Company as those it could
negotiate with unrelated parties, these agreements may be modified or
renegotiated in the future and additional agreements or transactions may
be entered into between the Company, on the one hand, and General
American or its affiliates, on the other hand. Conflicts of interest
could arise between General American and its affiliates with respect to
any of the foregoing, or any future agreements or arrangements between
them.
Executive officers, directors and employees of the Company from
time to time receive a profit interest in, and in the future may invest
in, investment funds in which the Company, or an affiliate of the
Company, is a sponsor or an investor or for which the Company performs
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.
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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 prospects, as well as its
ability to attract and retain highly skilled individuals as employees.
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, which arrangements are generally
terminable upon 30 to 90 days notice without penalty. The termination of
any of these arrangements 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
properties.
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, 1999, the Company employed approximately 350
employees. None of the Company's employees are subject to a collective
bargaining agreement. The Company believes that its relations with its
employees are stable.
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ITEM 2. PROPERTIES
The Company's headquarters and certain of its executive offices
are located in an approximately 25,000 square foot office space located
at 700 Market Street, St. Louis, Missouri 63101 pursuant to a lease from
General American. The Company also maintains executive offices in a
49,500 square foot office space located at 185 Asylum Street, Hartford,
Connecticut pursuant to a lease expiring in 2005 with annual base rental
expense of approximately $1.0 million until 1999 and a base rental
expense of approximately $1.2 million from 1999 until 2004, subject to
increases for taxes, insurance and operating expenses. The Company
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. 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 January 31, 2000, Conning was served with a complaint
purporting to be a shareholder class action that was filed in the
Supreme Court of the State of New York, naming the Company and MetLife
as co-defendants. The complaint was filed January 19, 2000, and the
named plaintiff is Ralph Shive. The complaint alleges that MetLife's
proposal to acquire all of the outstanding shares of common stock of
Conning not already controlled by MetLife (the "Proposed Transaction")
fails to offer a fair price to Conning's shareholders and lacks adequate
procedural protections. Additionally, the complaint alleges that the
defendants have engaged in acts of self-dealing and breaches of
fiduciary duty in connection with the Proposed Transaction. The suit
seeks to have the action declared as a proper class action, injunctive
relief against the consummation of the Proposed Transaction and, if the
Proposed Transaction is consummated, rescission of the transaction,
rescissionary and other monetary damages, and reimbursement of fees and
costs.
On January 31, 2000, the same law firm that filed the Shive
complaint filed a second suit in the same jurisdiction and with
substantially the same allegations and seeking substantially the same
relief sought in the Shive action. The second complaint names Carl
Hamann as the plaintiff.
On February 10, 2000, the Company was served with a complaint
purporting to be a shareholder class action that was filed in the
Circuit Court of the City of St. Louis, Missouri, naming the Company,
several of its current and former directors, and MetLife as defendants.
The complaint was filed February 2, 2000, and the named plaintiff is
Jeffrey R. Moritz. The complaint alleges that the consideration
proposed to be paid by MetLife pursuant to the Proposed
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Transaction is unfair and inadequate. Additionally, the complaint
alleges the defendants, individually and as part of a common plan, have
breached their fiduciary duties in connection with the Proposed
Transaction. The suit seeks to have the action declared as a proper
class action, assurances that no conflicts of interest exist among the
defendants, injunctive relief against the consummation of the Proposed
Transaction, and reimbursement of fees and costs.
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 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
On December 16, 1997, the Company's Common Stock commenced trading
and is listed on The Nasdaq Stock Market(SM) under the symbol "CNNG."
There was no established public trading market for the Common Stock
prior to December 16, 1997.
For the period from January 1 through December 31, 1999, the high
and low closing sales price of the Common Stock was $20.25 and $7.00,
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 100 holders of
record for the Common Stock at March 10, 2000. The Company believes that
there are in excess of 1,450 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. The Company declared and paid four quarterly
dividends during 1999 totaling $0.20 per share. On January 20, 2000,
the Board of Directors declared a quarterly dividend of $0.05 per share
on the Common Stock to record holders as of February 18, 2000, paid
March 11, 2000. 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
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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 $34.6 million. The proceeds were identified by the Company
as temporary investments. During 1999 and 1998, the Company used
approximately $4.3 million and $24.0 million, respectively, of the
temporary investments for business acquisitions or contingent payments
on previously concluded business acquisitions, and the remaining initial
proceeds and related investment income of approximately $6.3 million remain
as temporary investments. See notes 3 and 5 of the consolidated financial
statements in Item 8.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
(AMOUNTS IN 000'S, EXCEPT PER SHARE DATA)
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997 1996 1995 1995
------- ------- ------- ------- ------- -------
(PRO FORMA)
<S> <C> <C> <C> <C> <C> <C>
CONNING CORPORATION
INCOME STATEMENT DATA<F1>:
REVENUE:
Asset management and related fees $74,519 $62,755 $49,503 $40,456 $30,675 $24,050
Research services 14,788 16,924 15,479 12,148 9,480 4,090
Other income 1,588 2,553 1,634 1,062 996 663
------- ------- ------- ------- ------- -------
Total revenues 90,895 82,232 66,616 53,666 41,151 28,803
------- ------- ------- ------- ------- -------
EXPENSES:
Employee compensation and benefits 43,619 38,206 33,632 26,002 18,336 12,027
Amortization of goodwill and other 2,677 2,609 2,969 3,081 2,911 1,289
All other expenses 22,130 18,416 14,572 12,791 12,515 9,195
------- ------- ------- ------- ------- -------
Total expenses 68,426 59,231 51,173 41,874 33,762 22,511
------- ------- ------- ------- ------- -------
Operating income 22,469 23,001 15,443 11,792 7,389 6,292
Interest expenses 228 254 301 729 1,364 521
------- ------- ------- ------- ------- -------
Income before provision for income taxes 22,241 22,747 15,142 11,063 6,025 5,771
Provision for income taxes 8,922 9,634 6,226 4,851 2,739 2,359
------- ------- ------- ------- ------- -------
Net income 13,319 13,113 8,916 6,212 3,286 3,412
Preferred stock dividends - - 963 906 906 351
------- ------- ------- ------- ------- -------
Net earnings available to common shareholders $13,319 $13,113 $ 7,953 $ 5,306 $ 2,380 $ 3,061
======= ======= ======= ======= ======= =======
Earnings per share:
Basic $ 0.99 $ 1.00 $ 1.13 $ 0.79
Diluted $ 0.95 $ 0.93 $ 0.80 $ 0.57
<CAPTION>
AS OF DECEMBER 31,
1999 1998 1997 1996 1995
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $166,181 $122,478 $99,857 $50,020 $46,177
Long-term debt - - - 2,000 9,000
Total liabilities 70,518 42,301 26,152 20,870 24,552
Convertible preferred stock - - - 24,782 17,002
Total common shareholders' equity 95,663 80,177 73,705 4,368 4,623
Number of shares outstanding 14,063 13,571 13,250 6,710 6,710
Number of shares in treasury 318 318 - - -
<CAPTION>
1999 1998 1997 1996 1995
----- ----- ----- ----- -----
TOTAL ASSETS SERVICED
(END OF PERIOD, IN BILLIONS)
<S> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Assets under discretionary management:
Unaffiliated $21.7 $12.4 $11.8 $10.1 $ 8.9
Affiliated 11.6 17.2 14.2 10.6 8.7
----- ----- ----- ----- -----
Total 33.3 29.6 26.0 20.7 17.6
Investment advisory 6.5 29.3 21.3 20.8 15.9
Investment accounting and reporting 33.3 31.5 32.8 11.7 6.7
----- ----- ----- ----- -----
Total assets serviced $73.1 $90.4 $80.1 $53.2 $40.2
===== ===== ===== ===== =====
</TABLE>
21
<PAGE>
<PAGE>
<TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
(AMOUNTS IN 000'S, EXCEPT PER SHARE DATA)
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
1995
<S> <C>
CONNING INC. AND SUBSIDIARIES<F2>
INCOME STATEMENT DATA:
REVENUE:
Asset management and related fees $ 5,662
Research services 4,564
Other income 275
-------
Total revenues 10,501
EXPENSES:
Employee compensation and benefits 5,322
Amortization of goodwill and other -
All other expenses 3,087
-------
Total expenses 8,409
Operating income 2,092
Interest expense -
-------
Income before provision for income taxes 2,092
Provision for income taxes 809
-------
Net income 1,283
Preferred stock dividends 160
-------
Net earnings available to common shareholders $ 1,123
=======
<CAPTION>
AS OF JUNE 30,
--------------
1995
<S> <C>
BALANCE SHEET DATA:
Total assets $16,003
Long-term debt -
Total liabilities 6,927
Cumulative preferred stock 3,650
Total common shareholders' equity 5,426
Number of shares outstanding (end of period) 108
<FN>
- ----------
<F1> 1995 year reflects results of the consolidated activity from
August 1,1995 to December 31, 1995 and the results of General
American Investment Management Company 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, 1998 and 1999) reflect actual consolidated results. See
Note 1 to the Company's Consolidated Financial Statements.
<F2> The above information represents certain financial data of
Conning, Inc. and its subsidiaries for the six-month period ended
June 30, 1995 representing the period prior to the Strategic
Merger.
</TABLE>
22
<PAGE>
<PAGE>
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.
On August 22, 1999, the Metropolitan Life Insurance Company
("MetLife") announced they had reached a definitive agreement to acquire
GenAmerica for approximately $1.2 billion in cash. On January 6, 2000,
MetLife completed the transaction thus acquiring beneficial ownership of
approximately 61% of the outstanding common stock of the Company. On
January 18, 2000, MetLife proposed to acquire all of the outstanding
shares of the Company not already controlled by MetLife for $10.50 per
share cash. MetLife also indicated that it would assume the management
of the general account assets of General American, currently managed by
the Company. On March 9, 2000, MetLife and the Company entered into a
definitive merger agreement providing for the acquisition by MetLife of
all of the outstanding shares of the Company not already controlled by
MetLife for $12.50 per share in cash. The board of directors of each
company has approved the merger agreement.
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.
23
<PAGE>
<PAGE>
The Company's private equity fund management fees represent annual
management fees based on a percentage of committed capital and a
participation in specified net gains of the funds. The Company's
commercial mortgage fees primarily reflect fees associated with loan
originations, which usually approximate 1% of the loan balance, as well
as fees associated with ongoing servicing and management fees with
respect to loans in portfolios managed by the Company. In addition to
loans for General American and its affiliates, the Company has
originated mortgage loans for certain unaffiliated portfolios and for a
securitized offering with an investment banking firm.
Payment for the Company's research services is primarily in the
form of commissions derived from securities transactions effected by the
Company and, to a lesser extent, subscription fees for research
publications. A negotiated commission is received on each listed equity
transaction, and total commission revenues depend on the value that
clients place on the research 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
an additional $24.3 million of goodwill (See Note 2 of the Company's
Notes to Financial Statements). Goodwill is being amortized on a
straight-line basis over a 20-year period.
On May 14, 1999, the Company completed the acquisition of TCW
Group, Inc.'s ("TCW") insurance company high-grade fixed income
management business. Subject to certain adjustments, the purchase price
for the acquired business was approximately $3.0 million and was treated
as an asset purchase. Additional contingent consideration of up to $2.3
million may be payable over the next two years, subject to successful
retention of acquired client relationships and meetings certain revenue
targets on the acquired business. As a result of the acquisition, the
excess cost over fair value of net assets acquired was approximately
$3.0 million and is being amortized on a straight-lined basis over a 20-
year period. The goodwill is deductible for federal income tax
purposes.
During 1999, the Company paid approximately $1.3 million
contingent consideration under the terms of SMA Transaction. No
contingent consideration was paid under the terms of the N&A Purchase
Agreement.
RESULTS OF OPERATIONS
Statement of Income for 1999 compared to 1998
Asset Management and Related Fees. Asset management and related
fees increased 19% to $74.5 million in 1999 from $62.8 million in 1998.
The majority of this $11.8 million increase was from new revenue sources
attributed to the Company's acquisition strategy. During 1999, the
Noddings acquisition generated $3.0 million in asset management and
related fees
24
<PAGE>
<PAGE>
accounting for 26% of the overall 1999 increase while the TCW
acquisition generated fees of $1.7 million accounting for 14% of the
overall 1999 increase. Taken together, these two acquisitions increased
fees during 1999 by $4.7 million accounting for 40% of the 1999
increase. The Company's existing insurance asset management revenue
grew by $3.6 million or 12% accounting for 31% of the overall increase
in asset management and related fees. Assets under discretionary
management increased by $3.7 billion at December 31, 1999 compared to
December 31, 1998, due to the growth in unaffiliated assets. Assets for
which the Company provides investment advisory services decreased 78% or
$22.8 billion as of December 31, 1999 compared to the same period for
1998. This decrease is due to one client moving to full discretionary
management services and the loss of two other clients. Assets for which
the Company provides investment accounting and reporting services grew
by 6% or $1.8 billion during the same period. Investment advisory and
investment accounting and reporting fees did not contribute
significantly to the overall increase in asset management and related
fee from 1998 due to the lower fee structure for these services.
Private equity fund management fees remained relatively flat for the
period increasing 3% or $219,000 compared to 1998 accounting for less
than 2% of the overall change. Mortgage originations remained
relatively the same at approximately $1.0 billion generating an
additional $834,000 in revenue for 1999 compared to 1998. This
accounted for approximately 7% of the overall increase in asset
management and related fees.
Research Services. Revenues from research services decreased 13%
to $14.8 million in 1999 from $16.9 million in 1998 primarily due to
decreased underwriting fees reflective of the decreased activity in the
equity markets particularly in the insurance and financial services
sector. Underwriting fees decreased $1.5 million or 69% in 1999
compared to 1998. These fees remain a highly volatile revenue source
that are dependent on a variety of factors including market conditions
and transactional 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, decreased by
5% or $670,000 for the year due to market volatility, particularly in
the financial sector, and non-recurring revenue impacts resulting from
GenAmerica announcements in the third quarter of 1999.
Other Income. Other income decreased 38% to $1.6 million in 1999
from $2.55 million in 1998 primarily as a result lower investment income
as the Company utilized the proceeds from the initial public offering to
complete acquisitions. This resulted in lower average investment
balances during 1999 compared to 1998.
Expenses. Total expenses increased 15.5% to $68.4 million for the
year ended December 31, 1999 from $59.2 million for the year ended
December 31, 1998 due primarily to increased employee costs. Employee
costs increased approximately $5.4 million from $38.2 million in 1998 to
$43.6 million for 1999 due to additional staffing associated with the
Company's acquisition activity, increased support staff and additional
operational staff to keep pace with client service demands. Occupancy
and equipment costs increased approximately $1.8 million due to the
upgrading and enhancement of technology and additional space cost
associated with the Company's acquisition activity. Professional
services increased $1.5 million from $2.4 million in 1998 to $3.9
million in 1999 due substantially to non-recurring costs associated with
MetLife's acquisition of GenAmerica. Other operating expenses increased
approximately 14%
25
<PAGE>
<PAGE>
from $4.1 million in 1998 to $4.7 million in 1999 due to costs
associated with the Company's acquisition activity.
Interest Expense. Interest expense remained relatively constant
during 1999 at approximately $200,000 resulting from a present value
lease liability established at the date of the Strategic Merger.
Income Taxes. Provision for income taxes decreased approximately
7% during 1999 from $9.6 million for 1998 to $8.9 million for 1999 due
in part to a decrease in taxable income and due to decrease in the
effective tax rate. The Company's effective tax rate decrease from
approximately 43% to approximately 40% due to changes in various state
tax rates.
Net Income. As a result of all of the above, net income increased
approximately 2% to $13.3 million for 1999 from $13.1 million during
1998 and diluted earnings per share increased approximately 3% from
$0.93 for 1998 to $0.95 for 1999.
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 million 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. Core research revenues, exclusive of underwriting
revenues, increased 32% from $11.2 million in 1997 to $14.8 million in
1998.
26
<PAGE>
<PAGE>
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 expenses 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% to $0.93 for 1998 from $0.80 for 1997.
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, 1999, Conning
& Company had net capital (as defined by the Exchange Act) of
approximately $11.1 million, which was approximately $10.1 million in
excess of the regulatory
27
<PAGE>
<PAGE>
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, 2000. Any amounts drawn
under such facility would bear interest based on a fixed rate at the
then prevailing rate plus a specified amount per annum.
As of December 31, 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.
The remaining debt was paid in full in February 1997.
The Company or a subsidiary is a general partner for various
private equity funds and in a real estate joint venture. Capital
contributions to these partnerships are made as needed for investments
by the partnerships. At December 31, 1999, the Company's future
commitment to fund such required capital contributions was approximately
$4,559,000. 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 $4.3 million and $24.0 million
were used in 1999 and 1998, respectively, 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.
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", within the meaning of the
Private Securities Litigation Reform Act of 1995. These "forward-looking
statements" include, 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 the assets or activities of General American or
MetLife. Because such statements are subject to risks and uncertainties,
actual results may differ materially from those expressed or
28
<PAGE>
<PAGE>
implied by such forward-looking statements or from historical results.
Factors that could cause actual results to differ materially (the
"Cautionary Statements") include, but are not limited to, those
discussed under the caption "Risk Factors and Cautionary Statements." In
addition to the "Risk Factors and Cautionary' Statements", the Company's
business entails a variety of additional risks, which are set forth in
documents the Company has filed or will file from time to time with the
SEC. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Statements.
Investors are cautioned not to place undue reliance on such statements,
which speak only as of the date hereof. The Company undertakes no
obligation to release publicly any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
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 Sheet as of December 31, 1999 and 1998 30
Consolidated Statements of Income for the Years Ended December 31, 1999,
1998 and 1997 31
Consolidated Statements of Common Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997 32
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999,
1998 and 1997 33
Notes to Consolidated Financial Statements 34
Independent Auditors' Report 57
</TABLE>
29
<PAGE>
<PAGE>
<TABLE>
CONNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
<S> <C> <C>
ASSETS
Current asset:
Cash and cash equivalents $ 71,835,862 $ 31,343,314
Short-term investments 15,643,760 28,288,155
Accounts receivable, net (Notes 4 and 10) 13,949,653 11,165,200
Marketable equity securities 212,134 278,222
Prepaid expenses and other current assets 373,637 481,455
------------ ------------
Total current assets 102,015,046 71,556,346
Non-marketable investments at value 6,083,647 2,737,147
Equipment and leasehold improvements, at cost, less accumulated
depreciation of $2,417,176 and $1,903,293 3,378,028 1,451,653
Deferred income taxes 4,348,829 3,199,812
Goodwill 42,688,443 40,706,020
Other assets 7,666,962 2,827,145
------------ ------------
Total assets $166,180,955 $122,478,123
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Compensation payable $ 11,869,772 $ 12,794,850
Deferred revenue 2,990,594 3,792,762
Due to affiliates 6,395,874 2,338,918
Income taxes payable 1,665,109 284,441
Mortgage escrow liabilities for customer accounts 32,512,073 8,976,934
Accounts payable and other accrued expenses 12,031,822 10,577,733
------------ ------------
Total current liabilities 67,465,244 38,765,638
Accrued rent liability 2,892,500 3,215,897
Other payables 160,000 320,000
------------ ------------
Total liabilities 70,517,744 42,301,535
Common stock, $0.01 par value, 50,000,000 shares authorized; 14,062,548
and 13,571,403 shares issued and outstanding in 1999 and 1998,
respectively (Note 11) 140,625 135,714
Additional paid-in capital 79,844,834 74,975,681
Retained earnings 22,075,240 11,462,681
Treasury stock, 318,188 shares, at cost (6,397,488) (6,397,488)
------------ ------------
Total common shareholders' equity 95,663,211 80,176,588
------------ ------------
Total liabilities and shareholders' equity $166,180,955 $122,478,123
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
30
<PAGE>
<PAGE>
<TABLE>
CONNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
REVENUES:
Asset management and related fees (Note 10) $74,519,208 $62,754,631 $49,502,655
Research services 14,787,700 16,924,231 15,478,709
Other income 1,587,857 2,553,473 1,634,143
----------- ----------- -----------
Total revenues 90,894,765 82,232,335 66,615,507
----------- ----------- -----------
EXPENSES:
Employee compensation and benefits 43,619,229 38,206,080 33,632,314
Occupancy and equipment costs 6,470,897 4,680,032 3,552,179
Marketing and production costs 7,059,337 7,252,654 5,674,545
Professional services 3,887,414 2,360,196 1,992,032
Amortization of goodwill and other 2,676,731 2,609,166 2,968,964
Other operating expenses 4,712,659 4,123,225 3,352,641
----------- ----------- -----------
Total expenses 68,426,267 59,231,353 51,172,675
----------- ----------- -----------
Operating income 22,468,498 23,000,982 15,442,832
Interest expense 227,944 254,424 300,261
----------- ----------- -----------
Income before provision for income taxes 22,240,554 22,746,558 15,142,571
Provision for income taxes 8,921,828 9,633,952 6,226,242
----------- ----------- -----------
Net income $13,318,726 $13,112,606 $ 8,916,329
Preferred stock dividends - - 963,127
----------- ----------- -----------
Net earnings available to common shareholders $13,318,726 $13,112,606 $ 7,953,202
=========== =========== ===========
Net income:
Basic earnings per common share $ 0.99 $ 1.00 $ 1.13
Diluted earnings per common share $ 0.95 $ 0.93 $ 0.80
See accompanying notes to consolidated financial statements.
</TABLE>
31
<PAGE>
<PAGE>
<TABLE>
CONNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<CAPTION>
NON- TOTAL
COMMON VOTING ADDITIONAL COMMON
STOCK COMMON COMMON PAID-IN RETAINED TREASURY SHAREHOLDERS'
SHARES STOCK STOCK CAPITAL EARNINGS STOCK EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 6,710,000 $ - $ 67,100 $ 2,944,647 $ 1,355,884 $ - $ 4,367,631
Conversion of 110,000 shares
of Series B preferred stock - 1,100 - 768,900 - - 770,000
Tax benefit - employee
compensation (Note 9) - - - 1,134,785 - - 1,134,785
Accretion on Series A
preferred stock - - - (4,848,332) (8,861,966) - (13,710,298)
Issuance of common shares
through initial public
offering 2,875,000 - 28,750 34,566,250 - - 34,595,000
Conversion of 3,555,000
shares of preferred and
110,000 non-voting
common stock to common
stock 3,665,000 (1,100) 36,650 38,559,752 - - 38,595,302
Net income - - - - 8,916,329 - 8,916,329
Dividends on preferred stock - - - - (963,127) - (963,127)
---------- -------- -------- ----------- ----------- ----------- ------------
Balance, December 31, 1997 13,250,000 - 132,500 73,126,002 447,120 - 73,705,622
Exercise of stock options 186,750 - 1,867 1,076,464 - - 1,078,331
Issuance of incentive shares 134,653 - 1,347 - - - 1,347
Tax benefit - employee
compensation (Note 9) - - - 773,215 - - 773,215
Purchase of 318,188 shares
for treasury - - - - - (6,397,488) (6,397,488)
Net income - - - - 13,112,606 - 13,112,606
Dividends on common stock -
$0.16 per share - - - - (2,097,045) - (2,097,045)
---------- -------- -------- ----------- ----------- ----------- ------------
Balance, December 31, 1998 13,571,403 - 135,714 74,975,681 11,462,681 (6,397,488) 80,176,588
Exercise of stock options 499,465 - 4,996 3,775,952 - - 3,780,948
Forfeiture of stock options (8,320) - (85) - - - (85)
Tax benefit - employee
compensation (Note 9) - - - 1,093,201 - - 1,093,201
Net Income - - - - 13,318,726 - 13,318,726
Dividends on common stock -
$0.20 per share - - - - (2,706,167) - (2,706,167)
---------- -------- -------- ----------- ----------- ----------- ------------
Balance, December 31, 1999 14,062,548 $ - $140,625 $79,844,834 $22,075,240 $(6,397,488) $ 95,663,211
========== ======== ======== =========== =========== =========== ============
See accompanying notes to consolidated financial statements.
</TABLE>
32
<PAGE>
<PAGE>
<TABLE>
CONNING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 13,318,726 $ 13,112,606 $ 8,916,329
Adjustments for items not affecting cash:
Depreciation 513,883 757,578 564,508
Amortization of goodwill and other 2,676,731 2,609,166 2,915,963
Net unrealized appreciation on non-marketable securities (1,928,865) (134,294) -
Net sales of securities held for market making 66,088 322,440 (555,037)
Accretion of discounts on short-term investments (730,741) (1,105,587) (192,723)
Changes in:
Accounts receivable (2,680,475) 795,807 (5,486,576)
Allowance for doubtful accounts (103,978) (29,437) -
Prepaid expenses and other assets (5,071,999) (235,417) (2,196,050)
Accounts payable and other accrued expenses 24,829,228 11,284,417 3,485,349
Income taxes payable 2,473,869 2,413,629 (1,344,526)
Due to affiliates 4,056,956 970,360 (94,623)
Deferred income taxes (1,149,017) (1,463,399) 971,231
Deferred revenue (802,168) 591,426 1,668,046
Accrued rent liability (323,397) (283,551) (268,531)
Compensation payable (925,078) 1,645,850 2,726,801
------------ ------------ ------------
Net cash provided by operating activities 34,219,763 31,251,594 11,110,161
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of non-marketable securities (2,053,720) (1,192,245) (592,747)
Proceeds from non-marketable investments 636,085 939,070 -
Purchases of equipment and other assets, net (2,440,258) (572,123) (1,274,832)
Purchases of short-term investments (75,502,163) (94,349,567) (96,336,976)
Maturities of short-term investments 88,877,299 83,504,361 88,093,974
Acquisition of Schroder Mortgage Associates (1,333,333) (21,000,000) -
Acquisition of Noddings, net of cash acquired - (2,908,327) -
Acquisition of TCW (2,985,821) - -
------------ ------------ ------------
Net cash used in investing activities 5,198,089 (35,578,831) (10,110,581)
------------ ------------ ------------
FINANCING ACTIVITIES:
Issuance of common shares through initial public offering - - 34,595,000
Repayments on long-term debt - - (2,000,000)
Issuance of Series B preferred stock - - 79,950
Conversion of Series B preferred stock - - 793,250
Issuance of common stock 3,780,863 1,079,678 -
Purchase of common stock for treasury - (6,397,488) -
Dividends on preferred stock - - (1,198,942)
Dividends on common stock (2,706,167) (2,097,045) -
------------ ------------ ------------
Net cash provided by (used in) financing activities 1,074,696 (7,414,855) 32,269,258
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 40,492,548 (11,742,092) 33,268,838
Cash and cash equivalents, beginning of year 31,343,314 43,085,406 9,816,568
------------ ------------ ------------
Cash and cash equivalents, end of year $ 71,835,862 $ 31,343,314 $ 43,085,406
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ - $ - $ 27,222
Income tax $ 7,596,976 $ 8,703,302 $ 6,763,457
Supplemental disclosure of non-cash information:
Accretion on Series A and B preferred stock $ - $ - $ 13,710,298
Conversion of Series A and B preferred stock to common stock $ - $ - $ 38,595,302
See accompanying notes to consolidated financial statements.
</TABLE>
33
<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 options issued
resulting from acquisitions and normal compensation arrangements during
1999 and 1998, and purchase of treasury shares in 1998 (see Note 9),
General American owns approximately 61% of the outstanding common stock.
On August 26, 1999, Metropolitan Life Insurance Company
("MetLife") announced it had reached a definitive agreement to acquire
GenAmerica for approximately $1.2 billion in cash. On January 6, 2000,
MetLife completed the transaction thus acquiring beneficial ownership of
approximately 61% of the outstanding common stock of the Company. On
January 18, 2000, MetLife proposed to acquire all of the outstanding
shares of the Company not already controlled by MetLife for $10.50 per
share in cash. MetLife also indicated that it would assume management
of the general account assets of General American. On March 9, 2000,
MetLife and the Company entered into a definitive merger agreement
providing for the acquisition by MetLife of all of the outstanding
shares of the Company not already controlled by MetLife for $12.50 per
share in cash. The board of directors of each company has approved the
merger agreement.
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.
34
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 fair 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 $333,288 and $2,833,439 at December 31, 1999 and 1998,
respectively, which were readily convertible to cash and earn interest
at the short-term money market rates. For purposes of the financial
statements, such funds are considered cash equivalents.
Short-Term Investments - Short-term investments are comprised of
U.S. government securities and investment grade commercial paper having
a maturity of one year or less and are carried at amortized cost, which
approximates fair value.
Investments - 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.
35
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1998 and 1999 acquisitions of Schroder,
the Noddings Group and the TCW insurance operations is being amortized
on a straight-line basis over a period of 20 years (See Note 3).
Accumulated amortization was $6,191,734 and $3,855,003 as of December
31, 1999 and 1998, respectively. Goodwill is periodically reviewed to
determine recoverability based on the undiscounted operating cash flows
of the underlying business. At December 31, 1999 and 1998, 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, 1999, $368,333 remains to be amortized over the
remaining year of the License Agreement. Total amortization of $340,000
is included in the consolidated statements of income for the years ended
December 31, 1999, 1998 and 1997, respectively. Other assets included
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 and $1,562,915 is included in the consolidated
statements of income for the years ended December 31, 1998 and 1997,
respectively. The unamortized amount of $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
36
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a deferred savings plan for certain employees. At December 31, 1999 and
1998, the cash value amounted to approximately $7,200,000 and
$2,100,000, 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 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 such accretion was $13,710,298. The preferred stock was
converted into 3,555,000 shares of common stock in 1997.
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, 1999, 1998 and
1997 were
37
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13,512,431, 13,146,558 and 7,055,889, respectively, for basic earnings
per common share and 13,968,161, 14,036,973 and 11,100,732,
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 1999 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 $2.6 million over the next two years, subject
to meeting certain financial targets. During 1999, contingent
consideration of approximately $1.3 million was paid pertaining to the
Transaction and is reflected as an increase to goodwill. 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 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 deductible for federal income tax
purposes.
On May 14, 1999, the Company completed the acquisition of TCW
Group, Inc's ("TCW") insurance company high-grade fixed income
management business in a transaction accounted for as a purchase (the
"TCW Transaction"). Subject to certain adjustments, the purchase price
for the acquired business was approximately $3.0 million with up to an
additional $2.3 million payable over the next two years, subject to
successful retention of acquired client relationships and meeting
certain revenue targets on the acquired business. As a result of the
TCW Transaction, the excess cost over fair value of net assets acquired
was approximately $3.0
38
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
million and is being amortized over a 20-year period. The goodwill is
deductible for federal income tax purposes.
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, 1999 and 1998,
an allowance for doubtful accounts of $36,585 and $140,563,
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 - INVESTMENTS
At December 31, 1999 and 1998, the estimated fair value of
marketable and non-marketable investments were as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Marketable equity securities - trading
(cost $588,331 and $549,025) $ 212,134 $ 278,222
========== ==========
Non-marketable equity securities
(cost $16,200) $ 13,540 $ 20,410
Non-marketable partnership investments
(cost $4,318,909 and $2,526,716) 6,070,107 2,716,737
---------- ----------
Total non-marketable investments $6,083,647 $2,737,147
========== ==========
</TABLE>
The Company invests in various non-marketable partnerships and is
a 1% general partner in several 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.
39
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS
At December 31, 1999 and 1998, equipment and leasehold
improvements comprised the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Office equipment $1,412,454 $1,492,058
Computer equipment 3,539,127 1,174,371
Leasehold improvements 843,623 688,517
---------- ----------
5,795,204 3,354,946
Less accumulated depreciation 2,417,176 1,903,293
---------- ----------
Total equipment and leasehold improvements $3,378,028 $1,451,653
========== ==========
</TABLE>
Depreciation expense of $513,883, $757,578 and $564,508 on the
above is included in the consolidated statements of income for the years
ended December 31, 1999, 1998 and 1997, respectively.
The Company occupies premises and rents certain office equipment
under leases that are accounted for as operating leases and that have
expiration dates through 2005. Total rental expense during 1999, 1998
and 1997 was $2,365,761, $1,603,500 and $1,219,069, respectively. At
December 31, 1999, 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 $7,614,000 as follows: $1,751,000
in 2000; $1,489,000 in 2001; $1,313,000 in 2002; $1,274,000 in 2003;
$1,147,000 in 2004 and $640,000 thereafter.
NOTE 7 - INCOME TAXES
The provision for federal and state income tax for the years ended
December 31, 1999, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current income tax provision $10,070,845 $11,116,931 $6,389,796
Deferred income tax benefit (1,149,017) (1,482,979) (163,554)
----------- ----------- ----------
Total income tax provision $ 8,921,828 $ 9,633,952 $6,226,242
=========== =========== ==========
</TABLE>
The difference between the expected federal income tax provision
at the statutory rate of 35% for 1999, 1998 and 1997 and the Company's
actual federal income tax rate are as follows:
40
<PAGE>
<PAGE>
<TABLE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Income before income taxes $22,240,554 $22,746,558 $15,142,571
----------- ----------- -----------
Federal income taxes at statutory rate $ 7,784,194 $ 7,961,295 $ 5,299,899
Increases in income taxes resulting from:
State income taxes, net of federal 1,070,590 1,164,480 514,625
Amortization of goodwill 354,568 354,568 354,568
Other, net (287,524) 153,609 57,150
----------- ----------- -----------
Total income tax provision $ 8,921,828 $ 9,633,952 $ 6,226,242
----------- ----------- -----------
Total income taxes were allocated as follows:
Income tax from continuing operations: $ 8,921,828 $ 9,633,952 $ 6,226,242
Income tax from Stockholders' Equity:
Tax benefit from exercise of stock options (1,093,201) (773,215) (1,134,785)
----------- ----------- -----------
Total income tax $ 7,828,627 $ 8,860,737 $ 5,091,457
=========== =========== ===========
</TABLE>
The Company's net deferred income tax assets represent the estimated
future tax effects attributable to future taxable or deductible temporary
difference between amounts recognized in the financial statements and
income tax returns. At December 31, 1999 and 1998, the net deferred income
tax assets is as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets:
Accrued rent liability $1,090,623 $1,272,076
Employee costs 2,859,993 861,096
Partnership investments 12,592 1,013,925
Other, net 385,621 501,000
---------- ----------
Gross deferred income tax assets 4,348,829 3,648,097
---------- ----------
Deferred tax liabilities:
Depreciation - (448,285)
---------- ----------
Gross deferred income tax liabilities - (448,285)
---------- ----------
Net deferred income tax assets $4,348,829 $3,199,812
========== ==========
</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.
41
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - OUTSTANDING DEBT
At December 31, 1999 and 1998, 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,
2000. There were no borrowings under the line of credit during 1999 or
1998.
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. 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. 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,
42
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $963,127 during 1997 related to the
Series A and B Preferred Stock through December 15, 1997, the IPO pricing
date. Additionally, as a result of the offering, all shares of non-voting
common stock converted to common stock on a one-for-one basis.
On February 12, 1998, the Board of Directors of the Company
established the Company's dividend policy and declared a quarterly dividend
of $0.04 per share on the Common Stock to record holders as of March 5,
1998. 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. During 1999, the
Company paid approximately $2.7 million in dividends to outstanding
shareholders representing $0.20 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 preceding the date of purchase.
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,
1999, 1998 and 1997 amounted to $20,872,658, $19,802,311 and $17,227,994,
respectively. The total investment management fees receivable from these
affiliated entities at December 31, 1999 and 1998 amounted to $2,992,338
and $2,025,053, respectively.
43
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 six, seven and six funds during 1999, 1998 and 1997, respectively.
Fees for managing these funds were $6,646,768, $8,001,836 and $5,491,704,
for the years ended December 31, 1999, 1998 and 1997, respectively.
The Company received underwriting fees and concessions in connection
with the offering of shares of one company during 1998 which is considered
a related party. Such fees and concessions are included in research
services and amount to $529,739 for the year ended December 31, 1998.
These fees were earned from the secondary offering of the common stock of a
wholly-owned subsidiary of the Parent.
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. The notes were paid in full on July 31,
1999.
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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Employee costs $ 1,096,581 $2,173,092 $3,627,901
Marketing and production costs 1,830,829 1,616,719 966,268
Professional services 1,251,717 1,311,433 1,023,746
Rent 1,335,971 1,170,166 791,804
Computer services 2,641,968 216,709 163,337
All other operating costs 2,602,524 2,757,218 2,689,940
----------- ---------- ----------
$10,759,590 $9,245,337 $9,262,996
=========== ========== ==========
</TABLE>
The above administrative costs are predominantly based on direct,
identifiable costs incurred by General American on behalf of the Company
and at the Company's request and are charged back to the Company at
General American's cost. Where costs represent the result of allocations,
such allocations are based on customary methodology such as square footage
for rent and number of employees for payroll processing. The Company
believes that such allocation methodologies are reasonable and that the
resulting expenses incurred are not materially different from those that
would have been incurred on a stand-alone basis.
44
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999 and 1998, $32,512,073 and $8,976,934,
respectively, of escrowed funds pertaining to these activities is
reflected on the consolidated balance sheet of the Company.
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 475,000 and 824,000 as of December 31, 1999 and 1998,
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 199,250 and 233,750 as of December 31, 1999 and
1998, 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 1,559,147 and 1,892,706 as of December 31, 1999
and 1998, respectively.
45
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average remaining contractual vesting period at December
31, 1999 was approximately three years.
<TABLE>
<CAPTION>
NUMBER OF SHARES WEIGHTED AVERAGE EXERCISE PRICE
------------------------------------- ----------------------------------
DECEMBER 31, DECEMBER 31,
1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 2,950,456 2,522,689 1,230,000 $11.35 $ 9.65 $ 5.64
Granted 5,000 644,517 1,292,689 $16.44 16.48 13.46
Exercised 499,465 186,750 - $ 7.57 5.77 -
Canceled 222,594 30,000 - $13.22 12.85 -
--------- --------- --------- ------ ------ ------
Outstanding, end of year 2,233,397 2,950,456 2,522,689 $12.03 $11.35 $ 9.65
========= ========= ========= ====== ====== ======
Exercisable, end of year 909,112 1,288,786 1,366,189 $ 8.55 $ 7.81 $ 7.30
========= ========= ========= ====== ====== ======
</TABLE>
The following table summarizes stock options outstanding as of
December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING LIFE PRICE
<S> <C> <C> <C>
$ 5.33 - $ 7.00 674,250 6.0 $ 5.82
$13.18 - $18.34 1,559,147 8.3 $14.71
- ------------------------------------------------------------------------
$ 5.33 - $18.34 2,233,397 7.6 $12.03
</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 awards vest over
future periods and will be reflected as compensation expense in future
periods totaling approximately $1.3 million over the remaining four years.
The Company incurred $870,000 reflected as compensation and benefits
relating to this plan in 1999. No cost was incurred during 1998.
The Company applies APB Opinion No.25, "Accounting for Stock Issued
to Employees," ("APB 25"), in accounting for the 1998, 1997 and 1996
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:
46
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Grant-date fair value per share $11.40 $6.81 $3.18
Significant assumptions:
Risk-free interest rate at grant date 6.44% 4.65% 5.59%
Expected dividend payout $0.20 $0.20 $0.16
Expected stock price volatility 67.62% 47.8% 30%
Expected life to exercise (years) 4.75 5.00 2.75
Net income
As reported $13,318,726 $13,112,606 $8,916,329
Pro forma $11,123,525 $11,618,147 $8,392,758
Pro forma earnings per common share
As reported Basic $0.99 $1.00 $1.13
As reported Diluted $0.95 $0.93 $0.80
Pro forma Basic $0.82 $0.88 $1.05
Pro forma Diluted $0.80 $0.83 $0.76
</TABLE>
At December 31, 1999, the Company's closing stock price was $8.25.
As of December 31, 1999, there were approximately 126,000 shares of
restricted stock issued to employees under Company programs. In
conjunction with the merger agreement (see Note 20 - Subsequent Events),
all unvested restricted stock owned by employees who are employed at the
time of the closing would be eligible to be tendered to MetLife as an
outstanding share of the Company. Additionally, the Company has
approximately 2.2 million options outstanding that were issued under
various Company stock option programs. The merger agreement indicates that
all outstanding options will be vested immediately upon closing. Holders
owning options having intrinsic value have the ability to receive the
intrinsic value at closing. Holders owning options with no intrinsic value
will have the ability to participate in a replacement program that will be
announced prior to the closing of the tender offer.
NOTE 12 - EMPLOYEE BENEFITS
At December 31, 1999, the Company has one retirement savings plan,
the Conning Corporation Profit Sharing and 401(k) Savings Plan (the
"Consolidated 401(k) Plan"). On January 1, 1999, the Consolidated 401(k)
Plan replaced the two retirement plans that were in place at December 31,
1998. The Consolidated 401(k) Plan is available to substantially all
Conning & Company employees. The Company contributed $1,201,615 on behalf
of eligible employees for the year ended December 31, 1999.
At December 31, 1998 and 1997, the Company had 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
47
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
substantially all Conning & Company employees who were employed by Conning
& Company prior to August 11, 1995. The Progress Sharing Plan is available
to certain employees employed prior to August 11, 1995 and all employees of
the Company employed subsequent to August 10, 1995. The Company
contributed $892,618 and $1,019,327 to the 401(k) Plan on behalf of
eligible employees for the years ended December 31, 1998 and 1997,
respectively. Direct charges to the Company from General American for the
Progress Sharing Plan were $566,251 and $407,074 for the years ended
December 31, 1998 and 1997, respectively.
In addition to the qualified retirement plans, the Company also
offered certain senior employees participation in an Executive Deferred
Savings Plan (the "EDSP Plan"). The EDSP Plan is a non-qualified deferred
compensation plan available to eligible employees who can elect to defer a
portion of their compensation into the EDSP Plan, subject to certain
limitations. The Company invests in corporate owned life insurance
("COLI") products that are used to match the employee contributions. The
COLI product invests in mutual funds with investment strategies similar to
the employee fund options. At December 31, 1999, 1998 and 1997, the Company
carried a liability of $6,462,809, $4,047,968 and $1,554,157 representing
employee deferrals and investment credits on those deferrals. At December
31, 1999, 1998 and 1997, the cash surrender value of the COLI investments
were $7,201,397, $2,098,898 and $2,000,000, respectively.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The Company is a general partner in certain private equity funds that
the Company also manages and is a partner in a real estate joint venture.
Capital contributions to these partnerships are made as needed for
investments by the partnerships. At December 31, 1999, the Company's future
commitment to fund such required capital contributions was approximately
$4,559,000.
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 14 - 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, 1999, C&C
had net capital, as defined by the Uniform Net Capital Rule, of
approximately $11,144,000 which was $10,119,000 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
48
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
licensed to do business. As of December 31, 1999 and 1998, CAM was in
compliance with all minimum state requirements.
NOTE 15 - CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of trade account
receivables and short-term investments. Short-term investments consist of
investment grade commercial paper and approximate fair value because of the
short maturity of these items. With the exception of trade receivables from
General American and its affiliates, credit risk with respect to trade
accounts receivable is limited due to the large number of customers and
their dispersion across geographical areas. Investment management fees
receivable from General American and their affiliated entities at December
3l, 1999 and 1998 amounted to approximately $2,992,338 and $2,025,053,
respectively.
NOTE 16 - INDUSTRY SEGMENT
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" 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,
1999, 1998 and 1997 are as follows:
49
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
COMBINED
ASSET MANAGEMENT MORTGAGE LOAN RESEARCH OPERATING SEGMENTS
------------------------- ------------------------- ------------------------- -------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $48,931 $40,321 $33,399 $25,588 $22,434 $16,104 $14,788 $16,924 $15,479 $89,307 $79,679 $64,982
Pre-tax income $11,912 $10,977 $ 7,613 $ 7,951 $ 6,952 $ 3,614 $ 2,378 $ 4,818 $ 3,916 $22,241 $22,747 $15,143
Revenue from
Major Customer $15,527 $14,514 $11,444 $ 5,346 $ 5,288 $ 5,784 $ - $ 530 $ - $20,873 $20,332 $17,228
<CAPTION>
CONSOLIDATED REVENUES BY RECONCILIATION OF COMBINED OPERATING SEGMENT REVENUES
GEOGRAPHIC AREA TO CONSOLIDATED REVENUES
------------------------- --------------------------------------------------------------
1999 1998 1997 1999 1998 1997
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <S> <C> <C> <C>
Geographic Areas Combined operating segment revenue $89,307 $79,679 $64,982
United States $87,974 $80,033 $64,953 Other income 1,588 2,553 1,634
All Other Areas $ 2,921 $ 2,199 $ 1,663 ------- ------- -------
Consolidated revenue $90,895 $82,232 $66,616
======= ======= =======
</TABLE>
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,
1999, 1998 and 1997, other income was approximately $1,588,000, $2,553,000
and $1,634,000, 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
50
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
consider these items by operating segment when making operating decisions,
assessing segment performance or when allocating resources.
NOTE 17 - 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, 1999
-------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Net income $13,318,726
-----------
BASIC EPS:
Net earnings available to common shareholders 13,318,726 13,512,431 $0.99
EFFECT OF DILUTIVE SECURITIES:
Stock options 455,730
----------- ----------
DILUTED EPS:
Net earnings available to common shareholders
and assumed full conversions $13,318,726 13,968,161 $0.95
=========== ==========
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
-------------------------------------------
<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 conversion $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
========== ==========
</TABLE>
51
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1999 and 1998, there were 619,641 and 146,329 options,
respectively, that were considered anti-dilutive and were not included in
the earnings per share calculations above.
NOTE 18 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes quarterly results of operations for the
two years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
1999
Revenues $23,046 $23,957 $21,483 $22,409
Operating income 6,400 6,611 4,367 5,091
Income before taxes 6,341 6,553 4,310 5,037
Net income 3,766 3,924 2,564 3,065
Earnings per share
Basic earnings per share $ 0.28 $ 0.29 $ 0.19 $ 0.23
Diluted earnings per share $ 0.27 $ 0.28 $ 0.18 $ 0.22
Dividends per share $ 0.05 $ 0.05 $ 0.05 $ 0.05
Market price per share:
High $20.25 $18.13 $18.00 $11.56
Low $13.81 $14.50 $ 9.50 $ 7.00
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
</TABLE>
52
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - PARENT COMPANY FINANCIAL STATEMENTS
The following are the condensed balance sheets as of December 31,
1999 and 1998 and condensed statements of income and cash flows for the
periods ended December 31, 1999, 1998 and 1997 for Conning Corporation
(parent company only):
<TABLE>
CONDENSED BALANCE SHEET
<CAPTION>
DECEMBER 31,
-------------------------------------
1999 1998
------------ -----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 8,168,042 $ 5,716,696
Short-term investments 1,038,484 3,789,437
Investment in subsidiary 87,427,621 75,343,433
Capitalized software, less accumulated
amortization of $1,338,533 and $993,383 376,917 722,067
Income tax receivable 3,463,528 1,983,425
Prepaid expenses and other assets 4,418 4,418
------------ -----------
Total assets $100,479,010 $87,559,476
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses $ 961,921 $ 315,234
Due to affiliates 3,180,845 6,065,224
Other payables 160,000 320,000
Deferred liabilities 513,033 682,430
------------ -----------
Total liabilities 4,815,799 7,382,888
------------ -----------
Common stock, $.01 par value, 50,000,000 shares
authorized; 14,062,548 and 13,571,403 shares issued
and outstanding in 1999 and 1998, respectively 140,625 135,714
Additional paid in capital 79,844,834 74,975,681
Retained earnings 22,075,240 11,462,681
Treasury stock (6,397,488) (6,397,488)
------------ -----------
Total common stockholders' equity 95,663,211 80,176,588
------------ -----------
Total liabilities and shareholders' equity $100,479,010 $87,559,476
============ ===========
</TABLE>
53
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
Condensed Statements of Income
<CAPTION>
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
REVENUE
Dividend income $ 1,500,000 $ 39,634 $2,027,500
Management advisory fee 300,000 300,000 300,000
Other income 522,384 1,631,853 76,176
----------- ----------- ----------
Total revenues 2,322,384 1,971,487 2,403,676
----------- ----------- ----------
EXPENSES
Amortization of capitalized software 345,150 341,716 340,000
Professional services 1,603,174 597,717 43,596
Other expenses 109,193 112,065 72,147
Other expenses - - 21,389
----------- ----------- ----------
Total expenses 2,057,517 1,051,498 477,132
----------- ----------- ----------
Income before benefit for income taxes 264,867 919,989 1,926,544
Income tax benefit 285,378 105,678 20,948
----------- ----------- ----------
Income before equity in undistributed earnings
of subsidiary, net of taxes 550,245 1,025,667 1,947,492
Equity in undistributed earnings of subsidiaries,
net of taxes of $9,207,206, $9,426,654 and $6,247,190 12,768,481 12,086,939 6,968,837
----------- ----------- ----------
Net income 13,318,726 13,112,606 8,916,329
Preferred stock dividends - - 963,127
----------- ----------- ----------
Net earnings available to common shareholders $13,318,726 $13,112,606 $7,953,202
=========== =========== ==========
</TABLE>
54
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
Condensed Statements of Cash Flows
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net income $ 13,318,726 $ 13,112,606 $ 8,916,329
Adjustment for items not affecting cash:
Amortization of capitalized software 345,150 341,716 340,000
Changes in:
Investments in subsidiaries (13,584,188) (36,928,365) (8,996,338)
Income taxes receivable (386,902) (78,981) 3,556
Due to/from affiliates (2,884,379) 4,471,537 529,255
Accrued expenses 646,686 (272,596) 582,000
Deferred liabilities and other payables (329,397) 107,005 87,696
------------ ------------ ------------
Net cash used in operating activities (2,874,304) (19,247,078) 1,462,498
------------ ------------ ------------
Investing activities:
Purchase of software - (15,450) -
Maturities of short-term investments, net 2,750,953 7,625,314 (11,414,751)
Dividends received from subsidiaries 1,500,000 - 2,027,500
------------ ------------ ------------
Net cash provided by investing activities 4,250,953 7,609,864 (9,387,251)
------------ ------------ ------------
Financing activities:
Repayments on long term debt - - (2,000,000)
Issuance of common stock through incentive programs 3,780,864 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 (2,706,167) (2,097,045) -
Dividends on preferred stock - - (1,198,942)
------------ ------------ ------------
Net cash provided by (used in) financing activities 1,074,697 (7,414,858) 32,269,258
------------ ------------ ------------
Net change in cash and cash equivalents 2,451,346 (19,052,072) 24,344,505
Cash and cash equivalents, beginning of the year 5,716,696 24,768,768 424,263
------------ ------------ ------------
Cash and cash equivalents, end of year $ 8,168,042 $ 5,716,696 $ 24,768,768
============ ============ ============
Cash paid for:
Interest $ - $ - $ 21,389
Income taxes $ - $ - $ -
Supplemental disclosure of cash flow information:
Accretion of Series A & B preferred stock $ - $ - $ 13,710,298
Conversion of Series A & B preferred stock to
common stock $ - $ - $ 38,572,052
</TABLE>
55
<PAGE>
<PAGE>
CONNING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - SUBSEQUENT EVENT
On January 18, 2000, MetLife proposed to acquire all of the Company's
outstanding shares of common stock not already controlled by MetLife for
$10.50 per share in cash. MetLife acquired a beneficial interest of
approximately 61% in the Company as a result of its January 6, 2000
acquisition of GenAmerica. In addition, MetLife will assume the asset
management contract for GenAmerica's general account assets, which is
currently managed by CAM. As of December 31, 1999, CAM managed
approximately $5.8 billion for the GenAmerica general account.
On January 31, 2000, Conning was served with a complaint purporting
to be a shareholder class action that was filed in the Supreme Court of the
State of New York, naming the Company and MetLife as co-defendants. The
complaint was filed January 19, 2000, and the named plaintiff is Ralph
Shive. The complaint alleges that MetLife's proposal to acquire all of the
outstanding shares of common stock of Conning not already controlled by
MetLife (the "Proposed Transaction") fails to offer a fair price to
Conning's shareholders and lacks adequate procedural protections.
Additionally, the complaint alleges that the defendants have engaged in
acts of self-dealing and breaches of fiduciary duty in connection with the
Proposed Transaction. The suit seeks to have the action declared as a
proper class action, injunctive relief against the consummation of the
Proposed Transaction and, if the Proposed Transaction is consummated,
rescission of the transaction, rescissionary and other monetary damages,
and reimbursement of fees and costs.
On January 31, 2000, the same law firm that filed the Shive complaint
filed a second suit in the same jurisdiction and with the same allegations
and seeking the same relief sought in the Shive action. The second
complaint names Carl Hamann as the plaintiff.
On February 10, 2000, the Company was served with a complaint
purporting to be a shareholder class action that was filed in the Circuit
Court of the City of St. Louis, Missouri, naming the Company, several of
its current and former directors, and MetLife as defendants. The complaint
was filed February 2, 2000, and the named plaintiff is Jeffrey R. Moritz.
The complaint alleges that the consideration proposed to be paid by MetLife
pursuant to the Proposed Transaction is unfair and inadequate. Additionally,
the complaint alleges the defendants, individually and as part of a common
plan, have breached their fiduciary duties in connection with the Proposed
Transaction. The suit seeks to have the action declared as a proper class
action, assurances that no conflicts of interest exist among the defendants,
injunctive relief against the consummation of the Proposed Transaction, and
reimbursement of fees and costs.
On March 9, 2000, MetLife and the Company entered into a definitive
merger agreement providing for the acquisition by MetLife of all of the
outstanding shares of the Company not already controlled by MetLife for
$12.50 per share in cash. The board of directors of each company approved
the merger agreement. The transaction is expected to close during the
second quarter of 2000.
56
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<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, 1999 and 1998, 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, 1999. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
St. Louis, Missouri
March 9, 2000
57
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<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 name, age, principal occupation or position and other directorships
of the directors and executive officers of the Company is as follows:
DIRECTORS
JOHN A. FIBIGER, 67
Mr. Fibiger has been a director of the Company since June 1997.
Until April 1997, he was Chairman of Transamerica Occidental Life Insurance
Company as well as a director of four of its wholly owned life insurance
subsidiaries. He is currently a director of two of such subsidiaries -
Transamerica Life Company of Canada and Transamerica Life Company of New
York. Mr. Fibiger joined Transamerica Life Companies as CFO in 1991. He
was named President of Transamerica Occidental Life Insurance Company, one
of the seven Transamerica Life Companies, in December 1994. A 38-year
veteran of the life insurance industry, Mr. Fibiger was Vice Chairman,
President, and Chief Operating Officer of New England Mutual Life Insurance
Company in Boston, and held positions with Bankers Life Nebraska (now
Ameritas) and Lincoln National Life. A past board member of the Society of
Actuaries, Mr. Fibiger was the first chairman of the Interim Actuarial
Standards Board and served as President of the American Academy of
Actuaries. He is a past member of the Council of the International
Actuarial Association.
RICHARD A. LIDDY, 64
Mr. Liddy has been a director of the Company since November 1996. He
is Chairman, President, and Chief Executive Officer of GenAmerica
Corporation, and Chairman and Chief Executive Officer of General American
Life Insurance Company. He also is Chairman of General American Capital
Company, Paragon Life Insurance Company, Reinsurance Group of America,
Incorporated, and Security Equity Life Insurance Company. He is a Senior
Executive Vice President of MetLife, Inc., a member of the Executive
Committee of Metropolitan Life Insurance Company, and is a director of
Ameren Corporation, Brown Shoe Company, Energizer Holdings, Inc. and
Ralston Purina Company.
ARTHUR C. REEDS, III, 55
Mr. Reeds has been a director of the Company since July 1998, and
served as the Company's Chairman, President, and Chief Executive Officer
from September 22, 1999 until his resignation as an officer on March 9,
2000. Mr. Reeds remains Chairman of the Board of
58
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<PAGE>
Directors of the Company. From 1968 until his retirement in 1997, he was
employed by CIGNA Corporation where he held a series of management
positions in the company's asset management and investment operations.
From 1991 to 1997, he served as Chief Investment Officer of CIGNA. He also
has served in various consulting assignments focused upon insurance company
investments. Mr. Reeds is a member of several professional financial
analysts' organizations and serves on the investment committee of several
nonprofit organizations.
EXECUTIVE OFFICERS
JAMES L. LIPSCOMB, age 53, is President and Chief Executive Officer of the
Company. Mr. Lipscomb assumed the titles of President and Chief Executive
Officer effective March 9, 2000, coinciding with the resignation of Arthur
C. Reeds, III, the Company's former President and Chief Executive Officer.
Prior to his position with Conning, Mr. Lipscomb was Senior Vice President
in charge of the Corporate Planning Department of MetLife. Mr. Lipscomb
joined MetLife in 1972. He is a member of a number of professional
organizations and serves as Vice Chairman of the executive committee of the
Citizens Budget Commission of New York and on the board of directors of the
Citizens Housing and Planning Council (New York).
JOHN B. CLINTON, C.P.C.U., C.P.A., age 44, 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
that position, he was a Vice President of Dillon Read & Co., Inc. and a
founding partner of Concord Partners, a private equity fund. He also
previously worked for New Court Securities and KPMG LLP.
MICHAEL D. MCLELLAN, age 43, 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., age 41, 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.
PAUL W. KOPSKY, JR., CPA, age 35, has been Senior Vice President of
the Company since January 2000. Prior to that he was Vice President and
Controller since he joined the Company in 1997. Effective March 15, 2000,
Mr. Kopsky was named Chief Financial Officer coinciding with the resignation
of Fred M. Schpero, the Company's former Senior Vice
59
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President and Chief Financial Officer. Prior to joining the Company, he
spent ten years with KPMG where he specialized in working in the insurance,
investment company and health care operations.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
From July 1998 to May 1999, the Board of Directors was comprised of
Messrs. Richard A. Liddy, Leonard M. Rubenstein, Maurice W. Slayton, John
A. Fibiger, and John C. Shaw. Mr. Slayton resigned as a director effective
May 11, 1999. From May 11, 1999 until October 1, 1999, the Board of
Directors was comprised of Messrs. Liddy, Rubenstein, Fibiger, Shaw, and
Reeds. Mr. Rubenstein resigned from his positions as an officer and
director of the Company effective October 1, 1999. Mr. Shaw resigned from
the Board of Directors effective January 14, 2000. The Board of Directors
met a total of ten times during 1999. Each incumbent director attended at
least 75% of meetings of the Board and committees on which he served during
1999.
The Board of Directors currently has an Audit Committee and a
Compensation Committee. The Board of Directors does not have a standing
nominating committee. The Audit Committee, of which Messrs. Fibiger,
Liddy, Reeds, and Shaw (until his resignation from the Board on January 14,
2000) are members, met three times in 1999. This Committee is responsible
for overseeing the integrity and reliability of the Company's accounting
and financial reporting practices and the effectiveness of its system of
controls. It also recommends a public accounting firm to be retained for
the coming year and reviews the work to be done by such firm. The
Compensation Committee, which consisted of Messrs. Fibiger, Reeds (until
his resignation from the Committee on September 22, 1999, when he became
Chairman, President, and Chief Executive Officer), and Shaw (until his
resignation from the Board on January 14, 2000), met three times in 1999.
The Compensation Committee is responsible for making all compensation
decisions relating to executive officers and reviews decisions regarding
compensation generally.
DIRECTOR COMPENSATION
The Company pays each director who is not employed by the Company or
an affiliate a $10,000 annual retainer, paid in quarterly installments.
The Company also pays each non-employee director $1,000 for each Board
meeting attended in person and $500 for each telephonic Board meeting
attended, plus expenses. In addition, the Company pays each non-employee
director $750 for each committee meeting attended in person and $375 for
each telephonic committee meeting attended, plus expenses. Directors of
the Company are also eligible to participate in the Company's 1997 Flexible
Stock Plan. In January 2000, the Board of Directors approved a special
payment of $25,000 to Mr. Fibiger for his services as the sole member of
the Special Committee that was formed to consider the acquisition proposal
from MetLife.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth the compensation paid to or earned
during 1999 by Mr. Reeds, the Chief Executive Officer, and during 1997,
1998 and 1999 for Mr. Rubenstein, who retired as chief executive officer
effective October 1, 1999. Messrs. Sargent, Clinton, McLellan and
McDonald became executive officers on April 1, 1998, and their compensation
is reported only for 1998 and 1999.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION<F1> COMPENSATION<F2>
------------------------------- ------------------------------
RESTRICTED
STOCK SECURITIES ALL OTHER
NAME AND FISCAL AWARDS UNDERLYING OPTIONS COMPEN-
PRINCIPAL POSITION YEAR SALARY<F3> BONUS<F4> ($)<F5> (# SHs)<F6> SATION<F7>
<S> <C> <C> <C> <C> <C> <C>
Arthur C. Reeds, III 1999 $160,542 $ -0- -0- -0- $ 8,027
Chairman, President
and Chief
Executive Officer<F8>
Thomas D. Sargent 1999 $193,000 $260,000 -0- -0- $13,180
Executive Vice 1998 $193,000 $325,000 $34,986 5,469 $39,436
President
John B. Clinton 1999 $181,000 $269,000 -0- -0- $13,060
Executive Vice 1998 $181,000 $325,000 $31,228 4,883 $31,012
President
Michael D. McLellan 1999 $175,000 $350,000 -0- -0- $15,125
Executive Vice 1998 $155,000 $337,500 $51,840 8,105 $34,960
President
Donald L. McDonald 1999 $190,000 $250,000 -0- -0- $12,900
Executive Vice 1998 $190,000 $300,000 $41,872 6,543 $37,060
President<F9>
Leonard M. Rubenstein 1999 $213,846 -0- -0- -0- $ 5,422
Retired Chairman, 1998 $278,000 $345,000<F8> $42,469 6,641 $41,625
President and 1997 $278,000 $282,000 -0- 59,565 $39,910
Chief Executive
Officer<F10>,<F11>
<FN>
- ----------
<F1> All compensation reported reflects compensation for the full
fiscal year regardless of when the individual first became an
executive officer. Perquisites and other personal benefits
are not included, as they do not exceed the lesser of $50,000
and 10% of the total of salary and bonus for any named
executive officer.
<F2> Does not include the award of or distributions with respect to
participation interests in private investment funds sponsored
by the Company. See "Certain Relationships and Related
Transactions-Participation in Private Equity Funds."
61
<PAGE>
<PAGE>
<F3> Amounts reported for 1997 and 1998 include amounts deferred at
the election of the executive officer under the General
American Life Insurance Company Executive Deferred Savings
Plan, with respect to Messrs. Rubenstein and McLellan, and the
Conning & Company Profit Sharing and 401(k) Savings Plan, with
respect to Messrs. Clinton, Sargent, and McDonald. Both of
such plans are defined contribution plans. All amounts
reported for 1999 represent amounts deferred at the election
of the executive officer under the Conning & Company Profit
Sharing and 401(k) Savings Plan.
<F4> Bonuses are for services performed during the applicable
fiscal year and generally are paid in the first quarter of the
following year.
<F5> As of December 31, 1999, the number and value of the aggregate
restricted stock holdings of each of the named executive
officers were as follows: Mr. Sargent, 2,188 shares worth
$18,051; Mr. Clinton, 1,953 shares worth $16,112; Mr. McDonald,
2,617 shares worth $21,590; and Mr. McLellan, 3,242 shares
worth $26,746. Values are based on the closing price of the
Company's Common Stock on December 31, 1999, and the date of
grant, as applicable, and do not take into account the
restricted nature of the stock.
<F6> See "- Stock Option Awards."
<F7> Amounts reported for 1997 and 1998 for Messrs. Rubenstein and
McLellan represent amounts contributed by the Company to the
General American Executive Deferred Savings Plan and Augmented
Benefit Plan (defined contribution plans). Amounts reported
for 1998 for Messrs. Sargent, Clinton, and McDonald, represent
amounts contributed by the Company to the Conning & Company
Profit Sharing and 401(k) Savings Plan and Augmented Benefit
Plan (also defined contribution plans). All amounts reported
for 1999 represent amounts contributed by the Company to the
Conning & Company Profit Sharing and 401(k) Savings Plan.
<F8> Mr. Reeds resigned from his positions as President and Chief
Executive Officer of the Company on March 9, 2000, at which time
James L. Lipscomb assumed those positions. Mr. Reeds remains
Chairman of the Board of Directors.
<F9> Mr. McDonald resigned from the Company effective March 14, 2000.
<F10> Mr. Rubenstein will receive certain pension and post-
retirement health benefits under General American benefit
plans. See "Employment Agreements and Other Compensation
Arrangements." Although the cost of such benefits was deducted
from the bonus paid to Mr. Rubenstein for 1998 and 1997, such
cost has not been deducted from the amounts shown above. The
actual bonus paid to Mr. Rubenstein for 1998 and 1997 was
$306,328 and $245,345, respectively.
<F11> Mr. Rubenstein retired as Chairman, President and Chief
Executive Officer of the Company effective October 1, 1999, at
which time Mr. Reeds assumed those positions.
</TABLE>
STOCK OPTION AWARDS
The Company adopted the 1997 Plan to provide for the award of
benefits of various types, including stock options, stock appreciation
rights ("SARs"), restricted stock, performance shares, cash awards and
other stock-based awards. The Company did not award any such benefits to
the named executive officers during 1999. The following table shows
information regarding exercises of stock options in 1999 and the number
and value of unexercised options held by the named executive officers at
December 31, 1999.
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<PAGE>
<TABLE>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
SHARES
ACQUIRED
ON VALUE NUMBER OF SECURITIES VALUE OF UNEXERCISED
EXERCISE REALIZED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
# ($)<F1> OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END<F2>
-------- -------- ------------------------------- --------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Arthur C. Reeds, III 0 $ 0 344 4,666 $ 0 $0
Thomas D. Sargent 0 $ 0 25,840 5,469 $ 73,000 $0
John B. Clinton 0 $ 0 25,840 4,883 $ 73,000 $0
Michael D. McLellan 0 $ 0 105,068 40,014 $202,300 $0
Donald L. McDonald 102,999 $836,486 0 6,543 $ 0 $0
Leonard M. Rubenstein 128,000 $381,913 0 0 $ 0 $0
<FN>
- ---------------
<F1> Represents the difference between the fair market value of the
securities underlying the options and the exercise price.
<F2> Represents the difference between the December 31, 1999 closing
price of the Company's Common Stock ($8.25) and the exercise price
of the option, multiplied by the number of shares underlying the
option.
</TABLE>
EMPLOYMENT AGREEMENTS AND OTHER COMPENSATION ARRANGEMENTS
Effective October 1, 1999, Mr. Rubenstein retired as Chairman,
President and Chief Executive Officer of the Company. In accordance with
his retirement, the Company, GenAmerica Corporation, and Mr. Rubenstein
entered into a Settlement Agreement, Release, and Waiver (the "Agreement").
The Agreement provides, among other things, for the Company to make salary
continuation payments to Mr. Rubenstein until March 16, 2001, a lump-sum
payment for Mr. Rubenstein's accrued benefits under GenAmerica's Paid
Absence Time program, access to post-retirement group medical and dental
insurance, certain early retirement benefits commencing as early as March
16, 2001, and other customary terms and conditions. The Agreement is filed
as Exhibit 10.26 to this Form 10-K.
The Company no longer sponsors a defined benefit plan. Mr. Rubenstein,
as a result of his years of service with GenAmerica Corporation, was eligible
to continue to participate in the GenAmerica Corporation Performance Pension
Plan and Trust - Qualified (a qualified defined benefit plan) and Augmented
(a non-qualified defined benefit plan) (collectively the "Pension Plan").
Retirement benefits under the Pension Plan are based on the participant's final
average compensation and credited years of service. Mr. Rubenstein's final
average compensation has been predetermined and represents his estimated final
average salary and bonus as if he were to remain an officer of GenAmerica
Corporation from December 31, 1995 (the date on which his benefits under the
qualified plan were frozen) through March 16, 2001. The Agreement provides that
Mr. Rubenstein will receive credit for years of service through March 16, 2001.
Mr. Rubenstein may begin receiving his
63
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<PAGE>
benefits from the Pension Plan as early as March 16, 2001, in the amount of
$7,677 per month under a life only optional payment form.
Mr. Rubenstein also participated in the GenAmerica Corporation
Executive Supplemental Retirement Plan ("ESRP"), a non-qualified defined
benefit plan. GenAmercia Corporation froze the ESRP effective January 1,
1998. The ESRP is a non-qualified defined benefit. The ESRP benefit normally
vests when the Executive attains age 64 and benefits are payable at age 65.
Mr. Rubenstein's vesting was accelerated for his ESRP benefit to 100% on
March 16, 2001. Mr. Rubenstein may begin his benefit from the ESRP as early
as March 16, 2001, in the amount of $2,710 per month under a 15 year certain
and life optional payment form.
PERFORMANCE GRAPH
The following graph compares the cumulative total return on the
Company's Common Stock, based on the market price of the Common Stock and
assuming reinvestment of dividends, with the cumulative total return of
companies in the Standard & Poor's 500 Stock Index and the Russell 2000
Financial Services Index, for the period beginning December 16, 1997 (the
date the Company's Common Stock began trading on The Nasdaq Stock
Market(R)) and ending December 31, 1999.
64
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<PAGE>
TOTAL RETURN PERFORMANCE
[Performance Graph]
<TABLE>
<CAPTION>
PERIOD ENDING
--------------------------------------------------------------------
INDEX 12/16/97 12/31/97 6/30/98 12/31/98 12/31/99
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Conning Corporation 100.00 113.56 132.75 141.91 57.34
S&P 500 100.00 100.31 118.08 128.95 156.09
Russell 2000 Financial Services<F*> 100.00 103.08 102.82 92.92 87.47
<FN>
<F*> Index Values obtained from Frank Russell Company, Tacoma, WA.
</TABLE>
The indices are included for comparative purposes only. They do not
necessarily reflect management's opinion that such indices are appropriate
measures of the relative performance of the Company's Common Stock, and
they are not intended to forecast or be indicative of future performance of
the Common Stock.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain stock ownership information,
as of March 16, 2000, with respect to (i) each person known to the Company
to be the beneficial owner of 5% or more of the Company's outstanding
Common Stock, (ii) each director of the Company, (iii) each executive
officer named in the Summary Compensation Table, and (iv) all current
directors and executive officers as a group.
65
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<PAGE>
<TABLE>
<CAPTION>
PERCENT
AMOUNT AND NATURE OF OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP<F1> CLASS
---------------- ------------------------ -------
<S> <C> <C>
GREATER THAN 5% SHAREHOLDER:
Metropolitan Life Insurance Company
One Madison Avenue
New York, NY 10010-3690 8,304,995 <F2> 60.4%
DIRECTORS AND NAMED EXECUTIVE OFFICERS <F3>:
Arthur C. Reeds, III, Chairman 1,334 <F4> <F*>
James L. Lipscomb, President and
Chief Executive Officer -- --
John B. Clinton, Executive Vice President 138,070 <F5> 1.0%
Michael D. McLellan, Executive Vice President 128,510 <F7> <F*>
Thomas D. Sargent, Executive Vice President 78,444 <F8> <F*>
Paul W. Kopsky, Jr., Senior Vice President 4,106 <F8> <F*>
John A. Fibiger, Director 3,001 <F9> <F*>
Richard A. Liddy, Director 57,500 <F10> <F*>
All directors and executive officers
as a group (8 persons) 410,965 <F11> 2.9%
<FN>
- ---------
<F*> Represents less than one percent.
<F1> Unless otherwise noted, each person has sole voting and investment
power with respect to all shares listed opposite such person's name.
Shares issuable upon exercise of a person's exercisable stock options
are deemed to be outstanding for purposes of calculating such
person's percentage ownership.
<F2> Shares beneficially owned by GenAmerica Holding Company, a wholly-
owned subsidiary of General American Life Insurance Company, which is
a wholly-owned subsidiary of GenAmerica Corporation, which is a
wholly-owned subsidiary of Metropolitan Life Insurance Company.
<F3> The Stock Ownership table includes stock ownership information for
all persons named in the Summary Compensation Table. Effective
October 1, 1999, Mr. Rubenstein resigned as an executive officer or
director of the Company, but he is named in the Summary Compensation
Table in accordance with Securities and Exchange Commission rules.
<F4> Includes 334 shares of Common Stock subject to stock options that are
exercisable within 60 days and 1,000 shares held in a joint account
with Mr. Reeds' wife, an account over which he has shared voting
and investment power. Mr. Reeds resigned from his positions as
President and Chief Executive Officer of the Company on March 9, 2000.
Mr. Reeds remains Chairman of the Board of Directors.
<F5> Includes 25,840 shares of Common Stock subject to stock options that
are exercisable within 60 days and 1,953 shares of restricted stock
that are subject to forfeiture in accordance with the terms of the
specific grant (as to which Mr. Clinton has no investment power).
<F6> Includes 105,068 shares of Common Stock subject to stock options that
are exercisable within 60 days and 3,242 shares of restricted stock
that are subject to forfeiture in accordance with the terms of the
specific grant (as to which Mr. McLellan has no investment power).
<F7> Includes 25,840 shares of Common Stock subject to stock options that
are exercisable within 60 days and 2,188 shares of restricted stock
that are subject to forfeiture in accordance with the terms of the
specific grant (as to which Mr. Sargent has no investment power).
<F8> Includes 1,000 shares of Common Stock subject to stock options that
are exercisable within 60 days, 2,031 shares of restricted stock that
are subject to forfeiture in accordance with the specific terms of the
grant (as to which Mr. Kopsky has no investment power) and 100 shares
owned by Mr. Kopsky's children.
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<PAGE>
<PAGE>
<F9> Includes 15,000 shares of Common Stock subject to stock options that
are exercisable within 60 days and 42,500 shares held in a joint
account with Mr. Liddy's wife, an account over which he has shared
voting and investment power. Mr. Liddy is a member of the Executive
Committee of Metropolitan Life Insurance Company and disclaims
beneficial ownership of the shares beneficially owned by Metropolitan
Life Insurance Company.
<F10> Includes 173,749 shares of Common Stock subject to stock options that
are exercisable within 60 days and 9,414 shares of restricted stock
that are subject to forfeiture in accordance with the terms of the
specific grants (as to which the individuals have no investment
power).
</TABLE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers, and persons who beneficially own
more than 10% of the Company's Common Stock, to file reports of ownership
and changes in ownership on Forms 3, 4, and 5 with the Securities and
Exchange Commission, and to provide copies of such forms to the Company.
Based solely on the Company's review of the copies of such forms it
has received, or written representations from certain reporting persons,
the Company believes that all its directors, executive officers, and
greater than 10% beneficial owners complied with all filing requirements
applicable to them with respect to transactions during 1999.
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Company has a Compensation Committee, which was established in
October 1998, that is responsible for making all compensation decisions
with respect to the Company's executive officers and for approving
compensation for all of the Company's other employees. The Compensation
Committee is comprised of Messrs. Fibiger, Reeds (until September 22, 1999,
when he became Chairman, President, and Chief Executive Officer) and Shaw
(until his resignation from the Board January 14, 2000) all of whom were
outside directors at the time of their service on the Compensation
Committee.
Decisions regarding salary levels for each year are generally made at
the end of the prior year or the beginning of the current year, and
decisions regarding bonuses and long-term incentive compensation for each
year are generally made at the end of the current year or the beginning of
the subsequent year. As a result, the Compensation Committee set 1999
salaries for executive officers in December 1998. Bonuses for executive
officers for 1999 were determined by the current Compensation Committee in
January 2000. The Compensation Committee did not determine any stock-based
awards for executive officers during 1999 (see "Long-Term Incentive
Compensation" below).
This report describes the Company's executive compensation for the
fiscal year ended December 31, 1999. As of that date, the Company had six
executive officers, including Arthur C. Reeds, III (Chairman, President and
CEO), John B. Clinton, Donald L. McDonald, Michael D. McLellan, Thomas D.
Sargent, and Fred M. Schpero (Senior Vice President and CFO), all of whom,
with the exception of Arthur C. Reeds, III who served as a director until
September 22,
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1999, served as executive officers for the entire year. Unless otherwise
specified, the term "executive officers" used throughout this report refers
to the six persons who were executive officers of the Company as of
December 31, 1999.
OVERVIEW
The Company's compensation to executive officers and key employees
traditionally is comprised of three principal components - salary, cash
bonus, and long-term incentive compensation. The Company considers annual
and long-term incentive compensation to be important components of total
compensation, as the amount and value of an individual's bonus and stock-
based awards are significantly dependent upon the Company's financial
results and the performance of the Company's stock. The Company believes
this approach aligns the interests of management and shareholders and
encourages management to focus on the Company's long-term business
objectives and growth. The allocation of carried interest participations
in the Company's private equity funds similarly aligns the economic
interests of fund managers and fund investors.
Although the Company does not have a specific formula as to the ratio
between the various components of executive compensation, as a general rule
the greater an individual's responsibility and potential contribution to
the Company, the higher the percentage of his total pay that is variable.
The Compensation Committee believes that emphasizing performance-based
compensation for executive officers reinforces the notion that a
potentially significant part of their compensation is "at-risk" and must be
earned to be awarded.
SALARY
The Company reviews base salaries for executive officers annually,
generally during the fourth quarter of the Company's fiscal year. Various
factors are considered in evaluating salary levels, including job level,
responsibility, knowledge and experience, productivity, personal
contributions, the relationship of fixed to variable compensation, and
available market survey data.
In recent years, the Company has increasingly emphasized variable and
long-term incentive compensation for executive officers, including the
Chief Executive Officer rather than base salaries. In keeping with this
philosophy, the Compensation Committee in December 1998 did not increase
1999 salary levels for most of its executive officers, including Mr.
Rubenstein. This decision was based primarily on market survey information
provided in the fall of 1998 by an independent compensation consultant
which indicated that salary levels for the Company's executive officers
were at or near median levels as compared to market survey data of
competitive positions in the investment and asset management industry.
Mr. Reeds' salary for 1999 was set by the Compensation Committee at a
rate that approximates the annual total cash compensation rate in effect
for Mr. Rubenstein prior to his retirement from active service.
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BONUS
The Compensation Committee generally approves a bonus pool at the end
of each fiscal year. Substantially all of the Company's employees,
including all of the executive officers, are eligible to participate in the
bonus pool. The amount of the pool is based on a percentage of the
Company's operating income before "amortization of goodwill and other" and
incentive compensation, for the year. The bonus pool percentage increases
as operating income exceeds results for prior periods. The Company does
not have a written bonus plan.
The amount of each participant's bonus is based primarily on a
subjective determination as to the employee's individual performance and
achievements during the year using factors similar to those used in the
salary level decisions, as well as objective measures of the performance of
the employee's division. Any special contribution to the Company's
performance is an additional factor in the individual bonus determination.
For the Chief Executive Officer, the Company's overall performance, as
measured principally by operating income before "amortization of goodwill
and other" and incentive compensation, is primarily used to determine the
bonus. Although this general approach is followed in determining each
eligible employee's bonus, determination of the amount of each bonus is
predominantly discretionary and is not subject to a precise formula.
In connection with the adoption of a new long-term incentive program
in December 1998 (see "Long-Term Incentive Compensation" below), the
Compensation Committee enhanced the process for determining bonus awards.
The Committee established four general criteria for evaluating individual
performance - financial performance, investment performance, franchise
enhancement, and people development - which are then tailored for each
participant as described above. Specific personal goals generally will be
set forth at the beginning of each fiscal year, with attainment of those
goals assessed at the end of the year. The Committee is responsible for
approving performance goals for the Company's CEO and President. Bonuses
for executive officers are determined by the Compensation Committee.
Although individual bonus allocations are primarily based on the attainment
of personal performance goals, the Company believes the direct tie between
the amount of the bonus pool and corporate operating income makes Company
performance an integral part of individual bonuses. The Committee
consulted with an outside independent compensation consultant to assist in
evaluating the Company's bonus program.
In January 2000, the Compensation Committee approved the amount of
the 1999 bonus pool and the individual bonuses payable to all participants,
including the executive officers. In determining the amount of executive
officers' bonuses, the Compensation Committee took into account the
Company's financial performance, including the approximate 3% decrease in
operating income before "amortization of goodwill and other", and incentive
compensation from 1998 to 1999. The Committee also took into account
business group performance and an array of personal performance factors
indicated above, without giving specific weight to any single factor. In
approving bonuses for employees and executive officers other than the CEO
and
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President, the Committee based its evaluation of such criteria on
management recommendations. The Compensation Committee did not award a
bonus to Mr. Reeds.
LONG-TERM INCENTIVE COMPENSATION
The Compensation Committee considers long-term incentive compensation
- - in the form of restricted stock, stock options, and, in certain cases,
private equity fund carried interest participations ("private equity
participations") - a significant component of an officer's total
compensation package. Not only does such compensation encourage talented
employees to remain with the Company, it motivates employees to focus on
Company performance, teamwork, and long-term corporate growth strategies.
Stock-based awards also serve as an important means of aligning the
economic interests of management with the performance of the Company's
stock.
STOCK OPTIONS AND RESTRICTED STOCK. The Company has adopted a
1997 Flexible Stock Plan (the "1997 Plan") that provides for the award of
benefits of various types, including stock options, stock appreciation
rights, restricted stock, performance shares, and other stock-based awards,
as well as cash awards, in order to attract, retain, motivate, and reward
officers, employees, directors, and certain other individuals, and to
encourage stock ownership by such persons. The 1997 Plan is generally
administered by the Company's Compensation Committee, other than for awards
to non-employee directors, which are administered by the full Board. The
maximum number of shares of Common Stock that may be issued under the 1997
Plan is 2,200,000 shares. Prior to the adoption of the 1997 Plan, the
Company had similar plans in place and because of the pending acquisition
by MetLife of the outstanding shares of the Company, the Company does not
intend to grant any additional options under any of its plans. As of
December 31, 1999, the Company has granted restricted stock and options of
3,306,859 shares under all such plans. All options have an exercise price
greater than or equal to the market price of the Company's Common Stock on
the date of grant. All options granted after the Company's initial public
offering in December 1997 have a vesting schedule of between three and five
years from the date of grant. The Company did not make any awards of stock
options or restricted stock to executive officers during 1999.
PARTICIPATION IN PRIVATE EQUITY FUNDS. Employees in the
Company's Private Equity Group are responsible for managing the assets of
four private equity funds sponsored by the Company. The managing general
partner of each Fund is generally formed as a limited liability company or
limited partnership, with one of the Company's subsidiaries serving as
general partner. In addition to management fees, the managing general
partner is entitled to receive a carried interest in each fund representing
up to approximately 20% of specified gains of the fund as determined under
the applicable fund agreement. Traditionally, near the end of each fiscal
year or the beginning of the subsequent fiscal year, the head of the
Company's Private Equity Group and top management have allocated among
certain employees of the Company
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participation percentages in the managing general partner's carried
interest of each of the funds. The allocations are subject to approval of
the Company's Compensation Committee. The carried interest paid to the
managing general partner, if any, is split among the Company's subsidiary,
as general partner, and these employees based on their individual
percentage interests. Private equity participations have generally been
allocated in five tranches, with each tranche subject to a climbing vesting
schedule that varies by fund, generally over a period of up to seven years.
Although the Company determines the extent to which an officer may
participate in the carried interest paid to a fund's managing general
partner, the Company does not determine the amount of actual distributions.
The amount of any carried interest for each fund is paid by the fund and is
solely dependent upon the performance of the fund. With the exception of
Fund I, there have been no distributions of carried interests through
December 31, 1999.
The Company has historically allocated interests to key employees
both within the Private Equity Group and outside the group. Generally,
two-thirds of the participation percentages are allocated to individuals
within the Private Equity Group. The factors used in allocating such
interests are substantially the same as those used to determine bonuses,
but are significantly weighted based on an individual's level of
involvement in the Private Equity Group. The Compensation Committee
believes that private equity participations provide an important incentive
for members of the Private Equity Group to manage the funds effectively and
to stay with the Company. In addition, based on the Company's teamwork
philosophy, the Committee believes that senior officers outside the group
play a role, both directly and indirectly in terms of their contribution to
the Conning organization, which in turn contributes to the success of
Conning's private equity funds. The Committee thus views private equity
participations as an additional component of long-term incentive
compensation, and the amount of an officer's participations are taken into
account in determining the relative amount of stock options and restricted
stock that the officer is eligible to receive.
Allocations for Funds I, II, and III are complete, and Funds I and II
are closed. As of December 31, 1999, there is one allocation remaining for
Fund IV and two allocations remaining for Fund V.
See "Certain Relationships and Related Transactions - Participation
in Private Equity Funds" for more information.
STOCK OWNERSHIP GUIDELINES
In connection with the adoption of the Company's long-term incentive
program in December 1998, the Compensation Committee established stock
ownership guidelines to encourage the Company's senior officers to retain
an equity stake in the Company. The guidelines were designed to capitalize
on the Company's existing employee stock ownership levels. The minimum
value of an officer's stock ownership was based on a multiple of his total
cash compensation; for executive officers, the multiple was approximately
two times total cash compensation. The guidelines were to be phased in
over a period of five years beginning in
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December 1998 (or the later date on which an individual becomes a senior
officer). Unexercised stock options do not count toward the attainment of
stock ownership guidelines.
SECTION 162(m)
Section 162(m) of the Internal Revenue Code limits the deductibility
for federal income tax purposes of certain executive compensation paid by
publicly-held companies. Certain types of compensation are excluded from
the limitations. The Company believes the deductibility limitations under
Section 162(m) are not applicable to stock options, restricted stock, and
other awards granted under the 1997 Plan or predecessor plans. With
respect to other components of compensation, the Company has not taken any
action to exclude annual incentive compensation from the limitations on
deductibility.
Respectfully Submitted:
COMPENSATION COMMITTEE
John A. Fibiger
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
Until September 22, 1999, the Compensation Committee was comprised of
Messrs. Fibiger, Reeds and Shaw. From September 22, 1999 until January 14,
2000, the Compensation Committee was comprised of Messrs. Fibiger and Shaw.
After January 14, 2000, the Compensation Committee consisted of a sole
member, Mr. Fibiger.
None of Messrs. Fibiger, Reeds, or Shaw is or has been an officer or
employee of the Company or any of its subsidiaries while serving on the
Compensation Committee.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH GENERAL AMERICAN AND AFFILIATES. Metropolitan Life
Insurance Company, a New York life insurance corporation, beneficially owns
approximately 61% of the Company's outstanding Common Stock. General
American Life Insurance Company, an indirect wholly-owned subsidiary of
Metropolitan Life Insurance Company, is a Missouri life insurance company
principally engaged in issuing individual and group life and health
insurance policies and annuity contracts. The Company's subsidiary,
Conning Asset Management Company, acts as the investment adviser for the
general and separate accounts of General American and certain of its
subsidiaries and affiliates, including the General American Capital Company
funds, COVA
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Corporation and its subsidiaries ("COVA"), Reinsurance Group of America,
Incorporated and certain of its subsidiaries ("RGA"), Paragon Life
Insurance Company, General Life Insurance Company, General Life Insurance
Company of America, Security Equity Life Insurance Company and the General
American Life Insurance Company Pension Plan Trust. Conning also acts as
the investment adviser for Security Mutual Life Insurance Company of New
York, which has entered into a strategic alliance with General American.
Such advisory agreements are generally terminable by the client upon 30 to
90 days notice without penalty. The Company is generally compensated on
the basis of fees calculated at a percentage of the value of the assets
under management. The fees are billed and payable quarterly in arrears.
Investment management fees from these affiliated entities for the year
ended December 31, 1999 amounted to $21.6 million.
General American provides the Company with certain management and
administrative services (including legal, employee benefit, payroll,
personnel, facilities, and information services) at the Company's request.
As consideration for these services, the Company pays General American a
monthly fee based on General American's cost, computed in accordance with
General American's current cost accounting system. The Company paid
General American approximately $9.7 million for administrative services
rendered during 1999. The Administrative Services Agreement is terminable
by General American on 180 days written notice and by the Company on 90
days written notice.
Effective July 31, 1996, Conning Asset Management Company entered
into a lease agreement with General American for approximately 25,000
square feet of office space located at 700 Market Street, St. Louis,
Missouri. The lease has a five-year term, is terminable by the Company
upon 30 days notice and calls for annual lease payments to General American
of approximately $600,000. The Company also subleases from General
American, pursuant to a written sublease, five of its eleven office sites
for its various mortgage loan and real estate offices. The terms of the
lease and all of the foregoing subleases (collectively, the "Leases") were
designed to approximate the cost to General American of owning or leasing
such spaces. The Company made rental payments to General American under
the Leases of approximately $1.3 million during 1999. The Company believes
that the prices and other terms under the Leases are at least as favorable
as those prices and terms being offered generally in the same marketplaces
by unrelated parties for comparable spaces.
The Company and General American Mutual Holding Company are parties
to a Tax Allocation and Tax Sharing Agreement dated as of June 12, 1997
(the "Tax Agreement"). The Tax Agreement provides, among other things,
that the tax liability of the General American Mutual Holding Company
federal consolidated tax return group (the "General American Tax Group")
during the period that the Company was a member of such group (i.e., from
June 12, 1997 to December 19, 1997) will be allocated among the members of
the group in proportion to their separately calculated tax liabilities.
In addition, General American Mutual Holding Company will indemnify the
Company against any tax liabilities of the General American Tax Group that
are not attributable to the Company, and the Company will indemnify General
American Mutual Holding Company against any tax liabilities of the Company.
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As of February 5, 1999, General American held unsecured recourse
demand notes from certain shareholders of the Company totaling
approximately $1.4 million, including $151,864 and $65,000 due from Messrs.
Rubenstein and Schpero, respectively. Interest on such notes accrues at 6%
per annum and is payable semi-annually beginning in July 1997. Principal
payments on such notes are due annually and began in January 1998 in the
amount of 25% of the gross bonus earned by the obligor in the immediately
preceding year. The loans were paid in full to General American on July
31, 1999.
Mr. Liddy is Chairman and Chief Executive Officer of General American
and is an executive officer and director of certain of General American's
affiliates. Mr. Liddy is also a Senior Executive Vice President of
MetLife, Inc. and a member of the Executive Committee of Metropolitan Life
Insurance Company, and is a director of Ameren Corporation, Brown Shoe
Company, Energizer Holdings, Inc. and Ralston Purina Company.
PARTICIPATION IN PRIVATE EQUITY FUNDS. The Company, directly or
indirectly through intermediary partnerships, is the general partner, with
a 1% general partner capital interest, of the following private equity
funds: Conning Insurance Capital Limited Partnership II and Conning
Insurance Capital International Partners II (together, "Fund II"), Conning
Insurance Capital Limited Partnership III and Conning Insurance Capital
International Partners III (together, "Fund III"), Conning Connecticut
Insurance Fund, L.P. ("Fund IV"), and Conning Insurance Capital Limited
Partnership V ("Fund V"). At December 31, 1999, the Company's commitment
to fund future required capital contributions was approximately $560,000.
The Company had established similar relationships with respect to Conning
Insurance Capital Limited Partnership and Conning Insurance Capital
International Partners (together, "Fund I"), which terminated pursuant to
their terms on December 31, 1995. Each Fund has a term of eight to ten
years, subject to certain extensions for liquidation purposes. Fund I
commenced in December 1985 and is now closed, Fund II commenced in December
1988 and is now closed, Fund III commenced in December 1993, Fund IV
commenced in December 1995, and Fund V commenced in August 1997. The
Company received investment management fees from the Funds, in the
aggregate, of approximately $6.6 million during 1999. The Company is also
entitled to a carried interest, or performance fee, in each Fund
representing up to approximately 20% of specified gains of the Fund, as
determined under the applicable partnership or limited liability company
agreement. The Company, through its subsidiary, has committed to Conning
Connecticut Investors, L.L.C., a limited liability company of which the
Company is the general partner and managing member, up to approximately
$4.0 million for purposes of capitalizing the general partner. The amount
is payable only in the event of insolvency on the part of Conning
Connecticut Investors, L.L.C.
Certain officers of the Company and its subsidiaries receive
participation percentages annually over a five-year period in a portion of
the Company's carried interest in the Funds. These participations are
subject to a climbing vesting schedule that varies by Fund, generally over
a period of up to seven years from the date of receipt of the participation
percentage. At the end of the five-year period, the Company's percentage
of the carried interest ranges from 25% to 40% of the original amount,
depending on the Fund. At December 31, 1999, the percentage interests held
by Messrs. Rubenstein, Sargent, Clinton, McLellan, McDonald, and Schpero in
the general partner of Fund V were 1.45%, 1.35%, 5.8%, 0.7%, .8%, and .7%,
respectively; the
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percentage interests held by the same individuals in the general partner of
Fund IV were 1.50%, 2.2%, 7.8%, .65%, 1.25%, and .9%, respectively; and the
percentage interests held by the same individuals in the general partner of
Fund III were 1.2%, 4.7%, 9.2%, 0.4%, 1.7%, and .8%, respectively. As of
December 31, 1999, determination of participation percentages were complete
for Funds I, II and III; Fund IV had one allocation remaining; and Fund V
had two allocations remaining. As of December 31, 1999, with the exception
of Fund I, there have been no distributions of carried interests and the
value, if any, of carried interest participations cannot be readily
determined. Distributions of the carried interest from Fund I made to
Messrs. Sargent, Clinton, and Schpero totaled $3,638, $5,051, and $632,
respectively, during 1999.
General American and its affiliates other than the Company have
committed or invested a total of $30.0 million in four of the Funds.
General American and its affiliates may participate in the distributions
from the private equity funds on a pro rata basis with other limited
partners in the private equity funds. General American and certain of its
affiliates, which may include the Company, may invest in new private equity
funds in the future as limited partners.
REGISTRATION RIGHTS. The Company has granted certain rights with
respect to the registration of 6,710,000 of the 8,304,995 shares of Common
Stock beneficially owned by General American (the "Registrable
Securities"). Subject to certain limitations, General American and
permitted assignees have the right at any time after December 15, 1998 to
require the Company to register the sale of such shares under the
Securities Act of 1933 (a "demand registration"). The number of demand
registrations is limited to two, each of which must be requested by holders
of Registrable Securities representing at least 10% of the outstanding
Common Stock and must include at least 10% of the Registrable Securities.
The Company is not required to effect more than one demand registration in
any twelve-month period. The holders of Registrable Securities also may
include such shares in a registered offering of securities by the Company
for its own account or the account of any other security holder (a "piggy-
back registration"), subject to certain conditions and restrictions. In
addition to such demand and piggy-back registration rights, after December
15, 1998, the holders of Registrable Securities representing at least 10%
of the outstanding Common Stock may require the Company to file up to two
registration statements relating to such Registrable Securities on Form S-3
under the Securities Act of 1933 when such form is available to the Company
(a "Form S-3 registration"). A registration on Form S-3 must relate to the
offering of securities, including the Registrable Securities, at an
aggregate price to the public of at least $5,000,000. The Company is not
required to effect more than one such registration on Form S-3 (including
any demand registrations registered on Form S-3) in any twelve-month
period. The registration expenses of holders of Registrable Securities
(other than underwriting discounts and commissions) will be paid by the
Company.
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CONNING CORPORATION
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM S-K
(a) 1. FINANCIAL STATEMENTS
See Item 8 of this Report
3. EXHIBITS [<F*>denotes filed herewith]
[<F**>denotes a management contract or compensatory
plan or arrangement]
[<Fi> denotes incorporated by reference to the
Company's Registration Statement on Form 5-1,
File Number 333-35993.]
[<Fii> denotes incorporated by reference to the
Company's Form 10-K per the year ending December
31, 1997, File Number 0-23183]
[<Fiii> denotes incorporated by reference to the
Company's Form 10-K per the year ended December
31, 1998, File Number 0-23183]
[<Fiv> denotes incorporated by reference to the
Company's Form 8-K of July 1, 1998, File Number
0-23183]
[<Fv> denotes incorporated by reference to the
Company's Form 8-K on December 16, 1998, File
Number 0-23183]
[<Fvi> denotes incorporated by reference to the
Company's Form 8-K on March 25, 1999, 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.
2.2 Asset Purchase Agreement, dated as of July 1, 1998, by and among
Schroder Mortgage Associates, L. P., Schroder Mortgage Company,
Inc., Schroder Real Estate Associates, L.P., Norman L. Peck,
Mark Peskin, M. Leanne Lachman, Gregory A. White and Conning Asset
Management Company.<Fiv>
2.3 Asset Purchase Agreement, dated as of December 16, 1998, by and
among Conning Corporation, Conning & Company, Conning Asset
Management Company, John G. Noddings, Thomas C. Noddings, Edna F.
Noddings, Noddings & Associates, Inc. and Noddings Investment
Group, Inc. <Fv>
2.4 Asset Purchase Agreement, dated as of March 25, 1999, by and between
TCW Advisors, Inc. and Conning Asset Management Company.<Fvi>
3.1 Restated Articles of Incorporation of the Company, as amended <Fii>.
3.2 Bylaws of the Company.<Fi>
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.<Fi>
10.2 Investment Advisory Agreement dated as of July 2, 1990 between
General American and CAM relating to General American's separate
accounts.<Fi>
10.3 Investment Advisory Agreement dated as of July 23, 1997 between
General American Capital Company and CAM.<Fi>
10.4 Lease Agreement dated as of July 31, 1996 between General American
and CAM.<Fi>
10.5 Sublease effective as of July 19, 1995 between General American
and CAM.<Fi>
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 5-1,
File Number 333-35993, Exhibit 10.6).
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CONNING CORPORATION
10.7 Tax Sharing Agreement effective as of July 24, 1995 between the
Company, CAM and General American.<Fi>
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.<Fi>
10.9 Registration Rights Agreement dated as of June 12, 1997 among the
Company, General American and General American Holding Company.<Fi>
10.10 Tax Allocation and Tax Sharing Agreement dated as of June 12, 1997
between the Company, Conning, Inc., Conning & Company and Mr.
Hansen.<Fi>
10.11 Software License Agreement effective as of January 27, 1996
among CAM, General American and SS&C Technologies, Inc. (formerly
Securities, Software & Consulting Inc.).<Fi>
10.12 1995 Flexible Stock Plan.<Fi><F**>
10.13 1996 Flexible Stock Plan.<Fi><F**>
10.14 1997 Flexible Stock Plan.<Fi><F**>
10.15 Form of Incentive Stock Option Award and Terms and Conditions
under 1995 Flexible Stock Plan.<Fi><F**>
10.16 Form of Incentive Stock Option Award and Terms and Conditions
under 1996 Flexible Stock Plan.<Fi><F**>
10.17 Forms of Non-Qualified Stock Option Awards and Terms and
Conditions under 1997 Flexible Stock Plan <Fii><F**>
10.18 Office Lease dated August 22,1989 among Hartford CityPlace L.L.C.,
Conning, Inc. and Conning & Company, as amended as of June 30,
1997.<Fi>
10.19 Venture Carried Interests Allocation Plan, as amended.<Fi><F**>
10.20 Amended and Restated Limited Partnership Agreement of Conning
investment Partners Limited Partnership III, as amended.<Fi><F**>
10.21 Limited Liability Company Agreement of Conning Connecticut
Investors, L.L.C.<Fi><F**>
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CONNING CORPORATION
10.22 Limited Liability Company Agreement of Conning Partners II,
L.L.C.<Fi><F**>
10.23 Limited Liability Company Agreement of Conning Investment Partners
V, L.L.C., dated as of October 31, 1997.<Fi><F**>
10.24 Form of Restricted Stock Award and Terms and Conditions under 1997
Flexible Stock Plan<Fiii>
10.25 Agreement with Maurice W. Slayton dated December 24, 1998<Fiii>
10.26 Settlement Agreement, Release and Waiver dated September 21, 1999,
by and among Leonard M. Rubenstein, Conning Corporation and General
American Life Insurance Company.<F*>
21.1 Subsidiaries of the Company.<Fi>
23.1<F*> Consent of KPMG LLP.
24.1<F*> Powers of Attorney for John A. Fibiger, Arthur C. Reeds III, and
Richard A. Liddy.
27.1<F*> Financial Data Schedule
(b) Reports on Form 8-K
On November 10, 1999, the Company filed a Form 8-K
describing the arrangement that may result in a change in
control of GenAmerica Corporation, the beneficial owner of
approximately 61% of the shares of outstanding common stock
of the Company.
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CONNING CORPORATION
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/ JAMES L. LIPSCOMB
-------------------------------
James L. Lipscomb
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 dales indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ JOHN A. FIBIGER<F*> Director March 17, 2000
- --------------------------------
John A. Fibiger
/s/ RICHARD A. LIDDY<F*> Director March 17, 2000
- --------------------------------
Richard A. Liddy
/s/ ARTHUR C. REEDS, III<F*> Chairman of the Board and Director March 17, 2000
- --------------------------------
Arthur C. Reeds, III
/s/ JAMES L. LIPSCOMB President and Chief Executive Officer March 17, 2000
- -------------------------------- (Principal Executive Officer)
James L. Lipscomb
/s/ PAUL W. KOPSKY, JR. Senior Vice President and Chief Financial March 17, 2000
- -------------------------------- Officer (Principal Financial and Accounting
Paul W. Kopsky, Jr. Officer)
<F*>By: /s/ PAUL W. KOPSKY, JR. Attorney-in-Fact
- --------------------------------
Paul W. Kopsky, Jr.
</TABLE>
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CONNING CORPORATION
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
10.26 Settlement Agreement, Release and Waiver dated September 21,
1999, by and among Leonard M. Rubenstein, Conning Corporation
and General American Life Insurance Company.
23.1 Consent of KPMG LLP.
24.1 Powers of Attorney for John A. Fibiger, Arthur C. Reeds III,
and Richard A. Liddy.
27.1 Financial Data Schedule.
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<PAGE>
<PAGE>
APPENDIX
Page 65 of the printed 10-K contains a Total Return Performance Graph.
The information plotted in the graph appears in the table immediately
following the graph.
<PAGE>
SETTLEMENT AGREEMENT, RELEASE,
AND WAIVER
This Settlement Agreement, Release, and Waiver (the "Agreement")
is presented to Leonard M. Rubenstein ("Associate") on the 21st day of
September, 1999 and is by and between Conning Corporation, GenAmerica
Corporation, its subsidiary and affiliated companies, and its successors
and assigns (collectively referred to as "GenAmerica").
WHEREAS, Associate has been employed as the Chief Executive
Officer of Conning Corporation, a subsidiary of GenAmerica Corporation;
and
WHEREAS, Associate and GenAmerica agree that the employment
relationship shall now be terminated.
NOW THEREFORE, Associate and GenAmerica desire, and by this
Agreement intend:
* To resolve and settle all existing and potential differences
and disputes between them arising out of Associate's
employment and termination therefrom;
* To release all claims that could be asserted arising from
Associate's employment or termination therefrom;
<PAGE>
<PAGE>
* To protect the confidentiality of GenAmerica's business
information;
* To provide for responses for information concerning
Associate's employment or termination thereof;
* To secure Associate's full cooperation in the transition to
new management of GenAmerica and Conning Corporation; and
* To be legally bound, in consideration of the mutual promises
set forth herein, by the following terms:
I. TERMINATION OF EMPLOYMENT
Associate's employment with GenAmerica shall terminate effective
October 1, 1999 ("Termination Date").
II. BENEFITS
As consideration for Associate signing this Agreement, GenAmerica will
provide the following benefits to Associate:
A. GenAmerica will pay Associate the amount of $405,000 in the
form of bi-weekly payments of $10,658 from October 15, 1999 through
March 16, 2001.
2
<PAGE>
<PAGE>
B. GenAmerica will pay Associate the amount of $143,260 (which
is the approximate value of one-half of Associate's unused Paid Absence
Time) in one lump sum as soon as reasonably practicable after March 16,
2001. Associate acknowledges that under the terms of the Paid Absence
Time program the Associate payment of unused Paid Absence Time benefits
is normally available only if an associate retires after reaching age
55.
C. GenAmerica will pay Associate $1393 per month for the life
of Associate beginning as soon as reasonably practicable after March 16,
2001.
D. Commencing on the Termination Date, GenAmerica shall make
available to Associate continuation group medical and dental insurance
coverage in accordance with the provisions of the Consolidated Omnibus
Budget Reconciliation Act ("COBRA"). The full cost of such COBRA
coverage shall be the responsibility of Associate in accordance with
GenAmerica's regular practices in connection with such coverage. Upon
Associate reaching age 55 on March 16, 2001, Associate will become
eligible for post-retirement group medical and dental insurance coverage
in accordance with GenAmerica's regular program for retirees. Associate
will be responsible for the payment for the contribution required of
retired employees for such coverages. The availability of the benefits
described in this Section II.D. is subject to the terms of the retiree
medical and dental plan from time to time, and is subject to any changes
in the plan, including termination of the plan, in the future.
3
<PAGE>
<PAGE>
E. GenAmerica will pay Associate an early retirement benefit
under GenAmerica's Executive Supplemental Retirement Plan (ESRP) in the
amount of $2,710 per month starting as soon as reasonably practicable
after March 16, 2001 as an annuity to be paid for 15 years certain and
life. Associate acknowledges that under the terms and conditions of the
ESRP, vesting normally occurs at age 64 and the ESRP benefit becomes
payable at age 65.
F. GenAmerica will provide Associate executive level career
transition services from a professional outside career transition firm
mutually agreed upon by GenAmerica and Associate.
G. The payments and benefits enumerated in this Section II
(other than the COBRA coverage under II.D.) are in consideration for
Associate signing this Agreement and fulfilling the promises contained
herein. The parties agree that the payments and benefits enumerated in
this Section II are in excess of any payments or benefits to which
Associate would otherwise be entitled upon termination of employment at
this time. No such payments or benefits will be made from any plan
qualified under Section 401 of the Internal Revenue Code. Any payments
made shall be made under a nonqualified plan maintained by GenAmerica or
from cash.
H. No payments or benefits described in this Section II shall
be considered as salary or compensation for any purpose, including for
any purpose under any employer plan, qualified or nonqualified, or any
other plan, program, or arrangement sponsored or maintained by
GenAmerica.
4
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<PAGE>
III. COOPERATION IN TRANSITION AND LITIGATION
In addition to the consideration set forth below Associate agrees
that he will cooperate with GenAmerica, its successors and assigns, to
the fullest extent reasonably possible in the transition to new
management of Conning Corporation, the completion of the sale of
GenAmerica to Metropolitan Life Insurance Company, in the transition
during the period following the completion of the sale, and any
litigation involving GenAmerica. This Section III will not be construed
to require Associate to perform active work at GenAmerica on any regular
basis.
IV. CONFIDENTIAL INFORMATION
Associate warrants that he has returned or will immediately return
to GenAmerica all GenAmerica's business information that Associate has
in his possession or, had in his possession on October 1, 1999, which
Associate produced, received or otherwise took possession of during his
employment with GenAmerica including, but not limited to, any client or
customer lists, General Agent lists, agent lists, broker lists, or
Registered Representative lists. Associate warrants that he has not
made or retained any copies or excerpts of any business information, and
will not make or retain any copies or excerpts thereof. Associate
warrants that he will not disclose any information relating to
GenAmerica's business to anyone for any reason in the future unless
compelled to do so by law, at which time Associate may disclose the
information to his legal advisors. If Associate learns of any document
or other information purporting to compel Associate to reveal
information about GenAmerica's business, Associate shall immediately
5
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<PAGE>
disclose such document and/or information to GenAmerica in accordance
with the notice provisions in Section XII of this Agreement.
V. NON-DISPARAGEMENT
Except as may be compelled by a court of law, Associate shall take
no action (including without limitation the making of any oral or
written statement) which damages, disparages, or otherwise diminishes
the reputation and business practices of GenAmerica, Metropolitan Life
Insurance Company, and their officers, directors and employees.
VI. NONSOLICITATION
Associate agrees that he will not, separately or in association
with others, directly or indirectly, solicit any Associate, employee,
General Agent, agent, broker, or Registered Representative of GenAmerica
to become employed, contracted or associated by or with Associate or any
entity in which Associate is an employee or owner or any current
customer or client of Conning Corporation without first obtaining the
written consent of GenAmerica. This covenant shall continue for a
period of two (2) years from the date of this Agreement.
VII. CONFIDENTIALITY
Associate agrees that the terms of this Agreement and any related
documents are confidential and that performance by GenAmerica is
conditioned upon strict adherence to this confidentiality provision.
Associate agrees that he may not disclose to
6
<PAGE>
<PAGE>
any party any of the terms of this Agreement. Notwithstanding the
foregoing, Associate may disclose such information as needed to his
immediate family, accountants or tax preparers, financial planners, or
attorneys. Associate agrees to notify such persons of the confidential
nature of this information and to advise such persons not to disclose
any confidential information to any other person.
VIII. COMPLETE RELEASE
Associate, for himself and his successors, assigns, and heirs,
hereby discharges and releases GenAmerica and its parents, subsidiaries,
and affiliates, and all of their respective officers, directors,
employees, advisors and legal counsel, and each of their predecessors,
representatives, successors and assigns, from any and all claims or
demands that Associate now has or may have in the future based on
Associate's employment with GenAmerica, Associate's conduct during that
employment, or the termination of that employment. This includes a
release of any rights or claims Associate may have based on any facts or
events, whether known or unknown by Associate, that occurred on or before
the effective date of this Agreement, including, without limitation,
--------- ------------------
a release of any rights or claims Associate may have based on:
A. the Civil Rights Acts of 1964 (as amended); the Age
Discrimination in Employment Act of 1967, as amended; the Americans with
Disabilities Act of 1990; the Rehabilitation Act of 1973; the Equal Pay
Act of 1963; the Employee Retirement Income Security Act of 1974, as
amended;
7
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<PAGE>
B. the laws of the State of Missouri concerning wages,
employment and discharge; any City of St. Louis employment laws; or any
other law, rule, regulation or ordinance pertaining to employment, terms
and conditions of employment, or termination of employment;
C. claims arising out of any legal restrictions of the right to
terminate GenAmerica's employees such as wrongful or unlawful discharge
or related causes of action;
D. intentional infliction of emotional distress or any other
tortious conduct; and/or
E. violations of any contract or promise, express or implied.
No reference to the aforementioned causes of action or claims is
intended to limit the scope of this Settlement Agreement, Release and
Waiver.
IX. COMPLETE RELEASE NO FUTURE LAWSUITS, COMPLAINTS OR CLAIMS
Associate promises never to file any petitions, charges,
complaints, lawsuits, or related documents with any judicial or
administrative agency concerning GenAmerica, Associate's employment with
GenAmerica, or Associate's termination therefrom. Associate agrees to
withdraw all such actions that are pending. This Article shall not
apply to any action taken to enforce the terms of this Agreement.
8
<PAGE>
<PAGE>
X. PERIOD FOR REVIEW AND CONSIDERATION OF AGREEMENT
Associate confirms that he has been given twenty-one (21) days to
review and consider this Agreement before signing it. Associate
understands that he may use as much or as little of this period as he
wishes prior to signing.
XI. ADVICE TO CONSULT WITH AN ATTORNEY
GenAmerica had advised Associate to consult with an attorney, at
Associate's own expense, before signing this Agreement.
XII. ASSOCIATE'S RIGHT TO REVOKE AGREEMENT
If this Agreement is signed by Associate and returned to
GenAmerica within the time specified in Section X, Associate may revoke
this Agreement within seven (7) calendar days of the date of Associate's
signature. Revocation must be made by delivering a written notice of
revocation to GenAmerica, that must be received no later than close of
business on the seventh (7th) calendar day (or next business day
thereafter, if the 7th calendar day is not a business day) after
Associate signs this Agreement. If Associate revokes this Agreement, it
shall not be effective or enforceable and Associate will not receive the
payments described herein. Notice to GenAmerica for the purposes of
this paragraph shall be effective if and only if it is delivered within
the revocation period set forth above by one or more of the following
means: (a) personally;
9
<PAGE>
<PAGE>
(b) by overnight courier; or (c) by facsimile to:
Robert J. Banstetter, General Counsel
GenAmerica Corporation
700 Market Street
St. Louis, MO 63101
Fax No. 314-444-0510
XIII. SEVERABILITY AND JUDICIAL RESTATEMENT
Associate and GenAmerica agree that the provisions of this
Agreement are severable and divisible. In the event any portion of this
Agreement is determined to be illegal or unenforceable, the remaining
provisions of this Agreement shall remain in full force and effect.
XIV. TAXES
Associate is responsible for any tax liability associated with
payments provided under this Agreement. GenAmerica has the right to
withhold taxes from such payments to the extent required by law.
XV. BREACH
Associate agrees that any breach of Section III, IV, V, VI, or VII
will cause irreparable injury to GenAmerica and that GenAmerica may seek
an injunction or specific performance for any such breach. Associate
agrees to submit personally and GenAmerica agrees to submit to the
jurisdiction of the state or federal courts of the State of Missouri in
the event of any claimed breach of this Agreement and to comply with any
order or judgment of those courts. In any lawsuit commenced for breach
of this Agreement, the prevailing party will be awarded attorneys' fees
and costs associated with such lawsuit.
10
<PAGE>
<PAGE>
Associate agrees that in addition to any other damages and
remedies allowed by law, in the event of a breach of this Agreement by
Associate, the benefits set out in Section II shall be terminated and
any benefits not yet received by Associate will be forfeited.
XVI. GENAMERICA REPRESENTATIONS
In addition to any other consideration described herein,
GenAmerica agrees to cooperate with Associate in the transition to any
new position he might seek. GenAmerica will provide prospective
employers with no information other than Associate's dates of employment
with GenAmerica.
Except as may be compelled by a court of law, GenAmerica shall use
its best efforts to constrain its officers and employees from taking any
actions (including without limitation the making of any oral or written
statement) which damages, disparages, or otherwise diminishes the
reputation and business practices of Associate.
GenAmerica agrees that the terms of this Agreement are
confidential and GenAmerica will take such actions as are commercially
reasonable in order to enforce this confidentiality provision.
11
<PAGE>
<PAGE>
XVII. MISCELLANEOUS
This is the entire Agreement between Associate and GenAmerica.
GenAmerica has made no promises to Associate other than those in this
Agreement.
This Agreement shall be governed by and construed in accordance
with the laws of the State of Missouri, without reference to principles
of conflict of laws thereunder.
This Agreement may not be amended or modified otherwise than by a
written agreement executed by the parties hereto or their respective
successors and legal representatives.
Nothing contained in this Agreement is intended to be, or shall be
construed to be, an admission of any liability by any party or an
admission of the existence of any facts upon which liability could be
based.
Associate acknowledges and represents that Associate has
voluntarily executed this Agreement.
12
<PAGE>
<PAGE>
XVIII. EFFECTIVE DATE OF AGREEMENT
Provided Associate does not revoke this Agreement in accordance
with the terms of Section XII, above, this Agreement shall become
effective immediately upon the expiration of the revocation period set
forth in Section XII. If the Associate does not date this Agreement
when he signs it, the revocation period set forth in Section XII shall
commence when GenAmerica receives the signed Agreement.
PLEASE READ THIS AGREEMENT CAREFULLY. THIS AGREEMENT INCLUDES A
RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS TO THE DATE OF THIS AGREEMENT
INCLUDING THOSE PURSUANT TO THE AGE DISCRIMINATION IN EMPLOYMENT ACT, AS
AMENDED, AND OTHER LAWS PROHIBITING DISCRIMINATION IN EMPLOYMENT.
ASSOCIATE ACKNOWLEDGES THAT ASSOCIATE HAS READ THIS AGREEMENT,
UNDERSTANDS IT AND IS VOLUNTARILY ENTERING INTO IT.
CONNING CORPORATION
By: /s/ Matthew P. McCauley
---------------------------------------
Date: October 8, 1999
------------------------
GENAMERICA CORPORATION
By: /s/ Richard A. Liddy
---------------------------------------
Date: October 8, 1999
------------------------
LEONARD M. RUBENSTEIN
/s/ Leonard M. Rubenstein
------------------------------------------
Date: October 8, 1999
------------------------
13
<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 March 9,
2000, relating to the consolidated balance sheets of Conning Corporation and
subsidiaries as of December 31, 1999 and 1998, 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, 1999, which report
appears in the December 31, 1999 annual report on Form 10-K of Conning
Corporation.
/s/ KPMG LLP
St. Louis, Missouri
March 15, 2000
<PAGE>
CONNING CORPORATION
POWER OF ATTORNEY
-----------------
I, the undersigned, as a director of Conning Corporation hereby
constitute Fred M. Schpero and Paul W. Kopsky, Jr. or either 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, 1999 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
- -------------------
John A. Fibiger
- ---------------
Name (Typed or printed)
Date March 14, 2000
---------------
WLH:mef/powers/Conning
<PAGE>
<PAGE>
CONNING CORPORATION
POWER OF ATTORNEY
-----------------
I, the undersigned, as a director of Conning Corporation hereby
constitute Fred M. Schpero and Paul W. Kopsky, Jr. or either 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, 1999 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/ Richard A. Liddy
- --------------------
Richard A. Liddy
- ----------------
Name (Typed or printed)
Date 3/15/2000
-------------
<PAGE>
<PAGE>
CONNING CORPORATION
POWER OF ATTORNEY
-----------------
I, the undersigned, as a director of Conning Corporation hereby
constitute Fred M. Schpero and Paul W. Kopsky, Jr. or either 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, 1999 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
- ------------------------
Arthur C. Reeds, III
- --------------------
Name (Typed or printed)
Date 3/14/00
-------------
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 87,479,622
<SECURITIES> 212,134
<RECEIVABLES> 13,986,238
<ALLOWANCES> 36,585
<INVENTORY> 0
<CURRENT-ASSETS> 102,015,046
<PP&E> 5,795,204
<DEPRECIATION> 2,417,176
<TOTAL-ASSETS> 166,180,955
<CURRENT-LIABILITIES> 67,465,244
<BONDS> 0
<COMMON> 140,625
0
0
<OTHER-SE> 95,522,586
<TOTAL-LIABILITY-AND-EQUITY> 166,180,955
<SALES> 89,306,908
<TOTAL-REVENUES> 90,894,765
<CGS> 65,749,536
<TOTAL-COSTS> 68,426,267
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 227,944
<INCOME-PRETAX> 22,240,554
<INCOME-TAX> 8,921,828
<INCOME-CONTINUING> 13,318,726
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,318,726
<EPS-BASIC> 0.99
<EPS-DILUTED> 0.95
</TABLE>
